Is the Petro Truly Backed by Oil Reserves?

Photo: Vicepresidencia de la República

The petro launch has been plagued with doubts and inconsistencies, which challenge all analysis of the subject. Something certain, however, is the Venezuelan government’s announcement that the petro will be backed by extra-heavy crude reserves in Field 1 of the Ayacucho Block, in the Orinoco Oil Strip. Allegedly, there are 5,342 million barrels of certified reserves in Ayacucho 1, at one petro per barrel ratio.

In fact, the announced referential price per petro unit is $60, close to the price of a Venezuelan oil barrel. In other words, if we invest in a petro, we have the guarantee of a physical oil barrel supporting it.

So far, this has a certain logic. A government without credibility, whose legal currency suffers a more than 80% monthly inflation rate and a fast depreciation in the black market, a government that has defaulted on some bonds (which are for sale at nearly 80% discount), knows that any currency it issues, supported on anything but the BCV’s dwindling international reserves, will have the same fate of the bolívar.

But is the petro truly backed by oil barrels?

No, it isn’t. Let’s see why:

1.- The oil in the Ayacucho 1 Field is underground. It isn’t developed and there’s not even a development plan. The required infrastructure, or the oil piping to transport crude, doesn’t exist either. We’d have to invest billions of dollars to develop the aforementioned elements, pay extraction and transportation costs and, since we’re talking about extra heavy crude, we’d have to purchase and transport diluents. We’d also have to get the authorization to export it, or sell it to PDVSA, that pays late or not at all. We’d have to pay royalties too (33% of output), and taxes and special contributions to the State.

A government without credibility knows that any currency it issues, supported on anything but the BCV’s dwindling international reserves, will have the same fate of the bolívar.

On the other hand, 51% or more of the extraction company must be owned by PDVSA, which is currently in default and doesn’t have funds to invest (it would have to borrow money from someone). This crude is usually sold on a discount, so its price is lower than the price of the Venezuelan oil barrel, which still includes conventional crudes. Out of the theoretical $60, the operational profit from extracting the oil would be $5-10 per barrel at most. With that, we must recover the original investment of more than $4 billion per every 100,000 daily barrels produced. Where’s that money coming from?

To make it more attractive, let’s say the Venezuelan State forgoes all taxes and royalties (which can only be done by the National Assembly). The operation profit would reach $30 per barrel, so investment would be recovered much faster, but we’d have to wait two years to see those barrels. Out of the projects in the Oil Strip signed a decade ago, the most productive right now doesn’t reach 50,000 barrels a day. So if you buy a petro, let’s say it gives you the right to invest on the Ayacucho 1 Field, to see your barrel in a decade. How much would you pay for that right without political risk of foul play? How much would you pay in Venezuela, a country where the current Constitution establishes that oil reserves can’t be sold or transferred? A country whose legitimate legislature, recognized by the international community, has declared the petro an illegal asset.

Using economic rationality, I’d pay a few cents at most.

2.- The certified reserves in the Ayacucho 1 Field aren’t such. What’s certified is the Original Oil on Site, meaning the magnitude of underground resources. The government used a 20% recovery rate on those resources to calculate proven reserves when, in fact, recovery rates in the Oil Strip are much lower (6-8% in the most productive blocks), Ayacucho 1 being one of the blocks with the lowest expected productivity. The actual proven reserves are, at most, half of the 5,342 million barrels reported and, since there’s not even a plan to exploit that field, we can’t speak of proven reserves. Given the argument in point 1, this might be irrelevant, but if you were still thinking that you’d get your barrel, make sure that the government doesn’t issue more than $2 billion in petros and find out how to stand in line when time to collect comes.

But since Venezuela has one of the biggest oil reserves in the world, couldn’t we assume that the petro is backed by all those reserves, in a certain way?

The actual proven reserves are, at most, half of the 5,342 million barrels reported and, since there’s not even a plan to exploit that field, we can’t speak of proven reserves.

In general terms, yes, just like the bolívar, the PDVSA bonds and the Republic’s bonds. That’s why some investors keep thinking that the recovery value of Venezuelan bonds could be attractive. In that case, the petro would only be equivalent to a fiduciary convertible currency, or a debt instrument that doesn’t generate interests. If we take the petro as a debt instrument, its discount should be greater than a PDVSA bond.

Let’s circle back to the original point: in a country that depends on more than 90% of its oil exports and whose oil output is collapsing, who really wants a petro? Those who want to convert currency in dollars anonymously, without having to go through the international banking system. If the government offers you bolívares or petros, you’d take petros, especially if the equivalent exchange rate is better than that of the bolívar’s black market.

Even though the petro could have some of these advantages, let’s keep in mind that it’s not a legal tender. It hasn’t been approved by the National Assembly and it’s been declared by the U.S. government as a debt instrument subject to financial sanctions.

