NOT SULFUR, OIL...NO ES AZUFRE, ES PETRÓLEO!!!
**** The Venezuelan Oil industry in chaos: an unreliable supplier to the U.S.
The model chosen to nationalize the Venezuelan petroleum industry in 1976 was unique and very successful: four integrated operating companies under a financial and strategic planning holding company. Management was very professional, politics did not play a role and, as a result, Petroleos de Venezuela became, for the next 25 years, one of the top oil companies in the world, next to Exxon and Shell. This success story came to an end when Hugo Chavez came into power in 1999. During his presidency Petroleos de Venezuela has lost about 800,000 barrels per day of production capacity, and management has been politicized. U.S. based, fully owned affiliate, Citgo, has become a political tool that distributes subsidized fuel in the U.S. as part of Hugo Chavez’s strategy to establish a political beachhead in that country, with the willing assistance of Joseph Kennedy III and a few members of U.S. Congress.
Venezuela still is one of the key petroleum suppliers to the U.S., sending about 1.1 million barrels per day to that country. Any abrupt disruption of this flow of oil would result in a major blow to the U.S. economy, already in the threshold of a recession. Up to now the possibility of such a disruption had been based upon the unpredictable nature of Hugo Chavez as an authoritarian leader who hates the U.S. There is little doubt that Chavez would interrupt the flow of oil to the U.S if he could. But he cannot. Most of the oil coming to the U.S. can only be refined in U.S refineries and it would take China or India, the other two likely main clients, about five years to build refineries to process Venezuelan oil.
The danger of such an interruption is, therefore, negligible? Not really. There is another reason why this flow could be suddenly interrupted: because the Venezuelan petroleum company becomes unable to fulfill its contractual obligations due to poor management and to a major financial or operational collapse. Even two years ago this would have appeared extremely unlikely but, recently, the company has been deteriorating at an alarming rate. Under investment and lack of maintenance have combined to take production down to very low levels, no more than 2.5 million barrels per day, while domestic consumption is now reaching some 800,000 barrels per day, cutting into the volumes originally destined for exports. Some 300,000 barrels per day go at subsidized prices to Cuba, Nicaragua, Bolivia and some of the Caribbean states. Any further problems of an operational or financial nature would place PDVSA’s production below the volumes contractually committed to the U.S.
What are the chances of these problems getting worse in the near future? They are so high that the U.S. should be prepared for such an eventuality. The Venezuelan petroleum industry is nearing financial collapse. Recent signs are ominous. The company is demanding payment of exports within eight days, rather than the traditional thirty days, suggesting that the company has a severe problem of cash flow. Some days ago the Venezuelan petroleum company ordered Citgo to obtain an urgent $1 billion loan on its behalf and a few hours ago it requested another $500 million from Citgo as advanced dividends. In a very unusual move cargoes of fuel oil, worth about one billion dollars, have been placed for sale in the spot market at a discount provided they are paid in cash. The Venezuelan petroleum company has obtained a $4 billion loan to China, to pay for debts of the central government that have no relation with the oil company. The Bahamas oil terminal, owned by Petroleos de Venezuela, has been put up for sale, without success. There is an air of panic surrounding the finances of the Venezuelan petroleum company.
But this is not all. As a result of the aggressive political moves during the last two years by Hugo Chavez, who practically confiscated large oil projects of Exxon Mobil and Conoco Phillips in Venezuela, Exxon Mobil has just decided to counter attack and has obtained court orders from the U.K., the Netherlands, the Netherlands Antilles and the U.S. to freeze up to $12 billion worth of Venezuelan oil assets in these countries. This legal action by Exxon Mobil might not impede the daily operations of the company but represents a major financial and psychological blow to the already very weakened Venezuelan petroleum company and to the government of Hugo Chavez. This action might be followed by a similar action by ConocoPhillips,another company that feels wronged by the Chavez government.
The possibility of a major collapse of the Venezuelan petroleum company and of its inability to fulfill U.S. contractual commitments increases as the days go by.
The model chosen to nationalize the Venezuelan petroleum industry in 1976 was unique and very successful: four integrated operating companies under a financial and strategic planning holding company. Management was very professional, politics did not play a role and, as a result, Petroleos de Venezuela became, for the next 25 years, one of the top oil companies in the world, next to Exxon and Shell. This success story came to an end when Hugo Chavez came into power in 1999. During his presidency Petroleos de Venezuela has lost about 800,000 barrels per day of production capacity, and management has been politicized. U.S. based, fully owned affiliate, Citgo, has become a political tool that distributes subsidized fuel in the U.S. as part of Hugo Chavez’s strategy to establish a political beachhead in that country, with the willing assistance of Joseph Kennedy III and a few members of U.S. Congress.
Venezuela still is one of the key petroleum suppliers to the U.S., sending about 1.1 million barrels per day to that country. Any abrupt disruption of this flow of oil would result in a major blow to the U.S. economy, already in the threshold of a recession. Up to now the possibility of such a disruption had been based upon the unpredictable nature of Hugo Chavez as an authoritarian leader who hates the U.S. There is little doubt that Chavez would interrupt the flow of oil to the U.S if he could. But he cannot. Most of the oil coming to the U.S. can only be refined in U.S refineries and it would take China or India, the other two likely main clients, about five years to build refineries to process Venezuelan oil.
