The Long Agony of PDVSA

Thousands of tons of rotten food bought by PDVSA to pocket kickbacks.

A post about PDVSA by blogger http://www.caracasgringo.com/ , November 2009, gives a very articulate summary of the situation of this company. Excellent postings by Oliver Campbell about PDVSA's finances can be found in http://www.petroleumworld/ . These and other analysts such as Diego Gonzalez Cruz and Nelson Hernandez help us to understand the precarious situation of a company that was the pride of Venezuela from 1976 to 1999, year in which it was taken over by strongman Hugo Chavez and deeply politicized.

Operational Aspects.

Caracas Gringo reports that Pdvsa's crude oil production capacity has dropped to about 2.3 million barrels per day, compared with over 3.5 million b/d in 1998. Venezuela 's domestic gas deficit now averages over 1.5 billion cubic feet per day compared with 1.2 billion cf/d three or four years ago. Pdvsa's [domestic] refineries – Amuay, Cardon, El Palito and Puerto La Cruz – are falling apart. All of Pdvsa's programmed maintenance activities at [these] three refineries have suffered frequent delays and postponements over the past several years. And dozens of workers have been killed or injured in refinery accidents since 2005. Pdvsa has not completed even one major project involving the production and refining of crude oil in the seven years that [Minister Rafael] Ramirez has been “managing” the company. Pdvsa also has failed to complete any gas-related projects. And Venezuela 's national power grid has finally collapsed in 2009 – a collapse that was foretold by Ramirez's predecessors at the Energy Ministry in 1999, in 2002, and again in 2003 after Ramirez was the Energy Minister.Venezuela faces at least five years of daily power rationing, according to studies by independent experts”.

These are facts that reveal the deterioration of the company under the existing political regime. But the problems do not end there, adds Caracas Gringo: “At the end of 2005 Pdvsa published a six-year oil and gas investment plan it called “Siembra Petrolera.” Four years after its initial publication, not a single one of the plan's planned projects has been launched. [Since 2005] President Chavez has voraciously nationalized foreign-owned oil and gas assets, starting with the 33 oilfield operating service contracts signed in the 1990s, followed by the four Orinoco upgraders, and finally the oil services sector. At the same time, Pdvsa has signed dozens of bilateral agreements since 2005 with oil companies from China , Iran , Russia , Cuba , Belarus , India , Vietnam , Brazil , Spain , Indonesia , Syria , Argentina , Uruguay , Paraguay , Ecuador , Bolivia , etc. But Pdvsa's biggest agreements by far, at least in financial terms expressed on paper, are with Russia , China and Iran . Deals reportedly worth over $50 billion have been signed and/or are being discussed with the Russia Consortium (LUKoil, Gazprom, TNK-BP, Rosneft and Surguneftegaz). Pdvsa also has signed agreements with CNPC and other state-owned Chinese oil companies which reportedly are worth over $60 billion on paper. And the agreements between Pdvsa and Petropars of Iran reportedly are worth a further $30 billion or so, on paper”.

These agreements mentioned by Caracas Gringo, I might add, have often violated our laws and are undesirable from a management viewpoint. They include provisions by which the foreign partners will supply PDVSA's share of the capital investments required, to be paid back in future oil production. This amounts to a long-term mortgage of Venezuelan oil assets that is expressly forbidden in our constitution. Furthermore, the selection of these companies has been made on a political and ideological basis. Most of these companies have little technology in the field of very heavy oil recovery and upgrading and their quality of management is low. The agreements have turned turning the important Orinoco oil-bearing area into a Babel tower, where dozens of mediocre companies from many different countries are engaged in trying to do what they do not know how to do well.

Caracas Gringo further adds: “ [Minister] Ramirez says developing the Orinoco production and upgrader ventures Pdvsa is considering will cost at least $100 billion over the coming five years”. The problem is that PDVSA does not have that kind of money and that is the reason why it is getting into enormous debt. And this is only part of the problem because the other part is that PDVSA has no organizational capacity to invest $15-20 billion per year in the Orinoco area. Total PDVSA petroleum related investments in the last two years have not exceeded $10 billion per year, if that much. The company is simply not geared to invest twice or three times as much money since this would involve a huge challenge of logistics they are clearly uncapable to face.

Financial Situation.

In 2009 gross income of PDVSA amounted to $75 billion. According to Oliver Campbell only 14 percent of this income was dedicated to re-investing in the oil sector and even some of this amount was not dedicated to new plant and equipment. Campbell wonders, as we all do, how can PDVSA invest $ $21 billion in 2013.

