Archive for March, 2012

Why I Think PDVSA Plans To Sell Stock In One Heavy Crude Oil Project Via The Chinese Governement

March 1, 2012

It’s hard to stop thinking about the bizarre plan or project by PDVSA to sell stock in one of its units via the Chinese Government’s CITIC Group (China Investment Trust Investment Corporation). With more details known at this time of the agreement between PDVSA and CITIC signed by Chavez right before his departure from Cuba, I believe I have some idea about what this is all about. For background, you can read the few press notes on this here and here, (Note none are in Venezuela’s press) or the contributions by bloggers here, here and here.

Recapping, PDVSA signed an agreement to sell 10% of it’s Petropiar unit to China’s CITIC. Nothing strange there, PDVSA can, according to the Hydrocarbons Law, sell up to 40% of these joint projects to anyone. In the case of Petropiar, formerly known as Hamaca or Petrolera Ameriven, PDVSA holds (or held) 70% and Chevron holds 30%. (In the original project, ConocoPhllips held 40%, but refused to sell its stake to the Government and it was expropriated). Petropiar uses very heavy crude (8 to 9 API) which through mixing with other oil and processing through an upgrader generates much higher quality 26 degree API oil, about 180,000 barrels a day of them.

So, to begin with, press reports suggesting that CITIC Securities, the stock market arm of CITIC will advise PDVSA on how to float Petropiar shares in the Hong Kong Stock Market are, or seem to be, incorrect.According to law, only CITIC or Chevron could do that.

Thus, the first transaction is very clear: PDVSA is selling to CITIC 10% of Petropiar at an unknown price and the Chinese are giving PDVSA cash, which it needs to fund new projects or whatever:

So far, everything is OK, the Chavista Government or PDVSA gets more money from the Chinese. The problem is that the Chinese have no “exit” strategy, to use venture capital parlance. They give money and give money, but they have no way of either realizing the gain, or they may not want to commit ever increasing amounts of money to Venezuela for the heavy oil crude fields. But they do want more oil.

On the other side is PDVSA, that needs ever increasing amounts of money to develop the Heavy Crude Oil fields, but has found resistance from the Chinese in funding the projects. Essentially, the Chinese are willing to fund their 40% share, but expect PDVSA to finance its 60% majority stake in any new project.

Enter the very capitalistic Chinese people at CITIC Securities, who suggest buying a stake in a mature project like Petropiar, which is fully operational, at what I am sure is a good price, and have PDVSA allow CITIC to place part or all of the shares of CITIC in Petropiar in the Hong Kong Stock Exchange. Thus, sometime in the future, CITIC would sell its shares and get money in return. This is what would happen:

What has been accomplished? A number of things. First, CITIC recouped its investment and more than likely made a profit, knowing the Chinese, it will be a nice profit. Thousands of investors will now own the shares.

But more importantly, the market, the much hated by Chavismo capitalistic-Stock Market, will establish a price for a 10% stake of a heavy oil crude project in Venezuela’s Faja Petrolifera.

A couple of notes here. First, note that the upside of the sale goes to the Chinese, not to, for example, to Venezuelan investors. Perverse, no?. Two, for Venezuela this is a no-brainer, PDVSA gives up dividends (investors will have to be paid somehow), but the Venezuelan Government will continue to charge royalties, taxes and windfall taxes on each barrel produced, which is where the big money really is.Three, the Chinese have realized a profit in their investment and can now plow the money back into Venezuela. Simply recirculate it, they can buy 40% of Petroanzoategui (formerly Petrozuata, fully owned by PDVSA) or they could buy 23.3% of Petromonagas (formerly Cerro Negro, where BP has a small stake). Then, they can turn around and sell these in the Hong Kong Stock Exchange.

And they can take their money and their profits or whatever they sell their shares for and plow it back into Venezuelan oil fields.

But more importantly, PDVSA has found a way to raise money for the new projects, which are not producing yet and the Chinese to establish how much they will be worth when producing, a nice way to know your return in investment ahead of the project. After all, a barrel of improved oil from any of these projects is worth roughly the same in all of them. The Chinese get some money back, likely have clauses that the oil from new projects will be shipped exclusively to China and more importantly, they can sell their stakes in the new projects once they are fully functioning too.

And in a virtuous circle, an almost pyramid, as long as people need oil, they can invest the money in ever new projects in Venezuela’s heavy oil fields. The much-hated markets will provide the endless funding, like this, as long as it is profitable:

Over and over again. You can do this as many times as there is a new oil field to develop and there is investor appetite for it. Of course, oil prices and appetite for oil has to stay high too.

Of course, you don’t need the Chinese for all of this. PDVSA could have eliminated the Chinese middle-man and do a typical capitalistic placement directly in the World Stock Exchanges. This is what PDVSA was planning to do, but before Chavez. Thus, it was scrapped. It was against sovereignty, selling the country and all that revolutionary bla, bla, bla.

Except that PDVSA needs the money here and now and the revolution would look bad doing such an obvious about face about from what it claims to believe in. This is exactly what they have criticized and it is better for PDVSA to get the money now and later, after the elections, have the first transaction take place, pseudo-hidden behind the Chinese capitalists.

Which brings me to the last point: None of this is meant to take place until after the election for a number of reasons, the surprise is that they announced it now:

-First, you don’t want this to become a campaign issue, although it does remove the “the opposition wants to privatize PDVSA” accusation from the political debate.

-Second, you don’t want to place the shares in the market before the ExxonMobil and ConocoPhilips arbitration cases in the World Bank’s ICSID arbitration Court are decided. After all, if investor appetite were high for Petropiar, it would place a high price on its shares and could drive the compensation to the two oil companies mentioned much higher.

-Third, if Chavez does win the October election, he would have a few years to implement the above strategy, financing the development of the Faja, which would pump ever increasing amounts of money into the Government’s coffers.

And the virtuous circle of populism would just continue…They just hope…

Note Added: A friend notes that while PDVSA exercized an obligatory 60% majority on the projects when it forced control in 2007, the law says PDVSA only needs to have 50% of each Joint Venture. This implies PDVSA could sell an additional 10% of each of all the projects, a nice piece of change to add to the pot!!!

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