The danger of such an interruption is, therefore, negligible? Not really. There is another reason why this flow could be suddenly interrupted: because the Venezuelan petroleum company becomes unable to fulfill its contractual obligations due to poor management and to a major financial or operational collapse. Even two years ago this would have appeared extremely unlikely but, recently, the company has been deteriorating at an alarming rate. Under investment and lack of maintenance have combined to take production down to very low levels, no more than 2.5 million barrels per day, while domestic consumption is now reaching some 800,000 barrels per day, cutting into the volumes originally destined for exports. Some 300,000 barrels per day go at subsidized prices to Cuba, Nicaragua, Bolivia and some of the Caribbean states. Any further problems of an operational or financial nature would place PDVSA’s production below the volumes contractually committed to the U.S.
What are the chances of these problems getting worse in the near future? They are so high that the U.S. should be prepared for such an eventuality. The Venezuelan petroleum industry is nearing financial collapse. Recent signs are ominous. The company is demanding payment of exports within eight days, rather than the traditional thirty days, suggesting that the company has a severe problem of cash flow. Some days ago the Venezuelan petroleum company ordered Citgo to obtain an urgent $1 billion loan on its behalf and a few hours ago it requested another $500 million from Citgo as advanced dividends. In a very unusual move cargoes of fuel oil, worth about one billion dollars, have been placed for sale in the spot market at a discount provided they are paid in cash. The Venezuelan petroleum company has obtained a $4 billion loan to China, to pay for debts of the central government that have no relation with the oil company. The Bahamas oil terminal, owned by Petroleos de Venezuela, has been put up for sale, without success. There is an air of panic surrounding the finances of the Venezuelan petroleum company.
But this is not all. As a result of the aggressive political moves during the last two years by Hugo Chavez, who practically confiscated large oil projects of Exxon Mobil and Conoco Phillips in Venezuela, Exxon Mobil has just decided to counter attack and has obtained court orders from the U.K., the Netherlands, the Netherlands Antilles and the U.S. to freeze up to $12 billion worth of Venezuelan oil assets in these countries. This legal action by Exxon Mobil might not impede the daily operations of the company but represents a major financial and psychological blow to the already very weakened Venezuelan petroleum company and to the government of Hugo Chavez. This action might be followed by a similar action by ConocoPhillips,another company that feels wronged by the Chavez government.
The possibility of a major collapse of the Venezuelan petroleum company and of its inability to fulfill U.S. contractual commitments increases as the days go by.
Gustavo,
ResponderEliminarAlthough I realize that the nationalization of the Venezuelan petroleum industry was inevitable from a political and nationalistic perspective, I have to say, albeit with regret, that my concern at the time of the event that the action would not serve the economic interests of Venezuela, has proven to have been well founded.
That is not to say that I do not applaud the efforts and recognize the success of those who worked to keep PDVSA and its affiliates from turning into another Pemex, but placing that golden egg laying goose within such easy reach of the politicians has been a major contributor to the failure of all Venezuelan governments, starting with the first CAP Administration, to come to grips with the true development needs of the nation. The culmination of these failures is the tragedy that is now playing out in PDVSA and the country as a whole.
My contention is that the country would have been far better served if the transnationals had continued to own their local affiliates, not because the musiues were more capable of operating them (that myth had already been laid to rest before 1976), but simply because the financing required to keep the industry at a high level of productivity would have had to come from their own resources and from their ability to access the world’s financial markets. Despite my being no fan of the transnational oil companies, I’m convinced that the fiscal responsibility and control practiced by a Shell or Creole was far superior to anything any government anywhere has ever exercised , or will ever so do. The nationalization of the Venezuelan oil industry put the financial needs of industry in direct competition with the demand for expenditures to achieve political objectives, not to mention the drain caused by the endemic corruption. This, in the long run, ill served the needs of the country and of the industry.
I would have much preferred to have seen a continuation of transnational ownership of the affiliates with the Government getting a greater share of the revenues through taxation. I believe that the companies would have acceded to government representation on their Boards of Directors, thus giving the Government greater understanding of, and input in, management decision making. Venezuelan representation on the B.O.D.s of the transnational mother companies would not have been out of the question.
As it is, the transnationals did very nicely by the nationalization. They were able to curtail their investment in the industry in anticipation of the hand-over, thus maximizing profits. They were able take advantage of accelerated depreciation formulas, both in-country and abroad, as well as write-offs in their home countries for asset-loss abroad. Thereafter, they could maneuver in a buyers market without having to invest in the supply side. Apan grande we used to call that.
Now PDVSA is nearly in ruin. I’m confident that once we have gotten rid of Chavez, as we surely will, a lot of managerial, technical, and operational talent will come back to the industry. So, the human resources aspect of reviving it won’t be a problem. However, since the country is pretty much broke and in dire need of infrastructure renovation, in addition to all its other needs, getting the capital for rebuilding the oil industry will be a major challenge. I see re-privatization as a likely possibility, which, ironically, would put us back to where we started thirty-two years ago, except in much worse shape then we were then. Selling PDVSA stock on the worlds financial markets might be another option, but if the Venezuelan Government continues to hold the controlling interest, who would want to buy the shares or bonds, unless it were at a scandalous discount?
Well, what has happened is clavo pasa’o. First things first, and that means getting rid of Chavez.
Thanks for giving me the opportunity to get this off my chest. I may be dead wrong about all of it, but I feel much better now. ;-)
Good day, sun shines!
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