While I was on vacation, I wrote a post based on a document a reader had sent me, in which the Minister of Energy and Oil and President of PDVSA, Rafael Ramirez, asked Chavez for the excess money in the Chinese Funds to be returned to PDVSA.
Since I was on vacation, I concentrated on the numbers given there for Venezuela’s oil production, which contradict official numbers. What I fail to understand or comprehend, is that the document is a huge indictment for the illegality of the Chinese Funds, which the Government has been using to finance its activities and bypass the structure of the State.
In fact, as I will show, the whole mechanism is not only illegal, but it represents a perverse scheme for the Government to spend without the usual oversight, while simultaneously severely damaging PDVSA’s finances. For completeness, here is that document again:
Between jet lag and catching up, I had not gone back to the document, even if I meant to. But two things made me look back: One, the interview in today’s papers (El Universal here, El Nacional, by subscription) with Deputy Miguel Angel Rodriguez and a simple question: What is Venezuela’s US$ debt service per year.
In the interview, Rodriguez says: “The truth is that crude is advanced, but money is returned”. This piqued my interest, together with the fact that I calculated that 430,000 barrels of oil a day, at US$ 100 per barrel for a full year, corresponds, to the staggering amount of US$ 15.7 billion dollars a year. Since the official document above clearly states (page 6) that the total debt of the Chinese Funds is US$ 20.8 billion, how could it be that it takes US$ 15.7 billion to service that debt per year?
Clearly, something did not add up and it was time to go back to the document and really study it!
The whole thing is perverse, incredible and totally illegal, here is how the whole thing works, as clearly explained in the document by the Minister of Energy and Oil and President of PDVSA:
1) PDVSA sells the oil to the China National Oil Corporation (CNOOC)
2) CNOOC pays the oil into a Bandes account at the Chinese Development Bank (CDB), which is the lender to the Republic of Venezuela.
3) CDB subtracts from the amounts debt service, both capital and interest.
4) If there is an excess, PDVSA asks CDB that the money be transferred to pay royalties to the Government, taxes to the Government and cover some of the production and refining costs.
Except that starting on Jan 2010, as the document clearly states, PDVSA stopped even getting that. It got zilch, the Funds got it all!
So, let’s make it really simple: The Republic borrows US$ 20.8 billion from the Chinese. PDVSA “pays” for this loan to the tune of US$ 15.7 billion per year, clearly an inordinate amount of money for the loan received. The Chinese collect interest and capital and any “excess”, of which there is a lot, returns to the Government, not to PDVSA, via parallel funds, which bypass the controls and approvals of Venezuelan Laws.
This is absolutely illegal for a number of reasons: First of all, as Deputy Rodriguez says in the interview,the Organic Law for the Financial management of the Public Sector says in its Art. 93 that no credit operation can be guaranteed with income or assets of the Republic. This is exactly what the Chavez Government has been doing by guaranteeing it with oil. Second, there is a clear intent here to bypass the laws of Venezuela, spending the money outside of the budget and controls of both the National Assembly and the Comptroller in the interest of “expediency”, but the law was clearly established to guarantee the money is well spent and this represents a way to circumvent both the spirit and the letter of the law. But the worst crime is that the Republic is making use of PDVSA funds to pay for its debts, a clear violation of the law, but in the process, Chavez and his Government are weakening the finances of the company, as stated by Minister Ramirez in the memo to the President.
When Richard Nixon was President, in the midst of the Watergate affair, there was a big scandal with comic strip Doonesbury, which presented a cartoon indicting one of Nixon’s collaborators, by saying “Guilty, Guilty, Guilty”. Most of you can’t even remember this, but here is that strip:
Some newspapers did not run this, the Washington Post even ran an Editorial on it criticizing the cartoon for “reaching a verdict” on the Watergate affair in such fashion.
Well, today much like then, Hugo Chavez is ‘Guilty, guilty, guilty” of creating a mechanism to bypass the controls of the State, not only in violation of the law, but in order to spend the money at his discretion. The Chinese may one day have to face up to these illegalities and its consequences, but Chavez and his collaborators, if they lose power, will have to answer to Venezuela’s Courts.
Guilty, Guilty, Guilty!
The Devil's Excrement 
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November 29, 2011 at 7:47 pm
Let’s hope that the new govenment in a year or so, if Chavez is voted out and actually leaves, reneges on these illegal deals with China. China will get pissed; the only thing they can do is to try to take over the country. I don’t think the US will let it.
