Archive for May 16th, 2005

PDVSA: Official numbers indicate serious inconsistencies at the company

May 16, 2005


PDVSA has been in the limelight for the last few weeks. While the Government wants to claim that there is some sort of conspiracy against it surrounding PDVSA, the truth is that it was Chavez himself who really set the whole thing in motion by admitting a while back that production was below the OPEC quota, something that analysts have been charging for quite a while. To confuse the issue more, the all-powerful Minister of Oil and President of PDVSA immediately charged that this was not true contradicting the President who a few days later went back to the old position that production was barely down and above the OPEC quota.


 


The second act surrounding this, involved the “firing” of as many as 12,000 PDVSA workers in the Western part of Venezuela who were under contract, to be replaced by only a contingent of 3,000 to 4,000 workers likely to be chosen from the same group. The Government has denied this emphatically, saying they were not being fired, their contracts were simply expiring. This raised the question of why 12,000 workers were needed before and less than a third now. Two explanations were put forth for this: One, that these were all political hires before the recall vote who were let go. Two, that the workers were no longer needed because of the drop in production of in the Western part of the Nation.


 


The third act was introduced by Economist Domingo Maza Zavala, who is a Central Bank Director; Maza Zavala was interviewed in the El Universal saying that as much as US$ 20 million per day is not being turned over to the Venezuelan Central Bank by PDVSA. By law, PDVSA is supposed to transfer all of the foreign currency it receives to the Central Bank; it can only keep a “rotary” fund of US$ 600 million for its expenses abroad.


 


There have been other discussions surrounding PDVSA mostly generated by the Government which has been changing the definitions of income tax that apply to the operational agreements, as well as corruption charges, but these have been secondary to the discussion at hand.


 


The press has jumped on the issue, it not only sells newspapers and makes the Government look bad, but it is a very valid concern to wonder what is going on at PDVSA. Not only does PDVSA generate most of the revenues for the Government, but Chavez’ political platform when he first ran for President was based on how the oil industry was being handled. Chavez charged then that there was no transparency within the company, that foreign companies were being giving too much of the oil production of the country and that foreigners had too much of an influence on how it was being run. Today, there is very little transparency (the 2003 financials have yet to be turned in to the SEC), no public bidding is being done for any gas or oil fields, the percentage of oil produced by foreign companies has increased and two foreigners sit on the Board of PDVSA and only foreign companies are likely to be given new fields. It is indeed a field day for the media.


 


This weekend, there were many articles on PDVSA and its problems in the national press. El Nacional had an article yesterday which you can read here, where independent analysts claim that PDVSA is producing one million of barrels less a day than what is being claimed by the Government. Gustavo Coronel wrote an open letter to President Chavez. This weekend, there were articles in El Universal, La Razon, Zeta, El Nacional and many others, hammering on the Government and its mishandling of PDVSA. Chavez showed that he is sensitive to the issue, attacking all of these newspapers by actually showing them, only hours after being published and showing his skin is really getting thin, as discussed by Daniel, who points out how carefully Chavez appears to read these “bad” (or should I say “crappy”) opposition papers.


 


The whole point of this article is to attempt to shed some light into who is right and to what extent. Is Venezuela producing so much less as it is being claimed? If true, this not only would show that this Government lacks any scruples, it would say the prospects for Venezuela are very bleak. Bleak, because the country depends so much on oil. Bleak, because even if the Chavez administration were to leave tomorrow, the recovery of PDVSA would be extremely difficult, it at all possible. Difficult, because the company has now become completely politicized, which would be really difficult to eradicate, almost impossible, because PDVSA did have talent, most of which is now spread around the world, or doing other things and would be very skeptical of dropping everything to go back to PDVSA. Moreover, it may take decades to educate the type of people needed to run a world class corporation like PDVSA.


 


Oil Production:


 


The two positions are best described by the following graph from El Nacional yesterday:


 





What it has is the Official numbers (light blue) for oil production, compared to the “unofficial” numbers (dark blue) that are being given out by analysts who are mostly ex-PDVSA workers or independent geologists.


