One man's "acuerdo" is another man's "privatización"

Poder en gotas
Poder en gotas

PDVSA has been very active as of late.

On May 15th, it signed an agreement (“un acuerdo”) with China’s CNPC, to increase its production in the Carabobo area of the Orinoco oil belt. The agreement was for $4 billion.

Then, it signed a $1.5 billion “agreement” with Russia’s Rosneft – same type of deal, apparently, and in the same geographical area as the previous deal.

Finally, it announced an “agreement” with Chevron (headquartered at El Empereo Mejmo) to increase production in the Boscán oil fields of Zulia. The deal this time is for $2 billion.

What do all these have in common?

Well, for one, we don’t really know the details of what’s being signed. We do know, however, that in all of these PDVSA is, in theory, a majority shareholder. We also know the deals involve the minority partners forking over huge amounts of cash, and PDVSA forking out very little.

Here is what I think is happening: the “acuerdo” means the minority partner (CNPC, Rosneft, Chevron) forks over two large sums of cash: one, the total amount required to increase production; the other, to give to PDVSA so that it can say that it put its share of the investment as well. PDVSA turns around and buys toilet paper and gasoline with that cash. In the meantime, the minority shareholder is responsible for the entire investment required to increase production at the field.

When the investment is done, PDVSA has a huge bill to pay, and the minority shareholder is not happy. PDVSA then says: here, take all the oil you want. Instead of getting 40%, which is your share of the company, take all of it. Thanks for lending me way back when, partner.

Of course, the devil’s excrement is in the details, but we’ll never know about those, right? Right… unless, that is, three years from now President Capriles decides to turn back the clock and expropriate all these “investments,” signed under the shade of corruption by violating the open-bidding laws and trampling on the Constitution, because they amount to a virtual privatization of our oil wealth.

Still, the CNPC, Rosneft, and Chevron are obviously factoring in the risk in their accounting. Though PDVSA seems to be serious about focusing on drilling this time around, as witnessed by Schlumberger’s extension of credit to the company, it also has a long history of failing to meet commitments to increase output. It would be interesting to see what changed this time around to convince its partners to fork over their cash.

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    • No, it means 14 years lost with ideology, only to go back once Hugo croaked an oil prices started rising. We could have stayed as we were, it made MUCH more sense, the projects had debt, PDVSA did not, the foreign companies decided how to spend, after 14 years it was all hot air.

  1. Thanks for making public Chavistas’ complete mismanagement and hypocrisy.
    Mafioso and Rosneft’s head, Igor your-KGB Sechin, sent during the discussions in Caracas right now a request to the city of Moscow to name a street in the capital after Sabaneta’s best known poet.
    Source: ъ (Kommersant, business newspaper)

    Bear in mind something else: Venezuela has spent (as in already transferred) over 5 billion dollars in Russian weapons and it got into a debt for over 4 billion dollars more for more weapons, a big part already delivered. The Russian mafia will stand by Chavismo more than it supports Assad right now.

    Meanwhile, there are blackouts almost everywhere outside Caracas every second day…and Venezuelan teachers cannot afford to rent a flat in a working class area.

  2. My guess is that all of the money put in by the investor (including the 60% part that Pdvsa should have put but which the investor put in on its behalf ) is used to develop the fields crude production , with Pdvsa assumming the obligtion to pay the investor back the money the investor put in in Pdvsa’s behalf with the future revenue flowing from the sale of the oil produced in the newly developed field. In other words the investor ‘carries’ Pdvsa part of the investment ( as a kind of long term loan) and gets paid with the income from the increased production . I think that Pdvsa is not directly using the money put in on its behalf by the investor in funding other ‘non productive’ expenditures because by now they must be geting scared that if they dont do something to increase or maintain production quick the whole regimes financial structure will topple. Of course by not having to put in the money from their own pockets now they free up money to use in other projects or plans . The thing is that in future they will produce oil which does not produce any money for them , at least until the loan is paid. The big ‘if’ is that its not only a money problem for Pdvsa but an operational capability problem , so that it they recieve the loan from the investor and they insist on operating the field directly the chances are that the crude will not get produced to pay for the investment . They must trust their partner to assumme operations ( and be competent about it ) of they will fail once again to raise production as in the past .

