Archive for November, 2009

Oil Sowing Program: Ideology slows progress

November 16, 2009

ideology

It is not easy to build a power plant, complete a project, maintain a dam, keep a company from losing money. You need experts, professionals and the like. Because Chavismo prefers people who are very loyal, they have problems with all of this.

But even more surprising, the Chavez Government has had problems with completing bidding processes which are key to the country´s future. The reasons are many, they also have to do with the quality of people running the processes, but the main stumbling blocks that slows progress is simply ideology.

Last Thursday, PDVSA was supposed to finally give companies that want to bid for the heavy crude Carabobo oil field as part of the “Oil Sowing” program the final terms for the bids. This process has been delayed over and over and when the company failed to hand them over on Thrusday, it guaranteed that at least another six months will go by without the fields being awarded to anyone.

To give you an idea, when these projects were conceived, the scheduled called for the bidding process to be finished by December 2007 and the first barrel was supposed to be produced in August 2009 and the first upgraded barrel by 2011. Just to remind you, when you exploit a filed of heavy crude, you begin production of very low grade crude fairly rapidly, but the real deal comes when you finish the upgrader, a chemical-heat plant/process that allows you to improve the quality of the oil and sell it for much more. (More profit for PDVSA and the partner)

While the deadline was likely to be optimistic, the real delay is that idelogy has dominated the Government’s thinking and conditions are not that attractive.

Compare Venezuela’s Conditions with those of Alberta, Canada which has heavy oil fields of shale oil (These were Alberta’s conditions two years ago, they may have chanegd):

Venezuela                                Canada

Onwership         60% PDVSA                        100% company

Tax Rate              50%                                    25%

Royalty                33%                                    0% to 16% in time

Arbitration         Not International                    International

Financing           100% but you own 40%        100%, you own 100%

And therein lies the problem. A Government that has nationalized similar operations, breaking contracts and confiscating property, not only wants no international arbitration, but also wants to impose very tought conditions on minority partners, including that they provide 100% of the financing, given that PDVSA has no money to invest.

People always argue that the oil business is always good, however, think about it, if oil company X has to fund the project from its own credit lines, those are funds given to PDVSA, that you could use elsewhere to fund 100% of your ownership in a project.

Contrast this with the way this was funded in the terrible days of the IVth. Republic, where the projects were partnerships and these partnerships either issued bonds or borrowed money from banks as stand alone entities.

Remarkably, Chávez needs this. As oil income drops and production drops, one way out of this trap is to produce more oil and that was the idea of the Oil Sowing program, but any new revenue from this looks far into the future.

The Minsiter of Oil an Mines has said that he is willing to lower the royalty rate, but none of the other conditions. This seems to be the main reason while conditions were not announced, companies privately said that they would not participate under those terms.

Ideology has held back the process so far, we shall see in the next few days if a little pragmatism prevails . It probably will, after all, you can always nationalize them later.

The revolution builds housing in…..Mali

November 11, 2009

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Clueless Management Style

November 10, 2009

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I had heard this story, but did not know the particulars to write about it, but Petkoff in Tal Cual tells all the details in today’s paper:

On October 30th. Hugo Chávez named General José Rafael Guerra Baudett, who is retired, as President of Aluminum company Alucasa, part fo the CVG empire, a company in which the State owns 75% of the shares.

General Guerra was honest and responsible and told Chávez that he knew nothing about Aluminum nor had any experiene in running a company like that. Chávze told him that if he could command 11,000 men in tHe border, how could he be scared of “having” 600 workers in Alucasa.  The General took the job.

There you have it, Chávez’ clueless management style in a nutshell.

And people wonder why things don’t work in Veenzuela…

The true measure of Venezuela’s water and electricity problems

November 8, 2009

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While Hugo Chavez was worrying today about a US invasion, he should ahve really be paying attention to the problems of the country. Because two or three months ago there was little mention of water and electricity problems by him and his Government and all of a sudden they have taken center stage and they represent a sign of things to come.

Because these problems are not isolated, but represent the result of eleven years of mismanagement and incompetence. Take electric problems as an example. When Chavez got to power, there was a plan. Whether good or bad is besides the problem.Two large dams were going to be built. One was finished four years later than expected and the other one is still under construction.

The second is Tocoma, a dam that would have generated 14% of the electric needs of the country. This project is being financed by the IDB, but delays have made the project much more expensive, not only because times is money, but also because fixing the currency at Bs. 2.15 per US$, combined with 30% inflation has made cost simply soar.