Just like the infamous SUCRE, the petro will be just another way to carry out opaque transactions in which a few will profit at the expense of all Venezuelans.

Caracas Chronicles is 100% reader-supported. Support independent Venezuelan journalism by making a donation.


  1. There is one more angle to this excellent presentation by Monaldi that could be considered. Maduro has started talking about more than one billion dollars already invested in Petros or already commited by investors. But the records show that real commitements to the Petro have, so far, been scarce.
    Isn’t this Petro deal a wonderful excuse to launder momey from other sources? PDVSA is already under investigation for narco-related money laundering.
    The Petro could be more of this creative financing so dear to chavismo

    • Would that not presuppose something of value on the other end, the Petro certainly does not equate to “something of value”. Unless of course, Maduro et. al. are willing to throw their countrymen under the proverbial “bus”. They have proven themselves quite willing to impose unnecessary suffering for a myriad of reasons. So, I guess money laundering it is.

  2. Of course the Klepto-Petro is another Kleptozuelan Laundry Machine. A tropical Whirlpool of sorts.

    Some of the smarter Mega-Thieves left are working full time now at finding ways to hide their stolen millions. They are despicable crooks, but not so stupid as to watch Ramirez and others pursued by the US or the EU and do nothing. They know time is running out for Chavismo. They are desperate to find new ways besides drug traffic, food traffic, currency traffic, etc to do their money laundering. The Klepto Petro was designed just for that, hide the cash and get ready for plan B: Escape from whatever’s left of Klepto-Cubazuela, with all of their complicit friends and family, multiple names and bank accounts, untraceable.

    Remember, when in doubt, if something seems obscure, complicated in Chavistoide Zombie land, look no further. If it smells like a Guiso, walks like a Guiso, quacks like a Guiso, it’s another Mega-Guiso.

    • The consensus seems to be that the Petro is worthless – you’ll never collect on it. How could it be useful to launder money with no way to trade in and trade out? Unlike the bitcoin, nobody is going to bid this up 5000%, or $3000/bbl.

      • Th petro-investors money is reedemed by the regime in true currency, in dollars. They have the authority to do it. The Petro is a national debt, just like a bond

  3. An excellent explanation by Sr. Monaldi. I would quibble in private about some of the numbers, which I think are conservative. For example, $4 billion per 100k/d production is more likely closer to $6 billion if recovery is considered. Under current regime conditions this will never happen. Chavismo killed the golden goose there is no oil industry recovery without massive changes. The first being control. No sane IOC will invest without ironclad guarantees to recover their investment, meaning majority control of investment, drillong and operational control, transparent sales and revenue distribution, etc. Not only physical control of capital but human capital. During the Aperture IOC’s invested $100 millions just in training of operators, welders, geologists and engineers, etc. Post 2007, as documented here many left. New talent, indoctrinated in Chavismo, were hired and trained, but after +10 years of incompetence, corruption, hunger, etc they have left as well to wait tables in Bogota or Spain. Venezuela’s oil industry is only waiting for the coroner to officially declare it dead.

    So, a Petro in the ground is worth… nothing. Anyone thinking about post-Chavismo should be thinking hard how to recover the country, and I hope oil is not at the top of the list as that will take decade(s).

  4. Call me slow, but if I were to launder money, i’d use something ubiquitous. Something so common it would be hard to trace. That’s why drug lords use cash. (before Law Enforcement got wise about it). If I were a chavista enchufado and wanted to launder my ill gotten enchfuado gains, I’d use bitcoin. (and even then, I’m told there are plenty of people working on how to trace bitcoin transactions) By the very fact that nobody in their right mind would buy a Petro, large transactions with it (or even a a lot of small transactions) would be noticeable. And the minute they attempt to convert that crap into real currency, considering that right now the only exchange that will eventually take it is in Russia. it would be pretty easy to spot who it was. So, I think that Maduro and his boys really believe they’ll be able to use it as an alternative to regular bonds. I agree that they’ve seen the writing on the wall and this is their last attempt at remaining in power. Hopefully it will collapse soon, and the bastards will have no choice but to negotiate their exit. Which, as infuriating as it is, is the best we can hope for now.

    • Imprecator, I think you are right on!!

      So to think like a Guisero kingpin: It could be that they brought in thousands of Antminers that they say are for mining the Klepto, but then they only 10% are given to mine Klepto by all those Chamo Juvinil douchebags (and is pure show). While the other 90% goes to enchufados who are mining Bitcoin.

      Then Maduro goes to Asia to sell the Klepto bond which is paid for in oil futures in the Orinoco…

    • Imprecator, I forgot to add, to be the Guisero kingpin, you also import all those Antminers at 10 bolivares to the dollar.

