Archive for October 10th, 2004

Chavez increases royalties on heavy crude operators

October 10, 2004

President Chavez announced today that he was increasing oil royalties to the heavy oil projects from 1% to 16.66%. These projects are Petrozuata, Hamaca, Cerro Negro and Sincor. Reportedly hamaca already pays the 16.6%. These are all projects in which heavy crudes are transformed into synthetic fuels. These four projects produce a combined total of about 500,000 barrels a day today, but production is expected to reach 600,000 barrels within the next two years. Venezuela’s state oil company PDVSA is a minority partner in all of these projects.


Three years ago, Venezuela’s National Assembly approved a new hydrocarbons bill, that increased all royalties from oil exploitation to 16.6% but in Venezuela, laws can not be applied retroactively, so it did not apply to projects approved before the law. In general, at current levels of oil prices, this should not be a problem for these projects, most of which were planned assuming West Texas Intermediate prices of US$ 15 per barrel. They were all given a 1% tax for the first nine years of the production as an incentive to start them. Before these projects came into existence, there were no similar projects in Venezuela.


 


Most of these projects were built using debt issued in US dollars by the projects themselves. Bonds were issued which were guaranteed by the company’s partners until the projects met certain technical specifications of actual production. Many of the bonds are of the sinking fund type, in which after a certain date, they pay not only interest on the principal, but also part for the principal. This structure is used whenever investors may find that it is hard to look down the line to the maturity of the bond.


 


As an example, the Cerro Negro 2009 bond has a coupon of 7.33% per year, but has returned principal since three years ago at a rate of 6% per semester, so that only 70% of its principal is still outstanding. It currently has a yield of 5.75%, which is quite attractive given worldwide interest rates. Another project, Petrozuata, has a bond maturing in 2017 which pays no principal until 2008 and has a coupon of 8.22%. I consider this bond to be one of the most attractive fixed income investments in Venezuela.


 


While it is reasonable, given current oil prices, to increase the royalty to this level, I am not comfortable with the way it has been done. First of all, these were contracts signed by PDVSA in which that royalty percentage was negotiated. Second, it would seem more reasonable to negotiate it with the companies, establishing a sliding schedule in case prices go down in the future. Third, I understand that all of the projects are looking to expand their operations in Venezuela; maybe this could have been negotiated rather than imposed, as it does not send the best signal to investors looking for new oil deals in Venezuela.


 


The biggest problem in my mind with the decision is one of competitiveness; Canada and Venezuela have the biggest heavy oil reserves in the world. These projects are similar to much larger projects in Canada such as Suncor, which have found a way to exploit these heavy crudes. In Canada, according to the Suncor report, the royalty is 1%, which is probably the reason why PDVSA negotiated that rate when the projects were started. Note that there are royalties and there are taxes, in both countries the royalty was 1% until today. Suncor as a company pays an effective tax rate of 36% which is probably similar to Venezuela’s. Thus, Canada is more attractive from that point of view.


 


I am in no position no to know or evaluate at this time whether this hurts Venezuela’s competitive advantage in heavy crudes or not. There are other issues to consider such as production costs. These projects make use of natural gas, which is cheaper in Venezuela, so that may be an advantage. Financially at current oil prices the decision should not affect any of the projects as they were planned for much lower oil prices. The one affected the most is Hamaca, which only came on line recently, the rest have benefited for quiet a while of the lower royalty.


 


In any case, you read The Devil’s for free and today you get, also for free, two investment recommendations: If you are aggressive buy Suncor stock (NYSE:SU), the company’s cash flow is fantastic and if oil prices stay high it will keep going up. If you just want income, buy Petrozuata’s 2017 bond with a coupon and yield of 8.22% for the next 13 years and you start getting back you principal in 2008. Benefit from the Devil’s Excrement, not this one, the real one!


 


(You also get to see my new blooms for free!!!)

Chavez increases royalties on heavy crude operators

October 10, 2004

President Chavez announced today that he was increasing oil royalties to the heavy oil projects from 1% to 16.66%. These projects are Petrozuata, Hamaca, Cerro Negro and Sincor. Reportedly hamaca already pays the 16.6%. These are all projects in which heavy crudes are transformed into synthetic fuels. These four projects produce a combined total of about 500,000 barrels a day today, but production is expected to reach 600,000 barrels within the next two years. Venezuela’s state oil company PDVSA is a minority partner in all of these projects.


Three years ago, Venezuela’s National Assembly approved a new hydrocarbons bill, that increased all royalties from oil exploitation to 16.6% but in Venezuela, laws can not be applied retroactively, so it did not apply to projects approved before the law. In general, at current levels of oil prices, this should not be a problem for these projects, most of which were planned assuming West Texas Intermediate prices of US$ 15 per barrel. They were all given a 1% tax for the first nine years of the production as an incentive to start them. Before these projects came into existence, there were no similar projects in Venezuela.


