PDCSA: Petróleos de Chavez S.A. - The Destruction of Petroleos de Venezuela

www.newsmax.com Emma Brossard, Ph.D. Tuesday, February 18, 2003

The destruction of the 2nd largest petroleum company in the world, Petroleos de Venezuela S.A. has been a work in progress ever since Hugo Chavez became President of Venezuela, in February 1999.

This great company, known as PDVSA (an acronym that became a proper noun), was the result of the hard work of a first class group of Venezuelan oilmen. After nationalization of the foreign oil companies, by the Carlos Andres Perez government, in January 1976, these well-trained Venezuelans (by their former foreign employers) melded together 11 former foreign companies, developed an allegiance (“mistica”) and rebuilt the Venezuelan petroleum industry.

The Great One

By 1995, according to Petroleum Intelligence Weekly, PDVSA was the 2nd largest petroleum company, based on a combination of sales, reserves and refining activities. The three operating companies (Lagoven, Corpoven and Maraven) of PDVSA had raised Venezuela’s oil reserves of 18 billion barrels in 1976, to 72.6 billion in 1996 (and up to 76.8 billion barrels by 1999), the largest oil reserves in the Western Hemisphere. And the monetary value of PDVSA was between $50 billion and $100 billion. Of particular interest to the U.S., Venezuela was the most reliable supplier of imported crude oil and oil products to the United States.

Why would a President of Venezuela want to destroy such a well-managed company that supplies over 35 percent of the Venezuelan Government’s Budget? Actually, it is higher than 40 percent when income tax, royalties and dividends are added (not to mention that oil employees were among the few who paid their income taxes). And, there are substantial higher contributions: $200 million/year for the communities where PDVSA operated; and some $300 million/year in gasoline subsidies, since the government forced PDVSA to sell gasoline in the domestic market below production costs.

To protect its foreign market for its crude production, PDVSA purchased overseas refineries, including Citgo, in 1986. And in order to export higher quality oil products and be able to satisfy a growing domestic population with gasoline and other light products, PDVSA invested billions of dollars in major upgrading of its four large Venezuelan refineries. Amuay refinery’s upgrading and deep conversion, alone, cost $1.5 billion.

Even with all its careful strategic investments, PDVSA between 1976 and 1997, was able to supply $240 billion in oil taxation to the Venezuelan government.

Furthermore, PDVSA in the 1990s under the “Apertura” (Opening of mature fields; followed by profit sharing exploration contracts) attracted the return of foreign oil companies (34 companies), companies that agreed to invest over $16 billion in Venezuela, including more than $2.4 billion in cash bonuses.

The largest foreign investments went to the four Strategic Associations in the Orinoco Oil Belt, which contains 1.2 trillion barrels of oil-in-place, with possible recovery of 270 billion barrels.

But PDVSA could never supply enough revenue for a proliferate government that kept demanding new dividends, at the same time it demanded PDVSA adhere to OPEC quotas. Taxes on PDVSA that amounted to 90% were never enough for one corrupt government after another. PDVSA was forced to go to the international market and borrow, and by 1999 was indebted by $7.6 billion.

In August 2003, its PDV America, Inc. has to pay off $500 million in maturing notes, which means Petroleos de Chavez will have to borrow, and borrow at higher rates, because PDVSA/Citgo’s former investment grade has been downgraded to a speculative grade, by Standard & Poor’s and by Moody’s Investors Service.

Citgo - For Sale

PDVSA’s collateral in the U. S. is their wholly owned Citgo Petroleum Corp. with 730,000 barrels per day (b/d) of refining capacity in its four refineries; plus two refinery joint ventures, which combined, these assets represented $7.5 billion. In 1999, Citgo had 8% of the U.S. gasoline market.

Citgo in 1999 was PDVSA’s largest subsidiary abroad, and accounted for half of PDVSA’s market. With overseas refineries, Venezuela was able to increase it’s crude exports over its product exports, which were limited by Venezuela’s own upgraded refining capacity of only 1.2 million b/d (from which it had to supply Venezuela’s own needs of 450,000 b/d).

However, PDVSA does not have enough crude production to supply Citgo’s needs, or its other overseas refineries. Venezuela’s OPEC production quota forced PDVSA to buy large quantities of crude on the open market for their foreign refineries.

Over 70% of Venezuela’s oil production is heavy and extra heavy crude, which is far more expensive to refine than lighter crude. PDVSA invested billions upgrading Citgo’s refineries to refine these heavy Venezuelan crudes, of which Venezuela has huge reserves.

