UPDATE 2-Venezuela 2010 oil output lowest since 2002 strike

Tue Mar 1, 2011 1:55pm EST

* Output slides on low investment and rains

* Exports up to 2.6 mln bpd in January

* Some signs that production will not slide further (Releads, adds details, background)

CARACAS, March 1 (Reuters) - Venezuelan oil production fell in 2010 to its lowest level since a strike froze output eight years ago in a worrying sign for President Hugo Chavez, who uses oil revenue to pay for his socialist revolution.

Data released by the Oil Ministry on Tuesday showed production was 2.78 million barrels per day last year, compared with almost 3 million bpd state oil company PDVSA says the country produced the year before.

South America's top oil exporter, Venezuela sits on some of the largest oil reserves in the world. Output has not been so low since opponents of Chavez tried to oust him by shutting down the oil industry in a months long strike that started in 2002.

There are a number of reasons for the current decline, including lingering OPEC output cuts and bad weather in the last quarter. Underlying PDVSA's problems, however, is low investment in aging fields and maintenance problems stemming from a wave of nationalizations in recent years.

Oil sales provide 95 percent of Venezuela's export income and falling output is a headache for Chavez who uses the money to finance costly social programs and nationalizations and is widely expected to ramp up spending ahead of presidential elections in 2012.

"The Venezuelan economy is becoming more vulnerable to oil prices," said Boris Segura of Nomura Securities. "The recovery of production will not be enough to balance public finances, especially at the gates of the public spending-fest that awaits in 2012."

PDVSA is required to hand over so much of its revenue to the government that it has neglected maintenance of its older oil fields, hastening the decline of thousands of mature wells.

A wave of expropriations has also hit production, with PDVSA struggling to take on field and drilling services previously carried out by private companies.

Chavez nationalized more than 70 oil service companies in 2009, including U.S. operators Tidewater (TDW.N) and Exterran (EXH.N). Production is also down at four flagship upgraders that turn tar-like crude from the Orinoco basin into exportable oil. [ID:nnN26125419] The upgraders were brought under state control in 2007.

HOPEFUL SIGNS

The government says production will recover as the development of new areas of the vast Orinoco region are completed. But just 50,000 bpd of new production is likely to come online from the Orinoco belt by the end of 2011, compared with the 200,000 bpd drop in output last year. [ID:nN19236122]

PDVSA does have some cause for optimism, since production appears to have bottomed out in November before rising again in December. Data from service provider Baker Hughes shows and increase in drilling activity in recent months.

Stormy weather in the last quarter of 2010 reduced exports, meaning production was slowed as storage facilities reached capacity.

"The rains had an impact at the end of 2010 and it now appears that there is a catch up, but the recovery will not be major," Segura said.

The oil ministry also released export data for January, saying oil shipments reached 2.59 million bpd, up from 2.28 million bpd the month before.

The jump in exports was due to an increase in shipments of conventional crude, upgraded crude and products. (Reporting by Marianna Parraga; Writing by Frank Jack Daniel; Editing by Walter Bagley and Marguerita Choy)

FILED UNDER: