Last August, state oil company Petroleos de Venezuela SA issued one of its largest tenders in recent years: a multi-billion dollar project in the Orinoco Belt, the world's largest crude reserve. The project was designed to shore up the OPEC country's stagnating oil production and ease an economic crisis.

Then, out of the blue, a tiny Colombian trucking and trading firm with no relevant experience beat global industry leaders to win the contract, worth around $4.5 billion (£3.4 billion) according to one PDVSA [PDVSA.UL] document. Alarm bells rang among PDVSA's foreign partners, which include Chevron (>> Chevron Corporation) and Rosneft (>> Rosneft' NK OAO).

Trenaco, headquartered in Switzerland but largely run out of Colombia, had edged out the world's top service companies — Halliburton (>> Halliburton Company), Schlumberger (>> Schlumberger Limited.) and Weatherford (>> Weatherford International plc) — after a series of meetings with top-level PDVSA executives in the six months before the contract was tendered.

Certain it would obtain the huge contract to drill 600 wells, Trenaco began hiring staff and buying equipment months before winning the tender, according to four high-ranking sources from the now-liquidated company, as well as WhatsApp text and audio messages between senior staff reviewed by Reuters.

In an unprecedented rebellion, however, foreign oil firms - which would have had to work with Trenaco as PDVSA's joint venture partners - protested that the company was vastly underqualified and undercapitalized, according to complaint letters sent to PDVSA last year, copies of which were seen by Reuters. Executives at companies that sent the letters showed them to Reuters on the condition that they not be identified as sources.

The international companies also say they feared that getting involved in a massive public project anchored by a small and obscure contractor would expose themselves to regulatory scrutiny back home.

"There were red flags everywhere," said one foreign joint venture partner in Caracas.

In one complaint letter reviewed by Reuters, a multinational oil company wrote that Trenaco was "not qualified technically or financially" to handle the project.

Despite PDVSA's attempts to persuade partners to accept the deal during joint venture meetings, the foreign companies refused to fold, and the agreement finally collapsed between December and January, according to joint venture partners.

Venezuela's Oil Ministry, Information Ministry and PDVSA did not respond to detailed questions about the Trenaco project.

Among PDVSA's joint venture partners, the United States' Chevron, India's ONGC Videsh , Russia's Rosneft, Spain's Repsol (>> Repsol SA) and Japan's Inpex (>> Inpex Corp) declined to comment. Japan's Mitsubishi Corp (>> Mitsubishi Corp) said it "didn't complain about this deal," and had no further comment. Italy's Eni (>> Eni SpA), China's CNPC [CNPET.UL], India's Reliance Industries (>> Reliance Industries Limited), India's Oil India Ltd (>> Oil India Limited) and Venezuela's Suelopetrol did not respond to requests for comment.

DYSFUNCTIONAL ECONOMY

The doomed Trenaco deal highlights the opacity and dysfunction at PDVSA and in Venezuela's socialist-run economy.

Cash-strapped Venezuela, home to the world's biggest oil reserves, is heaving under a third year of recession, acute food and medicine shortages, triple-digit inflation, and rampant violent crime. Looting and food riots are proliferating, with hungry mobs chanting, "We want food!" outside increasingly empty supermarkets.

Reuters reviewed company documents and interviewed dozens of foreign and local oil executives, current and former PDVSA employees, union leaders, lawyers and politicians. The sources described a culture of corruption that ranges from the trivial - giving a gift to a secretary to land a meeting with a top PDVSA executive – to the systemic, such as funnelling kickbacks in return for large contracts.

The U.S. Justice Department has said there is a large, ongoing investigation into bribery at PDVSA. In perhaps the most damning case to date, U.S. authorities in December arrested two Venezuelan oil magnates, Roberto Rincon and Abraham Shiera, alleging they took part in a billion-dollar conspiracy to pay bribes to secure PDVSA contracts. Both men have pleaded guilty.

Oil accounts for 94 percent of Venezuela's export revenues, and PDVSA is the financial motor of President Nicolas Maduro's government. The company originally criticized the Rincon-Shiera case as part of a wider U.S.-led conspiracy and "smear campaign" against socialism.

But in its 2015 financial statement, published this month, PDVSA said an internal probe found it had been the "victim of fraud," referring to the Rincon and Shiera case.

"PDVSA does not tolerate acts of corruption and will continue investigating and acting with the aim of determining responsibilities," the company said.

It listed a series of actions under way to prevent corruption, from new payment procedures and controls to an improved internal ethics code.

Venezuela's economy has ebbed and flowed with the price of oil for a century, and allegations of corruption have been endemic in the industry here.

The country's opposition says the problem has worsened under the populist socialist administrations of Maduro and his predecessor, the late Hugo Chavez. The opposition, now in control of the National Assembly, accuses authorities of stymieing probes into the company.

HIGH-LEVEL MEETINGS

The Trenaco deal began to take shape in early 2015, when a handful of top Trenaco executives took weekly trips by private jet to Caracas and were whisked in a convoy of armoured vehicles to a reserved floor in the city's top Marriott hotel, said four senior Trenaco executives in Bogota. The visitors were in Caracas for meetings nearby at PDVSA's headquarters and Trenaco's local office.

