The “new” PDVSA: Lies, deceptive statistics and bad management
G2Americas | Intelligence Brief
19.08.06 | Venezuela has been a major global petroleum producer and exporter since 1913. The country has some of the largest crude oil and natural gas reserves in the world and a state-owned oil company that constitutes the fiscal and economic pillars of the country. Since President Hugo Chávez assumed power over seven years ago, however, Petróleos de Venezuela (PDVSA) has been turned into a hollow shell that may never recover the human technical expertise, professional management, and production capabilities it possessed only eight years ago. Today, PDVSA is managed by incompetent individuals that cook the numbers to hide the company’s true deplorable state, and who owe their jobs to their political loyalties. However, while PDVSA strives to hide the truth about its expanding decrepitude, there is sufficient market data in the public domain to assert that the Chávez government has destroyed PDVSA and weakened the country’s sovereignty over its oil and gas resources, with incalculable consequences for future generations of Venezuelans.
The Bolivarian Revolution is an accomplished mythmaker, and one of its principal myths is that President Hugo Chávez “rescued the sovereignty of the Venezuelan people over the country’s oil and natural gas resources.” The chavista rant is that the “old” PDVSA harmed Venezuela and the “new” PDVSA is fueling unprecedented national economic and social progress, and turning the country into a world power. The “new” PDVSA, headed by Energy and Petroleum Minister Rafael Ramírez, invests considerable effort in trying to make the country and the world believe that PDVSA is stronger today than at any time since the oil industry was nationalized 30 years ago, in January 1976.
To bolster this myth, the “new” PDVSA controls the flow of information very carefully. Employees of the “new” PDVSA are always under surveillance to ensure they do not have any contact with the news media or anyone who is not a bona fide sympathizer of the revolution. PDVSA also publishes a steady stream of statistics and written statements that seek to foster a public opinion matrix of PDVSA as a healthy, productive, efficient and well-managed company. When the numbers do not add up, PDVSA does not publish them until creative ways are found to portray a sow’s ear as a pearl necklace.
Unfortunately for the Chávez government’s mythmakers and PDVSA’s propagandists, the global oil market cannot be controlled by anyone. In the case of PDVSA, there are mountains of information available in the public domain that indicate very credibly that Venezuela’s oil industry already would have collapsed were it not for the foreign companies that committed to investing over $26 billion in oil projects before Chávez dismantled PDVSA internally.
While investments added over 1.1 million b/d to Venezuela’s total crude oil production capacity, Chávez has pilloried the companies publicly as tax cheats and lawbreakers. This article reviews some of the evidence that is available, starting with PDVSA’s official statistics for 2004.
Reading “collapse” between the lines
PDVSA issued a preliminary audited financial report in late June. The final report was supposed to be delivered to the U.S. Securities and Exchange Commission (SEC) no later than the first week of July, over a year after it was originally due. Not surprisingly, as this article was penned on July 23, the final report had not been delivered yet to the SEC, and PDVSA officials could not (or would not) say when it would be submitted. However, a careful review of the numbers in the preliminary report confirms that PDVSA definitely is hiding the truth about its true financial situation.
It’s useless to compare the alleged 2004 results to the data published for 2003 and 2002, because the two-month oil stoppage in December 2002-January 2003 actually helps to distort even more the truth about PDVSA. As a result, VenEconomy compared the alleged results for 2004 with those of 2001, which were filed with the SEC long before PDVSA started cooking its financial and operational numbers. This comparison proves that PDVSA is unraveling operationally and financially.
PDVSA officially claims in its preliminary SEC report for 2004 that PDVSA-own production averaged 2,833,000 b/d in 2004 (including output by 32 service contractors), down 434,000 b/d (13.3%) from 2001. However, a substantial portion of this decline was compensated by increased production from the four strategic associations in the Orinoco Heavy Oil Belt, which nearly doubled output from 189,000 b/d in 2001 to 353,000 b/d in 2004, for a net increase of 164,000 b/d. By including this output in its production figures, PDVSA claims its real production in 2004 was 3,148,000 b/d, only 256,000 (7.5%) less than in 2001.
