Published by Reuters August 18, 2010
Venezuela's state oil company PDVSA is at a crossroads: act now to salvage the skills and equipment that once made it a rival to Brazilian giant Petrobras, or risk tipping irrevocably into the type of decline suffered by Mexico's Pemex.
Thomas Coex | AFP | Getty Images
Venezuela's state oil company PDVSA is increasingly at a crossroads.
So far, it appears more likely to take the same path as Pemex.
During more than a decade under socialist President Hugo Chavez, PDVSA has expanded quickly with the nationalizations of major crude projects and has hired tens of thousands of workers.
But Chavez also has insisted the world's No. 4 oil company fund huge social welfare projects, which, combined with a sky-high payroll, falling production and volatile global prices, has left it in dire financial straits.
It is a similar story at Mexico's state-owned monopoly Pemex, created when the government nationalized the oil industry in 1938.
Pemex has much stricter restrictions on private investment than PDVSA, but has continued to add staff despite a steep decline in production over recent years. Some experts believe it could cease oil exports in the next five years.
But Brazil's Petrobras, the third of Latin American's oil "majors," shows that the region's state-led oil enterprises can tell a different tale.
Despite a growing debt load, Petrobras is strengthening its position as the region's most successful oil company and has ambitious plans to exploit massive deep-sea reserves. It could almost double its output over the next decade.
Pemex and PDVSA face increasing demands from their governments, forcing them to take on more debt and limiting their ability to invest as they struggle to turn around falling production levels.
"Petrobras will be much more successful in developing their investment plans than PDVSA and Pemex, which continue to be the petty cash boxes of their governments," said Francisco Monaldi, a visiting professor at Stanford University and the author of a study on oil tax regimes across Latin America.
While Petrobras maintains a certain independence from Brazil's government, ties between the other two companies and their states are close. PDVSA is the main engine of Chavez's socialist "revolution," while Pemex is saddled with a crushing tax bill and low domestic prices.
PDVSA has become increasingly politicized under Chavez, with Venezuela's oil minister describing it as "red from top to bottom".
In Mexico, Pemex's access to investment resources has been curtailed, undermining its current and future performance.
Financing the Orinoco Belt
This month, PDVSA said its net profit more than halved in 2009 to $4.4 billion due to the global financial crisis, lower crude prices and production declines. Revenue dropped 41 percent to $75 billion.
Its focus is on developing vast extra heavy oil reserves in its Orinoco belt with projects that are slated to increase Venezuela's total crude output by about 70 percent, or some 2.1 million bpd of new production.
If those projects are successful, PDVSA could pull out of its slump.
But, with Venezuela likely to be the only country in Latin America to record negative economic growth in 2010, some analysts question whether it will be able to meet its 60 percent share of the Orinoco financing costs.
"No one believes PDVSA can invest close to $7 billion per year of its own money in the Orinoco region," said Gustavo Coronel, a former director at PDVSA.
"The country simply does not have that kind of money. In fact, both the country and PDVSA are increasingly growing their debt due to commitments that clearly exceed their financial capabilities, some of them not even related to oil."
The strong politicization of both Pemex and PDVSA can be seen in the number of workers they had last year—145,461 and 102,750, respectively, compared with 76,919 employees at Petrobras.
Venezuela President Hugo Chavez has insisted PDVSA fund massive social welfare projects.
Miguell Guitierrez | AFP | Getty Images
Hugo Chavez
Although the cash cost of paying its workforce is just a fraction of Pemex's budget, it is saddled with more than $40 billion in unfunded retirement obligations from decades of sky-high employment levels. Those pension obligations are slightly larger than Pemex's long-term financial debt.
PDVSA says its high number of employees is a result of nationalizations and putting contract workers on the payroll.
But the staffing increases in both Mexico and Venezuela came amid decreasing production. Venezuelan output has stagnated since early last year, while Mexican oil production has plunged by nearly a quarter since 2004 as output from the aging Cantarell field has collapsed.
The conservative government of President Felipe Calderon wants to make Pemex more efficient and has tried to push through reforms, but opponents in Congress have blocked efforts to give private companies more of a stake in the oil industry and Pemex's staff numbers have continued to climb.
Refining or Exploration?
"Due to falling oil output, especially from offshore, Mexico will likely cease being an oil exporting nation by 2015," U.S. geologist Byron W. King wrote this month. "Right now, there's not nearly enough internal Mexican investment in exploration and new oil development ... it's fair to ask if Mexico should change its approach to development."
Mexico relies on imported gasoline to meet more than 40 percent of domestic demand due to years of under-investment in refining, while Venezuela has had to import 60,000 barrels per day of products this year due to problems in its refinery network.
Petrobras investors remain focused on a massive share offering slated for September. It is the backbone of a campaign to tap deep-sea reserves estimated at between 50 billion and 100 billion barrels of recoverable crude.
