Economics &
Finance
International reserves continue
decreasing.
Venezuela's international reserves have continued to
decrease and hit U$D 20.5 billion this week, a 31% drop year-to-date, and their
lowest level ever since August 20, 2004. The reduction in reserves is due to
lackluster gold prices, increasing debt service cost, more imports, and lower
oil revenues –caused by dwindling oil output and agreements under which
Venezuela sells oil at discount price to other countries. (El Universal, 12-11-2013; http://www.eluniversal.com/economia/131211/downtrend-in-venezuelas-international-reserves-exacerbates)
ECLAC estimates 1% economic growth
in Venezuela in 2014.
Nearly 40% of firms acquiring FOREX
in 2013 were dummy corporations.
Venezuela's food inflation is the
highest in Latin America.
Venezuelan authorities have established controls on prices for a large
variety of products, set up a number of agro-industrial corporations, and control
vast agricultural areas. However, according to the UN Food and Agriculture
Organization (FAO) there is huge gap between goals and results. In October 2012
- October 2013, the price of food and non-alcoholic beverages was 72.1% in
Venezuela, while the increase rise in Latin America and the Caribbean was
merely 9.6%. (El Universal, 12-12-2013; http://www.eluniversal.com/economia/131212/venezuelas-food-inflation-is-the-highest-in-latin-america)
Oil
& Energy
Attached is a SPECIAL REPORT from Latin Business
Chronicle: China, Russia, India, and the Venezuelan Petroleum Industry. By Dr.
Evan Ellis, Associate Professor with the William J. Perry Center for
Hemispheric Defense Studies in Washington DC.
This week PDVSA and REPSOL could sign an agreement through which the Spanish oil
company will invest U$D 1.2 billion in the PETROQUIRIQUIRE joint venture. The
agreement should have been signed last week. REPSOL had plans to close this
year with a U$D 470 million net investment in Venezuela. (Veneconomy, 12-10-2013;
http://www.veneconomy.com/site/index.asp?ids=44&idt=37467&idc=4)
Venezuelan government weighs
gasoline increase.
CAF grants U$D 300 million loan to
Venezuela's electricity corporation.
Venezuela's Electric Power Corporation (CORPOELEC) and CAF - the Andean Development
Bank signed a U$D 300 million loan to partially finance the consolidation of
power transmission grids in west and east Venezuela.
The funds will be disbursed as follows: U$D 122 million this year; U$D 100
million in 2014; and U$D 78 million in 2015. (El Universal, 12-11-2013; http://www.eluniversal.com/economia/131211/caf-grants-usd-300-million-loan-to-venezuelas-electricity-corporation)
Commodities
SIDOR works begin street protests.
SIDOR workers who have been striking for 27 days over wage calculations,
and benefits have taken their protests to the streets of Puerto Ordaz in
Bolivar state (Eastern Venezuela). They denied having starting up operations,
saying "they can’t continue to lie
to President Maduro, SIDOR has not started up again, we have stopped working."
More in Spanish: (El Universal, http://www.eluniversal.com/economia/131213/trabajadores-de-sidor-tomaron-las-calles-para-protestar)
International
Trade
Smuggling from Venezuela to Colombia
exceeds formal trade.
Authorities at San Antonio (Táchira state) Main Customs in western Venezuela
told the Venezuelan-Colombian Economic Integration Chamber (CAVECOL) that
"volumes and amounts involved in
smuggling" on the border "may
outnumber those of formal trade." According to CAVECOL's figures,
Venezuela-Colombia bilateral trade in January-July 2013 dropped by 9% to U$D
1.5 billion, under U$D 1.6 billion the same period in 2012. (El Universal, 12-12-2013; http://www.eluniversal.com/economia/131212/smuggling-from-venezuela-to-colombia-exceeds-formal-trade)
Logistics
& Transport
IATA concerned over Venezuela's U$D
2.6 billion debt with airlines.
Tony Tayler, Director General of the International Air Transport
Association (IATA) expressed the group's concern that the Venezuelan government
has "continued to block repatriation
of U$D 2.6 billion in cash due to the airline industry". More in
Spanish: (El Universal, http://www.eluniversal.com/economia/131213/lamentan-rezago-de-2600-millones-a-empresas-aereas)
Politics
Kerry says Washington is ready for
talks with Venezuela.
Despite concerns about some moves by Nicolás Maduro's
Government, US Secretary of State John Kerry says - in reference to
Venezuela-US relations: "We are
ready and willing, and we are open to improving that relationship." He
adds that Washington is "concerned"
about the recent approval of the Enabling Law, which grants the Venezuelan
president special powers to issue decrees, something that could lead to "potential" abuse. Despite this,
Kerry claimed he is prepared to resume a bilateral dialogue, yet hopes Caracas
does not try to take advantage of the bilateral relationship to hide
Venezuela's problems. (El Universal,
12-11-2013; http://www.eluniversal.com/nacional-y-politica/131211/state-secretary-washington-is-ready-for-talks-with-venezuela)
...but Caracas says US must stop
funding dissenters in order to resume relations.
