Are there advantages in selling CITGO?
www.vheadline.com Posted: Friday, March 07, 2003 By: Oliver L. Campbell
VHeadline guest commentarist Oliver L Campbell writes: Upon the nationalization of oil industry in 1976, PDVSA became one of the world’s major oil companies, but that did not make it a multi-national since it did not have subsidiaries ... mainly marketing companies ... in other countries as did the major oil companies like Exxon, Gulf and Shell. Instead PDVSA sold its oil to other oil companies and large customers such as electrical utilities.
PDVSA were initially content with this situation and had no plans to become a multi-national. However, they soon realised they had no control over export markets and were vulnerable to competition from both the multi-nationals and other national companies. They thus decided they needed to secure some sales volumes through long-term contracts and downstream investment in foreign countries. Ideally, the companies would have refining capacity and a substantial share of the local market, for which Venezuela could supply the crude oil.
The best deal that came up was with Veba Oil, which had both refineries, and a substantial share of the German market, but no crude supplies of its own. PDVSA proposed a joint venture under which they invested in the German refineries in exchange for the right to supply the oil for their local market requirements. The Minister for Mines and Hydrocarbons supported the investment, but many in Congress were against the concept of investing abroad and asked PDVSA to justify the investment. The latter’s explanation that it was a defensive strategy designed to secure an outlet for Venezuelan oil failed to convince many of them.
So the first attempt to gain some control over export markets got off to a bad start.
However, the deal was approved and, presumably, gave a satisfactory result otherwise PDVSA would have terminated it.
The CITGO investment ... made on very favourable terms ... was very much larger and had the goal of securing a large volume of sales to the USA.
PDVSA has supplied CITGO with about half its crude oil requirements and, in 2001, this amounted to 281,000 barrels per day (bpd), compared with the latter’s refining capacity of 589,000 b/d.
It is interesting to note that PDVSA has an additional refining capacity of 616,000 bpd under other ventures unrelated to CITGO ... taking PDVSA’S total refining capacity in the USA (including Saint Croix) to 1,205,000 b/d.
This is a significant figure, which compares with the 1,246,000 bpd actually processed in 2001 in the Venezuelan refinery system.
Though PDVSA saw its overseas investments as a defensive strategy, rather than one to improve its sale price, it also expected that refining its crude and marketing the products in the same country would produce an added value i.e. one that gave more than the sale of the crude oil to a third party would have done.
The USA products market is a lucrative one ... so this may well be the case ... but only PDVSA can confirm it.
Even if no added value resulted, what price does one place on the security of supply?
In 2001, PDVSA exported 2,762,000 bpd of which 1,497,000 bpd (54%) went to the USA.
The 281,000 bpd sold to CITGO represents only 18.8% of the latter so, with hindsight, one can question whether that particular investment was needed to secure sales since, it seems, PDVSA managed to sell its oil in North America, Latin America and the Caribbean with no particular problem.
Conflicting statements have appeared that the government does and does not want PDVSA to sell CITGO ... the rumor is that the assets are worth in excess of US10 billion though this seems doubtful ... the question is does a sale make commercial sense?
On the face of it, there may be a case for sale if:
- PDVSA is short of funds for new investment, and
- the crude oil at present sold to CITGO can be sold elsewhere at the average price for such crude oils.
The answer to the first is a definite yes, and to the second a qualified yes.
Traditionally, the bulk of the profit from oil comes from the E&P (exploration and production) function, and the writer suspects that PDVSA may well find the net cash proceeds from the sale of CITGO give a better return if invested in the upstream development of existing and new oil and gas fields than if kept tied up in CITGO.
PDVSA certainly needs to evaluate the opportunity cost of the CITGO investment, taking into account the security of supply and any added value which the investment provides.
However ... even if a good case is made for selling CITGO ... it only has merit provided PDVSA keeps the proceeds for upstream investment.
- So the crucial question is would the government allow PDVSA to keep the cash?
If not, then nothing will be achieved except to endanger the goose’s ability to continue laying the golden eggs.
PDVSA must invest in order to maintain and increase its production capacity, and the country needs PDVSA to increase its income in order to restore economic growth.
One comes before the other.
Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Campbell returns frequently to Venezuela and maintains an active interest in political affairs: "I am most passionate about changing the education system so that those who are not academically inclined can have the chance to learn a useful skill ... the main goal, of course, is to allow many of the poor to get well paid jobs as artisans and technicians." You may contact Oliver L Campbell at email: oliver@lbcampbell.com