 


Most of these projects were built using debt issued in US dollars by the projects themselves. Bonds were issued which were guaranteed by the company’s partners until the projects met certain technical specifications of actual production. Many of the bonds are of the sinking fund type, in which after a certain date, they pay not only interest on the principal, but also part for the principal. This structure is used whenever investors may find that it is hard to look down the line to the maturity of the bond.


 


As an example, the Cerro Negro 2009 bond has a coupon of 7.33% per year, but has returned principal since three years ago at a rate of 6% per semester, so that only 70% of its principal is still outstanding. It currently has a yield of 5.75%, which is quite attractive given worldwide interest rates. Another project, Petrozuata, has a bond maturing in 2017 which pays no principal until 2008 and has a coupon of 8.22%. I consider this bond to be one of the most attractive fixed income investments in Venezuela.


 


While it is reasonable, given current oil prices, to increase the royalty to this level, I am not comfortable with the way it has been done. First of all, these were contracts signed by PDVSA in which that royalty percentage was negotiated. Second, it would seem more reasonable to negotiate it with the companies, establishing a sliding schedule in case prices go down in the future. Third, I understand that all of the projects are looking to expand their operations in Venezuela; maybe this could have been negotiated rather than imposed, as it does not send the best signal to investors looking for new oil deals in Venezuela.


 


The biggest problem in my mind with the decision is one of competitiveness; Canada and Venezuela have the biggest heavy oil reserves in the world. These projects are similar to much larger projects in Canada such as Suncor, which have found a way to exploit these heavy crudes. In Canada, according to the Suncor report, the royalty is 1%, which is probably the reason why PDVSA negotiated that rate when the projects were started. Note that there are royalties and there are taxes, in both countries the royalty was 1% until today. Suncor as a company pays an effective tax rate of 36% which is probably similar to Venezuela’s. Thus, Canada is more attractive from that point of view.


 


I am in no position no to know or evaluate at this time whether this hurts Venezuela’s competitive advantage in heavy crudes or not. There are other issues to consider such as production costs. These projects make use of natural gas, which is cheaper in Venezuela, so that may be an advantage. Financially at current oil prices the decision should not affect any of the projects as they were planned for much lower oil prices. The one affected the most is Hamaca, which only came on line recently, the rest have benefited for quiet a while of the lower royalty.


 


In any case, you read The Devil’s for free and today you get, also for free, two investment recommendations: If you are aggressive buy Suncor stock (NYSE:SU), the company’s cash flow is fantastic and if oil prices stay high it will keep going up. If you just want income, buy Petrozuata’s 2017 bond with a coupon and yield of 8.22% for the next 13 years and you start getting back you principal in 2008. Benefit from the Devil’s Excrement, not this one, the real one!


 


(You also get to see my new blooms for free!!!)

Nice new blooms

October 10, 2004

 



Pictures of a Dendrochilum Cobbianum(?) which I have posted before. The plant is getting huge, it is about one meter in diameter (three feet) and sends dozens of long shots each in turn with dozens of little flowers aout 1/4 of an inch in size.It amkes a beautiful plant with and without flowers. Below on the left a close up of the flower itself.



Top left close up of flower for Denrochilum picture above. Right: Beautiful Venezuelan Cattleya Jenmanii



Brazilian Catlleya Aclandie on the left above and a hybrid of Aclandie on the right: Cattleya Lulu Hot Pink, both VERY fragrant.



Brazilian Cattleya Intermedia, they love my orchid room, making big specimen plants, this is another one.

On Mathematical Models of the Recall Vote and Fraud part XIII: Benford questions results once more

October 10, 2004

Physicist Imre Mikoss presented his data on tests on the August 15th. recall vote and comparison to Benford’s law two weeks ago at the third Simon Bolivar University seminar. His presentation is now online. While Pericchi and Torres have done similar tests, Mykoss does a couple of very interesting things which are worth posting for their implications.


-Results from the 2000 election: Mikoss has looked at the data from the 2000 Presidential vote. This is interesting because even though electoral results would seem like a natural set to test Benford’s law, nothing guarantees that it works in Venezuela or everywhere. Below is a graph the first digit in the number of votes obtained by Chavez’ challenger Francisco Arias Cardenas in the 2000 elections. :


 




Frequency of occurence of the first digit for the votes in favor of Arias Cardenas at each machine in the 2000 as a function of the digit.