      I am sure most of you here already seen this video, but you cannot understand the financial dumpster fire and the food and consumer good shortages in Venezeula unless you understand this.

      De Quien es el Guiso? Absolutely hilarious!!!!

  5. Putting 1 and 1 together:

    1a Petro supposedly backed by oil reserves, or oil futures
    1b Maburro is going on a trip to Asia to promote the Petro

    = could this be a way for Asian (Chinese, Vitenmamese, other commies) to buy oil futures in Venezeula at a 60% discount? And thus be able to finance the upcoming fraudulent elections (CLAP, Carnet de Patria bonuses, paying off corrupt military, etc).

    This is above my paygrade. Oil and gas and finance guys know more. But with the Klepto, we always have to be looking out for what the scam really is.

  6. This fucking Maduro is worse than the lowest heroine addict on earth who comes up with any total bullshit excuse to get enough money from anyone to pay for his next fix.

    But what else is new?

  7. “…let’s keep in mind that it’s not a legal tender…”
    Cryptos are not any kind of “currencies”; they are virtual commodities without any associated assets. So, backing the Klepto with Orinoco heavy might be progress. But an asset also caps the value. What’s a barrel of heavy worth after expenses? Like five dollars?

  8. From what I understand, neither the Russkies nor the Chinese are willing to throw any more money at this sinkhole. Not because of US Sanctions, but because of Maduro & Co’s complete mismanagement. I don’t see how the Petro would sweeten the deal for them for anybody else for that matter

  9. For the private presale foreign investors and the foreign investors in the ICO who get in before the last 24,000,000 petros are sold without a discount, the petro does bear “interest” or yield a return. Completely discounting the oil backing, and relying upon the “Acceptance Price of the Petro/Bf” formula, the way to realize the return would be to immediately convert the petros in to bolivars, and then the bolivars back out to the original currency.

    Let’s say a Venezuelan taxpayer owes Bf 1,737750 in taxes (the equivalent of a $60 barrel of oil at a DiCom rate of 28,962.50 Bf/$). That is the demand for Petros in bolivars of which the foreign buyer of discounted petros seeks to avail itself.

    The APP/Bf using the Dicom rate is : 60$/barrel)/Ptr x Ptr/(60$/barrel x 28,962.50 Bf/$) x (1-0)] = 0.000034527 $/Bf. Formula could be further simplified cancelling the Bf terms so that the APP=$, or whatever foreign currency in which oil is quoted. The Dv term is zero because it depends not on the discount received by this foreign buyer, but on the last discount given by the government, which here is assumed to be 0% on the last 24,000,000 petros issued. With the (1-Dv) term equal to 1, it becomes clear the APP/Bf is simply the inverse of the DiCom rate 28,962.5 Bf/$, that is, 0.000034527 $/Bf. “Value” is preserved, then, so long as the Bf/$ remains constant moving between dollars, petros and bolivars. Ultimately, the APP formula is a convoluted way to say that, with a Dv value of 0%, the value of a petro in bolivars to a Venezuelan taxpayer is the Bf/Ptr exchange rate based upon a certain Bf/$ exchange rate.

    Once the Exchange Houses have been set up and bolivars are accepted on the secondary market, and with DiCom rate guaranteed for both the APP—that is, the value of a petro to a Venezuelan taxpayer—and for the foreign investor’s conversion of bolivars to foreign exchange, the stage is set for the foreign buyers to recover their investment and realize their gains immediately.

    At a 30% discount, the foreign investor pays $42 to the regime for one petro to sell to the Venezuelan taxpayer. With a Dv of 0% and a set Dicom rate, the foreign investor sells the petro to a Venezuelan taxpayer for 1,737,750 Bf [60$ x 28,962.50 Bf/$]/Ptr, and converts the bolivars back to dollars at the Dicom rate—1,737,750 Bf x 0.000034527$/Bf= 60$—thus immediately recovering in dollars the investment of $42 and the profit of $18, a nifty 43% return. The Venezuelan taxpayer then extinguishes the tax liability with a single petro.

    The Venezuelan taxpayer buying the petro thus pays for both the $42 principal received by the regime and the $18 interest paid to the foreign investor. Were the government a faithful proxy for Venezuelan society, the principal could be considered a wash. Since it is not, by purchasing the petro to pay taxes, the Venezuelan taxpayer funded the regime to continue corrupt, unrepresentative ways and paid a foreigner interest for the privilege.

    Note that this process would work the same if the APP used for tax payments and the $/Bf exchange rate were based upon truly market rates in the exchange houses; what matters is that the $/Bf rates are the same. Yet, that would entail currency reform generally, and then there really wouldn’t be a need for discounts to foreigners. Since the project is proceeding without currency reforms, it is important to look at how the DiCom rate will be guaranteed to foreign investors.

