Petroleos de Venezuela: from Ponzi scheme to financial collapse

The Venezuelan oil industry is in flames started by the regime

The most recent emission (November 2011) of $2.4 billion in bonds by PDVSA will have the main purpose of paying part of its debt to the Venezuelan Central Bank. According to Venezuelan financial expert Jose Guerra the company owes the Central Bank about $13.6 billion, something that had never happened in PDVSA’s previous 35-year history. In issuing new debt to pay for the old one PDVSA seems to be engaging in a Ponzi scheme.

This illustrates the chaotic financial situation of the company.The Venezuelan oil industry had always given money to the Central government, never the other way around. This type of parasitic behavior has been common practice in other state-owned companies such as the huge, failed Corporacion Venezolana de Guayana, but never in PDVSA. It could almost be seen as the equivalent of, say, Algeria running short of sand.
In fact, batches of gasoline and gasoline components have been imported by PDVSA in recent years due to the poor performance of its domestic refineries.

Multiple financial afflictions

This Ponzi-like scheme is not the only financial affliction of PDVSA. With a declining production and the dedication of about half of this production, some 1.2 million barrels per day, to serve highly subsidized markets such as the local market (700,000 barrels per day), Cuba (100,000 barrels per day) and the Caribbean and Central America (about 300,000 barrels per day), the income of the company has suffered a dramatic decrease. In addition the diversion of much of its financial and human resources to non-oil related activities has contributed to the deterioration of its money making ability.This comes at a time in which significant new financial resources are required to develop the heavy oil deposits of the Orinoco region.

How not to manage an oil industry

The manner in which the Chavez government is handling the development in the Orinoco region should be the object of a Case Study in Extreme Mismanagement. Most international companies possessing the technology, management capabilities and financial resources that would be required have left Venezuela, forced out by the hostility of the government against the private sector. Only two or three capable companies such as Chevron Texaco and Repsol still have a presence in the region. In place of the private companies the government has invited a group of about 30 state-owned, largely unknown companies from ideologically friendly or third world countries: Vietnam, Iran, Cuba, China, Belarus, India and Russia. These companies do not possess what it takes to do the job. Moreover, they are in a mood of “wait and see”, given the unstable political and economic environment. Since the government lacks the money to contribute its 60 per cent share of all joint ventures, these companies have been requested to supply all the capital required, estimated to be more than $120 billion in the next 4 years. Not even the Chinese, intent on establishing a strong presence in Venezuela, are willing to go ahead with these significant financial commitments, in the light of current Venezuelan political and economic conditions. As a result the development of the heavy oil deposits is significantly delayed. Nothing much beyond talking has been done in the last 3 years, while production from the area has actually declined to about half of what it was about 5-6 years ago.

Enters China

This chaotic situation has served to facilitate the entry of China into the Venezuelan oil industry and other sectors of national life. The virulent anti-U.S. Chavez posture and his ideological inclinations made it almost inevitable that he should look to Communist China as an ally and supporter for his “revolution”. This played into the hands of China, a country actively searching for new sources of energy and raw materials all over the planet. Venezuela was a ripe fruit and took almost no effort for the Chinese to pluck it.

Today China is present in the Orinoco heavy oil region, having won, without a bid, the rights to develop a block that could develop a potential production of some 500,000 barrels per day in a few years. However, they would need to invest about $40 billion and are reluctant to do so, due to the reasons already outlined above. In parallel China is doing something different, even more effective, since it does not require them to sink money into an oil venture requiring great technological and managerial effort. They have become the main lender of money to Hugo Chavez. Since 2007 they have began to lend money to the Venezuelan government and have already delivered about $22 billion to Chavez and commited to deliver about $20 billion more. Therefore the Venezuelan debt with China will soon amount to $42 billion, partly in dollars and partly in Chinese currency. This debt has been placed on PDVSA’s head and has to be paid in future oil shipments. PDVSA’s President Rafael Ramirez has admitted, in a confidential document recently leaked to the public, that some 430,000 barrels per day of PDVSA production are already committed to China, some of this volume for the next 10 years, in order to pay this debt. This already represents about one third of Venezuelan current oil exports. This means that PDVSA is only getting paid in cash for about one third of its total exports, since the other third is sold under non-commercial terms to Cuba and other countries, as described above. In his memo Ramirez actually asks to use some of the money deposited in the Chinese fund to cover some of PDVSA’s losses due to this situation.

The losses of PDVSA are enormous

The losses, he admits, are enormous. In 2011 PDVSA will show about $12.5 billion in lost income due to the oil volumes being sent to China, plus about $5.8 billion out of pocket losses derived from royalty payments that the company has to make to the Central government for the oil sent to China. To add insult to injury much of this payment in oil is being delivered to China at prices per barrel substantially below the commercial price. According to PDVSA some or all of the oil going to China has had prices of $40-50 a barrel, significantly below the $70-100 per barrel prices prevailing during 2008-2011,the years the agreement has been in effect.

These Chinese loans, the benefits received by China through the agreements and the manner in which Hugo Chavez is handling the money received from China, without transparency or accountability, represent one of the biggest crimes the Chavez regime has committed against the nation. According to opposition member of the National Assembly, Miguel Angel Rodriguez, these agreements are illegal since they were not approved by the National Assembly and were never included in the national budget. He added that selling Venezuelan oil to China at a discounted price also violates article 93 of the Organic Law of Financial Administration of the Public Sector, which stipulates that no credit operations can offer lenders excessive economic benefits at the expense of the nation.

Other crimes committed by the Central government against PDVSA and the nation

During 2011 the Central government ordered PDVSA to coordinate and finance the so-called Mision Vivienda, a program to build new homes. This has demanded much money and efforts from the oil company, to be put into an activity that is clearly outside its sphere of expertise. The result has been predictable. Although originally promising to build 300,000 new homes this year, the government now claims to have built 95,000 new homes, while independent observers estimate that no more than 30,000 homes have actually been built, only half by the government, the other half by the private sector.

In August of this year the central government ordered PDVSA to take over the management of the mining sector, which involves the creation of joint ventures with foreign companies. As the mining sector is in total disarray it is believed that this new task cannot be done effectively by PDVSA and will further contribute to its organizational collapse.

In addition to these charges the Central government has instructed PDVSA to assume its debt with former public employees, estimated at some $4-5 billion. In order to do this PDVSA will have to issue new bonds and make extra royalty payments to the Central government. In view of their already critical shortage of funds this looks absolutely impossible to do.

Total debt and probable short-term obligations of PDVSA by end of 2011

According to data compiled by Jose Guerra, a former Director of the Venezuelan Central Bank, PDVSA had a debt of $2.9 billion in 2006. Today, PDVSA’s debt and probable short-term obligations will close at some $86 billion, as follows:

(a), $25.9 billion in bond emissions

(b), about $8 billion owed to expropriated companies, to be paid by PDVSA, including two cement companies and the Margarita Hilton Hotel, among others;

(c), about $3 billion owed to Maracaibo lake transport companies expropriated;

(d), probable amounts of money to be paid to Exxon Mobil and Conoco Phillips for the expropriation of their companies in the Orinoco area, estimated at $11.5 billion;

(e), About $13.6 billion owed to the Venezuelan Central Bank.

(f), $20 billion owed to China, being paid in oil.

(g), some $4-5 billion to be paid to former public employees on behalf of the Central government.

Far gone are the days in which Petroleos de Venezuela was a world-rank petroleum company. The company is now obliged to offer 12 and even 19 percent rates of interest to entice non risk-averse investors.