Venezuela: Up in smoke - FT.com Hugo Chávez, who faces an election next month, is squandering oil wealth, according to critics ©Photoshot Disaster management: Hugo Chávez visits Paraguaná, where a blast in August deepened doubts about the oil industry's competence Some thought the thunderous blast was a bomb; others never had time to find out. Just after 1am on August 25, at least 42 people died after a gas leak exploded and sparked an inferno at Amuay, the world's second-largest refinery. It took three days to extinguish the blaze that ripped through the tangle of glittering smokestacks, tubes and tanks on Venezuela's windswept Paraguaná Peninsula. The accident shines a harsh light on the troubles of oil monopoly PDVSA, which sits atop the largest oil reserves in the world. The suggestion PDVSA might be falling apart is particularly bad timing for socialist President Hugo Chávez. The 58-year-old, who says he has beaten cancer, is seeking re-election on October 7. Henrique Capriles Radonski, the challenger, has seized on the tragedy as further evidence of government mismanagement and incompetence. Although the president insists that 40-year-old Mr Capriles will finish the election "on a stretcher" after his own "knockout" victory, polls promise a tight race. "The government won't assume responsibility," says Mr Capriles of the explosion. The problem is that [the government] is only bothered with solving problems in other countries, it doesn't care about what happens here. Mr Capriles" mention of "other countries" follows because Mr Chávez is the self-crowned king of Latin America's left. Since he was first elected 14 years ago, the former tank commander has befriended assorted pariah states, such as Iran and Belarus. He has also sought to bolster the revolution closer to home by selling more than a third of oil exports at subsidised rates to like-minded regimes, especially Cuba. All that has only been possible thanks to PDVSA, the world's fourth-biggest oil company, according to a Petroleum Intelligence Weekly ranking. Since 1999, it has accumulated revenues of more than $1tn, which the populist Mr Chávez has liberally tapped to finance his quixotic dreams. At home, Mr Chávez has used PDVSA as an all-purpose development agency to finance "21st century Socialism." Last year, PDVSA contributed $17.7bn in taxes, royalties and dividends, while $30bn went to social programmes and obscure off-budget government funds. PDVSA's wealth has also been used to back multibillion-dollar loans from China and to buy arms from Russia. It supplies, almost single-handedly, Venezuela's foreign exchange market. It is also a source of patronage: the number of employees, hired on the basis of their loyalty to the "Bolivarian Revolution," has tripled since 2003 to more than 121,000. Rafael Ramírez, PDVSA's president, boasts that they are all "red, very red." Such politicisation is evident at PDVSA's head office in Caracas, where giant banners of a beaming Mr Chávez hang over the heads of passers-by - even though the constitution forbids the use of public institutions for political propaganda. As in most other state institutions - such as the judiciary, army and central bank, which are also controlled by "chavistas" - technical ability is a secondary consideration to fealty. [The Amuay disaster] is not a random occurrence. It is the consequence of PDVSA's transformation from an efficient and effective company into a profoundly politicised institution," says Diego González, president of the Caracas-based Centre for Energy Orientation. It is "a reflection of what is happening in the rest of the country." With fewer resources and attention dedicated to oil, it is no surprise that, according to BP, production has fallen from 3.1m barrels per day to 2.7m b/d in the past decade. Higher oil prices have masked that decline. When Mr Chávez came to power, oil was less than $10 a barrel, now it is more than $100. Much of this windfall has also been spent on social projects, helping to reduce poverty from 44 per cent in 1998 to 27 per cent in 2011, according to government statistics. But investment has been scrimped on, and the cost to PDVSA's operational ability has been huge. Last year there was even a moment when markets feared for PDVSA's solvency; its bonds still yield a hefty 11 per cent. Indeed, Gustavo Coronel, a former board member, likens the company today to "a toothless tiger resting on its haunches before a huge slice of raw meat." Venezuela might have the largest oil reserves in the world, some 300bn barrels, according to BP's statistical review. Yet these remain undeveloped because of "severe management, technical and financial constraints driven by the application of a rigid statist ideology for what should be a commercial enterprise." Fernando Travieso, who runs the Socialist Oil Observatory in Caracas, rubbishes such accusations. "The opposition says PDVSA is broke when it has reserves under the ground worth $30tn - that's more than the GDP of the European Union," he says, adding proven reserves have almost quadrupled under Mr Chávez. Whether or not Venezuelans worry that Mr Chávez is killing the goose that lays the golden eggs will become evident in the October election. But his standing abroad is at rock bottom. Latinobarómetro's 2011 poll ranked