However, the mystery surrounding PDVSA’s real production levels remains unsolved. Independent entities such as the International Energy Agency and OPEC indicate that Venezuela’s production in 2004 was about 2.5-2.6 million b/d, not including gas liquids and others that could total up to 300,000 b/d more. This suggests that the “official” PDVSA numbers overstate real production levels by some 250,000-350,000 b/d.
It can also be inferred from the preliminary report for 2004 that PDVSA is significantly less efficient today. Operating plus sales costs were $14.6 billion in 2004, up $1.9 billion (14.9%) from 2002. This is a very surprising number, considering that in 2003 the government sacked over 20,000 PDVSA employees.
The lack of investment can also be inferred from the reported depreciation of only $3.08 billion in 2004, up $458 million (17.5%) from 2001, but practically unchanged from 2002 and 2003. Another important point is that PDVSA invested $4.4 billion in social spending in 2004, but investment associated to natural gas and crude oil totaled only $3 billion. These numbers confirm that PDVSA’s production capacity is falling. Separately, the General Accountability Office (GAO) of the U.S. Congress finally issued its report on U.S.-Venezuela energy relations in late June. The report hasn’t received much coverage in Venezuela.
However, the GAO report identified Venezuela’s collapsing oil production capacity as a greater immediate threat to U.S. energy security than the blowhard Venezuelan president’s empty threats to suspend oil exports to the U.S.
Dying in PDVSA
A fire erupted in a distillation unit at the 640,000 Amuay refinery on July 17 at 6:50 a.m. Firefighters controlled the blaze within three hours, and thankfully no one was injured in the mishap. PDVSA immediately issued a written statement saying that the damaged unit would be repaired in two weeks. The statement also said that production at Amuay would drop by 74,000 b/d during July, but that export shipments would not be affected at all. The statement did not admit human error, nor did it suggest that the fire was caused by saboteurs.
However, PDVSA’s official explanation for the dozens of major industrial accidents it has suffered since 2003 is that saboteurs backed by the CIA are responsible for the fires, explosions and oil spills that have caused multiple deaths and dozens of serious injuries.
Amuay was processing about 580,000 b/d before the fire, according to independent estimates which PDVSA officials declined to confirm. The drop in production at Amuay will affect some gasoline and product shipments to the U.S., although accurate estimates will not be possible until PDVSA completes a damage assessment, which should be ready by the time this issue of VenEconomy Monthly is published.
PDVSA said in a statement that the fire was limited to Distillation Unit 5, which processes up to 190,000 b/d of Maya 22 API crude, and that firefighters contained the blaze before any nearby units were damaged. But a former PDVSA manager who worked at Amuay until 2003 said the fire may have damaged the atmospheric distillation tower, and that repairs could take at least two months, during which the refinery’s production could fall by 200,000 b/d to 300,000 b/d. The atmospheric distillation tower has been shut down since the fire on July 17, and eyewitnesses report that it has tilted visibly, which suggests that it suffered some structural damage.
PDVSA also said on July 17 that the fire at Amuay would not affect export shipments from the Paraguaná Refining Complex (PRC), which also includes the 300,000 b/d Cardón and 16,000 b/d Bajo Grande refineries. But four days later, on July 20, PRC officials said a U.S.-bound shipment of about 250,000-310,000 barrels of naphtha scheduled to depart to the U.S. before end-July had been postponed until August. PRC was scheduled to make eight shipments to the U.S. during the second half of July, including five gasoline shipments totaling 1.2 million barrels, two diesel shipments totaling 450,000 barrels, and one jet fuel shipment.
The fire at Amuay on July 17 was the third accident in 96 hours at the PRC. While no one was injured in the fire, five PRC workers suffered burns and other injuries in an oil spill at Amuay and an explosion at the Cardón refinery. Human error caused all three accidents, PRC officials said. There have been 17 major accidents so far in 2006 in PdV refineries and other production facilities, including at least five explosions and fires at the PRC, and numerous other minor accidents. Eight PdV workers have been killed and nearly two dozen have been injured at the PRC since November 2005. PRC General manager Jesús Luongo said that human error caused all of the accidents in which fatalities and injuries occurred.
Luongo conceded that personnel inexperience is a factor, since 47% of the PRC’s employees were hired since 2003, but he also cautioned that even experienced workers have relaxed safety standards. Luongo said that several of the workers killed in accidents at the PRC since November 2005 had over 15 years of experience in the oil industry. “They knew their jobs, they knew how to do the tasks they were performing, but they didn’t do them correctly,” Luongo said. “Why did they not do it right? That is the question.”
