January 4, 2008 / 2:23 PM / 10 years ago

Oil at $100, Venezuela's Chavez faces industry slump

<p>Venezuela's President Hugo Chavez speaks at a news conference in Caracas December 26, 2007.Jorge Silva (</p>

CARACAS (Reuters) - Even with oil at $100 per barrel, Venezuela's leftist President Hugo Chavez faces a continued slump in the nation's energy industry that could slow his oil-financed campaign to create a socialist society.

Still recovering from defeat in a December referendum that would have let him run indefinitely for reelection, Chavez is likely in 2008 to struggle with falling productivity in the oil industry, which provides around half of government revenues.

Oil sector GDP shrank by 5.3 percent in 2007, according to central bank figures, extending a decline of 14.7 percent since Chavez was elected in 1998 despite oil prices jumping from near record lows to historic highs in the same period.

The figure does not necessarily reflect Venezuela's oil income, which has soared on record prices, but rather demonstrates changes in the total amount of production, transport and processing of oil and gas.

Economists say oil GDP is falling because of massive spending of energy revenues -- state oil company PDVSA paid out more than $13 billion for social programs in 2006 -- that keeps Chavez popular but leads to industry underinvestment.

Even if triple-digit prices are here to stay, a continued slide in oil sector GDP could crimp government finances down the road as Chavez works to retain supporters upset about problems ranging from corruption to rampant inflation.

Anna Gilmour, analyst with consultancy Jane's Country Risk, said oil at $100 gives Venezuela obvious short-term benefits.

"But even high revenues pose medium-term risks, because they mask ... declining production and reduce the incentive to bring much-needed investment into the industry," she said.

The 2007 decline, the largest since Venezuela was rocked by two oil strikes and a coup in 2002, came amid Chavez's takeover of four multibillion

heavy oil projects that pushed Exxon Mobil (XOM.N) and ConocoPhillips (COP.N) from the OPEC nation.


The Texas energy giants are suing Venezuela for taking their assets.

Investment from other foreign oil companies like Chevron (CVX.N) has mostly been shelved, and Chavez's tax hikes and contract changes have made new investors nervous about Venezuela.

Global energy agencies say Venezuela, the fourth-largest exporter of oil to the United States, is only producing around 2.4 million barrels per day -- 20 percent below official figures of close to 3 million bpd.

PDVSA continues to suffer repeated operational problems, with a growing number of outages at the company's refineries.

An anti-Washington ally of Cuba's Fidel Castro, Chavez took power in 1999 as Venezuela's oil prices were bottoming out below $10 per barrel, promising to fight poverty and ween Venezuela off its oil dependence.

He built up popular support by turning PDVSA into the financial engine of health and education programs and spurring economic growth with heavy state spending.

But voters shot down his proposed constitutional overhaul in December, complaining his revolutionary ambitions left him ignoring such problems as a soaring crime rate and the highest inflation on the continent.

The government in early 2008 is already showing signs of toning down its traditionally confrontational style, easing strict price controls that have led to nagging shortages, and slowing the growth of government spending to stem inflation.

But officials have shown few signs of strengthening the oil industry, with Chavez mostly striking deals with political allies such as Cuba that have little energy experience.

"There are fewer barrels being produced and fewer barrels being processed," said opposition economist Jose Guerra. "This is a very dangerous situation for the industry, and for Venezuela."

Reporting by Brian Ellsworth; Editing by John Picinich

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