    • Forgot to add that one reason why the regime might this time follow through on its end of the bargain is that in the past Chavez who was absolutely ignorant about economics would intervene with magalomaniacal and irrational but showy decisions that Pdvsa officials instantly had to obey regardless of the consequences . Maduro has no such power so that the saner minds inside Pdvsa have some chance now of keeping things straight !!

  3. Wishful thinking, The window of opportunity for capriles has closed.

    Re: >>> …. three years from now President Capriles decides to turn back the clock and expropriate all these “investments

    • The bet is that Vzla will join the living once again.
      ZOMBIED economics died months ago.

      Re: >>>> … Still, the CNPC, Rosneft, and Chevron are obviously factoring in the risk in their accounting.

      • “Venezuela is a fraction of what it used to be,” said Sadad Ibrahim al-Husseini, a former head of Saudi Aramco’s exploration and production division, “and that’s really because Venezuela’s technocrats have scattered over the world and are no longer active in Venezuela.”

      • New beltways shall adorn our lands –
        Resaltó que El Troudi continuará la tarea de construir “las autopistas, carreteras e infraestructura que nuestra patria demanda para su desarrollo”.

    • Yep. The radical right wingers are going all out.
      Fill the bases while the groggy left weaves with the punchess.

      Re: PDVSA has been very active as of late.

  4. From what I understand, the loans are not made directly to PVDSA, instead they are made to the Joint Ventures (Petroboscan, Petrovictoria, Petrosinovensa, Petromonagas, …) in which this companies (Chevron, Schlumberger, …) have people on the board that can oversee that the money is used in oil related activities.
    I don´t think that the shareholders of Chevron would tolerate that 2 billion dollars of their money is used for importing toilet paper in Venezuela.
    Instead I think (in concordance with Bill Bass) that the repayment of the loan will be made in a “Fondo Chino” kind of way.

    • Exactly, from what i understand, this was always the hangup on the Chevron loan. With Chávez out of the way, the technocrats (and I’d even include Rafael Ramírez in that, given the rather limited spectrum we’re talking about here) can finally give a little to the private companies and let the joint ventures control procurement and investment decisions. Also, I thought I saw a tweet earlier (now deleted, so maybe it was wrong?) in which a knowledgable Venezuelan oil scholar with a protected Twitter account said the money isn’t new cash, but just a conversion of accounts payable into a formal debt. I’m not enough of an accountant to understand why that matters much, as debt is debt, but I guess there is some difference.

  5. What ever structure is used to funnel the investors funds into the joint venture oil activities , its ultimately Pdvsa either directly or in some other way which bears the cost of repaying the investor the money he puts in to cover Pdvsa’s 60% share . It thus will save Pdvsa having to put money from their pockets now but will not prevent it from having to use their part of the proceeds from the new or increased production to pay it back . The trick is in the capacity of the partner investor to produce the oil and Pdvsa willingness to let them run the operation and not simply to sit in the board of the joint venture company . Pdvsa’s current operational capacity is fraught with problems which might prevent the oil from getting produced as planned. These ventures amount to a ‘back door’ privatization !!

  6. Does anybody know what the lead time for this project is? I believe this project is dealing with very heavy oil as well. I also believe that heavy oil is difficult to extract and requires sophisticated expertise that Russians That Chinese don’t necessarily have. Does anybody have knowledge to clarify this ?

  7. Eduardo, Saposetty and Bill … Yes, I think that what is happening. For the most part, the partners are owed a lot of money, and they are loaning PDVSA the money to ‘pay them back’. This allows things to get moving again. It is quite interesting that the Chinese VP and Chevron signed agreements/acuerdos on the same day with the same basic elements (such ‘accidents’ don’t just ‘happpen’). For their part, the Chinese have been refusing to loan the BRV and Pdvsa money since at least Nov. 2012, for rather obvious reasons and were insisting on some ‘new condition’ in January 2012 that Pdvsa could not swallow and had walked away from.

    Now, the present ‘loan’ is money that will go directly to CNPC-Pvsa joint oil production efforts, with little or no possibility of Pdvsa and/or BRV or the President de la Republica’s office of grabbing it. So, now these JV’s ‘have cash’ to move forward … a necessary first step … but insufficient to boost Faja and mature field production. Lots of infrastructure upgrade and new buildup is needed as well.

    Besides these loans being a sort of cash infusion (such as it is) giving Pdvsa a chance to begin working on new production (yet again), the other aspect is that it is a limited granting of operational control (here, the financial aspect) to the foreign partners/socios. This is along the lines that Juan Nagel suspects. The foreigners (from Beijing to Houston) want Pdvsa making as few operational decisions from now on with their money as possible. (hmm. I should get back to writing my blog for this week.)