    Open market intervention in the Exchange Houses to guarantee the DiCom rate for all presale and ICO investors receiving a discount is one option, but doing so for that volume of trades even for a short period of time would be like prohibitively expensive. Even if open market operations were used for a period, there would eventually be a crash to market values after the foreigners realizing discounts cashed themselves out.

    A far more likely scenario would involve dictating the DiCom rate, allowing the resulting excess of demand for dollars to be allocated by non-price mechanisms, such as corruption or side-agreements for favorable access to dollars. Side agreements for access to the DiCom rate may well be the difference between a presale discount (with undisclosed side agreements that never get embodied in the blockchain), and a discount in the ICO. Those buying without a side agreement would need to wait in line forever for the DiCom rate or attempt to realize their discounts by selling the bolivars for which they exchanged their petros at black market rates, thus joining the other suckers who bought the petro without a discount.

    It is worth noting that the APP/Bf formula does no more than make the Venezuelan taxpayer indifferent to paying taxes with petros or bolivars. Paying with bolivars would leave the regime’s new foreign funders exposed to the eventual collapse of the petro towards market exchange rates. Hence, the attempts of the regime to dictate use of the petro, which is likely to reach the point of making scarce goods available only in petros to assure the inside investors their reward, so they are willing to do it all over again with the petro gold.

    None of this makes the Petro viable in the long term, but it does make the case for how favored investors, ones in on the scam, could make large short-term gains providing the regime with foreign exchange, all to be paid for by Venezuelans converting bolivars to Petros.

    • “At a 30% discount, the foreign investor pays $42 to the regime for one petro to sell to the Venezuelan taxpayer. With a Dv of 0% and a set Dicom rate, the foreign investor sells the petro to a Venezuelan taxpayer for 1,737,750 Bf [60$ x 28,962.50 Bf/$]/Ptr, and converts the bolivars back to dollars at the Dicom rate—1,737,750 Bf x 0.000034527$/Bf= 60$—thus immediately recovering in dollars the investment of $42 and the profit of $18, a nifty 43% return. The Venezuelan taxpayer then extinguishes the tax liability with a single petro.”

      “…all to be paid for by Venezuelans converting bolivars to Petros.”

      From the perspective of the taxpayer, VEF1,737,750 value was received as reduction of tax liability for a cost of VEF1,737,750. The future generations of citizens will ultimately pay via lost oil assets which their government sold off at a steep discount (30% will not be attractive enough).

      • I assume that either that 1) the State Backing APP formula is the only backing that will be included in the blockchain contract or 2) that any purchase-sale contract embedded is essentially worthless as a pledge in violation of article 12 of the constitution or for the reasons Mr. Monaldi states. Even then, plugged-in foreign investors can immediately realize their profits by selling petros for bolivars and then bolivars for dollars.

        If a Venezuelan pays taxes directly in bolivars, not moving through petros, the foreign investor does not realize the gain or recover the principal. If the Venezuelan buys the petro, he cashes out the foreign investor’s investment and profit. Who bears the ultimate burden of allowing a taxpayer to pay $60 in taxes with a petro for which the government received only $42 is a good question, but the foreign investor does care because he is cashed out at $60, if the taxpayer buys his petro.

        The later collapse of the overall petro market because there is no oil backing or the “purchase-sale” contract is illegal or worthless is irrelevant to the nature of the scheme to reap immediate, massive profits for supplying foreign exchange, realized through selling petros to Venezuelan taxpayers.

        My ultimate point is that expecting the petro to fail at the outset because it lacks oil backing in an economic sense may misunderstand the nature of the fraud.

        • If that’s their angle, they’d have to move VERY fast. The latest day to declare and pay the income taxes is on March 31th. The Petro goes on sale to the general public on the 20th. So far, there isn’t a single exchange running and the purported Petro “Wallet” is not available. Additionally, I think for that that scheme to work. Maduro would have to decree that SENIAT would ONLY accept taxes in Petros. Something he hasn’t done. Hell, even if he’s hoping that business pay the proceedings of the sales tax in petros, the logistics will be VERY messy given the very tight time constraints they have. SInce, as you said, this is a very short term guiso. And we Venezuelans are not known for being good at logistics, even at our best.

    • This comment needs to be

      1: Translated into Spanish, and at a level that a large percentage of Venezuelans can understand at least 80% of it.

      2: Be disseminated as far and wide as possible.

      Thank you Mr. Sweeney for the best explanation I have seen so far as to how this Petro scam is likely to work in real life.

        • They don’t need complicated mechanisms to steal dollars. They control the central bank. Nobody is going to give them dollars for petros. Clayton’s comment does not make sense.

          • They do prefer to have mechanisms with the least transparency possible. This is one mechanism that provides that.

