Long-term investment measures abroad to assure outlets for Venezuelan oil

<a href=www.vheadline.com>Venezuela's Electronic News Posted: Friday, April 04, 2003 By: Oliver L. Campbell

VHeadline.com commentarist Oliver L. Campbell writes: May I refer to a couple of points on internationalization made by Kira Marquez in her article about corruption in Venezuela?

At the time downstream investment abroad was proposed, it was felt selling all crude and products f.o.b. Venezuela left the State in a vulnerable position vis-a-vis the competition from the multi-nationals and other national oil companies. One may, or may not, agree with this assessment, but the objective of assuring an outlet for Venezuelan crude oil surely cannot be faulted.

The Veba joint venture was a net-back deal. The value of the oil sold to Ruhr Oel was determined by taking the sales proceeds of the products sold in the German market and deducting marketing, distribution and refining costs. The value thus depended on how buoyant the German market was at any time, and a further complication arose from movements in the DM/$ exchange rate. Both these factors, local market conditions and currency rates, have to be accepted when you invest abroad. CITGO is an exception as regards currency since the local market sales are in dollars.

Anyway, the net-back varied because of those two factors, and sometimes PDVSA got more than it would have done from selling the crude tel quel and sometimes less.

Even if the net-back was at times lower than the crude oil value, it can be argued this was the price for assuring a long-term outlet of crude oil sales.

As regards the refinery crude intake, PDVSA greatly reduced freight costs by buying light Russian crude oil (Ural) for Ruhr Oel in exchange for Venezuelan crude oil sold to Russia for Cuba. You cannot say PDVSA was anything but efficient. The initial problem, later overcome, was that refining and marketing costs in Germany were on the high side

The really large investment downstream was in CITGO and other USA refineries ... PDVSA believes the benefit is in the long-term assurance of crude oil sales to the USA. They assert the added value of refining and marketing directly in the USA is in the order of $1.50 per barrel. Whether you believe this or not, the fact is the refineries abroad refined 1,026,000 bpd in 2001, not far below the 1,246,000 bpd refined in the national refinery system. It is also important to note that, according to PDVSA’s Annual Report for 2001, The Corporation placed 85% of its heavy crude exports in its refineries abroad.

The alternative to not refining around a million barrels per day in refineries abroad is either to sell the crude oil tel quel or construct new refinery capacity in Venezuela. PDVSA is short of funds for the latter and, in those circumstances, upstream investment in new oil fields gives a much better return. Whether PDVSA should sell the refineries abroad, and return to the vulnerability of being an f.o.b. Venezuela seller of crude oil, is something our readers may wish to debate.

I fully share Kira Marquez’s views that more must be done to upgrade Venezuela’s heavy crude oils. Most of the world’s refineries were not designed to process heavy crude oils, and the Venezuelan ones also have many nasty characteristics which damage the plants.

One option is to construct the upgrading facilities in Venezuela, but does PDVSA have the funds available?

Another is to form a joint venture with a refiner abroad under which plants are modified to accept Venezuelan heavy crude oils. Modification costs less than new construction and it certainly takes less time to implement. However, this proposal may meet with the same opposition as other downstream investment abroad.

In brief, investments abroad should be seen as long-term measures to assure outlets for Venezuelan oil. There will be times, particularly in a rising market, when spot prices of crude oil will exceed realizations obtained under the different ventures, and the converse should also occur.

• To measure realizations at one point in time against spot prices is not particularly useful.

Kira Marquez’s concerns are pertinent and it is hoped the above sheds some light on her statement ... it does not explain, however, why PDVSA decided to invest in these refineries in the first place.

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