ANDRES OPPENHEIMER Venezuela's oil production is still iffy

Judging from an internal U.S. Southern Command report on long-term oil production in Latin America, Venezuelan President Hugo Chavez is unlikely to meet his promises of energy assistance to neighboring countries and could even find himself with problems to keep production up at home.
Before we get into whether the study is realistic or wishful thinking by U.S. military analysts, let's look at the report's main conclusions.
Overall, Venezuela, Mexico and Ecuador will face growing production problems because, among other things, "investors are becoming more cautious as some governments are changing the rules of investments," the report says. It adds that "a re-emergence of state control in the energy sector will likely increase inefficiencies and, beyond an increase in short-term profits, will hamper efforts to increase long-term supplies and production" in those countries.
Venezuela is facing some of the biggest problems, the report says. The country's oil production "has experienced a decline" in recent years because of a lack of investment and mismanagement of state-owned companies.
While Venezuela's PDVSA state oil company reports it is back to its pre-2002 production level of 3 million barrels a day (before the oil workers' strike), the Southern Command report quotes U.S. International Energy Agency and OPEC oil-cartel figures as showing that Venezuela is actually producing only up to 2.6 million barrels a day.
"Despite higher oil prices and the capability to reinvest in the energy sector, Venezuelan President Hugo Chavez is using a large portion of oil revenues to relieve internal social pressures and expand his Bolivarian revolution abroad," the report says. "This expenditure is directly at odds with PDVSA's own investment strategy that would entail capital investments of over $8 billion per year over the next five years."
Incentives for foreign companies to invest in Venezuela's oil fields "are decreasing as the government continues to implement unfavorable terms," the report says.
Income tax increase
Chavez recently increased foreign oil companies' income tax from 34 percent to 50 percent, raised their royalty payments from 17 percent to 33 percent and forced them to convert their operating contracts into joint-venture agreements with PDVSA, giving the state-owned company a majority stake in the country's oil fields.
Venezuela's ambassador to the United States, Bernardo Alvarez, told me in an e-mail response to my questions that Venezuela is producing 3.3 million barrels a day and cited AIE and BP Statistical Review reports as saying that the country produced about 3.1 million barrels a day last year. He added that "in 2006, it is estimated that Venezuela's average production could reach 3.4 million barrels a day."
Asked how Venezuela will increase production without more investments, Alvarez said, "Venezuela is increasing its oil investments." He cited several oil projects, saying that investments "have increased this year, to a projected level of more than $3 billion." He added that Venezuela will invest more than $9.2 billion in energy projects in 2007 and $8.5 billion in 2008.
Many U.S. oil experts say Venezuela is playing games with production figures. Jorge Pinon, a former head of Mobil Oil Latin American operations who is now an energy researcher with the University of Miami, estimates that current conventional crude oil production in Venezuela is nearly 2.8 million barrels per day.
"They are manipulating the figures by adding the Orinoco basin production of synthetic crude, which is not usually recognized or accounted for by international agencies," Pinon said.
And Rene Leon, El Salvador's ambassador to the United States, is just as skeptical of Venezuela's oil assistance offers to other Latin American countries. Asked about Chavez's vows to supply cheap oil to El Salvador's leftist-ruled provinces, Leon said that "so far, not a drop" of Venezuelan subsidized oil has arrived in his country.
My conclusion: It's hard to know which side's figures are more accurate. But there seems to be a consensus among independent oil experts that Chavez won't be able to both meet his ambitious foreign energy assistance promises and maintain or increase production levels at home. With luck, he may be able to do one thing or the other, but -- especially if oil prices decline somewhat, as most experts predict -- he won't be able to do both things at once.
X Andres Oppenheimer is a Latin America correspondent for the Miami Herald. Distributed by Knight Ridder/Tribune.