Mr Chávez as the second-least popular leader in the region after Cuba's Fidel Castro. With that decline, his dreams of a pan-Latin American "Bolivarian" revolution - so named after Simón Bolívar, South America's 19th-century independence hero - have also faded. It was not always like this. Everything began to change at PDVSA after Mr Chávez's opponents led an industry strike in December 2002. Having failed to remove him in a coup d"état that April, the strike lasted two months, crippling the economy. Afterwards, Mr Chávez cleaned out PDVSA, sacking about 20,000 employees - many of them among its best technicians and managers. "I sheathed my sword [after the coup] and I was wrong," Mr Chávez told a cheering crowd of supporters after the strike was broken. I have been forced to draw it again, and I will never ever sheathe it. This radicalisation marked the birth of "the new PDVSA," which Mr Chávez says belongs to "all Venezuelans." Indeed, PDVSA now engages in a multitude of activities which have nothing to do with oil, from managing a chain of state grocery stores and building houses to manufacturing sports shoes and running a school for Formula 1 racing car drivers. A decade ago, PDVSA was considered one of the best run oil companies in the Americas. Today, inefficiency and incompetence have led to a string of accidents, causing 77 deaths before the Amuay explosion since 2003. The company's annual report admits a lack of funds has hurt maintenance. "The only maintenance they have done is to paint things red," says Francisco Luna, a PDVSA union leader. They make everything look nice and pretty but underneath it is all rusted. They don't replace parts until they break," he said, describing worker conditions as "disastrous." Although Mr Chávez first swept to power on a wave of national disgust with endemic corruption and clientelism, many believe the situation is now worse. The old economic elite has simply been replaced by the "bolibourgeoisie," a term coined to describe a new breed of business magnates that emerged under Mr Chávez. Although Mr Chávez has remained untarnished - his loyalists see him as innocent of the clientelism around him - he faced a particularly embarrassing incident in 2010 when the Aban Pearl offshore drilling rig sank just days after it was inaugurated. Mr Coronel has shown that PDVSA was paying an intermediary $730,000 a day for the rig's services, when they normally cost $358,000 a day. The intermediary turned out to be a shell company owned by Venezuelan businessmen identified by opponents as close to the government. "No matter where you look you see evident signs of waste and corruption," says Mr Coronel, who believes that transparency and accountability are at all time lows in PDVSA's "black box." Also in 2010, more than 100,000 tonnes of rotting food was found in containers imported by a PDVSA subsidiary. This was especially awkward for the government since it was blaming the private sector for food shortages at the time. Then, in 2011, almost $500m went "missing" from a PDVSA pension fund after being invested in a Ponzi scheme run by a former PDVSA financial adviser. Perhaps the most infamous case, though, is of Guido Antonini Wilson, a US-Venezuelan businessman, who in 2009 flew with a team of PDVSA officials to Buenos Aires, only to be caught red-handed in customs after failing to declare a suitcase containing almost $800,000 in cash that US prosecutors later claimed was sent by Mr Chávez to support Cristina Fernández de Kirchner's presidential campaign. Mr Chávez said the charge was an attempt by the US "empire" to discredit him. Remarkably, in none of these cases has anyone been prosecuted. Anywhere else, this might have put an end to Mr Ramírez's lengthy career as PDVSA's president. Detractors suggest Mr Ramírez - who, unusually, as energy minister is also PDVSA's regulator - has always provided Mr Chávez with what he wants most: money. For years, the legacy of past investments, rising oil prices and the sheer depth of Venezuela's reserves have kept PDVSA afloat. This has enabled Venezuela to get financial help from abroad, including $32bn of loans from China in return for secured future oil shipments, but has increased its debt tenfold. Critics argue PDVSA is simply mortgaging its future. That future depends most on the upcoming elections. For now, most international oil companies - essential for the development of the oil-rich Orinoco Belt - have adopted a wait-and-see attitude. Although US majors ExxonMobil and ConocoPhillips have already left, others argue that the worst is already over. "We've lived with Chávez for so long that we know what we're dealing with," says one senior executive at a foreign oil company. He would have nationalised us by now if he had wanted to. Venezuela understands it needs foreign oil companies, says another. That is our best insurance. If Mr Capriles wins, he has promised to put an end to PDVSA's "arbitrary and unclear use" of its revenues, sending "not a single drop more" to allies abroad. That could only be a good thing for the much needed investment in the industry, and thus Venezuela, oilmen say. Should Mr Capriles lose, though, Mr González, the oil analyst, fears that Venezuela could "miss the boat and turn into the largest energy theme park in the world."