Hugo Chavez is once more secretly trying to sell Citgo. However, he has two problems. 1) Citgo has great value to Venezuela, but not to another refiner, because Citgo without Venezuela’s heavy crude supply has limited value. 2) There are no apparent foreign buyers with enough capital to buy Citgo. Only a very large corporation would have the financial ability. However, without available crude supply for the Citgo refineries, a company would only be interested if it was a fire sale deal.

How desperate is Chavez for cash? And would any buyer risk making a deal, when Chavez’s days in office may be numbered, and a new Venezuelan government would want to recover this valuable foreign asset - for its heavy crude production?

If Chavez were able to sell Citgo to a foreign competitor, he would not need to export crude or products to the United States, and then he could default on his foreign debt ($35 billion). Chavez would get the revenues he so desperately needs to stay in power from the Citgo sale, and Citgo would be out of reach when he defaults on Venezuela‘s foreign debt. Furthermore, Citgo would no longer be essential to the operations of the much smaller Petroleos de Chavez.

Reduced Production

Venezuelan oil production at this writing in mid-February 2003 is down from 3.1 million barrels/day (2.7 million b/d, plus 400,000 b/d from the Oil Belt) to a mere 1.3 million b/d. But an even more important problem for the Venezuelan oil industry, and for the U.S. market that has depended on Venezuelan oil imports for 74 years, is the following:

• Of the current 1.3 million b/d production, 500,000 b/d comes from the operating contracts (foreign companies).
• The four Strategic Association projects in the Oil Belt are shut-in, for they need natural gas, which is not available because of the oil production strike.
• Worse, Petroleos de Chavez in trying to restore oil production, with production in the newer free flowing fields, and they are over producing, i.e., wells that are supposed to produce 1,000 b/d are forced to produce 2,000 b/d. This implies a higher rate of natural decline in these fields. Venezuela has an oil field natural decline rate of 25%/year, requiring large investments in maintenance, which Chavez cut back when he came in to office, in order to squeeze more revenues out of PDVSA.
• What they are producing is not coordinated with what they can export, therefore, millions of barrels are going into storage.
• Finally, there was a permanent loss of 400,000 b/d in production capacity, resulting from some of the shut-in wells.

Therefore, when you hear Chavez, or Ali Rodriguez, or Rafael Ramirez, Minister of Energy, inform the public how they have increased exports and oil production to 2 million b/d, or more, it simply is not true.

All of this is of little concern when you intend to create a Cuba style government. In 1998, Chavez campaigned against PDVSA and its president, Luis Giusti, as a “state within a state.” He vowed to subordinate PDVSA to the Venezuelan state.

His first action after becoming President in February 1999 was to further cut oil production and comply with OPEC quotas. Some 6,000 oil workers lost their jobs because of the production cuts, and many service companies went out of business. PDVSA was also forced to cutback maintenance on the shut-in wells, and they lost production capacity of 500,000 barrels/day. The one area Venezuela was increasing production was in the Orinoco Oil Belt, under the four big joint ventures with foreign oil companies.

Paro -- “Ni un paso atras” (Not one step back)

With this slogan 80% of the 33,000 full time employees of PDVSA joined the Opposition calling for early elections and an end to the Cuban style government of Hugo Chavez.

What Chavez did not anticipate was the strength of the PDVSA people, whose principles would not let them abandon the brave Venezuelans in the Opposition who started the National Civic Stoppage (Paro) on December 2, 2002.

PDVSA’s enormous cash flow to the Chavez government was the make or break of the Opposition.

By going on strike, PDVSA lost $40 million per day, or 70% of Venezuela’s export earnings. Furthermore, the Chavez government had to turn around and spend millions importing foreign gasoline. But after nearly three months of the Paro, Chavez still refused to resign, or even agree to elections.

The Tanker Captains

The People of Petroleum (la Gente de Petroleo), led by Juan Fernandez, have shown immense courage in risking their careers and their lives to get Hugo Chavez to resign. There are many heroes, but a few stand out.

The first is Captain Daniel Alfaro of the tanker Pilin Leon, who took a courageous stand and in doing so united a slow starting Paro. On Wednesday, December 4, 2002, he and his crew dropped anchor in Lake Maracaibo, refusing to go into port and unload their cargo of gasoline. Seeing Captain Alfaro’s courage, the other 12 PDV Marina captains and their crews followed suit, and the captains and crews of the Venezuelan Merchant Marine followed them. (By the way, PDV Marina tankers are named after the “Miss Venezuela’s.”) Chavez ordered the military to board the tankers, but they were unsuccessful in getting them underway. Then the Chavez government imported unqualified foreigners, Hindus from India, Arabs and Cubans. The tankers did not move!