 


The graph shows the frequency of occurrence expected from Benford (green bar) and the frequency seen in the election (red bar) in the vertical axis versus each of the digits in the horizontal axis. The graph not only looks like Benford’s law, but the author performed statistical tests and obtained in the case of the number of votes for Arias across the nation to have a parameter S (which I believe is chi^2, but the presentation does not define)=0.003. Chavez’ votes in the same election, as well as the difference between the two numbers at each machine were all found to follow Benford’s law with S<0.014. Thus, Venezuelan electoral results did follow well Benford’s law in 2000, which needed to be established and seems to be established by this comparison.


 


-Results from the recall vote: The same test on the results from the recall vote do not agree well with Benford’s law as sown below for the Si and the No frequencies. As in the case of Pericchi’s analysis for the second digit presented here earlier, Mykoss finds that the Si votes agrees better (S=0.33) than the No vote (S=0.97) as seen below:


 




Frequency of occurence of the first digit for the Si votes at each machine as a function of the digit.


 



 


Frequency of occurence of the first digit for the Np votes at each machine as a function of the digit.


 


 


-“Reverting the data”: Mikoss then studies rather than the Si or No numbers, the set of differences (No-Si) for each voting machine. This apparently has the advantage that it provides a more uniform set of numbers that is not as bound as the pure set in which machine size bounds numbers. In fact, this difference for the recall vote shows the best comparison to Benford’s law with S=0.1.


 


But there is an additional reason for doing this. If you want to “simulate” tampering with the data and you calculate (NO-Si) at each machine, then it is very easy to “transfer back” No votes to the Si votes and measure chi^2 as a function of this “reversion” of the votes. Mikoss tested this, “reverting” votes by equal percentages in all machines and obtains the following graph:


 



 


 Chi squared of the comparison between Benford’s law for the difference (No-Si) as a function of the percentage of No votes “reverted” to the Si


 


 


The suggestion is a) the fits is much better if you shift votes from No to Si, with a very well defined minimum in which chi^2 goes down sharply by two orders of magnitude, corresponding to about 18% of the votes being shifted from No to Si. b) The work of Mikoss shows that you can use such testing to test for this reversion. C) There are suggestions that this was done given that the work assumes all machines were altered, which would seem surprising.


 


For completeness, below are the results for the second digit of Arias and Chavez in 2000 as well as the Si and the No in the recall referendum, which have also been studied by Pericchi and posted here before:


 



 


           Frequency second digit Arias  2000                Second Digit Chavez 2000


 



               Second digit Si vote RR                                         Second digit No vote RR

On Mathematical Models of the Recall Vote and Fraud part XIII: Benford questions results once more

October 10, 2004

Physicist Imre Mikoss presented his data on tests on the August 15th. recall vote and comparison to Benford’s law two weeks ago at the third Simon Bolivar University seminar. His presentation is now online. While Pericchi and Torres have done similar tests, Mykoss does a couple of very interesting things which are worth posting for their implications.


-Results from the 2000 election: Mikoss has looked at the data from the 2000 Presidential vote. This is interesting because even though electoral results would seem like a natural set to test Benford’s law, nothing guarantees that it works in Venezuela or everywhere. Below is a graph the first digit in the number of votes obtained by Chavez’ challenger Francisco Arias Cardenas in the 2000 elections. :


 




Frequency of occurence of the first digit for the votes in favor of Arias Cardenas at each machine in the 2000 as a function of the digit.


 


The graph shows the frequency of occurrence expected from Benford (green bar) and the frequency seen in the election (red bar) in the vertical axis versus each of the digits in the horizontal axis. The graph not only looks like Benford’s law, but the author performed statistical tests and obtained in the case of the number of votes for Arias across the nation to have a parameter S (which I believe is chi^2, but the presentation does not define)=0.003. Chavez’ votes in the same election, as well as the difference between the two numbers at each machine were all found to follow Benford’s law with S<0.014. Thus, Venezuelan electoral results did follow well Benford’s law in 2000, which needed to be established and seems to be established by this comparison.


 


-Results from the recall vote: The same test on the results from the recall vote do not agree well with Benford’s law as sown below for the Si and the No frequencies. As in the case of Pericchi’s analysis for the second digit presented here earlier, Mykoss finds that the Si votes agrees better (S=0.33) than the No vote (S=0.97) as seen below:


 




Frequency of occurence of the first digit for the Si votes at each machine as a function of the digit.


 



 


Frequency of occurence of the first digit for the Np votes at each machine as a function of the digit.


 


 


-“Reverting the data”: Mikoss then studies rather than the Si or No numbers, the set of differences (No-Si) for each voting machine. This apparently has the advantage that it provides a more uniform set of numbers that is not as bound as the pure set in which machine size bounds numbers. In fact, this difference for the recall vote shows the best comparison to Benford’s law with S=0.1.


