Train Wreck at Pdvsa

The Energy Ministry and Pdvsa have been Rafael Ramirez’s fiefdoms since mid-2002.

Ramirez’s in-laws, headed by former Supreme Court Justice Hildegaard Rondon de Sanso, have made personal fortunes since Ramirez has been the top “oilman” in the Bolivarian revolution. His brother-in-law, Baldo sanso, reportedly has profited hugely doing bond “negocios.” Many of Ramirez’s blood relatives also have prospered greatly.

Ramirez has been the Energy Minister/Pdvsa president for seven years. He has persevered by being more loyal to President Hugo Chavez than anyone else, more radical, and more revolutionary. Pdvsa “es roja, rojita,” he boasted repeatedly during the 2006 national election. Ramirez always has been out there on the fringes of the “rojo rojito” zealots in the regime.

And while oil prices were rising, Ramirez also easily satisfied all of Chavez’s demands for dollars at any time, for any notion which popped into the president’s head.

But Ramirez doesn’t know anything about oil and gas, and he certainly has no management capabilities besides wearing natty business suits and red ties.

Venezuela’s oil, gas and power industries have collapsed completely on Ramirez’s watch.

Pdvsa’s effective crude oil production capacity has dropped to about 2.3 million b/d at best, compared with over 3.5 million b/d in 1998. Venezuela’s domestic gas deficit now averages over 1.5 billion cubic feet per day compared with 1.2 billion cf/d three or four years ago.

Pdvsa’s refineries – Amuay, Cardon, El Palito and Puerto La Cruz – are falling apart. All of Pdvsa’s programmed maintenance activities at three refineries have been suffered frequent delays and postponements over the past several years. And dozens of workers have been killed or injured in refinery accidents since 2005.

Pdvsa has not completed even one major project involving the production and refining of crude oil in the seven years that Ramirez has been “managing” the company. Pdvsa also has failed to complete any gas-related projects.

And Venezuela’s national power grid has finally collapsed in 2009 – a collapse that was foretold by Ramirez’s predecessors at the Energy Ministry in 1999, in 2002, and again in 2003 after Ramirez was the Energy Minister.

Venezuela faces at least five years of daily power rationing, according to studies by independent experts.

Ramirez is under immense political pressure from within the regime to get something moving in the oil and power sectors. The Energy Minister has many detractors within the regime besides Cabello, and most have a military background.

Will President Chavez sack Ramirez any time soon?

Less than two weeks ago, Chavez unceremoniously fired Corpoelec President Hipolito Izquierdo and created a new Power Ministry to oversee the power industry.

The Isea brothers, who have a military background but are fierce competitors/enemies of the diosdado Cabello group, reportedly were among the chief proponents of creating a new ministry for the power sector.

Theoretically, the president’s action effectively strips Ramirez of 100% of his authority over the power sector. But in practice, the new Power Ministry doesn’t have any money yet, because it depends on the central government and Pdvsa for its budget.

The new Power Ministry won’t solve the power crisis. The new Power Minister, PSUV National assembly Deputy Angel Rodriguez, doesn’t know anything about power and apparently has never managed anything which is not political.

A cynical wag remarks that Rodriguez “might know how to screw in a fresh light bulb, but that would require turning the bulb clockwise to the right, which might short circuit his leftist brain.”

Solving the power crisis quickly would require at least five years of intense effort, over $20 billion of infrastructure investment, an intelligence power development plan which responds to the country’s real needs, technical knowledge of the power industry, and solidly professional management capabilities.

But the Chavez regime possesses none of these material and professional qualities.

And meanwhile, the problems at Pdvsa are growing larger by the day.

Surely, a state-owned oil company with over 300 billion barrels of crude oil reserves and over 170 trillion cubic feet of natural gas (according to President Chavez) cannot go broke. After all, oil and gas prices already are back into the seventies, and certainly will rebound more robustly in the not-distant future.

Perhaps so; but Pdvsa’s more immediate problem – and Ramirez’s too – is the company’s demonstrated inability since 2003 to get any of its major crude production, refining and gas projects off the ground.

At the end of 2005 Pdvsa published a six-year oil and gas investment plan it called “Siembra Petrolera.” Four years after its initial publication, not a single one of the plan’s planned projects has been launched.

President Chavez since 2005 has voraciously nationalized foreign-owned oil and gas assets, starting with the 33 oilfield operating service contracts signed in the 1990s, followed by the four Orinoco upgraders, and finally the oil services sector.