Venezuelan Foreign Minister Elías Jaua says that for
US-Venezuela relations to come back to normal, the United States must "once and for all" stop "financing Venezuelan opposition
organizations" and stop former officials allegedly plotting against
the country. His remarks came in response to the statements issued by US State
Secretary John Kerry. "For the
purpose of advancing in the normalization of relations with the United States,
once and for all that Government must stop financing opposition groups and
purported non-governmental organizations in Venezuela," Jaua said in a
press conference. (El Universal,
12-11-2013; http://www.eluniversal.com/nacional-y-politica/131211/caracas-demands-the-us-to-end-funding-dissenters-to-resume-relations)
Opposition coalition evaluates its next
steps.
President Maduro is touring districts where is party won
municipal elections, claiming opposition leader Henrique Capriles must resign
as Governor of Miranda state because he had called recent elections a "plebiscite" and they failed to
garner a plurality. Capriles counters by saying he will continue to seek
uniting all Venezuelans - adding that the President is not concerned about the
nation's polarization. At the same time, Ramón Guillermo Aveledo, Secretary
General of the United Democratic Conference (MUD), says the coalition must examine
the agenda to determine what most concerns voters: There was a 58.9% turnout
during municipal elections, which is high for a local vote, but not enough for
the plebiscite format the opposition sought to achieve. The pro-government United Socialist Party and
its allies tallied 5.1 million votes (short of 50%) and controlled 255
municipalities - many of them in rural and remote areas, while the opposition's
total was 4.2 votes and 75 municipalities which include most of the nation's
largest cities. A variety of minor independent parties controlled 8.03% of the
total vote, depriving the government of a clear majority. More in Spanish: (Infolatam)
Government claims the murder rate has
dropped under Maduro.
According to the Venezuelan government, the murder rate here has dropped
by about a quarter this year, and claims opponents' talk of ever-rising crime is
propaganda. Violent crime has been Venezuelans' No. 1 concern in recent years.
Awash with guns, the nation is one of the worlds most violent, with an official
homicide rate of about 52 per 100,000 people last year, or more than 15,000
victims. (Reuters, 12-12-2013; http://www.reuters.com/article/2013/12/12/us-venezuela-crime-idUSBRE9BB0LL20131212)
The following brief is a synthesis of the news as
reported by a variety of media sources. As such, the views and opinions
expressed do not necessarily reflect those of Duarte Vivas & Asociados and
The Selinger Group.
SPECIAL REPORT from Latin Business Chronicle:
China, Russia, India, and the Venezuelan Petroleum
Industry, by Dr. Evan Ellis, Associate Professor with the William J. Perry
Center for Hemispheric Defense Studies in Washington DC.
PDVSA
is increasingly beholden to foreign oil companies to keep up production. Is it
sustainable?
Venezuela
is in economic crisis: inflation exceeds 50%, basic goods run short, reserves
are dwindling, and the Bolívar trades on the black market at almost 11 times
the official rate. In this context, the oil sector -which generates over 96% of
the country’s revenues – finds itself stuck between investors cutting their
losses, and a group of Chinese, Indian, Russian, and Western firms who are
expanding their presence and commitment to the country.
While
the decision to stay may reflect a lack of better alternatives, it also implies
a hope or faith that PDVSA will grant them greater autonomy, due to its need
for continued investment. This autonomy could include allowing them to
rationally manage the operations that are, in name, controlled by PDVSA, as
well as ensuring that they can take delivery on additional oil, as promised, to
repay themselves. In the process, those staying hope to emerge with a strategic
position in the Venezuelan oil and gas sector, whose 300-500 billion barrels of
oil (depending on assumptions about recovery rates) make its reserves the
largest in the world.
China: The role of China in Venezuela includes:(1) loans to the
Venezuelan government (a part of which is for goods and services that support
the petroleum sector), (2) direct investments to quantify, develop and exploit
oil blocks, (3) loans to PDVSA to cover its share of petroleum joint ventures,
(4) augmentation of Venezuelan refinery capacity, and (5) the sale of major
assets for future petroleum deliveries, including oil tankers and drilling
rigs.
As of
December 2013, loans actually disbursed by China Development Bank (CDB) to the
Venezuelan government through its development bank BANDES total U$D 36 billion, with U$D 15.4 billion still
outstanding. The vehicle, referred to as the “China Fund” includes three
separate instruments: the Heavy Investment Fund (HIF) Phase 1, into which CDB
has made two injections of U$D 4 billion each, HIF Phase 2, which has similarly
received two injections of U$D 4 billion, and the Large Volume fund, disbursed
in two “tranches” totaling U$D 20 billion.
Some
confusion exists over the price Venezuela received for its oil to repay these
loans. The documents establishing the instruments mention a “Reference Price”
used to calculate the volume of oil deliveries to repay the loan, based on the
low market price for Venezuelan heavy crude when the deals were signed (U$D 50
for HIF Phase 1 and U$D 40 for HIF Phase 2). The actual credit received by BANDES
for each barrel of oil delivered against its outstanding loan balance was based
on the market price (plus markup) at the time of delivery.
