Maria Conchita Carrillo didn't learn to read and write as a child because her mother couldn't afford to send her to school. But in June the 77-year-old former seamstress will complete sixth grade, courtesy of Petróleos de Venezuela (PDVSA). Venezuela's state-run oil company doesn't just pay for Carrillo's schooling. It foots the bill for a new community health clinic where she can get free medicine, and it subsidizes the rice, cooking oil, and other staples she buys at government-run stores. "It's the first time that the government has ever done anything with our oil wealth to benefit the poor," says Carrillo, sitting in an improvised classroom in a poor barrio in Caracas.
Venezuela's oil riches have long been a curse as well as a blessing. The country boasts the largest petroleum reserves outside the Middle East. For the better part of a century the commodity has fueled the local economy -- along with the ambitions of politicians. Now, President Hugo Chávez, a left-leaning populist who draws inspiration from independence hero Simón Bolívar, is reaching deep into PDVSA's coffers to finance a "democratic revolution" to raise millions of Venezuelans out of poverty. Chávez is pumping some $4 billion of PDVSA's windfall profits into social programs each year. At PDVSA's headquarters in Caracas, a mural depicts Chávez and a child superimposed on an oil well, with the slogan: "Deepening the Bolivarian Revolution in 2005."
Turning petrodollars into good works? Sounds laudable. But Chávez is also using oil in his bid to turn Venezuela into a counterweight to U.S. influence in Latin America. Venezuela, once a dependable American ally, has become a thorn in Washington's side. The White House takes a dim view of Caracas' sales of subsidized oil to Fidel Castro's Cuba. It's also none too thrilled that Chávez is using petrodollars to outfit his army with Russian-made Kalashnikov rifles, combat helicopters and MiG fighter jets.
Ever since the Bush Administration appeared to endorse a short-lived coup d'état against Chávez in 2002, the Venezuelan leader has accused Washington of trying to oust him. In a Feb. 20 TV appearance he warned that George W. Bush plans to have him assassinated. If that happens, he warned, the U.S. will not receive another drop of Venezuelan oil for a 1,000 years.
Some of this is bluff and bluster. But Chávez knows he has oil-guzzling America in a corner. The U.S. depends on Venezuela for 15% of its oil imports, and when a strike at PDVSA disrupted crude shipments in 2003, American refineries were left scrambling. To curb Venezuela's dependence on the U.S., which absorbs 60% of the country's oil exports, Chávez has been working to find new markets. In December he inked deals to sell 120,000 barrels a month of fuel oil to China and is eyeing pipelines that could ferry larger amounts of crude to Pacific ports.
For now, Venezuela has little choice but to keep selling most of its oil to the U.S., where refineries are outfitted to handle high-sulfur, heavy Venezuelan crude. But if oil-hungry China builds similar refineries, Chávez will have a much freer hand in diverting oil from U.S. customers. No wonder U.S. Senator Richard G. Lugar (R-Ind.), recently asked the Government Accountability Office to conduct a study to determine how the U.S. might compensate for a drop in Venezuelan imports.
So far, Chávez' oil-fueled revolution appears to be going according to plan. The billions he spent on the poor helped him beat a recall referendum mounted by the opposition last August. It also powered consumer spending, boosting growth to 17.3% last year -- after two years of steep declines. Barring some unforeseen event, Chávez should handily win another six-year term in elections next year.
A STARVING GIANT
But everything depends on PDVSA's health. Interviews with former employees, foreign oil-company execs, and industry analysts indicate that the company has sustained heavy, perhaps long-term, damage under Chávez. The evidence: The government says Venezuela's oil output at 3.2 million barrels per day, but the Organization of Oil Exporting Countries puts it closer to 2.6 million. That's down sharply from a peak of 3.3 million in 1997. And despite sky-high oil prices, Central Bank data show that the oil portion of the economy actually shrank in the last three quarters of 2004. "The company is only a shadow of what it used to be," says Luis Giusti, PDVSA'S chairman from 1994 to 1999, and now a senior energy adviser at the Center for Strategic and International Studies in Washington.
Much of the decline can be traced to the paralyzing strike of two years ago. Angered by Chávez' appointment of a political ally to head a company that long prided itself as a meritocracy, some 18,000 of PDVSA's employees walked out, shutting down exports for two months. Chávez retaliated by firing them all.
It was a crippling blow, even if high oil prices mask the damage: PDVSA's preliminary 2004 results show a $6.5 billion profit on revenues of $63 billion. Yet, by other measures, PDVSA is hurting. Production levels at some of the country's most important wells are dropping at a rate of 25% a year, which means the company must ramp up exploration to keep output steady. Yet the number of exploratory rigs is down to 67 as of January, from a high of 119 in 1997, according to Baker Hughes Inc., an oil-services firm based in Houston. Independent analysts say this is evidence that the company is being starved of capital. PDVSA director Eulogio Del Pino insists the company continues to invest $5 billion to $6 billion a year in development and exploration: "Our [goal] is to reach production of 4.9 million barrels a day within five years, so we are investing according to that plan."
Venezuela's chances of making that target depend hugely on foreign oil companies, which today account for almost half of total production. The opening of the nation's oil sector to outside capital 10 years ago has netted some $25 billion in investments, with 22 foreign oil companies now present in the country.
Yet in October, Chávez hiked royalties on major heavy-crude exploration and refining projects in the country's Orinoco belt from 1% to 16.66%, arguing that the hike was justified based on market conditions. "These are highly profitable [projects], even considering the government's decision to [change the royalties]," says PDVSA's Del Pino. With the exception of Exxon Mobil Corp. (XOM ), which protested the increase and says it wants to negotiate a better deal, the oil majors have kept quiet. "We've been in Venezuela for 90 years, and we'll be here another 90 years," says Sean Rooney, Shell Oil Co.'s (RD ) new president for Venezuela operations.
The terms on new ventures will be even less favorable -- 30% royalties and a 51% stake for PDVSA. That could dampen enthusiasm for a new round of projects, especially since the new rules will not be finalized until mid-year. "We need a legal framework. Sanctity of contracts is key for us," says Luis Xavier Grisanti, who heads the Venezuelan Hydrocarbons Assn., which represents foreign investors.
The irony is that Venezuela's need for foreign investment in its oil industry will probably only increase. "We already killed the goose that lays the golden egg," says Ramón Espinasa, who stepped down as PDVSA's chief economist when Chávez took office in 1999. "That means the country will have no choice but to open even further to private international capital." Chávez' supporters counter that the old PDVSA was staffed by overpaid executives who cared little about using oil profits to improve the lot of poor Venezuelans. "Now employees are much more conscious of how important the company is for Venezuela," says Del Pino.
Chávez has even more plans for PDVSA. In February he signed agreements with Brazil that call for Petrobrás (PBR ), the state-run oil company, to help develop Venezuela's production and refining capacity. It's part of Chávez' dream of creating "Petroamerica," a Latin oil-and-gas giant controlled by the region's state-run oil companies. It may be far-fetched -- but it's abundant proof that Chávez' aggressive oil diplomacy has just begun.
By Geri Smith in Caracas