At the root of the delays are the constant changes in management of the electric sector. While Rafael Ramirez has been Minister of Energy and Oil since 2003, there has been a string of Generals presiding over Edelca, CADAFE and Corpoelec. Corpoelec was a typical unnecessary step, it was simply a copy of CADAFE, a holding company for all electric companies underneath. But nobody told Chavez about it. And even worse, there were no economies of scale. Corpoelec was created and additional structures were formed. And now we have the Ministry for Electric Power or whatever it is it is called.

And part of the problem for Corpoelec, was that rather than being concerned with planning, funding, financing, investment, it had to worry about all of the companies that Chavez was nationalizing. Who would run them? Who to appoint? And more military was called in, as if that guaranteed anything.

But imagine now the funding problem at the Tococa dam. You get US$ 750 million to build it, but there are delays as General after General goes through the Presidency of Cadafe. The project has two parts, the turbines and equipment that is bought abroad and local costs. Unfortunately. local costs increase by local inflation, so any delays add to the cost of the project like you would not believe. And on top of that, the currency has been held constant for five years.

Take, for example, an engineer in the project. He cost you Bs. 2,150 a month five years ago, but you have given him or her, 25% salary increases every year. Except that those Bs. 2,150 five years ago, were $1,000 from IDB, but now have to be $3,015 from the same source and the project was not completed. And now, despite the huge windfall, Venezuela is going back to much hated IDB to get more. Mismanagement, overvaluation and inflation are coming back to haunt Hugo, but he does not seem to know it.

Because the problem is even more complex than that. While new infrastructure is being delayed, old infrastructure can barely be maintained, because electricity rates across the board have been held constant for seven years. This implies two things: First, electric companies have not kept up their revenues with inflation. This means they have to ask the Government for more or cost costs. You can bet they decided to implement cuts. Second, the few that pay (I count myself among them for both water and electricity) pay so little, that there is little incentive to save (I do collect all rain water to water my orchids). In the end, it is like a vicious circle, every policy is aimed at making sure that the whole system will collapse.

And when I say “everything”, I mean everything. Gas (oline) is being subsidized, it is a huge subsidy, if PDVSA did not have to fund it, it would not have had to issue any debt this year. Chavez nationalized a bunch of companies, including Sidor, which will have losses of US$ 410 million this year. Not only did he have to pay US$ 1.4 billion for it, but the company ahs to come up with the money to finish the year, satisfy unions and the like.

It’s the same everywhere, housing, ditto, health care, ditto, mining, ditto, all mired in a sea of mismanagement, lack of funding and investment and ideological BS that will force a collapse one day.

So, while many of us were expecting the symptoms of the collapse elsewhere (in the financial system), they are sprouting everywhere else, in the real economy for once. Not the usual way things collapse in Venezuela.

But sadly, the truth is that there is nothing, other than the fact that Chavez has increased awareness of the plight of the poor, that has improved in the last eleven years under Hugo. So, rather than worry about an implausible US invasion, he should be paying attention to real problems, from no maternity wards, to no water, to no electricity. Everything is simply malfunctioning and I see no way out, other than a huge spike in oil prices.

The fanatics, the hard core cheerleaders of Chavez and his fake revolution always say that we have been predicting disaster for the last eleven years. They forget that Chavez was forced in February 2002 to allow the currency to float freely and devalue sharply  and that oil prices have saved the day ever since. But water and electricity rationing are the symptoms and not the cause. The crisis has arrived, the water and electricity problems are just an indication, a true measure,  of the country’s problems.  Attacking them today (It’s funny to hear Ramirez talking about increasing electric rates after seven years of neglect) will not solve the problem as long as the economy is mismanaged. Overvaluation, inflation and only worrying about the swap rate are the real problems, while Hugo worries about a US invasion an his 100 year war and blaming the opposition and Colombia  for the problems of his revolution.

What revolution?

Yoani Sanchez: The surprise is that this did not happen earlier

November 8, 2009

89-Yoani-Sanchez

Reports out of Cuba that blogger Yoani Sanchez was beaten up are obviously appalling, but represent no surprise to me. While the OAS and Zapatero et al. want us all to believe that something has changed in Cuba, nothing has. The true surprise is why Yoani Sanchez was allowed to go this far without a warning. Or why they let her go when kidnapped and beaten yesterday. Was it a message to others that security forces will continue to repress and jail those that dare dissent from the official line?