Captain Jose Luis Blandin, president of the Merchant Marine union, stated on December 16, “even if they bring in Martians or people from Jupiter those anchored tankers in Venezuelan waters cannot be moved.”

Where will Petroleos de Chavez get qualified captains and crews, now that 276 of the PDV Marina captains, crews, and personnel have been fired (January 30)? Under Venezuelan law, to operate a Venezuelan flagship, the captain and at least 50% of his crew must be Venezuelan. It appears that Chavez (through PDVSA Board member Aires Barreto) was trying to hire crews from India, Libya and Iraq.

PDVSA was forced to declare “force majeure.” Foreign tankers were notified by insurers that docking in Venezuelan waters was unsafe, and their ships and cargoes would not be insured. This is still the case. Most foreign tankers that moved PDVSA’s oil before the strike are staying away. Some crude is moving in smaller Venezuelan tankers, e.g. for January: 50,000 b/d to Cuba; 270,000 b/d to Citgo in the United States; and 85,000 b/d to Hovensa in the U.S. Virgin Islands.

Before Venezuela can boost its oil production, it must solve not only its shipping, but its refinery problems as well. Both operations have been militarized and are unsafe. And Venezuela will undoubtedly be defending itself in foreign Courts, as a result of its force majeure notices to its clients. When a company is forced to do this by events beyond its control, it must prorate its supply to its clients. Venezuela has been sending oil to Cuba (without payment?), to Citgo, and to their joint refinery with Hess in the Virgin Islands. Their other clients are not in the mix. Therefore, Venezuela is open to future lawsuits from former clients to whom they declared force majeure.

The Refineries

Venezuela, because of the planning and investments by PDVSA since nationalization, has the largest and one of the most complex refineries in the world. The Paraguana Refining Center, comprised of Amuay and Cardon refineries, has 940,000 b/d capacity and since December 2002 is shut down by the strike.

The Puerto la Cruz refinery has 200,000 b/d capacity and is the only Venezuelan refinery now producing any gasoline (75,000 b/d). It is doing so at great risk because it is overdue for its annual maintenance turnaround.

The El Palito refinery with 130,000 b/d capacity is also shut down since December. The chavistas have caused considerable damage to these refineries, by trying to restart them with incompetent, often foreign, workers.

Prior to the strike, Venezuela produced 250,000 b/d of gasoline for the domestic market, now they are producing only 75,000 b/d. Venezuela has 1811 gasoline service stations (owned by PDV, Shell, Texaco, and BP) but only around 370 are receiving any gasoline, which is mainly being delivered by the National Guard, and sold without receipts by the chavistas at highjack prices. Service stations in Opposition areas receive few deliveries.

The Chavez government imported 11 cargoes of gasoline (2,820,000 barrels) in January and paid around $110 million for these imports. Venezuelans are forced to line up for hours, and days, to get gasoline (in Maracaibo it takes up to 3 days in line to get gasoline). These lines are in a country that invested millions in their refineries so they could export unleaded and later reformulated gasoline to the U.S. market. Before the Paro, Venezuela was the largest source of U.S. gasoline imports.

Petroleos de Chavez (PDC)

Now the finale to the extinction of PDVSA. Chavez has done two things to “clean out PDVSA”:

1. He has fired over 12,400 (as of 2/15/03) top executives, middle management, secretaries, accountants, engineers and technical people, along with 881 of the Ph.D.s, researchers, and technical people at Intevep.

On Sunday, February 9, 2003, Chavez announced he would send the 80% of striking oil workers to prison! There will be no amnesty for the “petro-terrorists.” Chavez’s hatred for the people of PDVSA is all consuming.

And as the incompetent chavistas now trying to operate the petroleum industry have one serious accident after another, ruining expensive equipment and despoiling the environment, Chavez accuses the striking PDVSA employees of being “saboteurs.” Chavez did not forget the retired pensioners who had worked all their lives for the Venezuelan oil industry--he terminated their benefits.

2. Chavez through Ali Rodriguez, his President of Petroleos de Chavez, has eliminated many of the subsidiaries (Interven, Cied, Palmaven, Bariven, Proesca, CVP, and PDVSA Trading), and downsized Pequiven, Intevep and Deltaven; and split the remaining industry into two companies: Operator of the East, and Operator of the West. PDVSA people do not have a company to return to. Their jobs have been eliminated and their offices in most buildings have been turned over to government employees, the military, or chavistas.

