Bloomberg News

Chavez Misses $10 Billion a Month Curbing Oil Spending: Energy

February 21, 2012

Feb. 15 (Bloomberg) -- Venezuelan President Hugo Chavez’s reliance on state oil company Petroleos de Venezuela SA to finance government budgets and social spending is forcing the company to delay investments and lose billions of dollars of export revenue.

PDVSA, as the Caracas-based company is called, planned to produce 5.8 million barrels a day this year, according to a 2007 bond prospectus. Since then, output has remained little changed at around 2.5 million barrels a day, according to the International Energy Agency. The 3.3 million barrel-a-day gap between the five-year business plan and actual result costs the company around $10 billion a month in unrealized revenue at current oil prices.

“There has been a choice here to maximize the short-run cash contribution to the central government and that has had long-run costs,” said New York-based Bank of America Corp. economist Francisco Rodriguez. “If they had taken a longer run perspective to sacrifice immediate cash flow to increase production, right now they would have a much higher stream of revenue.”

PDVSA, which reported that sales rose to a record $128 billion in 2011, supplies the Venezuelan government with 95 percent of export revenue. Even as the country’s export oil basket price reached the highest yet, the company has had to turn to the central bank and state-run banks for short-term loans, ask the government to review shipments to China to recover losses and borrow in U.S. dollars at interest rates above 10 percent.

Dig Deeper

Chavez, 57, is about to dip deeper into his country’s oil fortune as he prepares a bid for re-election to a third consecutive six-year term when Venezuela holds presidential elections later this year.

Chavez has pushed the state oil company to channel $53 billion into social development programs that include importing food, constructing houses and financing health care clinics from 2006 to 2010, compared with $1 billion for exploration activities, according to financial statements from PDVSA.

PDVSA, which says it is investing around $15 billion a year, is falling behind other Latin American oil producers including Petroleo Brasileiro SA, Petroleos Mexicanos and Ecopetrol SA. Mexico’s Pemex, for instance, is investing $18 billion to $20 billion a year to refurbish and expand its infrastructure, according to Juan Cruz, an emerging-market corporate debt analyst at Barclays Plc in New York.

“For companies that are trying to increase their resource and production, companies the size of Ecopetrol, which are significantly smaller, are spending about $10 billion a year,” said Cruz. “A company like Petrobras, which has a very challenging program, they’re spending about $45 billion.”

Chinese Burden

While Venezuela has received more than $30 billion of loans from China for infrastructure projects, the repayment of financing agreements falls on the shoulders of PDVSA, which sends the world’s second-largest economy about 400,000 barrels a day without directly receiving any revenue.

The financial burden of exporting one-sixth of oil production to China without receiving cash prompted Oil Minister Rafael Ramirez to send an internal memo to the government to seek a change to the repayment mechanism.

“The 419,000 barrels of oil a day sent to China in the first quarter of 2011 represent a very heavy financial burden for PDVSA and requires a structural solution,” the minister said in a memo sent to Chavez in April of last year that was released by opposition lawmaker Miguel Angel Rodriguez.

China Shipments

Ramirez said in November that Venezuela’s government had modified the structure for shipments to China and that PDVSA would receive around $7 billion for its deliveries there in 2011. The minister, also PDVSA’s president, said on Feb. 9 that China paid Venezuela higher prices than the U.S. and that PDVSA wanted to double oil exports to the Asian country by 2015.

Due to the strains on PDVSA’s finances by diverting cash to social projects, PDVSA has had to resort to heavy borrowing. The company vowed in 2006 to raise 30 percent of the investment plan through loans and finance 70 percent from its own resources. Since then, PDVSA’s long-term borrowing has surged to $34.9 billion through December from $2.5 billion in 2006, including the 2007 sale of $7.5 billion of dollar-denominated bonds, a record for a Latin America corporate issuance at the time.

“When a company like Petrobras takes on new debt, everyone is happy,” Ramirez said on Feb. 6. “But they criticize us when we do.”

Perceived Risk

PDVSA pays higher borrowing costs than regional peers because of the country’s perceived risk. Its bonds due in 2017 yield more than 12.5 percent, compared with between 3 percent and 4 percent for similar maturity securities denominated in U.S. dollars and sold by Petrobras, Ecopetrol and Pemex.

“PDVSA has not gone bankrupt yet because they are taking on debt,” said Ricardo Villasmil, a professor at Venezuela’s Catholic University and an economic adviser to opposition political candidates. “Delaying planned investments is also a form of taking on debt, because they are going to have to pay more in the future.”

Net income at the state oil company fell to $3.16 billion in 2010 from a record $9.4 billion in 2008 amid record oil prices, and down from $6.5 billion in 2005. The company hasn’t published financial reports from 2011 on its website.

“Both private sector analysts and public sector officials expect 2012 production to be flat relative to 2011 at worst,” Credit Suisse analysts Casey Reckman and Igor Arsenin wrote in a Feb. 10 report. “PDVSA compensates for the squeeze on its cash flow by issuing debt, running arrears with suppliers and postponing dividend payments to private partners.”

New Threats

PDVSA, which wants to increase production by 500,000 barrels a day in 2012 from new output in the Orinoco belt, can only send heavy crude typical of the region to specialized refineries and may not be able to move new barrels into the market without cutting prices, said Carlos Bellorin, an analyst with IHS in London.

Venezuela, which in November saw its exports to the U.S. fall to a nine-year low of 764,000 barrels a day according to the U.S. Energy Information Administration, is already starting to lose market share at refineries along the U.S. Gulf Coast that were originally built to process Venezuelan crude. The South American country exported as much as 1.9 million barrels a day of crude to the U.S. in May 1997.

Houston Contract

Houston Refining LP and Valero Energy Corp., which together imported 34 percent of the 906,000 barrels of oil a day delivered to the continental U.S. from Venezuela in the first eight months of 2011, want to diversify suppliers and may be able to replace Venezuelan crude with Canadian heavy barrels now planned to increase supplies. Houston Refining has not renewed a long-term contract with PDVSA that expired in July, company spokesman David Harpole said in a phone interview from Houston.

Oil minister Ramirez, meanwhile, said in January that the Venezuelan government wasn’t concerned about the proposed pipelines that could transport competing Canadian crude to its traditional markets and reduce its access to its main source of export dollars.

“Oil is a scare commodity, and there will always be demand, especially from China,” he said. “There are a lot of buyers for crude from the Orinoco belt. It sells like hot bread.”

Oil for March delivery rose 61 cents, or 0.6 percent, to $101.35 a barrel at 10:31 a.m. on the New York Mercantile Exchange.

--With assistance from Corina Pons in Caracas. Editor: Rick Schine, Dale Crofts

To contact the reporters on this story: Nathan Crooks in Caracas at ncrooks@bloomberg.net; Daniel Cancel in Caracas at dcancel@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net


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