After all, if well known Yoani Sanchez can be kidnapped and beaten up like this, those bloggers that are not as well known abroad or have not won any awards can be disappeared at will. Because nothing really has changed in Cuba beyond Castro being old and ill, despite what the hypocrite leaders of the world and Latin America would like you to believe. It’s a double standard that we see everywhere, Castro can repress, Chavez can block the CIDH from coming to Venezuela, Ortega can stage his Constitutional coup, but Zelaya becomes an icon for the defense of democracy in the Hemisphere.

That is why today, beyond Human Rights Watch, I have not been able to find any official condemnation of the brutal attack of this young woman who has more guts than all of the leaders of Latin America put together. I imagine Lula Da Silva does not want to offend the macabre Dictator of Cuba, Zapatero and Moratinos must be busy rewriting the new Spanish immigration law in a way that Franco would be proud of them and Obama and Hillary don’t want to step on Raul’s toes, so as not to affect the phantom thawing of US-Cuban relations. Chavez, of course, would never offend his pathetic alter ego, but he no longer has a clue about what human rights are, if ever he had any.

To bloggers, it matters, in particular to Alex, Daniel, Juan and me, because we try to fight Governments that abuse their people, Yoani Sanchez is very special, because we know the difficulties she has faced to be heard, while we can still express ourselves with ease, even if the threats are always there. Because Yoani blogs in a Dictatorship, where everyone is under suspicion and surveillance, where your neighbors may be your enemies and where the boot of the repressor is right around the corner. She has pushed the boundaries over and over and managed surprisingly to get very far.

The surprise is that she managed to do so much without an ugly incident like yesterday’s taking place. The hope and the prayer is that it will not go beyond that scare. While others want to forget the thousands killed, disappeared and repressed by the Castro Dictatorship, nobody should forget and it is shameful that the wimpy leaders of the world’s democracies are silent in the face of this symbolic act which simply reiterates the true nature and spirit of the Castro Dictatorship.

Salud Yoani! That you may soon get all of the rights you risk your life to defend!

Chacumbele electrocutes himself by Teodoro Petkoff

November 6, 2009

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With the electricity crisis Chacumbele is getting a little nutty. When supposedly he wants to get to the bottom of things, he makes absurd decisions,  which can only aggravate the problem.

With the creation of the Ministry of Electricity Chacumbele does not know he has stirred up a hornet’s nest.  Rafael Ramirez, Minister of Petroleum and Energy, got really pissed upon hearing of the matter and, quite beside himself, demanded that the new minister will not be given water. In addition, he mocked Angel Rodriguez (the new Minister) mercilessly.

In the midst of this disaster, the Boards of Edelca and Cadafe have yet to meet with the new Minister and all is on stand by at the headquarters of Cadafe, in El Marqués, where the new ministry will function. Moreover, the military, who thought they had secured the electric area as their hunting ground (in all senses), have been displaced, even if  Chacumbele asked General Hipólito Izquierdo to “stay around”.

Izquierdo has yet to turn over the position to unionist Rodriguez.

In turn, Izquierdo complains about being the victim of “injustice” because both he and Gen. Machado, the former president of Edelca, had warned for years about the catastrophe that was approaching if nothing was done. He says Chacumbele  never paid him any attention. Entre tanto, Su Excelencia, Meanwhile, His Excellency, the reincarnation of Simón Bolívar, each day has a more absurd idea on how to confront the crisis he created.

With forced jokes he wants to minimize the dramatism of the crisis, but what his wisecracks have produced is ill-tempered sulking jokes by a lot of people that voted for him and that have suddenly discovered what an incapable guy the man has turned out to be.

Law and order: What happens when you close the border

November 4, 2009

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Venezuela’s Electricity and Water supply: Not a pretty picture

November 1, 2009

guri3

I have been trying to write about the country’s electricity and water problems for a while, but have not done it because the whole things has so many edges that to describe all of the problems would take a post so long that you would all be bored to death. But in some sense, the problems that have surfaced now, have been around for years and the fact that they have exploded now is simply coincidental. I have not been able to pin down exactly why everything happened all at once. Chavez blames the water problems for El Niño, but while there is evidence that the phenomenon has started, it can not be blamed for what is happening.