One possible answer to Luongo’s question is that even experienced workers have relaxed their safety practices because the “new” PDVSA’s management assigns more importance to maximizing output than to protecting the safety and lives of its workers. In the same vein of thought, the fact that even experienced workers have become sloppy and reckless is a strong indicator of poor leadership, meaning that management is primarily at fault.
Shell’s CEO: New mixed companies a “good deal”
The CEO of Royal Dutch/Shell, Jeroen van der Veer, visited Caracas in July for a round of meetings with President Chávez, Energy and Petroleum Minister Ramírez, Foreign Minister Alí Rodríguez, and other senior government officials. During his stay in Caracas, Shell and PDVSA subsidiary Corporacion Venezolana del Petroleo (CVP) signed the contract that officially constituted Petroregional del Lago, the mixed company (CVP 60%, Shell 40%) that will operate the West Urdaneta oil field in Zulia.
PDVSA said the second week of July that before the end of the month a total of 21 new mixed companies would be constituted. CVP will own 60% of 17 of these companies, and between 74.8% and 80% of the other four. These new mixed companies will operate 25 of 32 fields that were being operated by 22 foreign oil companies under operating contracts that were declared illegal and suspended last year by minister Ramírez.
The remaining seven oil fields will be operated directly by PDVSA, including five that were returned to PDVSA voluntarily by their foreign operators (B2X 68/79, Guárico Occidental, Maulpa, Quimare-La Caeiba and Sanvi Guere), and two that PDVSA took over (Jusepín and Dación) when French oil firm Total and ENI of Italy declined to sign preliminary contracts by March 31, 2006.
Petrobras is a partner in four mixed companies, BP in two and Chevron in two, while Shell, CNPC and Repsol are each partners in one mixed company with CVP. Mixed companies established since as of July 21 included Petrowarao, Baripetrol, Retronado, Petroquiriquire, Petroregional del lago, Petroindependiente, Petroboscan and Petrowayu. (A full listing was published in VenEconomy Monthly’s May issue.)
The new mixed companies will pay an income tax rate of 50%, and a royalty of 30%, according to the Income Tax Law and the Organic Hydrocarbons Law (which also allows the government to reduce royalties to 20% and 16.66%, respectively, in some cases where oil fields are very mature and are not commercially viable with the 30% royalty). In addition, the new mixed companies will be subject to a 3.33% royalty surcharge, 2.22% to compensate local towns for municipal taxes “lost” by virtue of the “migration” of the service contracts to mixed company status, and 1.11% for an endogenous development fund. Also, exports are now subject to an 0.1% additional levy.
Shell’s CEO said in Caracas that the new mixed companies are the best formula for advancing the expansion of Venezuela’s oil industry. And why not? As explained recently by Alberto Quirós Corradi, who started his long career in oil with Shell, the foreign partners in the new mixed companies now pay 40% of a royalty of nearly 34%, whereas under the old operating contracts they did not pay any royalty. However, the foreign partners now can sell their 40% share of the mixed company’s production at current market prices, which in Venezuela’s case is about $64 a barrel, whereas previously they were paid a per barrel fee by PDVSA regardless of the market price at which PDVSA sold the crude they produced. As senior partner, PDVSA now also has to carry 60% of any investments in these mixed companies, presumably lightening the investment burdens of the minority foreign partners. A big downside, of course, is that the “new” PDVSA will make all the key management, operational and investment decisions in the mixed companies.
Targeting the Strategic Associations
At the XVII Latin American oil industry exhibition held in Maracaibo at the end of June, Ramírez gave a speech in which he declared with conviction that Venezuela needs private foreign and local oil companies to participate in the execution of PDVSA’s ambitious expansion plans. PDVSA can carry out the needed investments by itself, Ramírez said, but also needs committed private investors.
But the recently published GAO report highlighted a significant reality about the “new” PDVSA under Chávez. In more than seven years, PDVSA has not signed any significant commercial production deals. Certainly, PDVSA has a plan to expand crude production capacity from the current official level of 3.3 million b/d to over 5.8 million b/d in 2012. Six months ago this plan’s cost was officially estimated at $56 billion, but the estimate has since ballooned to over $130 billion as Chávez keeps announcing regional spending commitments. However, no major commercial production deals have started up yet.
