Pdvsa auctioned two Orinoco joint venture projects in the Carabobo bidding round held on 28 January-10 February 2010, and since October 2009 has signed strategic agreements with Russian, Chinese and Italian oil companies to develop three more projects in the oil belt’s Junin section.
Pdvsa estimates that these projects will require combined investments of $40 billion in the two Carabobo projects, and another $40 billion roughly for the three planned Junin joint ventures. PdV is responsible for funding 60% of these investments.
But this is just the start – for PdV, which has accumulated some very substantial investment obligations in the oil belt. For example:
*Pdvsa has been ordered to develop the Junin project by itself after the proposed minority partners, Total (France) and Statoilhydro (Norway), withdrew from negations because they could not reach an agreement on terms and conditions with Pdvsa. Estimated cost: $20 billion.
*Pdvsa also reportedly plans to develop the Carabobo 2 project by itself, unless Pdvsa decides to hold another auction and perhaps include the Junin block that Total/Statoil dropped out of. Estimated cost: another $20 billion.
*Pdvsa is responsible for building the oil pipelines, solids terminals, power generation/transmission infrastructure and other fixed assets required by the planned production/upgrader joint ventures. Estimatede cost: Unclear, but let’s say $3 billion.
*Pdvsa also is responsible for funding and developing the Orinoco/Apure Development Pole that is dear to President Hugo Chavez. Estimated cost: Another $26 billion.
That’s a huge pile of cash: $48 billion (60%) for the two Carabobo and three Junin projects, plus another $69 billion to fund the other obligations listed above. In all, $117 billion spread over six to ten years?
Where does Pdvsa expect to raise so much cash? Central Bank reports that Venezuela’s oil GDP – i.e. Pdvsa – contracted 10.2% in fourth-quarter 2009 when oil prices averaged over $70/bl. Oil GDP was down 5.8% for all of 2009, even though the average price of Venezuela’s oil basket was $57/bl.
Pdvsa says this year will see the official launch of its Carabobo and Junin joint ventures in the oil belt. But Pdvsa appears to be suffering a critical cash shortage. Energy Minister Rafael Ramirez and senior company officials are scrambling to raise cash everywhere they can. For example:
*All minority joint venture partners in the oil belt’s Carabobo and Junin projects are required to (1) pay front-end cash bonuses for the “rights” to participate in the joint ventures, (2) provide front-end financing of $500 million to $1 billion per project, and reportedly (3) accept (commit to?) Pdvsa’s demand that the minority partners must take the lead in arranging 100% of any project financing.
*Ramirez flew to Moscow and Beijing at end-January/start-February to urge Pdvsa’s Russian and Chinese joint venture partners to speed up the payment of, reportedly, about $1.2 billion owed for participation rights bonuses and other front-end payments required by Pdvsa.
*President Chavez announced a few days ago that Caracas and Beijing are in talks to raise the capitalization of the Venezuela-China joint infrastructure fund to $20 billion from $12 billion (of which over $10 billion has been spent). When first created in 2007, the fund was set at $6 billion, but it was doubled to $12 billion in 2008, with China putting up $8 billion as a loan payable with Pdvsa oil shipments. Now Chavez wants to hike it to $20 billion, likely in another debt-for-oil deal.
*Ramirez threatened on 1 March that Pdvsa could suspend its lease to operate Isla Refinery on Curacao, and terminate its operations there because the governments of Curacao and Aruba allegedly are “helping US military aggressions against Venezuela.” In fact, the Chavez regime appears to be creating an international political crisis with Curacao to give Pdvsa an excuse to suspend the lease, which does not expire until 2019. A Curacao court ordered Pdvsa in May 2009 to spend over $1.6 billion to reduce emissions at the 92-year-old Isla refinery. Pdvsa doesn’t have the cash, and it doesn’t want to risk getting saddled with any legal claims for cleaning up the environmental disaster zone that surrounds the refinery.
*Petrobras officials in Brazil say that Pdvsa to date has not paid $300 million that it owes as part of the joint venture agreement to take a 40% stake of the Abreu de Lima refinery. Pdvsa also hasn’t made a move yet to assume its 40% share of the 9 billion Reais debt on the refinery project. Why? Pdvsa doesn’t have the cash.
*Pdvsa’s debts are also impressive. The company’s direct financial debt climbed to over $21 billion in 2009 from $15 billion at end-2008. Moreover, Pdvsa owes $8 billion worth of oil shipments to China, not including any new debt acquired if the joint fund is increased to $20 billion. Pdvsa also owes 76 expropriated services companies about $3 billion, by some estimates. Pdvsa also is in international arbitration proceedings with Exxon and Conoco, which together reportedly are pressing compensation claims of at least $20 billion against Pdvsa.
Pdvsa expects to rake in over $6 billion in cash from the front-end bonus payments and loans provided by the minority joint venture partners. This will help Pdvsa cover part of its 60% portion of any development costs. But $6 billion is a drop in the bucket compared to the $117 billion of Pdvsa investment obligations listed above.
Higher oil prices won’t help Venezuela. The regime’s “break-even point,” the oil price at which its fiscal revenuers and crazed spending balance out, is now estimated at over $90/bl and that’s a low-ball estimate. Anyway, Pdvsa’s crude production has collapsed below 2.3 million b/d, for a net output loss of at least 1.5 million b/d of crude oil (over 20,000 production wells are shut down from zero maintenance). The numbers say that 1.5 million b/d of lost crude production capacity x a price of $70/bl today x 365 days = over $38.32 billion of oil export revenues that Venezuela cannot realize.
Pdvsa can issue more debt, and make more deals involving fresh debt-for-future oil shipments. But there are limits to Pdvsa’s borrowing capacity, and the more that Pdvsa borrows, the more expensive that borrowing will be in terms of cost-of-money, risk premiums and other fees/surcharges tacked onto each new debt contract.
Pdvsa’s prospective joint venture minority partners might be able to help out. But what will the oil companies seek in exchange from Pdvsa? Right now, Pdvsa rejects international arbitration, is reluctant to eliminate the windfall profits tax, is lagging on the legislative follow-through to its pledge to reduce the royalty rate from 33.3% to 20%, and won’t let the foreign companies carry on their books the Orinoco crude oil reserves in their respective project areas.
It’s very doubtful that Pdvsa’s Orinoco joint ventures will advance on schedule if Pdvsa doesn’t have the financial resources to cover its 60% stake in the joint ventures, plus also cover 100% of the other obligations listed above.
The foreign oil companies know this. They will leverage Pdvsa’s financial weakness to their advantage if at possible, which is only natural. But the companies also know that Pdvsa is, at bottom, unreliable and not to be trusted.
Petrobras officials say privately that their company has no desire to do any business deals or joint ventures with Pdvsa, but was pushed into the Abreu de Lima joint venture by President Luiz Inacio “Lula” da Silva. Likewise, a poll of Spanish multinationals found that they view Brazil as a good place to do business and Venezuela as very bad business, a place not worth risking investment capital.
China and Russia have strategic reasons for sending their state-owned and state-controlled oil companies into Venezuela. China needs every drop of crude oil it can get to drive its economic development. Vladimir Putin’s Russia wants to bring the US down a few pegs, particularly in its own back yard in Latin America/Caribbean.
But even Chinese and Russian oil companies are literally held captive by Pdvsa’s financial deficiencies. Without money in hand, Pdvsa can’t pay its way – period, and that means that the development of its Orinoco joint ventures quickly will fall behind schedule.