At the same time, Pdvsa has signed dozens of bilateral agreements since 2005 with oil companies from China, Iran, Russia, Cuba, Belarus, India, Vietnam, Brazil, Spain, Indonesia, Syria, Argentina, Uruguay, Paraguay, Ecuador, Bolivia, etc.

But Pdvsa’s biggest agreements by far, at least in financial terms expressed on paper, are with Russia, China and Iran. Deals reportedly worth over $50 billion have been signed and/or are being discussed with the Russia Consortium (LUKoil, Gazprom, TNK-BP, Rosneft and Surguneftegaz).

Pdvsa also has signed agreements with CNPC and other state-owned Chinese oil companies which reportedly are worth over $60 billion on paper. And the agreements between Pdvsa and Petropars of Iran reportedly are worth a further $30 billion or so, on paper.

But the proof is in the doing, and not the tiresome redundant announcements of big new oil and gas projects which don’t materialize.

The coming four months could be the end of Ramirez’s reign at the Pdvsa – assuming Chavez hasn’t already decided to give him the boot. Caragas Gringo is told that Cabello is doing all he can to persuade the president to fire Ramirez.

Alternatively, Ramirez could re-energize his political fortunes with Chavez.

After three postponements and almost a year’s delay, Pdvsa finally will accept bids on 28 November 2009 for the seven production blocks it is offering in the Orinoco oil belt’s Carabobo section.

Pdvsa expects to create joint ventures to develop at least 200,000 b/d of extra-heavy crude production capacity in each block, and build three or four new upgraders with a combined capacity of 600,000 b/d to 800,000 b/d. These planned joint ventures would start to be commissioned as soon as 2012.

Ramirez says that Pdvsa will increase the Orinoco oil belt’s crude production capacity from 610,000 b/d today to as much as 2 million b/d by 2012-2014.

But this does not include a further 1.42 million b/d to 1.4 million b/d of extra-heavy crude production capacity that would be developed by joint ventures mainly in the oil belt’s Junin section, where the Russia Consortium, CNPC, Repsol and other “strategic” favorites of the Chavez regime currently are discussing with Pdvsa.

Very large production numbers, on paper – and very substantial estimated development costs.

Ramirez says developing the Orinoco production and upgrader ventures Pdvsa is considering will cost at least $100 billion over the coming five years.

But will Pdvsa have the capital? In the near-term, meaning at least 2010 and perhaps also 2011, the answer appears to be no. Pdva’s earnings have declined significantly in 2009, while its total indebtedness including new borrowings, unpaid bills to oil services companies and labor costs have increased sharply.

Ramirez says confidently that Pdvsa will easily finance over $15 billion of planned capital expenditures (capex) in 2009 and a further $16 billion of capex in 2010. These capital expenditures of $31 billion in 2009-2010 form part of Pdvsa’s plans to spend about $130 bn on new crude oil production, refining and gas ventures between 2009 and end-2014. But Ramirez’s boasts ring hollow. The available numbers on Pdvsa hint strongly at a company already in deep, and growing, financial and operational difficulties

Ramriez says that Pdvsa’s total planned capex over the coming five years includes about $100 billion mainly in the Orinoco oil belt, and $15 billion for the construction of three new refineries with a combined processing capacity of over 500,000 b/d, plus modernization and expansion capex at the El Palito, Puerto La Cruz and the Amuay-Cardon refineries on the Paraguana peninsula. It also includes a further $15 billion of capex for offshore gas production/liquefied natural gas projects in eastern Venezuela.

But barring a swift and sustained return to the high oil price levels seen in the first months of 2008, it’s unclear where Pdvsa will secure the funds required for its ambitious capex plans.

Pdvsa has not issued any financial statements at all in 2009. However, a Finance ministry report delivered to the National Assembly in September 2009 says that Pdvsa’s total pre-tax income was $13.6 billion during the first three months of 2009, down 23.6% from $17.8 billion of pre-tax income reported for the first three months of 2008.

Pdvsa’s after-tax profit fell even more sharply than income during the first quarter of 2009 to $1.6 billion, a drop of 54.3% pc compared with $1.9 billion of after-tax profit reported for the first three months of 2008. The price of Venezuela’s oil exports averaged $40.14/bl during the first three months of 2009, off 52.8 pc from an average price of $85.19/bl during the first three months of 2008. The ministry report attributed the steep fall in revenues and profit during the first three months of 2009 to sharply lower oil prices and OPEC-mandated crude production cuts which further reduced export earnings.