Problems with Venezuela’s water and electricity’s supplies are not new. When Chavez came to power, the Caldera Government was thinking of privatizing some of the regional electric power companies for the simple reason that the investments required with oil at around US$ 12 per barrel were beyond the capability of the country’s Government.

Chavez clearly disagreed with this even as he was not using the word socialism at the time. And he stopped the nationalizations, while simultaneously freezing rates for water and electric services. This immediately limited the ability of the water and electricity companies to fund new projects and do maintenance. No new major electric power plants have been built in the 11 years of the Chavez era. Instead smaller plants were built, most of which contribute little to the country’s power grid, because they were built without taking into consideration the ability to connect and transmit the power.

Pictures of Planta Centro, a 2,000 MW plant that s now rated at 430 MW and currently producing only 130 MW have been circulating for a couple of years, but is only now that people are paying attention.

And then there is the incredible story of Venezuela buying power plants from Cuba. These are small plants of up to 40 MW, great for Cuba which does not have the modern interconnected power grid, but not as useful  in Venezuela. Cuba does not make these plants, they buy them from Sweden or Spain and reexport them to Venezuela at an outrageous price of about $1,400 per KW, compared to $500 for a large power plant, unless Venezuela is buying that from Spain. Oh, I forgot, the 300 small power plants purchased from Cuba are currently not operating because of problems with the filters with Venezuela’s diesel.

In the middle, when oil prices were high, Chavez rather than invest money in new power plants went out and nationalized all private power generation companies, spending over US$ 2 billion in buying fully functional electric companies, rather than patching up Planta Centro or Guri.

And according to Caracas Gringo, Guri, Venezuela’s largest hydroelectric power plant is a mess, with seven of its twenty turbines out of service. There are also landslides all around the dam, and the engineers are feeling the heat to bring the turbines on line before they are ready.

One of the problems is that Chavez has named, time after time, retired or active military to lead these electric power companies, all of which had no prior experience in the electricity genration or transmission business. To top it all off, Chavez now creates an additional bureaucracy, creating the Ministry for Electric Power on top of Corpoelec (which Chavez created in 2007), the company which was supposed to consolidate all of the country’s electric power, transmission and generation. However, no cost efficiencies ahve been achieved as each of the regional companies still runs independently, with its own Board and independent structure, including bodyguards and perks for the Executives. And the firts Minister for Electric Power has no experience in the area, as he is a former oil worker who is totally loyal to Chavez and his revolution.

The situation is no different in water, where rates have been frozen in another one of Chavez’ perverse subsidies to the rich (The poor mostly do not pay for their water, if they have it).Which is the reason why Venezuelans use more water than they should, besides the fact that there is a very leaky distribution system due to the lack of investment. (There is an article on the water system in El Nacional’s Siete Dias section today, by subscription).

Take Caracas as an example. It is fed by three dams, all below Caracas’s altitude, which thus requires electricity to pump up the water. These three systems were built in 1962, 1968 and 1998, in the terror days of the incompetent IVth Republic, but this Government was too busy spending on studying Giordani’s folly, the Orinoco-Apure axis, to do anything in the last eleven years. Remarkably, 2008 was the year with the lowest rate of investment, a year with the biggest oil windfall in the country’s history.

Unfortunately, this is a problem that affects us all and has no easy solution in time. What Venezuelans face in the next few years is more blackouts and water shortages. We now have water rationing such that the water will last until May, when rains are supposed to begin again. But the calculation is precise: There will be no water if rains come in June or July, which is always a possibility.

Curiously, this is the second time in Chavez Government that water levels have been low. It happened in 2002 and then rains came and the Government forgot the problems.

Many companies now have emergency power plants just in case. Even condo buildings have begun buying them, it is a big business to import and install them. Funny thing is that two years ago, as part of the nationalization of the electric industry, Chavez also nationalized those companies that were offering industrial concerns their own power independence. The same thing that Chavez now is asking even shopping centers to have.  But he probably forgot what he did already.

When I was a kid, water problems were the rule of the day. Electricity was not, because I lived in Caracas and the private Electricidad de Caracas always provided us with power. The water problems went away as the IVth. Republic spent and built what was required.

But now, Electricidad de Caracas has been nationalized and water problems are back. Unfortunately this means that the upcoming years will be bad as our standard of living declines as water and electricity rationing becomes the rule of the day.

It’s called underdevelopment and is all part of the Devils’ Excrement.

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