Oil Venezuela's lifeblood is also a political flashpoint

Hugo Chavez vs. Big Oil. Now there's a showdown without an obvious crowd favorite.

The notoriously anti-American president of Venezuela started this fight by tearing up his contracts with four oil industry partnerships, demanding they convert the government's minority stakes into majority control. The oil majors developing the projects, including ExxonMobil, Chevron and ConocoPhillips, fume about having their deep pockets picked, but they don't have much choice. If they can't agree on financial terms by June 26, Chavez could always order the army to seize the oil fields.

The battle over Venezuela's Orinoco Belt development highlights the increasingly critical role of Petroleos de Venezuela or PDVSA, (ped-eh-VAY-sa), the national oil company that will control the multibillion-dollar ventures in four weeks. Once recognized as a world leader among state-owned companies, PDVSA today is a troubled entity struggling to cope with responsibilities that far exceed merely pumping oil. Chavez taps the state-owned giant to finance an array of social programs at home and to cement his regional influence through subsidized oil exports to allies such as Cuba and Bolivia.

But as PDVSA prepares for the Orinoco takeover, some question whether its already stretched managers are up to the job. "Can they do it as well? A lot of people say no," says Pietro Pitts, editor of the Caracas-based trade publication LatinPetroleum.

If an overtaxed PDVSA stumbles, the United States could feel the reverberations. In January, Venezuela, a leading member of the Organization of Petroleum Exporting Countries (OPEC), was the USA's fifth-largest source of imported oil, shipping 955,000 barrels of crude each day. That figure is 23% below the level of one year ago, reflecting the aging of Venezuela's oil fields and its compliance with OPEC production quotas.

For such a vital national institution, PDVSA is in surprisingly rickety condition, independent analysts say. During the 1980s and 1990s, it enjoyed an enviable reputation among oilmen worldwide for technical competence. But after Chavez was first elected in 1998, PDVSA emerged as a focal point of opposition to the socialist president. Subsequent political confrontation with the government left it demoralized.

In 2002, PDVSA officials backed a general strike aimed at toppling Chavez, bringing daily oil production from 3.3 million barrels to a near trickle of 700,000 barrels. But Chavez broke the strike and then retaliated against what one of his ministers labeled "enemies of the country" by sacking 19,500 veteran PDVSA employees, roughly half the firm's workforce.

Today, employment exceeds pre-strike levels, and Venezuela claims to be producing 3.3 million barrels of oil per day. But the International Energy Agency in Paris puts current production at 2.43 million barrels, and analysts say PDVSA continues to suffer the lingering effects of the political battles that consumed it in recent years. Its efforts to quickly recoup lost production after the failed strike also may have damaged the country's underground oil reservoirs in ways that will hasten future production declines, says the U.S. Energy Information Administration.

"It's in awful shape," says David Mares, a political scientist at the University of California, San Diego, who co-wrote a new study of the Venezuelan oil company.

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