Oil Venezuela's lifeblood is also a political flashpoint

Just to maintain current production, PDVSA must invest $3 billion annually in its aging fields, EIA says. But Chavez has drained PDVSA's coffers to fund generous health, education, literacy and food programs, leaving insufficient funds for its core operations.

The oil company's obligations to the poor appear to be mushrooming. PDVSA last week disclosed that it spent $13.3 billion last year on social programs, almost twice as much as in 2005 and more than it invests in its oil operations.

Incredibly, at a time of sky-high oil prices, the company's net income last year fell 26% to $4.8 billion on $101 billion in revenue, according to unaudited financial results published in Caracas. That's less profitable than other state-owned oil producers such as Norway's Statoil, which last year was twice as profitable as PDVSA in terms of net income as a percentage of revenue.

Instead of selling more oil to the USA at top dollar, Chavez is using increasing amounts of PDVSA oil in barter or low-profit trades with Caribbean and Central American countries designed to boost his regional clout. Some of his political allies pay for discounted oil with bananas or sugar; the Cubans, who receive nearly 100,000 barrels per day, send doctors to treat the poor.

"Chavez says Venezuela will be a small world power but a large world energy power. … Oil is a geopolitical weapon," says historian Albert Garrido.

PDVSA on Tuesday sold $7.5 billion in bonds to finance planned expansion of daily production to 5.8 million barrels by 2012, a figure no one outside the Chavez administration believes will be attained. Indeed, the oil company's latest projections for future investment and drilling "lack credibility and are quite risky," according to Mares' study, published this month by Rice University's Baker Institute.

Extracting Orinoco's oil

If PDVSA is to have any hope of significantly increasing production, its "Magna Reserva" project in the Orinoco fields must succeed. Officially, the country ranks seventh in the world, with reserves of 80 billion barrels. But the government says additional exploration of the Orinoco region before the end of 2008 will boost that total to 316 billion barrels, vaulting Venezuela beyond Saudi Arabia as the world's No. 1 oil power.

That title will be little more than an honorific unless PDVSA can extract the heavy oil from the ground. That isn't always easy in the Orinoco Belt, which the government has divided into four large oil fields named for the major battles of Latin America's 19th-century war of independence from the Spanish empire.

The Orinoco takeover illustrates Chavez's determination to regain control of the country's oil resources, which were opened to private investment in the 1990s after almost two decades of nationalization. During his first presidential campaign in 1998, Chavez hammered PDVSA for granting international oil companies what he said were overly generous contracts during the "apertura" or opening to private capital. Reflecting a clear break with the market-oriented policies of the 1990s, Chavez vowed to reassert Venezuela's "oil sovereignty" by placing the government in command of the country's natural resources.

Last year, the government converted 32 operating service agreements with foreign oil companies into new joint ventures, with PDVSA holding a majority stake.

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