There is a great feeling of unease about the future of Venezuela. It’s palpable. Chavez’s death by all accounts is imminent. Iran, Cuba and China will attempt to stop any type of regime change.
Venezuelans, take control! Learn how to use the machinery required to take back your country. What a waste of 13 years!
November 28, 2011 at 11:57 pm
No. That is 21st century socialism. Just as corrupt as all other socialism.
November 28, 2011 at 8:23 pm
In the “old days” pirates would attack, pillage the village,
burn down the village, rape the women, take slaves,
take food.
Now, pirates borrow money illegally and buy huge weapons
and take properties and steal resources.They don’t rape and kill
as often, but they rape and steal your future. And, they
have the nerve to give you food to keep you alive and expect
you to worship them! Now, that is evolution!!
November 28, 2011 at 7:53 pm
To: George Best:
He will die, you will die, we all will die someday… the difference is that he will do a lot of damage before he dies. if he know when he will die (let’s say he has been told…two months, he will make sure he will get all the money he can and all the gold he can and distribute among his people. he will die and no-one will know where all the money and gold went, and everybody will blame on him. but … he will be death. THAT IS WHY YOU SHOULD WORRY and BIT TIME WORRY.
November 28, 2011 at 6:04 pm
I agree that a US$ 15.7 Billion a year to pay a US$ 20.8 Billion long term debt does not make sense.
The quid of the question is what Miguel Angel Rodriguez says in his interview for the Universal sunday paper. I quote ” Porque en otro documento, en nuestro poder, con fecha febrero del 2010, dice: “El ingeniero Asdrúbal Chávez presentó la propuesta original del señor presidente Chávez de iniciar un financiamiento de gran volumen y a largo plazo por 116 mil millones en 10 años.”
So, going back to the US$ 15.7 Billion, this is just one of 10 annual payments !!
You can find the “February 2010” document in Miguel Angel Rodriguez Blog, in the following link:
http://miguelangeldiputado.blogspot.com/2011/11/mas-pruebas-contra-el-fondo-chino-pag1.html
November 28, 2011 at 8:24 pm
The 116 billion is coming, or is planned, but even 15 billion for 116 billion would be too much. I will show some info that proves the intent to ship more than needed to pay for the loan and then use that money off-budget or to compensate PDVSA. But at this time, I think they only have US$20.8 billion, but they do plan to increase it.
November 28, 2011 at 3:49 pm
Corrupt – how do you spell that….
November 28, 2011 at 3:48 pm
“Chavez and his collaborators, if they lose power, will have to answer to Venezuela’s Courts.”
Why not answer to the Court now? Duh! I know the answer…
All the more reason not to “lose power”.
I wonder just how many will lose their nerve and jump ship even
before the election? If IF it becomes clear that Chavez will lose
the election next year…
November 28, 2011 at 4:28 pm
You can sleep well knowing that all the smartest rats have their escape plans ready. Only foolish dictators and their equally foolish minions stick around waiting for justice to be administered.
Of course, most of them are megalomaniacs and foolish…the most recent examples being Chavez’s good buddies from Iraq and Libya.
Unfortunately, Chavez is going to escape punishment, but not judgement. History will soon make believers out of everyone: Chavez was an evil curse visited upon a mostly deserving people.
[To the minority of decent Venezuelans, I’m sorry. And I might be wrong (I’m often wrong). Perhaps most Venezuelans don’t deserve what Chavez has wrought. I say they do, because I don’t believe that Chavez is the cause; I believe he’s merely the symptom.]
November 28, 2011 at 3:19 pm
And, as to the FAJA Orinoco giving oil patches to Iran, South Africa,
China, Russia, etc.- don’t you think most of them -if they ever drill a well
and it produces -will try to sell the crude to US market first.
Primarily because shipping cost is less…
Who will eventually own CITGO- whomever -willown refineries especially
built to take on Venezuelan crude…
Chavez is simply adding “middlemen” between Venezuelan crude and
US market??Corrupt middlemen.
November 28, 2011 at 3:15 pm
Gustavo Coronel: A Crime of Passion — Chavez Destroys Venezuela’s Citgo
“The hatred of Hugo Chavez against anything U.S. has led to a progressive liquidation of Citgo as a major refiner and distributor of hydrocarbon products in the national U.S. market”
Take a step back and look at the whole picture. Chavez ordered PDVSA
to build a refinery in China. ANd, PDVSA doesn’t have the money…
First Chavez said Cuba and Venezuela were same country.(Sold out to
Cuba for love?)
Second, Chavez has doomed the future of Venezuela indebt to China.
(Sold out to China for money?)
