Pdvsa, the third-largest company in Latin America, is in trouble. The state-owned company is facing a one-two punch: declining production and growing financial demands from Venezuela’s cash-starved government.
“The cash flow that the government takes from Pdvsa is very high,” says Lucas Aristizabal, an analyst with Fitch Ratings in Chicago. “That includes the royalties, taxes, dividends, social programs and oil barter agreements such as Petrocaribe and the Fondo Conjunto Chino-Venezolano. When you add it all together, the cash flow from operations is about negative.”
That’s hamstringing Pdvsa, which is trying to develop Venezuela’s oil reserves, which at 297 million barrels are the world’s largest. The company is in the midst of an investment program intended to more than double output to six million barrels of oil per day by 2019, by spending $257 billion. The question is where the money will come from.
According to the company’s 2012 annual report, Pdvsa will finance $208 billion of the investment splurge, with private partners supplying the rest. “Pdvsa is going to be hard pressed to meet its investments. The company just doesn’t have the money to pay its bills,” says Fernando Sanchez, vice president of the Society of Venezuelan Petroleum Engineers.
Pdvsa’s problem has been years in the making as the government has used the company to finance its social programs, political objectives and electoral campaigns, including two presidential campaigns and one gubernatorial election since October.
To gain more funds, the government has raised royalties, income taxes and other payments on all oil companies. Like others, Pdvsa has paid the price. The company paid $20 billion in taxes, royalties and dividends last year, up from $19 billion in 2011, and $13.7 billion in 2010. Taxes rose even though the company’s revenue fell slightly to $124.5 billion last year, down from $124.8 billion in 2011.
But that’s not all. Pdvsa’s contributions to social programs, including a government housing project, totaled $9 billion last year, down from $15.6 billion in 2011, but nearly double the $5.3 billion in 2010. Contributions to Fonden, an opaque government development fund that has been used to purchase Russian fighter jets, totaled $8.5 billion last year, down from $14.5 billion in 2011, but still nearly quadruple the $1.7 billion in 2010.
Pdvsa’s overall payments to the government were $47.5 billion last year, just slightly down from $49.1 billion in 2011, but more than double the $20.7 billion paid in 2010. Many analysts suspect that hundreds of millions more were advanced off the books, especially in the two presidential campaigns. “Pdvsa is the government’s golden goose,’’ says Risa Grais-Targow, an analyst with Eurasia Group. “Oil is essential to the government.”
Pdvsa has also underwritten the government’s foreign policy initiatives. To curry favor with its neighbors, Venezuela has used oil to buy support. Under the aegis of its Petrocaribe program, Venezuela sells or barters oil to Caribbean, Central and South American countries offering subsidized finance. Members, who include Guyana, Haiti, Jamaica and the Dominican Republic, can defer payments for up to two years, while accessing long-term financing. Participating countries can also pay in goods and services. Last year, Venezuela’s oil exports to the members rose 14 percent to about 108,000 barrels per day (bbl/day), up from 95,000 bbl/day in 2011. They are expected to rise another 10 percent this year. Petrocaribe doesn’t include Cuba, which takes another 100,000 bbl/day in return for thousands of Cuban doctors, teachers and other professionals working in Venezuela.
But the chief culprit is China. In the last few years, China has advanced the Venezuelan government $36 billion in credits with repayment being set in oil and petroleum products, chiefly fuel oil. Venezuela has already repaid $16 billion, according to Pdvsa President Rafael Ramirez, who is also the country’s energy minister.
However, Venezuela is already seeking another $4 billion tranche. The loans have been repeatedly criticized by opponents of Venezuelan President Nicolas Maduro, especially as terms have never been released. Many suspect that the Venezuelan government is selling oil at a discount of up to $5 a barrel to cover shipping costs.
The downside of loans to China, and other barter programs, is that Pdvsa doesn’t receive any money from the sales, and must cover the production costs. “Such deals make up about 700,000 bbl/day,’’ Aristizabal says.
Cheaper than water
Pdvsa faces another drain on its resources: Venezuela’s domestic market where products are sold at a loss. Gasoline is one example. Raul Rodriguez, a government employee, can complain about many things in Venezuela, but the price of gasoline isn’t one of them. Rodriguez fills up the tank of his Volkswagen Golf for less than $0.50 for 10 gallons of fuel each week. That’s about $0.01 per gallon at the black market rate. “Considering the prices of everything else, it’s ridiculous,’’ Rodriguez says. “I spend less on gasoline than a liter of water costs, or a can of Pepsi.”
Cheap gasoline costs Pdvsa dearly. Since prices were frozen 17 years ago, the subsidy has cost the oil giant $7.5 billion, according to some analysts. However, there is a hidden toll as well. With gasoline so cheap, there is no conservation.