Since 1997, when Luis Giusti was PDVSA President, 11,500 employees left, many taking early retirement because of Giusti’s policies, and many doing the same or forced out under 5 consecutive presidents named by Chavez. These departures greatly reduced the qualified personnel in the oil and gas industry. PDVSA has now been decimated with the firing of the remaining qualified personnel, along with the elimination of subsidiaries and positions in those companies. Incomprehensible has been the firing of the 881 Ph.D.s and technical researchers at the crown jewel of PDVSA -- the very prestigious Intevep research center. To throw these highly qualified researchers out in the street boggles the mind. PDVSA spent millions sending these bright men and women to the best universities in the U. S. and in Europe to get their advanced degrees. They have successfully acquired hundreds of patents for their research at Intevep.

In 1993, I had my book on Intevep published by PennWell, so I personally know these exceptional people. Furthermore, I know how great a loss this center and its people will be to Venezuela, when Petroleos de Chavez is forced to pay top dollar to foreign companies for needed technology, technology that Intevep could have provided.

The new dictatorship indirectly has promoted privatization of the only well run and efficient state industry in Venezuela. The Chavez government has destroyed PDVSA and now is forced to bring in foreigners to restart its major resource. Another irony is that the Chavez Constitution forbids the privatization of PDVSA, and requires it to hold a majority stake in oil sector projects with foreign energy firms. But never mind, Chavez writes constitutions and carries his around in his pocket, but does not follow any constitution.

Having fired over 700 of PDVSA’s top executives and most of its middle managers, PDVSA is a company without a brain. With the upper level management removed, PDVSA headquarters in Caracas, in La Campina, has been taken over by the Minister of Energy and Mines, now in place to execute government orders. The new Petroleos de Chavez will try to raise production using foreign companies, whose workers do not strike!

Which foreign companies are willing to come into Venezuela, under the new currency and price controls, unattractive royalties and tax regime, and a country full of potholes and beggars? Will these companies be from the United States, Europe, China, Nigeria or Russia?

The Chavez government is rumored to be preparing an attractive offer to present to foreign companies to come in and restart Venezuela’s oil and gas production - using foreign companies’ financial strength and technology.

Gustavo Coronel, former PDVSA Board member, wrote the following in a January 28, 2003 article: “With the collapse of PDVSA, we are witnessing the collapse of the country . . . when the time comes, if I am still around, I hope to be a witness for the prosecution. Why? Because when I was building pipelines for a better PDVSA, Ali Rodriguez, the current President of the “revolutionary” PDVSA, was blowing them up, as the main dynamite expert of the Cuban-supported guerrillas which failed in Venezuela during the 1960s.” (VHeadline.com)

It is Ali Rodriguez who now has complete control of PDVSA: financially and contractually. Ali Rodriguez Araque not only fires and hires, moves PDVSA funds around, but also can sign contracts like the one with Pepex.com (Herb Goodman, CEO) to take over PDVSA’s oil trading. There is no longer any transparency. Those who work for PDVSA now work for Petroleos de Chavez, the fully credentialed People of Petroleum having been replaced by the mediocre, and now led by an “Oil Commander-in-Chief” (Chavez), with no auditing, or transparency.

Venezuelans are living in a war economy - in an internal war - a civil war, which could last a long time. Over 12,000 commercial establishments have closed, and 5,000 businesses are bankrupted. The Chavez government is now using currency controls and price controls to attack the only remaining productive sector remaining.

The Opposition, led by Carlos Ortega, the brave President of the CTV (Confederation of Venezuelan Workers), is going to continue to march, by the hundreds of thousands of families, demanding that Chavez resign. But he will not resign. These millions of brave Venezuelans refuse to live under a corrupt, Cuban dictatorship, and refuse to give up their country to a man who intentionally is destroying Venezuela.

Venezuela had no national debt in the 1950s. It paid cash for what it purchased - in 1957, Venezuela’s purchases of goods and services from the United States alone exceeded $1 billion. There were more than 1,500 U.S. companies that sold products and services to Venezuelans. The U.S. relied on Venezuelan oil imports - not imports from the Persian Gulf or Africa.

Until the early 1970s, Venezuela was the largest source of U.S. oil imports (and became so again in 1986), of both crude oil and oil products. In recent years, Venezuelan oil exports to the U.S. ranged around 1.5 million b/d. No longer! Venezuela, the country some of us have loved since childhood, no longer exists.

Therefore, citizens of the United States, no longer will you rely on Venezuelan crude oil and oil products imports. This country that since 1928 was a long time ally and reliable supplier of petroleum, helping the Allies fuel and win World War II, now has a very unfriendly government with greatly reduced oil production.

Dr. Brossard’s book Power and Petroleum: Venezuela, Cuba and Colombia, A Troika? was published in late 2001, and her book on Intevep The Clash of the Giants, in 1993. Between 1985 and 1994, she was an adviser to the Presidency of PDVSA and its affiliates.