Venezuela muscles oil service contractors

MIAMI, May 6 (UPI) -- Venezuelan officials are mulling over a proposed law that would allow the state-owned oil company, Petroleos de Venezuela SA, to take over certain service projects associated with the petroleum industry currently being performed by private companies.

According to the proposed rule change, the Venezuelan state would compensate companies performing tasks such as oil well maintenance, but not at the cost quoted in current service contracts.

The decision to pursue the law change was announced by Venezuela's Energy and Mines Commission chair, Angel Rodriguez, who said the state would either take partial or total control of all PDVSA service projects.

The proposal -- which must be approved by Venezuelan lawmakers in two separate rounds of voting -- comes at a time when PDVSA is cutting spending and salaries in hopes it can invest more money in much-needed infrastructure improvements aimed at bolstering production.

Rafael Ramirez, head of PDVSA, said the cuts will reduce spending this year to about $6 billion amid the company's growing debts, a capital shortage and slumping oil prices.

PDVSA will also halt scheduled pay increases for oil workers, Ramirez said last week. The company's top brass face a 20 percent salary reduction as well.

The reductions are aimed at trying to free up capital during a period when PDVSA is struggling to find the funds needed for modernization of the country's long-neglected infrastructure, which critics of the Venezuelan government contend has been ignored in favor of spending PDVSA revenue on wide-ranging social programs favored by President Hugo Chavez.

In an effort to raise additional capital for its mounting debts to service companies, PDVSA officials announced last week that it would issue $2.5 billion in two-year zero-coupon bonds.

With oil prices falling more than $100 per barrel in the last 10 months, PDVSA finds itself with mounting debts totaling more than $8 billion and little in the way of hard currency to cover them.

The hard turn of events for South America's largest oil and gas producer follows several years of unprecedented wealth for the Venezuelan state, which under the auspices of the leftist Chavez spent much of PDVSA's riches on education and health programs in Venezuela and other social spending in Latin American countries like Cuba, Bolivia and Nicaragua.

With oil falling from its historic high of $150 per barrel in July 2008, the Venezuelan government has been forced to make some very tough decisions about PDVSA spending.

The bond issue, spending halt and salary slashing follow last month's decision to cut costs across the board at the state company.

Ramirez announced the company would reduce costs by cutting back on contracts to service companies whose "high prices" are no longer affordable.

PDVSA officials were hopeful that the production cuts across the board mandated by the Organization of Petroleum Exporting Countries would drive global oil prices higher to help meet costs both at the state oil company and in the Venezuelan budget, which received about 93 percent of its revenue from the petroleum sector.

In February Venezuela made good on its promise to reduce oil exports, canceling several shipments to the United States, in order to comply with reduced OPEC production requirements and bolster its own fortunes by helping raise the price of oil worldwide.

Meanwhile, the steep reduction in the price of oil has already forced significant cost-cutting measures by the leftist Venezuelan leadership and the programs favored by Chavez.

Venezuela's budget for 2009 was created with a $60-per-barrel price tag in mind. But with prices hovering in the $30 to $40 range, the Chavez administration has admitted that its social efforts, both at home and abroad, would surely suffer.

Experts contend the Venezuelan petroleum industry is indeed poised to face tough times in the face of capital shortfalls, declining production and a downturned global economy.

Venezuelan oil production is down to 2.1 million barrels per day, according to OPEC estimates. As recently as 2005, production topped 2.5 million bpd.

"PDVSA is financially stretched as a result of declining oil prices and its growing obligations, casting a dark cloud over Venezuela's future production outlook," Eurasia Group Latin American analyst Patrick Esteruelas wrote.

Despite the downturn caused by falling oil prices and a worldwide economic slowdown, Chavez recently expressed confidence in both PDVSA and the Venezuelan economy's ability to weather difficult challenges ahead.

"The revolution will not fall into pieces because of the economic problems that may arise from the global crisis," Chavez said during a national address in March. "But it does not mean that we are unlikely to face serious hardships."