In the long term, Petrobras also needs to increase its oil production to satisfy a voracious domestic market that sucked up some 1.75 million bpd in 2009—more than 80 percent of its production—in order to generate more exportable surplus.
The company still faces financial challenges, concerns over its operational priorities and political pressures.
At the end of 2009, Petrobras had the highest debt of the three Latin American "majors" at $56.87 billion, and its plans to step up investment in refining have raised concerns that it is moving away from its core competency as a deep-water exploration and production pioneer to satisfy the state's desire for it to create more jobs.
While it is nowhere near as interventionist as Chavez's administration, Brazil's government is also looking to use more of Petrobras' profits to help finance social welfare policies.
Wednesday, August 18, 2010
Wednesday, August 4, 2010
VenEconomy: Let’s hope he follows Raúl’s example!
Published on 8/3/2010.
In the 1920s, when the Russian economy went into a recession, Lenin implemented the New Economic Program (NEP), which allowed the people who farmed the land to enjoy the profits they obtained, while small and medium companies were freed from the controls of the communist State.
The economy recovered following the implementation of these measures. Then, following the death of Lenin, Russia took another backward step with the arrival of Joseph Stalin’s fierce, bloody communism, which plunged the Soviet Union into poverty and claimed the lives of millions of people.
In the 1990s, history repeated itself in Cuba. When he found himself without the economic support of the USSR, Fidel implemented a kind of NEP. He opened up the economy a bit, allowing private individuals to engage in agriculture and provide certain services, such as the “paradores” (small restaurants with seating for 12), and the economy posted its highest level of growth in decades.
Unfortunately, with the arrival of Chávez in the presidency, the Venezuelan Government stepped in and started to provide Cuba with patronage in the USSR’s stead, with the result that Fidel once again closed the economy to private initiative and returned to the backwardness of a communist regime.
Now, more than 10 years later, the new commander of the Cuban revolution, Raúl Castro, is leaving the doors of the economy ajar to allow people who farm the land to enjoy the fruits of their labor and private individuals to provide certain services. Everything seems to indicate that, in Raúl’s Cuba, there is the possibility of a more open economy.
This shoring up of the economy by setting it on the path to greater freedom would seem to be due to Raúl Castro’s certainty that the Venezuelan bonanza and, therefore, the unconditional economic support Chávez has been giving the Castro regime are coming to an end.
It is worth noting that this opening up of Cuba’s market is happening just when Chávez is taking steps to put communism firmly in place in Venezuela. Last week, the President signed a string of new socialist laws, among them the Partial Amendment to the Lands and Agricultural Development Act, which eliminates the right to own agricultural land, the Insurance Business Act, which burdens this sector with functions that are the responsibility of the State, and the Supreme Tribunal of Justice Act, which, among other things, grants the Constitutional Chamber full powers to reverse decisions handed down by any of the TSJ’s five chambers, making it a kind of Supreme Court within the Supreme Tribunal. This means that there will be no firm sentence worth the paper it is written on, so finally eliminating any vestiges of the rule of law.
One would hope that, influenced by his friend Raúl, Chávez will also consider opening up the economy, even if it’s just a little bit.
In the 1920s, when the Russian economy went into a recession, Lenin implemented the New Economic Program (NEP), which allowed the people who farmed the land to enjoy the profits they obtained, while small and medium companies were freed from the controls of the communist State.
The economy recovered following the implementation of these measures. Then, following the death of Lenin, Russia took another backward step with the arrival of Joseph Stalin’s fierce, bloody communism, which plunged the Soviet Union into poverty and claimed the lives of millions of people.
In the 1990s, history repeated itself in Cuba. When he found himself without the economic support of the USSR, Fidel implemented a kind of NEP. He opened up the economy a bit, allowing private individuals to engage in agriculture and provide certain services, such as the “paradores” (small restaurants with seating for 12), and the economy posted its highest level of growth in decades.
Unfortunately, with the arrival of Chávez in the presidency, the Venezuelan Government stepped in and started to provide Cuba with patronage in the USSR’s stead, with the result that Fidel once again closed the economy to private initiative and returned to the backwardness of a communist regime.
Now, more than 10 years later, the new commander of the Cuban revolution, Raúl Castro, is leaving the doors of the economy ajar to allow people who farm the land to enjoy the fruits of their labor and private individuals to provide certain services. Everything seems to indicate that, in Raúl’s Cuba, there is the possibility of a more open economy.
This shoring up of the economy by setting it on the path to greater freedom would seem to be due to Raúl Castro’s certainty that the Venezuelan bonanza and, therefore, the unconditional economic support Chávez has been giving the Castro regime are coming to an end.