The four executives say a new boss had just taken the helm at Trenaco: Alex Saab, a 44-year-old businessman from Colombia's coastal city of Barranquilla.

Saab, they say, was close to top figures in Maduro's government and had done business with authorities under Chavez. He also had connections with top people at PDVSA, they say.

"Alex Saab had very good relations with the executives at PDVSA," said one senior Trenaco executive, who spoke on condition of anonymity.

In November 2011, Saab signed an agreement on behalf of another of his ventures, a Bogota-based construction company named Fondo Global de Construccion, to build social housing for the Venezuelan government. He appeared on state television signing the deal alongside Chavez and Colombia's president, Juan Manuel Santos.

Fondo Global's headquarters in Caracas are in the same building as Trenaco's, according to Venezuela's National Registry of Contractors database.

Saab denies having anything to do with Trenaco. Neither Swiss corporate records nor hundreds of pages of Colombian registry records obtained by Reuters specify who owned Trenaco.

"I am not and have never been an employee or shareholder in the company that you mention and for that reason I have nothing to say," Saab told Reuters in an exchange on the Whatsapp message service. He did not respond to a detailed set of follow-up questions.

His lawyer, Colombian attorney Abelardo de la Espriella, said Trenaco executives had approached Saab to "speak about business" but Saab had no involvement with the company.

Interviews and other evidence suggest otherwise. Four senior executives of the now-defunct company told Reuters that Saab was in full control of Trenaco. They showed Reuters internal Trenaco correspondence and audio files exchanged via WhatsApp in which Saab participated. Reuters authenticated Saab's number by successfully contacting him on the one used in the WhatsApp conversation.

The four Trenaco executives say the company was run by Saab and two other men: Carlos Gutierrez, the son of a Colombian agricultural baron, and fellow Colombian businessman Alvaro Pulido.

The trio took over the management of the company between 2012 and 2014, when Trenaco was seeking capital, the sources said. Details of the past and current ownership structure are obscure.

Gutierrez did not respond to a request for comment. Reuters was unable to contact Pulido.

MONEY-LAUNDERING PROBE

Separately, the U.S. Drug Enforcement Administration (DEA) has been investigating companies owned by Saab and Pulido on suspicion of laundering money from illegal drug trafficking operations, mostly cocaine from Colombia, a U.S. law enforcement official told Reuters. The status of that investigation is unclear and it is possible that no charges will result.

Saab didn't respond to a question about the DEA inquiry. Reuters was unable to contact Pulido.

A PDVSA document from last year put the Trenaco project's price tag at some $4.5 billion, though people familiar with the matter said the value was later reduced.

Once the PDVSA tender was published in August, Schlumberger, Halliburton and Weatherford requested an extension to the roughly two weeks allowed for proposals, the PDVSA document shows. Of the three firms, only Schlumberger ultimately submitted an offer, and it was disqualified by the tender committee.

The Schlumberger proposal was shot down because it "did not accept the conditions and terms of the type of contract," the document notes, without elaborating, and because Schlumberger's proposed financing scheme, which appeared to involve paying off dividends that PDVSA owes to the joint ventures, was deemed inadequate.

At a time of low oil prices, sources at foreign companies said, PDVSA was keen that the contractor finance the project itself, as Trenaco had proposed.

Schlumberger declined to comment. Halliburton said it had "no additional information to add." Weatherford did not respond to a request for comment.

Foreign executives said they did not receive an explanation from PDVSA as to why the Trenaco deal fell through.

Whatever the case, it was a death knell for the Colombian company. Trenaco went into liquidation in March, according to registry documents. The senior Trenaco executives attributed the company's shuttering to the collapse of the PDVSA deal.

Even some government supporters are questioning the unpopular Maduro's management of the key oil sector.

"We're 'Chavistas,' we're revolutionaries, but we're not idiots," said Johnny Jimenez, a PDVSA operator and union leader in Maracaibo. He said PDVSA has ignored union requests for worker-led audits. "Why are they scared of an audit?"

Worried about corruption and inefficiency, foreign companies in Venezuela say they are now vying for more control over the contracts they strike with PDVSA, decreasing the role of Bariven, PDVSA's procurement arm. But because PDVSA has a minimum 60 percent stake in joint ventures, the foreign partners usually cannot take full rein.

Venezuela's resolve to clean up the industry may soon be put to a test. Sources in Caracas and Bogota say PDVSA is now preparing a new tender to drill oil wells in the Orinoco.

In the meantime, Caracas-based foreign executives complain that PDVSA has been signing unexpected contracts with new, inexperienced companies seen as close to the Venezuelan oil giant. In one case, a source at a foreign company said, workers were renting lights from a contractor to illuminate oil fields - during the daytime.

(Reporting by Alexandra Ulmer in Caracas and Girish Gupta in Bogota. Additional reporting by Mircely Guanipa in Punto Fijo, Marianna Parraga in Houston, Nelson Bocanegra in Bogota and John Walcott and Julia Harte in Washington, D.C. Editing by Brian Ellsworth, Andrew Cawthorne, Kieran Murray and Michael Williams.)

By Alexandra Ulmer and Girish Gupta