Demand for gasoline has surged, as well as for fuel oil, especially as the government builds new power plants intended to end power outages. The plants will someday burn natural gas, but right now, Venezuela has a shortage of the fuel even though it has the world’s eighth-largest reserves of natural gas.
Given those two factors, Pdvsa estimates that domestic demand for petroleum products will rise by 16 percent this year to about 790,000 bbl/day. That compares to 681,000 bbl/day in 2012, and 646,000 bbl/day in 2011. Those figures are considered low by some analysts. When oil from barter programs and domestic consumption are combined, about 1.5 million bbl/day of Pdvsa’s output isn’t being sold at international prices.
If Pdvsa was growing its oil production, such giveaways wouldn’t hurt the company’s finances so much. But, production is falling and Pdvsa seems unable to grow it significantly in the short term. Pdvsa claims that its 2012 output averaged 3.03 million bbl/day and exports were 2.56 million bbl/day. However, most analysts and the Organization of Petroleum Exporting Countries (Opec) estimate output anywhere between 2.35 million bbl/day and 2.8 million bbl/day.
Most expect output to fall further this year. According to the Central Bank of Venezuela, oil revenue dropped 13 percent to $21.3 billion for the first quarter of this year, down from $24.6 billion in the first quarter of 2012. The central bank said that the fall was caused by a 5.6 percent drop in export volume, and a 7.2 percent drop in price.
Production from Pdvsa’s mature fields is falling in the face of the company’s financial crunch. Many of the fields in the western state of Zulia need to have fresh wells drilled every few years due to sediment and silt buildup.
Indicative of the problems are the fields that Pdvsa seized in 2005 from private companies. The 32 fields were operated by private companies such as BP, Shell, Chevron and ExxonMobil, with the companies being paid a per barrel fee. Then President Hugo Chavez ordered that the contracts be converted into joint ventures with Pdvsa holding at least a 60 percent stake. The minority partners were supposed to receive dividends to cover their investments and profits. At the time of their seizure, the fields were producing about 500,000 bbl/day. Since their conversion, production has slipped, and last year it averaged 360,000 bbl/day.
“The fall isn’t surprising,’’ says Vera De Brito de Gyarfas, counsel with international law firm King & Spalding, which advises oil companies. “When Pdvsa took control of the fields, they didn’t have the personnel to run them. The company was supposed to approve the new ventures’ business plans each year. That hasn’t happened.”
Making matters worse is that Pdvsa doesn’t have the funds to cover its share of the investments in the fields, most of which are mature fields located in Lake Maracaibo. The company has also failed to make dividend payments to its partners. “Pdvsa owes its partners about $10 billion, both in dividends and to cover its own share of the investments,’’ says Sanchez.
Ramirez declined repeated requests for an interview.
Falling production in Pdvsa’s traditional fields hasn’t been made up by the oft-promised, but oft-delayed, Faja, where the bulk of Venezuela’s oil reserves lie. The Faja holds more than 257 billion barrels of recoverable extra heavy crude that has the viscosity of peanut butter. However, the crude must be upgraded to lighter blends before it can be refined. Therein lies the rub: few of Pdvsa’s partners want to invest the billions needed to build upgraders. Without upgraders, development in the Faja will lag. “Venezuela has the world’s largest oil reserves but Pdvsa can’t grow production,’’ says Sanchez. “And that is their number one problem.”
Pdvsa has sought to raise funds from its partners. This year, the company has finalized loan agreements with Chevron, China’s Cnpc and Schlumberger for a combined $7.5 billion, with funds geared toward increasing output. But even those moves have been criticized by Pdvsa’s unions, who have repeatedly called for Ramirez’s removal, especially due to a string of industrial accidents, including last August’s fire and explosion at the Amuay refinery that claimed more than 40 lives.
“Pdvsa has a double discourse,” says Jose Bodas, secretary general of the Futpv, one of Pdvsa’s largest oil unions. “They say they are supporting the government’s socialist revolution with its anti-capitalistic, anti-imperialistic line but what are they doing? They are borrowing from capitalists like Chevron, and Cnpc to fund their operations. “But if we ask the company to honor the terms of the collective contract, they call us counter-revolutionaries or imperialist lackeys. Pdvsa’s workers are the worst paid in the industry now. And we don’t have the right to protest. We don’t have the right to strike.”
Ramirez brushes aside such criticisms, saying that the company remains on course to meet its goals and further Venezuela’s socialist revolution that was started by Chavez and being continued by Maduro. However, Pdvsa and the government may only be delaying the inevitable by denying the inherent problems in the company’s balance sheet. Operating costs soared last year with the cost of producing one barrel of oil rising to $11.09 from $7.53 in 2011 as the company continues to add workers and take on more non-energy responsibilities. “Pdvsa’s financial situation is unsustainable if they continue operating in the way that they are without increasing production,” says Aristizabal.
Peter Wilson reported from Caracas.
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