It is worth noting that this opening up of Cuba’s market is happening just when Chávez is taking steps to put communism firmly in place in Venezuela. Last week, the President signed a string of new socialist laws, among them the Partial Amendment to the Lands and Agricultural Development Act, which eliminates the right to own agricultural land, the Insurance Business Act, which burdens this sector with functions that are the responsibility of the State, and the Supreme Tribunal of Justice Act, which, among other things, grants the Constitutional Chamber full powers to reverse decisions handed down by any of the TSJ’s five chambers, making it a kind of Supreme Court within the Supreme Tribunal. This means that there will be no firm sentence worth the paper it is written on, so finally eliminating any vestiges of the rule of law.
One would hope that, influenced by his friend Raúl, Chávez will also consider opening up the economy, even if it’s just a little bit.
Sunday, August 1, 2010
VenEconomy // SITME has been an almost insurmountable barrier...
VenEconomy: Just recently, in response to a question on the System of Transactions in Foreign-Currency-Denominated Securities (SITME), the president of the Central Bank of Venezuela, Nelson Merentes gave some good news: that the swap market would be restored in two months' time.
This is welcome news, as SITME has been a tremendous flop. While it has been allowing the government to maintain the lie of a strong bolivar fuerte (strong bolivar), as far as importers, merchants, and other businessmen are concerned, SITME has been an almost insurmountable barrier and has failed to meet their foreign currency requirements.
The volume of foreign currency being traded via SITME is no more than $25- $30 million a day, on average, compared to an average of between $80 million and $100 million a day that was being traded on the swap market last year. That means that, at the moment, there is repressed demand of some $60 million to $70 million a day.
The main reason for the scant volume being traded via SITME has nothing to do with the system's rigid and complex procedures; it has to do with the fact that the government does not have sufficient foreign currency to satisfy the market. If the Central Bank, PDVSA or Fonden had the foreign currency, they would be releasing it to the market, as this would help bridge the fiscal gap while stimulating economic activity.
It is said that the exchange rate on the illegal market has remained "high but stable, with scant volume." If that is true, the explanation for that stability would be that there is scant supply at a time when demand continues to be repressed.
The reason? Fear. No responsible company is going to resort to the illegal market, because it is being strictly monitored and is subject to stiff penalties that go from heavy fines to the closure and confiscation of the company. Faced with such a risk, companies' managers prefer to stop production or to stop selling.
Now then, what would happen if the Central Bank were to honor its offer of October and the swap market is legalized and revived?
On the one hand, the Central Bank will continue to be without sufficient foreign currency to meet demand. In other words, there will be no change in the present situation. On the other, when the swap market starts up again, without the restraints of repression and penalties, repressed demand will be unleashed and prices will shoot up.
And there is something else. Bearing in mind the huge fiscal deficit, it is highly likely that the government will decide to devalue the bolivar again in October, the second time this year.
Given this panorama, the only thing businessmen can do is to refrain from incurring debt in dollars and put their bolivars in tradable assets, as those are the assets that will maintain their value after the currency is devalued once again. As long as the march towards communism allows them to, that is.
This is welcome news, as SITME has been a tremendous flop. While it has been allowing the government to maintain the lie of a strong bolivar fuerte (strong bolivar), as far as importers, merchants, and other businessmen are concerned, SITME has been an almost insurmountable barrier and has failed to meet their foreign currency requirements.
The volume of foreign currency being traded via SITME is no more than $25- $30 million a day, on average, compared to an average of between $80 million and $100 million a day that was being traded on the swap market last year. That means that, at the moment, there is repressed demand of some $60 million to $70 million a day.
The main reason for the scant volume being traded via SITME has nothing to do with the system's rigid and complex procedures; it has to do with the fact that the government does not have sufficient foreign currency to satisfy the market. If the Central Bank, PDVSA or Fonden had the foreign currency, they would be releasing it to the market, as this would help bridge the fiscal gap while stimulating economic activity.
It is said that the exchange rate on the illegal market has remained "high but stable, with scant volume." If that is true, the explanation for that stability would be that there is scant supply at a time when demand continues to be repressed.
The reason? Fear. No responsible company is going to resort to the illegal market, because it is being strictly monitored and is subject to stiff penalties that go from heavy fines to the closure and confiscation of the company. Faced with such a risk, companies' managers prefer to stop production or to stop selling.
Now then, what would happen if the Central Bank were to honor its offer of October and the swap market is legalized and revived?
On the one hand, the Central Bank will continue to be without sufficient foreign currency to meet demand. In other words, there will be no change in the present situation. On the other, when the swap market starts up again, without the restraints of repression and penalties, repressed demand will be unleashed and prices will shoot up.
And there is something else. Bearing in mind the huge fiscal deficit, it is highly likely that the government will decide to devalue the bolivar again in October, the second time this year.
Given this panorama, the only thing businessmen can do is to refrain from incurring debt in dollars and put their bolivars in tradable assets, as those are the assets that will maintain their value after the currency is devalued once again. As long as the march towards communism allows them to, that is.
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