Private oil companies are very interested in accessing Venezuela’s oil and gas resources. However, no major deals have been launched because PDVSA has dragged its feet for years. The new 1999 Constitution, the 2000 Gas Law, and the 2001 Hydrocarbons Law changed the rules of the game for the oil and gas industries, but the government did not move to implement those laws until 2004, and when it finally started to restructure the oilfield operating contracts into mixed companies, it managed the process abusively and with an unnecessary degree of hostility and confrontation towards the private oil companies. The process also took over a year to conclude, creating a lengthy period of uncertainty that affected potential new investments.
Now PDVSA is preparing to move against the four strategic associations in the Orinoco Heavy Oil Belt. CVP President Eulogio del Pino said in July that PDVSA expects to complete the process of restructuring the ownership of the four strategic associations by the end of 2006, and expand syncrude production from 620,000 b/d today to 1.1 million b/d by the end of 2009. The remarks by del Pino indicate that the Chávez government believes the process of restructuring the ownership of the strategic associations will be swift and relatively painless, although formal talks have not started yet between PDVSA and the seven foreign oil companies that own majority stakes in the four extra-heavy crude upgraders in the oil belt. But a spokesman at the Venezuelan Association of Hydrocarbons (AVHI), the business organization that represents the foreign oil companies here, hinted that the oil companies expect lengthy and difficult negotiations.
If negotiations between PDVSA and the oil companies drag on into 2007, plans to start expanding extra-heavy crude production capacity in the Orinoco Oil Belt could be delayed until 2008 or 2009. This could set back the execution of PDVSA’s 2006-2012 expansion plan, and could delay planned increases in oil exports to China and other markets in Asia and Latin America.
The strategic associations include Petrozuata (ConocoPhillips 50.01% and PDVSA 49.9%); Cerro Negro (ExxonMobil 41.67%, Veba 16.66% and PDVSA 41.67%) and Sincor (Total 47%, Statoil 15% and PDVSA 38%) and Hamaca, also called Ameriven (ConocoPhillips 40%, ChevronTexaco 30% and PDVSA 30%).
The National Assembly is currently drafting a reform to the Hydrocarbons Law that would raise the royalty and income tax levies on the associations and all future extra-heavy crude projects to 33.33% and 50%, respectively. This reform will be approved soon and could be applied retroactively to 1 January, 2006, said officials at the assembly.
“The companies will accept higher royalty and income tax levels, even if publicly they state otherwise,” an AVHI official told VenEconomy Monthly. But in any ownership restructuring talks, the foreign companies will insist on “full compensation based on the present market value of the upgraders, which would include investments realized less depreciation, plus lost earnings 35 years into the future,” he added.
If PDVSA and the foreign oil companies fail to reach an agreement, the government could decide to resort to unilateral tactics as it did with the 32 oilfield service contracts that were declared illegal in 2005 and replaced on April 1, 2006 with mixed companies in which PDVSA is the majority owner. However, the AVHI official cautioned that the extra-heavy crude upgraders are too complex technologically for PDVSA to operate by itself. He also said that the agreements and contracts on which the strategic associations were established are “legally and politically solid.”
Until negotiations between PDVSA and the foreign companies to restructure the strategic associations are completed and new contracts signed, it is likely that most (if not all) foreign oil companies will continue to tread water in Venezuela. By this, VenEconomy Monthly means that foreign oil companies will continue seeking business opportunities, and will sign agreements and letters of intent laying out what they propose to do jointly with PDVSA. However, progress will be glacially slow until the rules of the game are clear and binding for everyone, including the Chávez government. This suggests that expansion investments planned in 2006-2008 could be delayed until 2009, in which case PDVSA likely would not achieve its targeted capacity increase to over 5.8 million b/d until 2015. Meanwhile, PDVSA continues to shift its focus away from the United States.