 


But there is an additional reason for doing this. If you want to “simulate” tampering with the data and you calculate (NO-Si) at each machine, then it is very easy to “transfer back” No votes to the Si votes and measure chi^2 as a function of this “reversion” of the votes. Mikoss tested this, “reverting” votes by equal percentages in all machines and obtains the following graph:


 



 


 Chi squared of the comparison between Benford’s law for the difference (No-Si) as a function of the percentage of No votes “reverted” to the Si


 


 


The suggestion is a) the fits is much better if you shift votes from No to Si, with a very well defined minimum in which chi^2 goes down sharply by two orders of magnitude, corresponding to about 18% of the votes being shifted from No to Si. b) The work of Mikoss shows that you can use such testing to test for this reversion. C) There are suggestions that this was done given that the work assumes all machines were altered, which would seem surprising.


 


For completeness, below are the results for the second digit of Arias and Chavez in 2000 as well as the Si and the No in the recall referendum, which have also been studied by Pericchi and posted here before:


 



 


           Frequency second digit Arias  2000                Second Digit Chavez 2000


 



               Second digit Si vote RR                                         Second digit No vote RR

On Mathematical Models of the Recall Vote and Fraud part XIII: Benford questions results once more

October 10, 2004

Physicist Imre Mikoss presented his data on tests on the August 15th. recall vote and comparison to Benford’s law two weeks ago at the third Simon Bolivar University seminar. His presentation is now online. While Pericchi and Torres have done similar tests, Mykoss does a couple of very interesting things which are worth posting for their implications.


-Results from the 2000 election: Mikoss has looked at the data from the 2000 Presidential vote. This is interesting because even though electoral results would seem like a natural set to test Benford’s law, nothing guarantees that it works in Venezuela or everywhere. Below is a graph the first digit in the number of votes obtained by Chavez’ challenger Francisco Arias Cardenas in the 2000 elections. :


 




Frequency of occurence of the first digit for the votes in favor of Arias Cardenas at each machine in the 2000 as a function of the digit.


 


The graph shows the frequency of occurrence expected from Benford (green bar) and the frequency seen in the election (red bar) in the vertical axis versus each of the digits in the horizontal axis. The graph not only looks like Benford’s law, but the author performed statistical tests and obtained in the case of the number of votes for Arias across the nation to have a parameter S (which I believe is chi^2, but the presentation does not define)=0.003. Chavez’ votes in the same election, as well as the difference between the two numbers at each machine were all found to follow Benford’s law with S<0.014. Thus, Venezuelan electoral results did follow well Benford’s law in 2000, which needed to be established and seems to be established by this comparison.


 


-Results from the recall vote: The same test on the results from the recall vote do not agree well with Benford’s law as sown below for the Si and the No frequencies. As in the case of Pericchi’s analysis for the second digit presented here earlier, Mykoss finds that the Si votes agrees better (S=0.33) than the No vote (S=0.97) as seen below:


 




Frequency of occurence of the first digit for the Si votes at each machine as a function of the digit.


 



 


Frequency of occurence of the first digit for the Np votes at each machine as a function of the digit.


 


 


-“Reverting the data”: Mikoss then studies rather than the Si or No numbers, the set of differences (No-Si) for each voting machine. This apparently has the advantage that it provides a more uniform set of numbers that is not as bound as the pure set in which machine size bounds numbers. In fact, this difference for the recall vote shows the best comparison to Benford’s law with S=0.1.


 


But there is an additional reason for doing this. If you want to “simulate” tampering with the data and you calculate (NO-Si) at each machine, then it is very easy to “transfer back” No votes to the Si votes and measure chi^2 as a function of this “reversion” of the votes. Mikoss tested this, “reverting” votes by equal percentages in all machines and obtains the following graph:


 



 


 Chi squared of the comparison between Benford’s law for the difference (No-Si) as a function of the percentage of No votes “reverted” to the Si


 


 


The suggestion is a) the fits is much better if you shift votes from No to Si, with a very well defined minimum in which chi^2 goes down sharply by two orders of magnitude, corresponding to about 18% of the votes being shifted from No to Si. b) The work of Mikoss shows that you can use such testing to test for this reversion. C) There are suggestions that this was done given that the work assumes all machines were altered, which would seem surprising.


 


For completeness, below are the results for the second digit of Arias and Chavez in 2000 as well as the Si and the No in the recall referendum, which have also been studied by Pericchi and posted here before:


 



 


           Frequency second digit Arias  2000                Second Digit Chavez 2000


 



               Second digit Si vote RR                                         Second digit No vote RR

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