Venezuela oil output may slide on cash woes

By Brian Ellsworth - Analysis

CARACAS (Reuters) - Venezuela faces a growing risk of falling crude production in the coming months as oil service companies show signs they may halt key activities over a huge buildup in unpaid bills sparked by tumbling crude prices.

A major oil sector slowdown would devastate the OPEC nation's economy and force cuts in billions of dollars in social programs that keep leftist President Hugo Chavez popular among Venezuela's poor majority.

Some service providers have idled operations as they await payment while local firms are struggling to keep workers paid, foreshadowing a slowdown in critical oil field services required to maintain output.

The problems may balloon in the coming weeks because top officials at state oil company PDVSA are focused on campaigning for a February 15 referendum on amending the constitution to allow Chavez to stay in office after his term ends in 2013.

"Venezuela's energy policy has been to capture oil revenues at the expense of sustaining production levels," said Antoine Halff, analyst with Newedge brokerage in New York.

"It worked as long as oil prices were rising, but in a bear market its unsustainable nature becomes evident."

Venezuela says oil production is still around 3 million barrels per day, but after a decade of Chavez rule, especially a crippling energy strike in 2002/2003, output has slumped to around 2.4 million bpd according to industry analysts.

Reeling under the impact of a $100 per barrel drop in oil prices in the last six months, PDVSA is struggling to pay at least $8 billion in debts to companies that provide a dizzying array of services ranging from transportation to oil field exploration.

PDVSA said in a press release on Friday it was urging service providers to lower costs that rose 40 percent in 2008, adding that "a large part of the debts registered by contractors are related to the increase in costs of 2008."

The situation changes the panorama for Chavez, who has for years depended on ever-increasing oil revenues to expand services to the poor, spur lavish consumer lifestyles and win repeated elections on a platform of wealth redistribution.

Driller Helmerich and Payne (HP.N) on Thursday said it had halted two rigs for lack of payment of some $100 million and could leave up to five idle by February as contracts expire.

PDVSA on Tuesday said it took over a rig owned by Texas-based Ensco (ESV.N) after it halted operations to demand $36 million in pending payments.

PAYMENT CRUNCH

Union officials say service company workers, particularly in the western state of Zulia, have for weeks been paid less than their full salaries or gone without pay because their employers are running out of money.

PDVSA said it has ordered service companies to pay workers while they continued negotiations of other issues.

The company denied firing any of its own workers, but said "it was taking actions to protect" contract employees at service companies following union complaints that PDVSA had dismissed some 1,500 contractors.

"With PDVSA undercutting contractors and suppliers, there is a good possibility we'll see larger production declines than what we are accustomed to seeing," said Patrick Esteruelas, an analyst with the Eurasia Group in New York.

Industry sources expect the government will ensure workers are paid during the next two weeks to prevent social unrest from marring the referendum campaign, which has kept PDVSA officials too busy to answer calls from providers.

One oil executive evaluating investments in Venezuela said he found the energy ministry "abandoned" on a recent visit. An official told him the workers were at a pro-Chavez rally.

Production at Venezuela's oil fields naturally falls by 25 percent per year, known as the "decline rate," meaning PDVSA must constantly drill new wells just to keep production flat.

And many of the older fields, particularly in Zulia state, require reinjection of natural gas to maintain well pressure that helps push oil to the surface.

Slowing down these activities would have an immediate effect on production levels and could damage the fields.

Industry giants, like Halliburton (HAL.N) which is owed some $200 million, are digging in for tough payment talks while trying to maintain good relations so they can work in Venezuela in the future.

But some small local firms, such as equipment manufacturers and construction companies, are teetering on the edge of bankruptcy, financing operations out of pocket, and preparing for the possibility they may have to shut operations.

Falling behind on certain payments can prevent small companies from accessing hard currency through the nation's currency control board which limits their capacity to import equipment or materials and can leave them further behind on bills.

"We've already talked to the lawyers, if things go on like this, we're not going to make it," said one local service company owner, who asked not to be identified.

(Editing by Marguerita Choy)