 


The numbers agree for both the “Operating Agreements” (Convenios) in which marginal fields were sold to foreign companies in the 90’s and the “partnerships”, the heavy crude projects (Faja) in which PDVSA has retained a 42.5% stake of each project but the whole plant was built and is being run by foreign companies. Thus, there is no disagreement there; Venezuela produces 532,000 barrels of oil via the agreements and 624,000 barrels of synthetic crude made from heavy oil.


 


The big discrepancy is in how much the Western (Occidente) part of the nation is producing and how much the Eastern (Oriente) part is producing. Obviously, Occidente seems to be in the limelight, since the discrepancy is over 700 thousand barrels per day.


 


Obviously, we can’t possibly check what is being produced. But there are official numbers that are released by either the Government or PDVSA that will tell us more. However, it is important to note that


 


–The 2005 budget was based on total production of 3.6 million barrels of oil a day that is clearly not being fulfilled.


–The 625,000 barrels a day from the Faja are new, in the sense that in 2002 none of these projects (Hamaca, Cerro Negro, Petrozuata and Sincor) was producing any oil, thus this is “new” production, which was not in existence before the strike, when PDVSA was said to be producing 2.8 million barrels of oil a day.


Venezuela consumes about 400,000 barrels of oil a day, 360,000 of which is gasoline and 40,000 in other products. I could not get a more precise number from any source. Thus, if the Government is right, Venezuela is exporting 2.765 million barrels of oil day, while if the analysts are right; Venezuela is exporting some 2 million barrels of oil a day.


 


Price of Oil: The price of Venezuelan oil is different than that of West Texas or Brent. Venezuela produces a basket of oils that goes from very light crude, which you could probably use in your gas tank right off the well, to very gooey stuff that is found in the tar sands. PDVSA publishes every Friday afternoon the average price of the Venezuelan oil basket of exported oil for the previous week. This “basket” is supposed to have the same mixture as the exports. PDVSA used to say what this mixture was in the old days, but there is no information about this anymore. I will assume they keep adjusting this to that profile. This historical data can be obtained from Bloomberg and can be seen below, where I plot that weekly price since June 2004:


 



 


 


In theory, if you multiply the weekly production of oil by this number you should get the amount of sales PDVSA did abroad. Now, from the data on that graph we can get the average price of an exported barrel of oil in 2005, it comes out to US$ 39.202 per barrel for the first three months of 2005.


 


Dollars handed over to BCV: The Venezuelan Central Bank (BCV) does not release details of the amount handed over by PDVSA day by day to the monetary authority. But according to this article in El Universal, both the President of PDVSA Ramirez and Central Bank Director Maza Zavala agree that the oil company turned over US$ 6.433 billion in the first quarter of 2005, to fulfill the law. Now, the law does say that PDVSA can subtract from this any expense in foreign currency to keep in a fund that should never exceed US$ 600. Thus, the 6.433 billion seems to be an official number, if we believe El Universal.


 


From this, we can derive some initial numbers:


 


–At US$ 39.202 per barrel, if PDVSA has handed over US$ 6 433 billion in the quarter, it means that PDVSA exported some 1.823 million of barrels of oil a day at the average price of the Venezuelan oil basket during the 90 days of the quarter. This is 9% (183,000 barrels a day) above the “unofficial” estimates but 34% (942,000 barrels a day) below the official production numbers given by the Government, after subtracting the 400,000 barrels a day for local consumption in both cases.


 


The problem is that PDVSA does not have to hand over all of the foreign currency; it can keep whatever it needs to pay for foreign expenses. One can estimate if the difference comes from this:


 


Case 1: The analysts are right. This means PDVSA keeps every day, US$ 7.17 million for its foreign expenses or US$ 2.6 billion a year.


 


Case 2: The Government is telling the truth and PDVSA keep everyday US$ 36.92 million per day or US$ 13.475 billion dollars a year.


 


Given the amount of money spent by PDVSA locally, the lack of investment in exploration which requires foreign technology, the fact that PDVSA has no debt and most of its expenses are local, it seems as if the second numbers is simply absurd and the real numbers is closer to Case 1 than Case 2, by quite a bit. Thus, the numbers, as derived from official figures, appear to clearly indicate the country’s oil production is way below what the Government says or the PDVSA is keeping part of the foreign currency it is supposed to turn over to the Central Bank, in clear violation of the law.


 


This suggests all of the screaming is just a smoke screen to hide the reality of the tragedy at PDVSA

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