The Finance ministry report also says Pdvsa’s costs were slashed by 55.6%, to $11.8 billion during the first three months of 2009 compared with the same period in 2008. But it does not provide any explanation for the steep drop in profit.

A second central government document – the proposed budget for 2010 – sheds more light on Pdvsa’s precarious financial situation. In the introduction to the budget submitted to the National Assembly in October 2009, the Finance ministry estimates that Pdvsa’s fiscal contributions to the national treasury will total about $20 billion for all of 2009 based on average oil export price of $50/bl. This represents a decline of 47.7% compared to the $38.3 billion of income taxes, royalties and other fiscal transfers to the government reported by Pdvsa in 2008 when the average price of the country’s oil exports was $86.bl.

As Pdvsa’s income and fiscal transfers have collapsed in 2009, its total debt has climbed over 53%, from $15 billion at end-2008 to over $23 billion as of 31 October 2009, including its recent $3.2 billion bond issue. But this bond issue – which reaches maturity in 2014, 2015 and 2016 – succeeded only because the National Assembly hastily reformed Venezuela’s Central Bank Law to authorise the Central Bank for the first time in its history to buy government debt bonds. Pdvsa finance officials say it is possible the company could float another $3 billion bond issue before end-2009, which would raise its total debt to $26 billion.

The central government’s total debt also has climbed hugely so far in 2009. In all, the government has borrowed at least $20 billion between 1 January and 31 October 2009, including over $9 billion borrowed directly by Pdvsa. However, a report issued 30 October 2009 by UK investment bank Barclays Capital forecasts that the total debt of the Bolivarian republic of Venezuela will increase to at least $97.9 billion by end-2009 from $64.7 billion at end-2008, up $33 billion or 51% year-on-year.

As a result, the Venezuelan government’s total debt, expressed as a percentage of the country’s gross domestic product, will grow from 27.6% of GDP at end-2008 to 39.2% at end-2009.

Venezuelan government debt is forecast to continue growing rapidly in 2010, since the government plans to issue up to $22 billion in new debt next year, including about $10 billion of bonds denominated in local currency (the Bolivar), and another $12 billion denominated in US dollars, according to Barclays. The Barclays report says its borrowing estimates for 2009 and 2010 are based on data provided by Venezuela’s Central Bank.

If these borrowing estimates are accurate, the Venezuelan government’s total debt could climb to $113.7 billion by end-2010. Also, if the same proportion of new borrowing by the central government and Pdvsa during 2009 is maintained in 2010, it can be inferred that Pdvsa’s debt could climb from $26 billion at end-2009 to about $35 billion at end-2010.

Moreover, these debt estimates apparently do not include some major additional liabilities, including:

*The $8 billion debt the Chavez regime owes China for Beijing’s “contribution” (i.e. loan) to the joint infrastructure fund created in 2007, initially for $6 billion but doubled to $12 billion in September 2008. Pdvsa is repaying this loan with fuel oil and Merey 16 crude exports.

*The over $20 billion in compensation which ExxonMobil and ConocoPhillips reportedly are seeking as compensation for Orinoco upgrader assets the Chavez regime expropriated in May 2007.

*Between $4.5 billion and $8 billion in unpaid Pdvsa debts to oil services companies and contractors, much of it dating since over one year ago.

*At least $12 billion in compensation for oil services assets the regime nationalized in May of this year. Pdvsa has not started the assets valuation process yet, but $12 billion is the estimate given by private sources.

*Over $2 billion in pension payments to Pdvsa retirees.

*Last but not least, a further $8.5 billion to $10 billion for the new and still unsigned collective contract with the Unitary Oil workers Federation (FUTPV). The old contract cost about $4.5 billion and covered 45,000 workers, but FUTPV President Wills Rangel (a chavista) says the new contract will cover all 90,000 of Pdvsa’s employees and workers.

These additional liabilities total a further $60 billion of red ink for Pdvsa, which implies that Pdvsa’s total debts and outstanding liabilities could hit $95 billion by end-2010.

A train wreck is happening at Pdvsa.

About Caracas Gringo

Representing less than 0.00000000001515152% of the world population as of 31 December 2011.
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2 Responses to Train Wreck at Pdvsa

  1. I posted part of your post on PDVSA in my blog. I find your blog extremely interesting. Keep up the excellent work

    Like

  2. Gringo says:

    Will President Chavez sack Ramirez any time soon?
    If Thugo does, Thugo will simply replace him with another clown.

    Like

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