            If this gets off the ground it can provide plenty of cover, and yet another bite of the Apple.

            The final irony is that the money they’ll use to make a quick 43% profit was stolen from us in the first place.

      • I’m just trying to make sense of the “State Backing” set forth in the White Paper, which, unlike decree 3,196, makes no reference to any “contrato compra-venta” as a form of backing. If I have misunderstood the White Paper, please point out what I misunderstood. If I understood the White Paper, and the White Paper makes no sense, that is another, quite possible, scenario.

        Regarding the Ptr/Bf exchange rate in the Exchange Houses, the petro is necessarily related to the dollar through the price of oil (even if oil is quoted in a different foreign currency) through the process of arbitrage. The Bf term must equate to the price of oil in dollars through *some* Bf/$ exchange rate. The Exchange Houses are a new Venezuelan currency exchange, in addition to the DICOM system, and arbitrage must equilibrate the two systems, either through equal prices or unequal prices with distorting mechanisms of non-price allocation (enchufadismo).

        The Bf/$ exchange rate implied in any Ptr/Bf rate set through the exchange rate logically should fall somewhere at or between the DICOM rate and the black market rate. I chose the DICOM rate because using the the black market rate either be the end of the DICOM rate or would subject it to immense “arbitrage pressure” and distortions.

        Again, so long as the implied Bf/$ rate in the APP/Bf formula’s Ptr/Bf term is the same as the rate available to foreign investors to cash out bolivars, my analysis holds true. If the former is DICOM and the later is the black market rate, every foreign investor would lose money, so the regime must be at least pretending, if not promising, that the rates are the same.

  10. Anyone sleazy enough to purchase Klepto-Cubazuela’s petros deserves to get burned. And burned real good. The Klepto-Petro ain’t no “National debt” as our esteemed Gustavo mistakenly wrote here above. If my buddy Rex finally nails down Delcy la Fea from the unconstitutional, illegal Asamblea Prostituyente, after Chavismo falls, the Interim Muddy Gov’t and legally elected AN is not obliged to repay the bogus KleptoPetros to anyone, nationals or foreign.

    I hope a lot of sleazy crooks trying to make a quick buck at the people’s expense get BURNED real good. Not just the Chavista Thugs laundering their millions, no. That includes foreign ‘investors’, vultures and hyenas, unscrupulous financial mercenaries. Todo el que compre un Clepto Chavistoide, QUE SE JODA.

  11. Now this, from TeleSewer….

    ‘Positive’: Venezuela May Limit Number of Petros Traded by Exchanges
    Published 27 February 2018

    The government is authorized to modify the number of Petros each exchange is allowed to handle after the first 90 days of the digital coin’s launch.

    Following the launch of its oil-backed cryptocurrency, the Petro, the Venezuelan government has released a 10-page manual detailing that as few as eight exhcanges may operate domestically in the market regulation of the new digital coin. The document outlines the rules and regulations which all local crypto exchanges must follow.

    It suggests, according to CoinDesk tech news outlet, that a cap on the amount of Petros each exchange has will be imposed by the Superintendence of Cryptocurrencies and Related Activities from the start of sale. The superintendence, as well as Venezuela’s Blockchain Observatory, are responsible for regulating the digital coin.

    The government is authorized to modify the number of Petros each exchange is allowed to handle after the first 90 days of the digital coin’s launch.

    Daniel Arraez of BlinkTrade, a company that offers open-source software for bitcoin exchanges, is applying for a license to sell and trade Petros. Having launched SurBitcoin in Venezuela in 2014, he said the regulation change may very well present a huge opportunity for the market, but only if the Venezuelan people are confident that the exchanges operate legitimately and transparently.

    “We’re already in conversations to operate as soon as possible if we feel the market is going to be safe and we can get operational guarantees to safeguard our customers’ funds and safety,” said Arraez.

    The launch of the Petro was announced in December. Venezuelan President Nicolas Maduro has said the goal of the cryptocurrency is to combat sanctions and the “economic war” waged by the U.S. government and its junior partners against his country and advancing “on issues of monetary sovereignty, to make financial transactions and overcome the financial blockade.”

    Democratic U.S. Senator Bob Menendez and his Republican counterpart, Marco Rubio, have co-authored a letter denouncing the Petro, and requesting that the Treasury Department closely monitor its progress. The lawmakers also made suggestions on measures the agency can take to undermine the success of the digital currency.

    Shouldn’t the prospectus come out BEFORE you decide to change the rules?

  12. I think it is just an awfully wrong Telesur article. The underlying Coindesk article and the Manual for Exchange Houses speak of limiting Exchange Houses, not transactions in petros. The will be 8 Exchange Houses initially per the Manual, with the number being adjustable after 90 days.

