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May 26 (Bloomberg) -- Petroleos de Venezuela SA ousted half its board of directors today after the state-owned oil company’s pension fund lost about $500 million in a Ponzi scheme linked to a Connecticut-based investor.

PDVSA, as the company is known, ejected the head of finance Eudomario Carruyo, internal director of production Luis Pulido, planning director Fadi Kabboul, head of gas Carlos Vallejo and research director Hercilio Rivas, according to a decree in Venezuela’s Official Gazette, which didn’t elaborate on the changes. Director Ricardo Coronado kept his post.

By removing Carruyo, President Hugo Chavez may seek to deflect criticism from the pension fund scandal that flared after a Securities Exchange Commission probe found Venezuelan-American Francisco Illaramendi used investors’ money to cover losses, said Patrick Esteruelas, senior analyst with the Latin American sovereign team at Moody’s Investor Service.

“It could be construed as a response to the Ponzi scheme, which has certainly attracted a lot of criticism of PDVSA’s finances and a lack of proper supervision,” Esteruelas said in a telephone interview from New York.

Carruyo on May 10 sent a report to Venezuela’s National Assembly denying PDVSA’s board was responsible for the $453 million loss. Illaramendi wasn’t employed directly by PDVSA. He worked for the oil producer while outsourcing with another company during 2004, Carruyo said in the report.

Covering Losses

PDVSA will cover all the pension fund’s losses, company President and Oil Minister Rafael Ramirez said March 27.

Ramirez was ratified in his post as were vice presidents Asdrubal Chavez and Eulogio Del Pino, today’s decree said. Finance Minister Jorge Giordani and Foreign Minister Nicolas Maduro were added to the board as external directors as well as the head of a pro-Chavez union named Will Rangel. New PDVSA board members are Victor Aular, Jesus Luongo, Orlando Chacin and Ower Manrique, it said.

Giordani will bring “additional pressure” on the company to invest more in Chavez’s social programs rather than in the oil sector, Esteruelas said.

“Giordani has been shifting the burden over to PDVSA and has been extremely reluctant to use resources to emit external bond issuances that fund capital flight,” Esteruelas said. “This is something that could become firmly entrenched now that Giordani has a seat on the board.”

Giordani declined to comment during an event in Caracas today.

Falling Production

Caracas-based PDVSA’s profit and production have been declining as the company increases investment in government social programs and unplanned refinery outages curb exports. Venezuela’s oil sector contracted 1.8 percent in the first three months of 2011, according to the central bank.

“I suspect the changes on the board were made in response to PDVSA’s steadily declining crude production,” Gianna Bern, president of Brookshire Advisory and Research, said today in a telephone interview from Chicago.

Venezuela’s net crude oil and refined products exports fell 4.5 percent in April from a year earlier to 2.14 million barrels a day, the oil ministry said on May 23. The country produces about 2.8 million barrels a day, according to the ministry.

The yield on PDVSA’s 12.75 percent dollar bonds due in 2022 jumped 51 basis points, or 0.51 percentage point, to 17.51 percent at 3 p.m. in New York, according to prices compiled by Bloomberg. The price fell 2.04 cents on the dollar to 77.24 cents, the biggest drop since the bonds were sold in February.

Arbitration Rulings

PDVSA, which is finalizing some accords with partners to increase output, may see the startup of projects in the Orinoco heavy crude belt delayed until 2013 or 2014 as companies seek to negotiate safeguards or incentives, said Alberto Ramos, an analyst with Goldman Sachs Group Inc.

“Oil companies currently operating as junior partners with PDVSA see the regulatory environment and governance conditions as challenging,” Ramos said today in a report after meeting officials in Caracas on a research trip.

PDVSA is expecting some adverse arbitration rulings and has set aside about $1.5 billion for payments, Ramos said. PDVSA may have to pay $3.7 billion in compensation to Exxon Mobil Corp. for nationalized assets, Barclays Capital analysts said in April.

“PDVSA will not dispute the rulings and may honor the largest ongoing arbitration claims with potential asset swaps,” said Ramos.

Link to Company News: {PDVSA VC <Equity> CN <GO>}

To contact the reporter on this story: Corina Pons in Caracas at Nathan Crooks in Santiago at

To contact the editor responsible for this story: Dale Crofts at

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