  8. Several things about these agreements:
    1. Yes. They represent privatization moves while the regime keps talking about the second independence and oil sovereignty, The ownership of oil is being transferred to foreign companies.
    2. Some of the loans were agreed and probably disbursed last year, even before the presidential campaign of Hugo Chavez, and I suspect some of the money was sunk into that campaign. Speciallly Chevron’s $2 billion. Boscan is not in the Orinoco area and is a rather modest heavy oilfield in Western Maracaibo, it does not need $2 billion to increase production.
    3. Bill Bass speaks of PDVSA’s “saner minds”. Wishful thinking. The ineptitude of these people is apalling and the levels of corruption within the company would make Putin blush. Money is put into raising pigs,sowing yucca, building houses and drilling wells for the Cubans and the Bolivians. It is all there in their Annual Report for 2012. They don’t hide these crazy activities but are proud of them
    4. These projects have a long maturing time due the logitics. Dilling hundreds or thousands of wells require rigs, personnel, water, trucks, cement, housing, food and whores galore. Most of these requirements are ot easy to meet overnight. PDVSA moves at a snail’s pace that has the Chinese and the Vietnamese in ascuas. During 2012 the production increase in the FAJA was of….. 20,000 barrels per day!!! peanuts.
    5. Production quote for the orinoco area of over one million barrels per day is creative thinking. It does not correspond to production from the FAJA but from a newly organized District with the name, which includes poduction from adjacent fields. It is not FAJA production.
    6. If and whn production is actually generated in significant volumes this oil has to be upgraded. It cnnot be sold commercially as it comes out of the ground, unless it is blended with lighter oil, PDVSA has not enough of this to do the blending of, say, one million barrles pr day ne production. Alternatively they would need dep conversion refineries, such as he ones built by Exxonmobiletc. In the last 15 years NOT ONE plant of this type has been built.
    I can go and on listing the characteristics of this immnese fraud but I hope this offers a sampling of the difficulties to be encountered.
    Of course, add to this what has been sai above: these agreements are fragile legally. Can be challenged by a new gvt. I hav told so privately to some of the “partners”.

    • Don Gustavo: Once again your deep blunt matter of fact understanding of the oil business comes through !! , All the points you make are either totally ‘on spot’ or close enough to zing , I still think that except for Chevron most other investors are not fools and will not put money on ventures which will not allow them some chance to recover their money , so that very little of these investments will get to be spent on non oil activities . Boscan field I’m not certain about , its a tough field to produce with very low grade crude ,so Chevrons $2 bln investment does sound a bit ‘off”.
      There is a saying: ‘In the country of the blind the one eyed man is king’, that sort of explains my reference to the ‘saner’ minds in Pdvsa , although almost all are appallingly mediochre and inept there are some that by sheer happenstance are not wholly bad , except that they can never get their act together because crazy or stupid orders come from the top that make a shambles of any half decent effort on their part ., they are one eyed men but their bosses are blind from ignorance and corrupt or stupid motives. The thing is that they now realize after 14 years that they are inept and falling on an abyss of their own making so out of a feeling of self preservation they are backtracking and allowing some more competent operators a chance of getting into the act , The odds as you say are against their success, but maybe they get lucky and these initiatives end up by improving things a bit. About the legality of these arrangements , Pdvsa has dug itself into a trap . with the laws theyve ennacted these arrangements are either fringe illegal or politically ‘incorrect’, so that they have to exercise their imaginations to make them look different from what they actually are. Any new government would have to look at them case by case and perhaps allow those which have achieved some success a chance of continuing and pressure those that havent to let go !! time will tell.

  9. Schlumberger deal behind the all publicity was very simple: Pay us back the >1.5B$ of unpaid bills in quotes staring now and we keep working in specific high margin services or we continue to decrease our capacity in Venezuela… Whatever deal they can reach with CHina or Chevron or any company with out the service capacity to drill, construct and service the wells is just paper and no action… Ask YPF in Argentina vaca muerta. W/o special refineries to deal with the Faja crude oil of <10 API all this is just dreams and BS! Ask what's the current production of the Maracaibo lake right now? There you can tell the catastrophe of the Venezuelan oil industry on the hands of the PDVSA roja rojita


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