    Even if they are subject to gross manipulation, the transactions must go through to establish the Ptr/Bf exchange rate to give meaning to the “State Backing” in the form of the “Acceptance Price of Petro/Bf” that supposedly shows that all value is preserved.

  13. Thanks Clayton, great insight! Second notion of translating your comments into Spanish. Good job for Naky. We have to be like bloodhounds sniffing out the scam before they are able to pull it off.

  14. I thought that the constitution stated that the oil reserves belonged to the state and were ‘inalienables e imprescriptibles’ meaning that they cant be sold or disposed of or mortgaged until they are extracted at which time they can be sold via Pdvsa exclusively …..have they already changed the constitution ??

  15. Well If im counting on the backing of a flagratly unconstitutional guarantee to assuage my fears of buying petros , then Im pretty stupid because if the guarantee is unconstitutional then its not worth anything and if the party offering the petro ignores the constitution then its promises arent worth anything so in either case you are talking of a backing which is totally fictitious…!!

  16. Looking at the process I suggested in my original post in the aggregate may provide a reality check on whether, and under what conditions, that process is viable.

    First, let’s try to deduce a rational structure of discounts in the offering of Petros. Although the documentation is a mess (the day-of-release English and Spanish versions were inconsistent on this structure), the best estimate is that the entire offering is divided in to 13 tranches. Tranche 1 contains 3,400,000 petros, tranches 2-12 contains 5,000,000 petros each, and tranche 13 contains 24,000,000 petros. White Paper, “Incentives” section (English ver.).

    The White Papers are consistent in providing that discounts decline from the greatest discount for tranche 1. Versions of the White Paper are inconsistent regarding the discounts to be applied. A purportedly leaked early Spanish version suggested discounts up to 60%, the day-of-release English version said the discounts started at 30%, and the day-of-release Spanish version did not specify the initial discount. This discussion has assumed that 30% is the greatest discount offered because, well, it was the last actual number offered.

    Although not stated anywhere, it will be presumed that the discounts decline equally pursuant to the formula Dx+1=Dx-(D_initial/12), meaning that tranche 13 is sold at face value. (The documentation is inconsistent as to whether petros will ever be sold at face value. The “Incentives” section says that tranche 13 “will have no discount” and the “State Backing” section says that the “Dv” term “is equivalent to the current discount rate at which the State sells Petro, which will be at least 10%.” Having discounts decline to zero does not materially affect the argument, so that is assumed for its simpler math).

    Assuming $60/barrel for the price of oil, and an initial discount of 30%, the results of a fully subscribed offering would be as follows:

    The presale offering of 38,400,000 petros would consist of tranches 1-8. The presale petros would a face value of $2,304,000,000.00, and would be sold for $1,822,800,000.00, with a total discount of $481,200,000.00 for an average discount of 20.885%. The discount per tranche ranges from 30% for tranche 1 to 12.5% for tranche 8.

    The ICO offering with discounts of 20,000,000 petros would consist of tranches 9-12. They would have a face value of $1,200,000,00, and would be sold for $1,125,000,000.00, with a total discount of $75,000,000.00 for an average discount of 6.25%. The discount per tranche ranges from 10% for tranche 9 to 2.5% for tranche 12.

    Tranche 13, consisting of 24,000,000 petros would be sold at a face value of $1,440,000,000.00, without any discount.

    Overall, 82,400,000 petros with a face value of $4,944,000,000.00 would be sold for $4,387,800,000.00, with a total discount of $556,200,000.00 for an average discount of 11.25%.

    Relevant to this discussion, only the presale petros and the discounted ICO petros carry an unrealized profit. Combined, 58,400,000 discounted petros with a face value of $3,504,000,000.00 would be sold for $2,947,800,000.00 for a total discount of $556,200,000.00 for an average discount of 15.873% across discounted tranches.

    Let’s plug those number into my analysis to determine what it would look like on an aggregate basis if this strategy is employed.

    Assume the DICOM exchange rate of 28,962.50 Bf/$ is the implied exchange rate used in the managed Ptr/Bf exchange rate to calculate the Acceptance Price of Petros/BF, which determines the value of petros to Venezuelan taxpayers, as well as the exchange rate at which foreign investors are allowed to cash out bolivars into dollars. Looking only at the discounted tranches, the face value of tranches 1-12, $3.504 billion, represents the demand for petros from Venezuelan taxpayers when it is converted into bolivars, Bf 101.4846 trillion.

    The regime creates its petros, embodying it APP/Bf formula in the blockchain, and sells them in the fully subscribed sale of tranches 1-13, described above.

