Venezuela behind on payments to oil contractors

The Associated Press Friday, February 6, 2009 CARACAS, Venezuela: Venezuela's state oil company owes billions of dollars to hundreds of private oil contractors from Oklahoma to Belarus — but that hasn't stopped President Hugo Chavez from drawing on the industry to fund social programs as he campaigns to extend his time in power. State oil company Petroleos de Venezuela SA, or PDVSA, said unpaid invoices jumped 39 percent in the first nine months of last year — reaching $7.86 billion in September. And that was when world oil was still selling for $100 a barrel. Prices have since plummeted to less than half their September level, prompting PDVSA to renegotiate some contracts. But analysts say hardball tactics to reduce charges from crucial service providers could backfire by lowering Venezuela's oil output. And foreign debt markets are reflecting jitters about Venezuela's government finances based on the pending payments, lagging oil prices and an upcoming referendum that could lift presidential term limits for Chavez. Companies that perform oil drilling, consultancy and other services already say they are halting operations because of PDVSA debts. U.S. contractor Helmerich & Payne Inc. said last week that it has stopped drilling with two of its 11 oil rigs in Venezuela because of delayed payments. The Tulsa, Oklahoma, company says it will stop three more rigs by the end of February and the rest by the end of July if PDVSA doesn't begin to pay off a debt it puts at nearly $100 million. Dallas-based Ensco International Inc. said it suspended operations on an oil rig off Venezuela's Caribbean coast because it was owed $35 million, prompting PDVSA to take over operations. And Belgazstroy of Belarus has stopped work on gas networks in western Venezuela because of nonpayment, Venezuela's ambassador to Belarus, Americo Diaz Nunez, told Russia's RIA-Novosti news agency, adding that two other Belarusian contracts are also in question. Greg Priddy, a global oil analyst with the Eurasia Group in Washington, estimated that within a year, production could decline an extra 100,000 to 150,000 barrels a day if drilling slows — equal to $5 million of daily income even at today's slumping oil prices. PDVSA said in a statement that service providers increased prices by as much as 40 percent when oil prices were high. Beyond that, company officials said that only Oil Minister Rafael Ramirez could discuss the debts to service providers. PDVSA headquarters did not respond to requests for an interview with Ramirez, but he previously said PDVSA will make good on debts accumulated with contractors. Venezuela's net oil income soared 225 percent in the first nine months of 2008, allowing PDVSA to stash $10.8 billion in a government-run investment fund to be used for infrastructure, agriculture and other projects. Chavez has gained widespread popularity by using the country's vast oil wealth to help the poor. He is also in the midst of campaigning for a Feb. 15 referendum that would eliminate term limits for all elected officials, allowing him to seek re-election indefinitely. "The government is making priorities" on spending, said RoseAnne Franco, a lead analyst at Washington-based PFC Energy. In Venezuela's oil-producing Zulia state, PDVSA has held off on paying 230 service providers for an average of six months, said Nestor Borjas, state director of the nation's Fedecamaras business chamber. The debts total about $465 million, he said. The outstanding payments appear to be contributing to declining confidence in government-issued bonds. Venezuelan bond prices have fallen 7 percent since Jan. 9, to an average yield of 17.4 percentage points more than U.S. Treasuries, said Enrique Alvarez, head of research for Latin American financial markets at IDEAglobal in New York. He attributed the plunge to PDVSA's shortfalls in payment, falling oil prices and the referendum that could open the door for Chavez to run for re-election in 2012 and beyond. Still, some analysts agree with government assurances that it has plenty of cash accumulated from the days of $147-a-barrel oil. Alejandro Grisanti, an analyst with Barclays Capital in New York, said Venezuela likely has enough savings to sustain itself with oil prices of $45 a barrel through 2010. Oil accounts for 94 percent of Venezuela's exports and funds nearly half the government's budget. "While Venezuela is still far from being in a comfortable economic and financial position, the expectations of a default price in the markets appear excessive," he said in a recent report. Some suppliers say they're not worried by the delays. "It's happened in the past. We've always been paid," said Jens Schmidt, general manager for Copenhagen, Denmark-based Maersk Drilling in Venezuela, whose 10 offshore rigs are all operating normally. Franco says many oil companies around the world are delaying payments as they renegotiate contracts with service providers, but that PDVSA is taking a stronger stance than most. "It's part of a larger strategy of hardball," said Franco, adding the tactic is likely to discourage already reluctant foreign investors.