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Money News

ANALYSIS - Venezuela's PDVSA at crossroads

CARACAS (Reuters) - Venezuela’s state oil company PDVSA is at a crossroads: act now to salvage the skills and equipment that once made it a rival to Brazilian giant

Petrobras, or risk tipping irrevocably into the type of decline suffered by Mexico’s Pemex.

So far, it appears more likely to take the same path as Pemex.

During more than a decade under socialist President Hugo Chavez, PDVSA has expanded quickly with the nationalizations of major crude projects and has hired tens of thousands of workers.

But Chavez also has insisted the world’s No. 4 oil company fund huge social welfare projects, which, combined with a sky-high payroll, falling production and volatile global prices, has left it in dire financial straits.

It is a similar story at Mexico’s state-owned monopoly Pemex [PEMX.UL], created when the government nationalized the oil industry in 1938.

Pemex has much stricter restrictions on private investment than PDVSA, but has continued to add staff despite a steep decline in production over recent years. Some experts believe it could cease oil exports in the next five years.

But Brazil’s Petrobras, the third of Latin American’s oil “majors,” shows that the region’s state-led oil enterprises can tell a different tale.

Despite a growing debt load, Petrobras is strengthening its position as the region’s most successful oil company and has ambitious plans to exploit massive deep-sea reserves. It could almost double its output over the next

decade.

Comparing full-year figures for 2009, Petrobras significantly boosted its total equity and posted the highest revenue of the three companies, more than $100 billion.

Pemex [PEMX.UL] and PDVSA face increasing demands from their governments, forcing them to take on more debt and limiting their ability to invest as they struggle to turn around falling production levels.

“Petrobras will be much more successful in developing their investment plans than PDVSA and Pemex, which continue to be the petty cash boxes of their governments,” said Francisco Monaldi, a visiting professor at Stanford University and the author of a

study on oil tax regimes across Latin America.

While Petrobras maintains a certain independence from Brazil’s government, ties between the other two companies and their states are close. PDVSA is the main engine of Chavez’s socialist “revolution,” while Pemex is saddled with a crushing

tax bill and low domestic prices.

PDVSA has become increasingly politicized under Chavez, with Venezuela’s oil minister describing it as “red from top to bottom”.

In Mexico, Pemex’s access to investment resources has bee curtailed, undermining its current and future performance.

FINANCING THE ORINOCO BELT

This month, PDVSA said its net profit more than halved in 2009 to $4.4 billion due to the global financial crisis, lower crude prices and production declines. Revenue dropped 41 percent to $75 billion.

Its focus is on developing vast extra heavy oil reserves in its Orinoco belt with projects that are slated to increase Venezuela’s total crude output by about 70 percent, or some 2.1 million bpd of new production.

If those projects are successful, PDVSA could pull out of its slump.

But, with Venezuela likely to be the only country in Latin America to record negative economic growth in 2010, some analysts question whether it will be able to meet its 60 percent share of the Orinoco financing costs.

“No one believes PDVSA can invest close to $7 billion per year of its own money in the Orinoco region,” said Gustavo Coronel, a former director at PDVSA.

“The country simply does not have that kind of money. In fact, both the country and PDVSA are increasingly growing their debt due to commitments that clearly exceed their financial capabilities, some of them not even related to oil.”

The strong politicization of both Pemex and PDVSA can be seen in the number of workers they had last year -- 145,461 and 102,750, respectively, compared with 76,919 employees at Petrobras.

Although the cash cost of paying its workforce is just a fraction of Pemex’s budget, it is saddled with more than $40 billion in unfunded retirement obligations from decades of sky-high employment levels. Those pension obligations are

slightly larger than Pemex’s long-term financial debt.

PDVSA says its high number of employees is a result of nationalizations and putting contract workers on the payroll.

But the staffing increases in both Mexico and Venezuela came amid decreasing production. Venezuelan output has stagnated since early last year, while Mexican oil production has plunged by nearly a quarter since 2004 as output from the

aging Cantarell field has collapsed.

The conservative government of President Felipe Calderon wants to make Pemex more efficient and has tried to push through reforms, but opponents in Congress have blocked efforts to give private companies more of a stake in the oil industry

and Pemex’s staff numbers have continued to climb.

REFINING OR EXPLORATION?

“Due to falling oil output, especially from offshore, Mexico will likely cease being an oil exporting nation by 2015,” U.S. geologist Byron W. King wrote this month. “Right now, there’s not nearly enough internal Mexican investment in

exploration and new oil development ... it’s fair to ask if Mexico should change its approach to development.”

Mexico relies on imported gasoline to meet more than 40 percent of domestic demand due to years of under-investment in refining, while Venezuela has had to import 60,000 barrels per day of products this year due to problems in its refinery

network.

Petrobras investors remain focused on a massive share offering slated for September. It is the backbone of a campaign to tap deep-sea reserves estimated at between 50 billion and 100 billion barrels of recoverable

crude.

In the long term, Petrobras also needs to increase its oil production to satisfy a voracious domestic market that sucked up some 1.75 million bpd in 2009 -- more than 80 percent of its production -- in order to generate more exportable surplus.

The company still faces financial challenges, concerns over its operational priorities and political pressures.

At the end of 2009, Petrobras had the highest debt of the three Latin American “majors” at $56.87 billion, and its plans to step up investment in refining have raised concerns that it is moving away from its core competency as a deep-water

exploration and production pioneer to satisfy the state’s desire for it to create more jobs.

While it is nowhere near as interventionist as Chavez’s administration, Brazil’s government is also looking to use more of Petrobras’ profits to help finance social welfare policies.

Editing by Frank Jack Daniel and Kieran Murray

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