Tuesday, May 17, 2005

The State-Run Messes In Venezuela And Mexico


Am I cynical about the South American republics' newfound nationalism when it comes to their oil industries? Of course; no government willingly cedes power, and all of them sense when the other guy is behind the eight ball. But all is not well in the Bolivarian Republic of Venezuela, no sir; Bloomberg News reports that country's oil production falls 200,000 barrels per day below its official OPEC quota, something president Hugo Chavez has denied for some time. As pointed out earlier in this space, Petroleos de Venezuela has had charges of favoritism, corruption, and intimidation leveled at high-ranking executives, all of which likely factor in. A crippling strike in December 2002 and January 2003 "aimed at ousting Chavez" failed, and the company then hired workers loyal to Chavez.
``There's a significant lack of transparency in Petroleos de Venezuela,'' said Jason Todd, an analyst with Fitch Inc., a credit ratings company in New York. He pegs the country's oil output at no higher than 2.5 million barrels. ``We certainly have concerns about Petroleos de Venezuela's production.''

The company has yet to release its 2003 and 2004 annual reports. Several deadlines to deliver the results to the U.S. Securities and Exchange Commission in Washington have been missed. The company is subject to U.S. regulators because its refining unit, Houston-based Citgo Petroleum Corp., issued debt in the U.S.

Blogger News Network has much, much more on this, citing an Agence France-Presse report claiming the drop is as much as 800,000 barrels per day. As well, they mention this AP story indicating that Chavez is getting testy and wants his "back taxes" now, thank you very much, and with the following wrinkle:
According to Venezuelan law, oil companies must pay [a] 30 percent royalty, but companies producing heavy crude - which is expensive to produce - were allowed to pay 1 percent royalty until last year, when the government raised it to 16 percent.
Estimated back taxes amount to $2 billion on companies such as ChevronTexaco, British Petroleum, Total, Petrobras, Repsol YPF, Royal Dutch Shell, and China National Petroleum Corp.

The sudden interest in "back taxes", it turns out, may just be a bold move masking the precarious financial situation of a state-run operation hurtling toward bankruptcy, according to the blogger running Venezuela News And Views. He points to an editorial in the English-language Venezuela Today by Gustavo Coronel, who fires a bitter recrimination against Chavez. Chavez's chief spiritual advisor, Jesuit priest Jesús Gazo, has taken up the klaxon against corruption now rampant in the country, saying "I am convinced that the highest levels of the government are corrupt, including ministers and National Assembly members. If nothing is done this can end the revolution." It is a corruption, we presume, that infects Petroleos de Venezuela. Firing large numbers of maintenance workers (replacing them with only a quarter to a third their former numbers), combined with admitted mismanagement could accelerate the 2005 Q4 supply crunch I mentioned earlier, which itself may possibly manifest Geoff Styles' proposed structural production peak.

No consideration of the situation in Venezuela would be complete without a mention of a wonderful blog I happened on recently, The Devil's Excrement, hosted at Salon.com. In particular, I would like to draw your attention to this great piece noting the lack of progress on the alleged social reforms Hugo Chavez trumpeted when his name was on the ballot, as well as a deeper analysis of production overreporting.

Update: I should also like to add this Stratfor letter republished in the admittedly biased vcrisis.com. Stratfor, known for their extensive high-quality for-fee analysis, make the all-too-credible observation that "many individuals associated with Chavez and the Bolivarian Revolution could be stealing", and that Chavez and his pals may have looted Petroleos de Venezuela (or PDVSA as it is commonly abbreviated) to the tune of $2.39 billion dollars over the last year -- "if the government's official production figures are truthful." That might actually be a conservative estimate, as it assumes a $39.33/bbl oil price. Indeed, a descrepancy of $4.02 billion appeared when PDVSA only deposited $4.08 billion instead of the $6.43 billion Energy and Mines Minister Rafael Ramirez should have deposited. Stratfor, for their part, believes production underreporting caused the differnce, or the bulk of it, anyway.

Forecasting "collapsing crude oil production will continue for the foreseeable future", Stratfor also believes that the campaign of intimidation against foreign oil companies is backfiring, as even Brazilians, Spaniards, and Chinese, the designated "special strategic partners of his Bolivarian Revolution" are being hit with "back taxes". A $40 billion expansion plan "only exists on paper", and foreign oil companies report impasse after impasse when trying to negotiate with the government; one company reports that "[n]o one in PDVSA or the Energy Ministry seems to have any negotiating capabilities."


Undercapitalization and mismanagement are two features of most government-run oil operations, and it appears Mexico's Pemex is no exception. Reuters today documents Pemex's struggles against the Mexican government's unwillingness to afford foreign investment. With its big field, Cantarell, expected to go into decline within two years, Pemex had better find more oil and gas, and soon, if only for domestic consumption. Trouble is, what's left in the country is technically difficult to get to (e.g., deepwater Gulf of Mexico) and requires tons of cash -- cash that Pemex, a state agency bled as a cash cow, doesn't have. So, Mexico struggles to find a politically acceptable way to enter some kind of joint exploration agreement without having to cede a percentage of the profits. The situation gets so bad that Pemex openly hints that it may go abroad rather than trying to develop domestic reserves.
In somewhat related news, Mexico's proximity to the U.S., and, let's face it, laxer safety standards and, um, more pliable government has made it a target for the construction of LNG terminals, presumably to serve U.S. natural gas needs. However, Mexico is having second thoughts about providing LNG terminals that "[leave Mexico] with the disadvantages and none of the advantages".