Venezuela's oil output slumps under Hugo Chavez
Venezuela's daily oil production has fallen by a quarter since President Hugo Chavez won power, depriving his "Bolivarian Revolution" of much of the benefit of the global boom in oil prices.

By Jeremy McDermott in Caracas
Last Updated: 7:26AM BST 13 Oct 2008

To win allies and forge an anti-American front, Mr Chavez sells oil to friendly countries at low prices. Ironically, the only big customer buying Venezuelan oil at the full market price is the United States, which the president routinely denounces as the "Empire".

"As production falls, the sales to the US become more important," said Pietro Donatello, an oil analyst from Latin Petroleum in the capital, Caracas. "Only the US is paying the full amount for Venezuelan oil and in cash, the rest are in some kind of barter agreements."

The state oil company, PDVSA, produced 3.2 million barrels per day in 1998, the year before Mr Chavez won the presidency. After a decade of rising corruption and inefficiency, daily output has now fallen to 2.4 million barrels, according to OPEC figures. About half of this oil is now delivered at a discount to Mr Chavez's friends around Latin America. The 18 nations in his "Petrocaribe" club, founded in 2005, pay Venezuela only 30 per cent of the market price within 90 days, with rest in instalments spread over 25 years.

The other half - 1.2 million barrels per day - goes to America, Venezuela's only genuinely paying customer.

Meanwhile, Mr Chavez has given PDVSA countless new tasks. "The new PDVSA is central to the social battle for the advance of our country," said Rafael Ramirez, the company's president and the minister for petroleum. "We have worked to convert PDVSA into a key element for the social battle."

The company now grows food after Mr Chavez's price controls emptied supermarket shelves of products like milk and eggs. Another branch produces furniture and domestic appliances in an effort to stem the flow of imports. What PDVSA seems unable to do is produce more oil.

Venezuela has proven reserves of 80 billion barrels, but estimates suggest that it may possess 142 billion barrels - more than anywhere else except Saudi Arabia. But the crude is of low quality and must be upgraded before it can be shipped. There are only three upgrade units currently operating, processing only 600,000 barrels per day.

"There is a bottleneck in the Venezuelan production system," said Mazhar al-Sheridah, 68, an oil expert at the Central University of Venezuela. "It will cost at least $32 billion to build another three upgrading units and take some five years, meaning that Venezuelan production is stuck at current levels for a while yet."

All this means that Venezuela has missed much of the benefit from the oil boom and, now that prices are falling, Mr Chavez faces huge financial problems. Nobody is sure at what point his government would be unable to pay its bills, but most sources consulted believe this would probably happen if oil falls to $80 a barrel. Yesterday, oil was trading at $79.80.

Oil powerhouse Venezuela struggles to keep lights on

By Brian Ellsworth Brian Ellsworth – Wed Oct 22, 11:49 pm ET

SAN FELIX, Venezuela (Reuters) – Despite having some of the world's largest energy reserves, Venezuela is increasingly struggling to maintain basic electrical service, a growing challenge for leftist President Hugo Chavez.

The OPEC nation has suffered three nationwide blackouts this year, and chronic power shortages have sparked protests from the western Andean highlands to San Felix, a city of mostly poor industrial workers in the sweltering south.

Shoddy electrical service is now one of Venezuelans' top concerns, according to a recent poll, and may be a factor in elections next month for governors and mayors in which Chavez allies are expected to lose key posts, in part on complaints of poor services.

The problem suggests that Chavez, with his ambitious international alliances and promises to end capitalism, risks alienating supporters by failing to focus on basic issues like electricity, trash collection and law enforcement.

"With so much energy in Venezuela, how can we be without power?" asked Fernando Aponte, 49, whose slum neighborhood of Las Delicias in San Felix spent 15 days without electricity -- leading him to block a nearby avenue with burning tires in protest.

Just next door, Carmen Fernandez, 82, who is blind and has a pacemaker, says she has trouble sleeping through sultry nights without even a fan to cool her.

Experts say Venezuela for years has skimped billions of dollars in electrical investments, leaving generation 20 percent below the level necessary for a stable power grid and increasing the risk of national outages. Officially Venezuela has a capacity of 22,500 megawatts for a population of 28 million people, but a sizeable proportion is not working, analysts say.

And while Chavez has won praise for investing in health and education, his government has done little to repair local distribution systems that deliver electricity to end users, from barrio residents to business and industries.

'GOD HEARD ME'

Pastora Medina, a legislator representing San Felix and nearby cities suffering chronic power problems, this month tried to bring the issue up in the national Congress in Caracas, but the legislature's leadership refused to let her speak.

Several hours later, as the legislature discussed a South American integration plan created by Chavez, Congress itself lost power for around 10 minutes.

"Congress wouldn't listen to me, but God must have," Medina said with a chuckle as she recounted the incident later at her office in San Felix.

Though it is a key oil exporter, most of Venezuela's power comes from hydroelectricity generated in dams in the southeast, near Brazil, and sent to the rest of the country. The remainder comes mainly from aging oil-fired plants.

The transimission system is also suffering from underinvestment, which makes it vulnerable to the failures that caused this year's blackouts.

The government has responded by building dozens of tiny local plants that generate a fraction of a percent of national consumption, a model known as "distributed generation" used in Cuba, where a U.S. embargo impedes electrical development.

But to keep up with demand, Venezuela needed to add 1,000 megawatts of new generation capacity every year for at least the last five years, but instead it has installed only about 350 MW a year.

"We have to reach the most remote villages with the system of distributed generation," Chavez said in recent speech, inaugurating a generator in a town with deficient power.

His government has also promised to accelerate new generation and boost transmission grid investment.

BARRIO IMPACT

But critics say these small power plants are political quick fixes that avoid tackling the thorny problems of boosting generation and fixing decrepit distribution systems.

"We need a clear energy policy, because the policy we have is not sustainable," Andres Matas, a former planning chief for a state power company. "This is a problem for the entire country."

He said this will require investment in local distribution systems, speeding up generation projects stalled for years by bureaucracy and lifting state-imposed price controls that keep tariffs at about 20 percent of what U.S. residents pay.

It will also require collecting fees from millions of barrio residents who illegally link their homes to the power grid with improvised and dangerous lines -- a move not likely to be popular with a government that depends on barrio votes.

Even as he enjoys strong support for his oil-financed social development campaign, polls show Chavez sympathizers are losing patience with the national and local politicians' inability to tackle bread-and-butter issues.

Chavez last year fired up his supporters with a wave of state takeovers including the nationalization of electricity operations, among them Electricidad de Caracas, which was majority owned by U.S.-based AES Corp.

But his supporters now seem more concerned about deteriorating service than the state ownership.

Chronic power problems take the strongest toll in barrios like those of San Felix -- still bastions of Chavez support -- where power surges routinely burn out home appliances.

"Our refrigerators have burned out so we can't shop for the week, we can only shop for one day at a time," said Nestor Pacheco, 39. "The situation is serious."

(Reporting by Brian Ellsworth; Editing by Eddie Evans)