Petróleos de Venezuela is forced to open its can of worms
By Gustavo Coronel
21.10.05 | With a debt of some US$7 billion, most of it in the hands of international investors and lenders, Petróleos de Venezuela (PDVSA) is obliged to disclose its operational and financial situation, on a yearly basis, to the U.S. Securities and Exchange Commission (SEC). After a delay of almost two years they have finally filed the report for 2003 and promise to file the report for 2004 very soon. The report is quite detailed, some 180 pages long, well written and contains a lot of information on the situation of the company. It is paradoxical that, although the propaganda slogan of the company is: "Now Petróleos de Venezuela belongs to all Venezuelans," no report at all has been made to the Venezuelan people for several years. For the average Venezuelan, PDVSA is now more of a black box than ever before. When professional managers ran this company, a very comprehensive report was published every year in Venezuelan newspapers, so that all of us could see it. Now that "it belongs to the people" there is no disclosure being made to us, the shareholders. The bottom line of this story is that, if you want to find out what is going on in PDVSA, you have to read English and have a computer, something that perhaps 8% of Venezuelans can say.
I am particularly interested in the situation of the company, being a Venezuelan, a petroleum geologist and a former member of the Board of the Company and lucky enough to read English and to have a computer. I read the report and I made the following comments as I read on:
A table shows total income of the company for the last four years. Income for 2003 is, in round numbers, US$44 billion while it was US$49 billion in 2000. Income for 2003 is, therefore, about US$5 billion lower, although prices have been increasing. This can only be explained by a significant loss of production and sales.
There are several curious statements here. One is that "Petróleos de Venezuela is an independent and commercial entity." This is a double lie. First of all, the Minister of Energy and Petroleum, a secretary of the president, runs PDVSA. As such the company has become a political appendix of the regime and has lost the independence it enjoyed when professionals managed it. In the second place, it cannot be considered as a commercial entity since, by definition, a commercial entity does not respond to political and social objectives but is profit oriented. The report says that PDVSA "now has social obligations" and, in fact, diverts considerable amounts of its income to social projects of questionable efficiency. In doing this, it has ceased to become a real commercial enterprise. The original mission of the company was to produce optimum benefits for the nation, so that the nation would use these benefits in social improvement. As it is now, PDVSA has become the private bank of Hugo Chávez, where he goes to get the money he needs for his wild political adventures. Another curious statement is that the (Bolivarian) Republic of Venezuela is not legally liable for the obligations of PDVSA. The company is 100% owned by the Republic of Venezuela and run by a member of the Executive power of the Republic of Venezuela and, yet, the Republic is not liable for what the company might do. Who is liable then? Perhaps this comment is due to my being a geologist rather than a lawyer but maybe someone can explain it to me.
When defining the business strategy of the company the report claims as a main objective: "to maximize the value of oil and gas resources." Now, this is a lie. How can a company, that subsidizes Castro's Cuba to the tune of some US$1.2 billion per year and that does not bother to collect the gigantic Cuban debts, claim that they "maximize the value of its oil and gas resources?" How can a company that is offering to exchange petroleum for bananas or beans in the Caribbean make such a claim? According to the report Venezuela exports about 35% of its total production to the Caribbean and Central America but much of these exports are under non-commercial, clearly political terms. As a shareholder, if I had a chance to attend a shareholder's meeting, which I do not, I would ask for the immediate removal of the Board of the Company. Another strategy claimed by the company is "to ensure financial strength and stability." How can the company reconcile this strategy with the deviation of billions of dollars that are required for its financial strength and stability to other activities that have nothing to do with its mission?
The report states that the investment of the company in 2004 was US$2.9 billion and adds that this amount was 42% lower than what they had budgeted. In other words, they executed half of what they should have. In my days this would have been considered a major managerial disaster but in the current company this is reported in a very matter-of-fact fashion. The story does not end here. They go on to announce proudly an investment plan for 2005-2010 that contemplates an investment of US$5.8 billion in 2005 (we wonder how much they have invested so far, since we are in October of 2005). In other words, they say that, from 2004 to 2005, they are practically going to double the level of investment. This is ridiculous, especially since the bulk of this increase will have to be in exploration and production, the two areas where the company has had a major decline in activity. At this moment in time there are about 50 drilling rigs operating in Venezuela. Just to maintain production, the country would need about 60 active rigs but to increase production significantly this figure should be closer to 100 rigs, twice as many as there are currently active.
The report states that during the year US$4,355,000,000 ($4.3 billion) was diverted from PDVSA for social programs. These social programs, moreover, were not part of the official Venezuelan budget and represented extra expenses not previously planned or approved by the Venezuelan National Assembly. Hugo Chávez requested this money personally from PDVSA. Probably all it took was a telephone call from Chávez to Rafel Ramírez, the Energy and Petroleum Minister, and President and CEO of PDVSA. This gigantic amount is US$1.5 billion higher than the total amount invested by the company in 2004 and practically twice as large as the total amount invested by the company in 2003. This represents totally unacceptable management standards and shows the chaotic manner in which PDVSA is being handled by the Chávez regime.