Recent Citgo moves signal Venezuelan disengagement
Citgo Petroleum Corp., PDVSA’s wholly-owned U.S. subsidiary, said on July 12 that it will suspend fuel supplies to over 1,800 branded service stations in 14 states during the next eight months. By end-march 2007, Citgo will pull out of ten U.S. states completely, and reduce its presence in four more. The ten states Citgo is pulling out of completely are North Dakota, South Dakota, Iowa, Kansas, Kentucky, Minnesota, Missouri, Nebraska, Ohio and Oklahoma. Fuel supplies also will be suspended to some cities and areas of Arkansas, Illinois, Indiana and Texas.
Citgo President Félix Rodríguez said in a written statement that the company would focus on “strengthening our presence in marketing areas in the Northeast, South, mid-Atlantic, and portions of the Midwest that are served by our refineries in Lake Charles, La., Corpus Christi, Texas, and Lemont, Ill., while reducing the current number of branded locations in markets in which we are less efficient.” These refineries can process up to 750,000 b/d of crude oil.
Minister Ramírez said in Caracas that the decision was taken for commercial reasons. Citgo has lost over $400 million in the past 18 months supplying these outlets with 130,000 b/d of gasoline purchased in the spot market, Ramírez said, adding that political issues were not a factor. “The suspension of fuel supplies (to these service stations) has nothing to do with any alleged reduction in refining capacity, or any decision to reduce the oil sent to the U.S., nor with any decision to withdraw Citgo from the U.S.,” Ramírez said during an interview with VTV. It’s not clear where that $400 million figure comes from, but VenEconomy refuses to believe that, however inefficient, Citgo is incapable of losing $5.62 per barrel (=13 cents per gallon) on its gasoline sales in the affected areas.
In fact, the decision to suspend gasoline sales to 14% of Citgo’s branded service outlets was made in Caracas, not Houston. Moreover, this is the latest move by Citgo that hints at a gradual disengagement by PDVSA from the U.S. market.
In the past six months, Ramírez has announced that Citgo would sell its asphalt refineries in Paulsboro, New Jersey and Savannah, Georgia. Ramírez also confirmed during his VTV interview that Citgo was considering the sale of its Lake Charles refinery in Louisiana. Citgo also plans to sell its 15.8% stake in the Colonial pipeline and its 6.8% ownership of the Explorer pipeline. On July 20, Citgo and Houston-based Lyondell Chemical Company announced that they had agreed to abandon their planned sale of the Lyondell-Citgo refinery, for which interested bidders had offered up to $5 billion. But PDVSA still plans to sell its stake to Lyondell for over $2 billion, according to news reports in Caracas.
Ramírez and Rodríguez have said repeatedly that these moves are meant to slash costs, eliminate unprofitable business activities, and focus Citgo on its core mission of processing Venezuelan heavy crudes and selling gasoline and other products in regional markets served by the company’s refineries. However, before Chávez was elected president in December 1998, PDVSA’s expansion plans called for integrating increased crude oil production with U.S. refineries and retail outlets. The U.S., for geographic and historical reasons, was considered the premier natural market for Venezuelan oil exports. PDVSA acquired Citgo as part of its long-term strategy of integrating upstream operations in Venezuela with guaranteed downstream refining and distribution networks.
Chávez scrapped that strategy because he views the U.S. as a political foe. Instead, Chávez announced in Beijing on Dec. 24, 2004 that Venezuela would break what he called its “oil supply dependency” on the U.S. and would focus instead on expanding oil exports to China, other Asian markets and to Venezuela’s “strategic allies” in Latin America.
PDVSA plans to raise oil exports to China to 300,000 b/d by the end of this year, and to over 1.0 million b/d within five years. Ramírez said on July 18 that Venezuela would not cut back oil exports to the U.S., but statistics from the Energy Information Administration of the U.S. Department of Energy for the period from 1998 through April 2006 confirm that Venezuelan oil exports to the U.S. fell from an average of 1,719,000 b/d during all of 1998 to 1,393,000 b/d in April 2006, for a decline of 316,000 b/d over slightly more than eight years. The steady drop in Venezuelan oil exports to the U.S. during the time Chávez has been president has coincided with increasing oil exports to China, Cuba, Argentina, Uruguay, and other Latin American and Caribbean states. It has also coincided with the collapse in Venezuela’s production capacity, which has dropped between 300,000 b/d and as much as 700,000 b/d, according to different estimates, although there is broad consensus among independent analysts that PDVSA has lost over 1 million b/d of net production capacity since Chávez has been president.
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