So, Venezuela–has 2 masters now…
November 28, 2011 at 9:53 am
Yes Sir, I DO agree with you 100% – because Huguito is history and will only try to sink the ship more… before he fades away… 130 billions with the Chinese connection ONLY…
November 28, 2011 at 3:39 am
HI – good morning – wonder why we all still comment – HE WILL DIE in a couple of month – what´s the point… watch THE OTHER´s
November 28, 2011 at 3:54 am
To George Best: as you say, you have to watch the others, and the money. Any new government will need a very strong mandate and very high popular support to confront all those currently with hands in the till, including the FANB and the various police corps and emerging militias. Not very likely, so unfortunately things may go from very bad to even worse.
November 28, 2011 at 8:46 am
It is illegal, independent of the health of Chavez.
November 28, 2011 at 7:52 pm
He will die, you will die, we all will die someday… the difference is that he will do a lot of damage before he dies. if he know when he will die (let’s say he has been told…two months, he will make sure he will get all the money he can and all the gold he can and distribute among his people. he will die and no-one will know where all the money and gold went, and everybody will blame on him. but … he will be death. THAT IS WHY YOU SHOULD WORRY and BIT TIME WORRY.
November 28, 2011 at 3:31 am
Sorry, I’m new here. This still raises some questions: you assume that oil delivered to CNOOC is priced at $100, but it is probably not the case (the memo mentions $50, then $40, then no price whatsoever for the Gran volumen. At $100, if this has been going for say two years, the Chinese loans would have been totally reimbursed.
Then there’s some accounting process to clarify: when PDVSA ships out the oil, it books sales and receivables. When CNOOC pays for the oil, it is no longer in debt to PDVSA, and PDVSA has to debit the Venezuelan state’s account in its books. Obviously, any payments such as royalties that PDVSA has to make to the state should be deducted from those receivables, not paid out in cash – which does not seem to be the case.
Also, would you be able to reformulate that bit from the Buenos Aires item which has probably not been accurately transllated: “The financial impact of the crude oil shipments to China (some 430,000 barrels a day this year at an average of 90 dollars a barrel) over and above the PDVSA cash flow reaches 18.43 billion dollars, consisting of the costs of drilling and refining (the oil shipped), the payment of royalties and taxes and the unpaid shipments.” “Over and above” is surely wrong. The cash flow loss cannot be higher than the sales value of the shipments. If PDVSA doesn’t get any money for those shipments, it still has to pay production costs, etc.
Lastly, I understand that the Chinese funds are handled by Fonden, the public oversight of which seems to be scant, to say the least.
November 28, 2011 at 8:46 am
John: The letters says the oil is “calculated” at US$ 40, I have assumed that this means the final price is adjusted later, because later Ramirez talks about market prices to argue that this hurts PDVSA’s cash flow. I really dont know the answer, but it would really be treason to sell now oil for US$ 5- per barrel. In the end, these documents is the first glimpse we have at the details. I use $100, because it is easy to calculate things, whether $50 or $100, Venezuela is paying too much per year for US$ 20.8 billion. That is the point, the excess money is returned to Venezuela but to the pararllel funds.
Yes, the over and above is hard to understand…
Yes, that is exactly the point, the money is used from parallel unsupervised funds, rather than from the budget, obviously done to bypass supervision.
November 28, 2011 at 9:47 am
I just got a copy of the contract, the price is a market price based on this formula:
5. FOB PRICE
THE PRICE OF THE PRODUCT TO BE DELIVERED PURSUANT TO THE CONTRACT HEREOF, SHALL BE DETERMINED BY MEANS OF THE FOLLOWING PRICE FORMULA:
IFO380: HSFO 380 4% SINGAPORE PLATT´S MID (USD/MT) PLUS K (USD/MT) MINUS FREIGHT (USD/MT).
WHERE K = USD -2.50 PER METRIC TON (MINUS USD TWO DOLLARS AND FIFTY CENTS PER METRIC TON)
November 28, 2011 at 10:43 am
If it’s a market price as per Platt’s, obviously it will have moved a lot over the period. The price of a metric ton of HSFO has been roughly $660 over the summer and according to Platt’s the Singapore high sulfur fuel oil conversion factor is 6.35 barrels/mt since 1 July 2011, which indeed means a gross sales price of something like $104 per barrel.
I have downloaded the Fonden/Chino fund report and may have more questions on some items of expenditure as I’m none too fluent in Spanish.
November 28, 2011 at 12:37 am
Welcome back. One of my favorite posts of yours to date.
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