The report mentions two projected investments for the immediate future: a Jamaican refinery and the Cienfuegos refinery in Cuba. The Cienfuegos refinery was built from 1985 through 1991 by the former Soviet Union and never became operational. There is no economic justification to spend money on this refinery which is technologically obsolete today, except to divert money from Venezuela to Cuba for political purposes.
Exploration wells drilled in 2003 were seven, half of the number drilled in 2000. This shows the decline in activity of the company in what is a vital aspect of the operations.
The total production reported for the company in 2003 averaged 2.595 million barrels-per-day (mil b/d). This compares with an average production of 3.252-mil b/d in 2000 and represents a drop in the production of PDVSA of some 650,000 b/d in four years. This illustrates clearly the collapse of this company. This collapse has been partially compensated by the production generated by the heavy oil associations of the Orinoco area. 42% of this oil production, not generated by PDVSA, represents its share of the Orinoco production and could be added to the figure above, to give the company a total volume of 2.717-mil b/d, still well below the 2000 production and well below the level of production of 3.200-mil b/d the company bureaucrats and Chávez keep claiming as the true one. This estimate given above is based on the figures given by the report, not my own figures. Independent analysts such as Platts tell a somewhat different story. In Rigzone.com, October 7, 2005, this publication reports a story by Platts ("OPEC Output Up 50,000 Barrels Per Day in September") in which they estimate Venezuelan production consistently at the level of 2.640-mil b/d for this year, well below the OPEC quota assigned to Venezuela, which is of 3.223-mil b/d. Venezuela cannot fill its OPEC quota because its level of production, according to Platts, is considerably lower.
The report says that the operating contracts signed with foreign companies in several areas of the country do not give these contractors title to the oil produced. The contractors simply produce the oil for a fee, in name and on behalf of PDVSA. However, the Chávez regime recently decided to alter the tax treatment for these contractors, increasing it significantly, on the grounds that they were oil producers, not simple contractors acting on behalf of PDVSA. This is a major inconsistency in the treatment the regime is giving the contractors.
The report says that CITGO invested US$253 million in 2003 in environmental issues. Yet, the much bigger PDVSA invested only US$59 million in this type of activity in Venezuela. This strongly suggests that the concern for the protection of the environment is much less pronounced in the Venezuelan oil industry under Chávez than in the U.S. In fact, this is confirmed by the unusually high rate of oil spills and industrial accidents that have afflicted the operations of PDVSA in the last four years (see satellite images of Lake Maracaibo oil spills below - dark patches in middle image).
The report states that the oil production capacity of PDVSA is of 3.529-mil b/d. Some analysts who are not familiar with reservoir engineering or geology have accepted this statement at face value. Production capacity is the volume of oil that could be produced if all wells capable of producing were opened to production. The fact that Venezuela is not producing up to its OPEC quota of 3.2-mil b/d already suggests that they cannot produce that much. If they could they would, specially since Chávez always needs more money for his wild schemes. The low amount of rigs in the country, the paralysis of investment in production maintenance, in secondary recovery projects and in the required equipment would suggest that PDVSA has lost considerable production capacity in the last five years or so. I would guess that this capacity is currently no greater than 3-mil b/d, at the very most, but even this production would take a great effort to materialize, given the sorry state of many of the oilfields and of the production plant and equipment in the country.
The report indicates that PDVSA faces legal claims for US$2.9 billion. That is a lot of money and yet the report adds that they do not expect these claims to have a potentially significant impact on the company. The provisions made in this connection only represent 13% of this amount.
The report mentions the existence of a Code of Ethics in the company. This is good news. It probably could be applicable to several high officers and advisers of the company, starting with Ramírez, who violates the laws of the country by having two public jobs at the same time, even if he only gets paid for one. This is corruption and fraud because no person can do two jobs efficiently.
Note 18 of External Auditors, KPMG.
In this note the external auditors mention that the amount deposited in the Macroeconomic Stabilization Fund had gone from US$2.3 billion in 2002 to US$698 million in 2003. This fund was created by the government to deposit excess oil income that could serve to stabilize the economy in case of an oil price decline. PDVSA simply stopped contributing to this fund and started raiding it. I guess that, by this time, there is nothing left in the pot, at a time in which oil prices are the highest on record. How is this for good management?
There is much more to comment on this report, such as higher production costs; lower net income; higher total costs and expenses; the elimination of the training center for the industry, the elimination of production plans for Orimulsion and the "sale" of its licenses to the Chinese government; the pretense of the company that negative results in 2004 and even in 2005 can be explained by the "sabotage" of 2002 (what they call sabotage I call incompetence of the staff hired to replace the 18,000 professional managers and technicians dismissed in 2002). I think, however, that what is contained here reveals, with sufficient clarity, how the company has deteriorated and how this deterioration threatens to gain speed in the short term.
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