    The foreign investors who bought the discounted petros in tranches 1-12 avail themselves of the Venezuelan taxpayer demand by selling 58,400,000 petros at essentially face value to Venezuelan taxpayers at 1,737,500 Bf/Ptr (the price of a dollar-denominated barrel of oil at the DICOM rate of 28,962.50 Bf/$). The Venezuelan taxpayers discharge Bf 101.4846 trillion in tax liabilities. The regime collects 58,400,000 petros, which have twice traded at the value of a barrel of oil: once when the foreign investors sold them, and once when the taxes were paid.

    The foreign investors next cash out of bolivars back into dollars at the same rate embodied in the APP/Bf formula, receiving the face value of the original petros in dollars in the amount of $3,504 billion, thus actualizing the $0.5562 billion in profit. The foreign exchange market, in this case likely the regime itself in one form or the other, receives the Bf 101.4846 trillion.

    The Venezuelan taxpayer allows the foreign investor to recover the principal and realize the profit in bolivars. To this point in the analysis, which is focused solely on the discounted petros, the regime has not raised any net foreign currency. Indeed, in allowing the foreign investors to cash out bolivars at the same Bf/$ that is implied in the APP/Bf value formula, the government has lost foreign exchange in precisely in the amount of the aggregate of the discounts—$0.5562 billion dollars.

    Madness, you say? Perhaps not. The regime has in its possession the 58,400,000 petros that have now twice traded at the equivalent of value of a barrel of oil, $60, and it can attempt to sell them on the foreign exchange market relying on the past trades for valuation purposes. If successful, the regime can sell them for $3.504 billion in foreign exchange. If the government sells the petros it received in taxes on the foreign exchange market, the net gain in the overall scheme from the once-discounted petros, now sold again by the regime for face value, is $2.9478 billion.

    The 24,000,000 petros from tranche 13 are a foreign exchange wash if the foreign investors resell the petros for bolivars and cashes out the bolivars to dollars. Indeed, if the government can sell them in the ICO, there appears to be little reason for the investors to go through this process. The regime would have $1.44 billion representing petros just sitting, and perhaps trading, in the outside world. Combined with resale of the petros the government received in taxes, the next gain in foreign exchange would be $4.3878 billion dollars.

    So, are any of these numbers so out-of-whack that this cannot possibly be the intended scheme or succeed if it is intended? I certainly can’t say definitively, but here are some thoughts.

    The first issue to jump out—and a key one at that—is whether there is an aggregate tax liability of Bf 101.4846 trillion to constitute domestic demand for petros. Subject to some qualifications, the number is not wholly out-of-whack.

    First, let’s look at that number in terms of the October 2016 Budget for 2017, first in dollars because it gets weird with bolivars. It has been reported that the total budget was for $8.5 billion dollars (Bf 8.5 trillion converted at a then black market rate of about 1000 Bf/$). In a major reform due to falling oil income, 83% of the 2017 budget, or $7 billion, was to be paid for with tax revenue, which is about twice the required demand of $3.504 billion. On the one hand, perhaps that tax reform did not take, taxes are not paid, the collapsing economy resulted in declines in collectible taxes, etc. On the other hand, perhaps I am missing decentralized state and municipal taxes for which the petro is now acceptable. But a tax-driven demand for petros, at least calculated in dollars seems to be of the right order of magnitude.

    Second, in bolivars today, an $8.5 billion budget would be Bf 246.2 trillion at the DICOM rate, and Bf 1.85 quadrillion at the black market rate, putting the tax liability of Bf 101.4846 trillion in the realm of possibility, at least going forward. As for actual, current outstanding tax liability, it very difficult make even a guess. Neither government budgets nor already incurred tax liabilities are indexed to inflation. For example, a Bf 32 tax on a profit of Bf 100 in January 2017 will still be a Bf 32 tax in December, despite a year of hyper-inflation. For actual tax liability, one can not simply adjust budgeted or incurred taxes across a year.

    A tax liability of Bf 101.4846 trillion would represent 79.9% of the Bf 127.1 trillion M2 measure of the money supply for December 2017. Knowing only that the velocity of money is also high in hyper-inflation, I cannot say whether is a fatal misalignment. I have no idea what an appropriate ratio of aggregate tax liabilities to money supply would be, if there is such a thing.

    The permanent or temporary foreign exchange loss of $0.5562 billion is not out of line with the $9.333 billion in foreign reserves reported for December 2017.

    Redoing the exercise using aggregate numbers does not clearly refute this theory as a possible way the petro is intended to work, so far as I am able to tell. Feel free to point out if I’ve misread the White Papers or missed some flaw in what the White Paper contends will happen.

      • In the yet to be established Exchange Houses. It’s “only” $3.5 billion at a rate of 28,962.50 VEF/$ (~$430 million at the black market rate). If the Exchange Houses cannot handle such volumes, the petro under any interpretation would fail for jsut that reason.

