Grand Theft Oil

It's not a new video game. (T)Hugo Chavez is set to seize control of Venezuela's oil fields from the Western companies that have invested $20 billion dollars in recent years there. (Read steal their assets). He's calling it glorious, oil analysts are calling it stupid. With good reason. (T)Hugo will be facing an economic disaster if oil prices decline because his state-run oil company is acting more like a welfare operation than a business. And production is falling as a result.

The shift is being greeted with revolutionary fervor. "For the country's workers, it's a day to celebrate," Energy Minister Rafael Ramirez said recently.

Despite the pomp of the occasion, many oil analysts question whether the state company, Petroleos de Venezuela, is prepared to oversee the development of projects in the country's north that, if fully exploited, could give Venezuela the largest certified oil deposits in the world.

The firm, which previously had a minority stake in each of the projects, will now be better positioned to make key decisions on production and refining, and on how to manage the workforce. It will also assume more responsibility for investments. But the fields contain a heavy, molasses-like oil that is highly expensive and problematic to refine — and the state company could face severe financial and technical challenges, analysts say.

On the surface, PDVSA, as the company is best known, appears stronger than ever. It is among the world's top five oil companies and exports to the United States, Europe and distant China. Last year its revenue, including refineries and the Citgo retail arm in the United States, topped $100 billion.

PDVSA has also become a tool for social change in the president's self-styled revolutionary government, spending nearly $12 billion last year to alleviate poverty and helping run programs from home building to literacy training.

But oil analysts say the pace and scope of the expenditures on social programs, up from $549 million in 2003, are hitting the company hard, leaving it vulnerable.

Company filings and interviews with oil analysts show that PDVSA has failed to invest in infrastructure and is unable to ratchet up production. If prices tumble — unlikely in the near term, but almost certain in a historically volatile industry — the company would have difficulty making up for the shortfall, troubling for a country that depends on PDVSA for three-quarters of its export revenue.

Given the relatively difficult extraction of Venezuela's low grade crude oil, investment in the infrastructure is vital. (T)Hugo, like socialists everywhere, doesn't understand that wealth is not created by government decree. It will require capital to build that infrastructure and (T)Hugo has effectively killed any interest in companies providing foreign capital. Why bother? When production falls further, (T)Hugo will have to seize more to keep up the illusion of oil revenue. Meanwhile what revenue the country gets from oil is being squandered rather than reinvested. Give (T)Hugo a few years and he will have run the entire Venezuelan oil production into the ground. Where the oil will stay.