For a company that has a relation debt/patrimony of 30 percent each new loan, says Campbell , will be much more expensive. Campbell estimates that only an oil price of $90 or more per barrel would allow for sufficient money to flow into PDVSA. Campbell adds that to have imposed a minimum level of 60 percent in PDVSA's ownership in all joint ventures was a “well received nationalistic measure” but created a financial problem for the company. Here I disagree with Campbell . Only the ideologically blind could have applauded a measure that forced PDVSA to put up a 60 percent of all investments and costs when it was obvious that they could not afford to do so. As a result the company and the country are becoming progressively indebted and the government has neglected attention to the basic poblems of health, education and infrastructure.

Financial Manipulations at PDVSA.

The government take from the activities of PDVSA have declined from $53.1 billion in 2008 to only $27.8 billion in 200. Total take is the sum of royalties, income tax and payments for social projects and dividends. Campbell is correct in saying that this amount is a more valid indicator of PDVSA's financial performance than net profit. As such the abrupt decline mentioned above is a worrying signal of significant deterioration.

In 2009 and also this year, in order to improve their numbers, PDVSA has been resorting to several financial manipulations that give the appearance of real monetary gains when, in fact, they seem to be fictitious accounting gains. Some of these manipulations have to do with the re-acquisition of their own bonds at a lower price. By buying these bonds with official exchange rates of Bs 2,15 per dollar and paying their debts to contractors with the bonds, which are accepoted at a different exchange rate both PDVSA and the contractors manage to “make a profit”. This can de done several times, each time yielding a “profit”. These transactions and the manner in which they have been handled by the company in their financial statements and the comments made by the external auditors have led some analysts to talk about fraud and a “scandal”. Apparently, they claim, the debt that has been “paid off ” with the bonds has not disapeared from the books. Some analysts see these financial transactions as “normal” and even congratulate PPDVSA for their shrewdness. They also see in a positive light PDVSA making a profit of almost $200 million reselling food abroad.

We should be severe in judging all deviations of PDVSA from their original core business. They should not be a food distributing company or a financial speculative company but an energy company. I remember going once to an Indonesian restaurant in New York . It was pretty good but it did not last long. Pertamina, the oil company, owned it. In fact Pertamina became technically bankrupt because it owned restaurants, hospitals, even airlines.

The debt of PDVSA.

The debt of PDVSA is intimately connected to the national debt, as Chavez has been using the company, more and more, as a vehicle to get money that is getting difficult to place on the national government's head.

Caracas Gringo said by end 2009 : “ As Pdvsa's income and fiscal transfers collapsed in 2009, its total debt climbed over 53%, from $15 billion at end-2008 to over $23 billion as of 31 October 2009, including its recent $3.2 billion bond issue…

The central government's total debt also has climbed hugely so far in 2009. In all, the government has borrowed at least $20 billion between 1 January and 31 October 2009, including over $9 billion borrowed directly by Pdvsa. However, a report issued 30 October 2009 by UK investment bank Barclays Capital forecasts that the total debt of the Bolivarian republic of Venezuela will increase to at least $97.9 billion by end-2009 from $64.7 billion at end-2008, up $33 billion or 51% year-on-year.

As a result, the Venezuelan government's total debt, expressed as a percentage of the country's gross domestic product, will grow from 27.6% of GDP at end-2008 to 39.2% at end- 2009” .

This shows that both PDVSA and the nation are increasing their debt burden in a very accelerated manner. In fact, during 2010 PDVSA has continued issuing bonds, so that its officially registered debt will surpass $30 billion by the end of 2010, while national debt will increase to over $110 billion. I would be inclined to say that PDVSA's real debt is much higher because of two, possiby three main reasons: one, because it has been made responsible to pay back the Chinese debt, which amounts to some $20 billion, not included in the above amount. Two, because the contingencies made in their books to pay the potential claims of the expropriated companies, such as ExxonMobil, are only $1 billion or so, while the claims could go as high as $40 billion. Campbell estimates that $10 billion should be a more conservative estimate for the contingencies. The third main reason is that adequate provisions to cover employee severance payments and contributions to the Retirement and other Funds are probably not being made.

Employee Funds.

The situation of PDVSA's Retirement Fund, the Severance Fund and the Savings Fund of the employees is extremely irregular. According to information received from retired PDVSA's employee the assets of the Retirement Fund have practically evaporated into thin air, particularly those in foreign currency. There are about 13,500 members of PDVSA's Retirement Fund but the exact number is not known since 2002. In 2002 the fund had about Bs. 1,3 billion and $600 million and should have had some $2 billion by 2008 but no one knows for sure. Representatives from the retired employees have not been allowed in the meetings of the Fund since 2002. They fear that the money that should have been kept in this fund has been used for other purposes, while no provisions are being made to cover current obligations.

In summary,

The current situation of the company is highly fragile in almost every sense. The recent scandal of the rotten food handled by PDVSA, in the amount of some 180,000 tons found in abandoned containers in diverse locations of the country and, even, in foreign ports, has illustrated tragically the degree of moral and managerial deterioration within the company.