  17. CASJ—interesting take, please continue. I do have a quibble, 5% of claimed foreign reserves is not insignificant. Why would the regime be willing to lose that amount when they have failed to pay bond obligations of only 1 to 2 percent of those same reserves? How many believe reserves to remain at that amount?

  18. I don’t think the regime is looking to lose foreign reserves in the overall transaction. They do have the reserves to give them the flexibility to cash out preferred investors in dollars as part of the process to make the petros domestically traded twice at the equivalent of $60 appear to have that value on the international market. If they resell the petros collected domestically as taxes for dollars, the net foreign exchange position, +$4.3878 billion, is the same as if no one sold petros for bolivars in the first place. The difference in my proposed scenario is that in the short term, the domestic transactions “benchmark” the price at a barrel of oil AND cashes out the preferred investors willing to fund the regime. Once the regime resells the petros collected in taxes for dollars, a collapse of the international petro market affects no one about whom the regime cares.

    • I’m still trying to understand how they’re going to get Juan Bimba to buy petros. According to the Seniat Figures you can find here: about 20% of the Tax collected comes from Income Tax. Which could help their short term guiso, because the bulk of the payments are made during March. However, the deadline to pay it is March 31st. HOWEVER, the Petro doesn’t go public until the 20th and, again, no word on when their exchanges are going to be online. Even now, it’s not clear if their blockchain is based on Ethereum or Nem. I still suspect that if this was their angle, they’d have to demand payment EXCLUSIVELY in Petros (which hasn’t happened either) Also, considering how widespread is individual Tax evasion around here (not to mention that the vax majority of people here don’t make enough to pay income tax) I presume they could collect it from private businesses, HOWEVER they’re already paying their taxes (the usual drop in the value of the Dolar Today Exchange Rate that occurs in March has already started). Since the the bulk of the taxes collected by Seniat is Sales Tax (IVA) Then I guess they could targeting that. Since I presume that most organizations pay their taxes through Banks, I presume that what they’ll do is have Seniat demand that aggregated IVA payments be done in Petros. This would allow the number of clients to be small. HOWEVER, that would also require that the Banks develop the necessary software infrastructure to handle the automation of those payments. This could be a major Bottleneck, particularly if the Banks don’t know what needs to be done. Don’t think so? It took MONTHS for the banks to make the necessary changes for ATMs to handle the higher denomination bills, and THEY’RE STILL NOT DONE. So if this is a quick one-or-two shot to launder money at the expense of taxpayers I think they’ll run into major logistical snags. And, as I said before. We as a culture are particularly bad at logistics

      • I know virtually nothing of Venezuelan taxation, so I appreciate your input. I’m confident those are all valid points.

        Since it is very clear on the most basic level that a legitimately oil-backed coin would sell at a steep discount from the price of oil without immediate convertibility, I’m trying to figure out what the regime is trying to sell at the price of oil. It appears to me that they are trying to PEG the petro’s price to the price of oil, rather than back the petro with oil. Under this theory, they could peg the price to the price of tea in China, or any other commodity, for all it really matters. The means of doing the pegging and giving the petro value, it appears, is based upon the demand for currency to pay taxes and fees.

        If that is what they are selling, they could fail to sell it for many practical reasons relating to taxes, including the issues of timing, competence, structure of taxes, etc., etc. that you have raised. Or because the overall magnitude of the demand is inviable.

        To these issues, I would also add the critical issue of the effects of the general management of the economy on the demand for currency to pay taxes and fees. Taxes owed, and owed taxes collected, depend upon the regime’s economic reliability, both on a macro level (exchange rates, reserves, inflation, etc.) and a micro level (price controls, forced below cost sales, expropriations, etc.). The demand for petros to pay taxes rises and falls with economic output, which is collapsing now and few, if any, have confidence in the regime’s willingness or ability to stop the collapse.

        My theory of what they are trying to sell to foreign investors–a pegged digital coin supported by the demand for currency to pay taxes–may well be theoretically sound in a stable economic and political environment, and they may fail to sell it because they are the Maduro regime from Venezuela.

        Thanks for your input.

        • If you ask me, I think those nutjobs actually believe their own press and think that there’s plenty of people outside the country that will throw money at us if we weren’t subject to sanctions. I’ve worked my whole life in the private sector and have seen plenty of IT projects crash and burn because the leadership refused to to do what had to be done out of miserly or simple inertia. I think someone sold Maduro this cockamamie Petro business and he convinced himself that it’s going to work. It’s also interesting to note that the “Petro Gold was supposed to come out this week, and so far: crickets

  19. […] “In a country that depends on more than 90 percent of its oil exports and whose oil output is collapsing, who really wants a petro?” Francisco Monaldi, a professor of Latin American energy policy at Rice University, wrote in a recent blog post. […]


Please enter your comment!
Please enter your name here