Outside
the “China Fund,” CDB has loaned U$D 4 billion to PDVSA to support the joint
venture SINOVENSA. International Commerce Bank of China (ICBC) has also
explored loaning as much as U$D 4 billion in support of projects being worked
in Venezuela by the Chinese company CITIC, although no ICBC funds appear to
have been disbursed.
The
presence of Chinese companies in Venezuela’s oil industry predates the current
“Bolivarian Socialist” regime. In 1997, CNPC was awarded rights to exploit the
mature Intercampo and Caracoles oilfields. The project was the largest Chinese
investment in the Americas at that time. In 2001 CNPC established a joint
venture with PDVSA, SINOVENSA, to produce a special boiler fuel, Orimulsion,
from heavy petroleum extracted from the MPE-3 oilfield in the Orinoco belt
region. In 2006, SINOVENSA switched to upgrading the extracted product to sell
it as oil instead. In 2004, CNPC was awarded another mature field, Zumano,
converted to a joint company in 2007 as part of the nationalization of the
Venezuelan oil sector.
Production
from these mature fields supported the ramp-up in petroleum exports to China,
starting in 2005, although the 2008 agreement with CNPC to develop Junin-4
(formalized in 2010) grabbed more attention. PDVSA received U$D 900 million
from CNPC for the rights to Junin-4, plus the company’s commitment to
contribute its 40% share of the U$D 16.4 billion estimated to be required to
develop the block.
Despite
the initial promise, progress on Junin-4 was very slow, with PDVSA lacking the
funds to pay for its 60% of the infrastructure required to develop the field. Chinese
commitments to other joint ventures were also slow to emerge. In 2010, SINOPEC
was contracted to quantify reserves in Junin 8, yet there was no award for
follow-on development, nor progress on the Junin-1 and Boyacá 4 blocks which
PDVSA head Rafael Ramirez announced in 2011 might be awarded to SINOPEC. Similarly,
in non-associated gas production, although China National Offshore Oil Company
(CNOOC) signed a MOU in 2011 to participate in the Mariscal Sucre field, no
commitment emerged.
In
February 2013, amidst questions about leadership succession in Venezuela,
China’s growing reservations led it to defer a request for a new U$D 4 billion
loan. By the summer, however, with Xi Jinpeng officially installed as China’s
president, and with serious challenges to Nicholas Maduro’s claim to power in
Venezuela in the past, China appears to have decided to proceed with new loans
to and projects with the regime. In June 2013, CDB agreed to loan U$D 4
billion, outside the China fund, to help the PDVSA-CNPC joint venture SINOVENSA
more than double production at MPE-3 in a bid to generate more revenue. In
September, trips to the PRC, first by Ramirez and subsequently Maduro, led to
agreements with SINOPEC to develop Junin 1, and to CNPC for Junin 10, giving
PDVSA much needed, albeit small, royalty payments. The meetings also produced a
commitment by CDB to inject an additional U$D 5 billion to the China fund,
although the latter was reportedly a disappointment for Maduro, who was hoping
for an even bigger loan with cash not tied to specific projects.
Beyond
loans and joint ventures, Chinese support to Venezuela’s petroleum sector
includes a U$D 843 million Wilson Energy Services contract to support the
Puerto la Cruz refinery in eastern Venezuela and CNPC’s construction of a
400,000 barrel per day refinery in Guangdong to process heavy Venezuelan crude.
While CNPC is formally partnered with PDVSA on the refinery, it has had to fund
the venture on its own, with PDVSA committing to pay its share through future
petroleum deliveries.
Finally,
PETROCHINA is supplying eight new oil tankers to PDV Marine through the joint
company CV Shipping, also paid for through the China fund by Venezuelan oil
deliveries. The tankers are important to control PDVSA’s freight costs as it ships
increasing volumes of petroleum across the Pacific to China and India. While
the first of such tankers, the Carabobo, never left China following its
September 2012 christening in (now scheduled for delivery in May 2014), the
second, the 2 million barrel Ayacucho arrived in Anzoátegui in October 2013,
and the third, the Boyacá, overdue as this article went to press.
Russia: As with China, Russia is also making a long-term play for a
stake in Venezuela’s petroleum sector, although its presence is more modest. Russia’s
participation was initially spearheaded by a 5-company consortium, comprised of
ROSNEFT, GASPROM, LUKOIL, SURGUTNEFTEGAZ and TNK-BP, which was awarded rights
in 2010 to develop the Junin 6 block in partnership with PDVSA (forming the
joint company PETROMIRANDA). In 2011, the consortium was named to develop the
Mariscal Sucre offshore gas fields, while GAZPROM was separately given a
contract for the Bachaquero Tierra and Lagunilla Tierra oil fields in the state
of Zulia. The driving force behind the Russian initiatives was arguably Igor
Sechin, Deputy Prime Minister until 2012, and current Executive Chairman of ROSNEFT.
Sechin,
with close ties to the leftist regimes in both Cuba and Venezuela, assembled
the consortium of Russian companies to present a unified front while
negotiating with Venezuela on a state-to-state basis, rather than engaging PDVSA
as individual companies. The consortium quickly ran into problems. In 2012, ROSNEFT
began the purchase of TNK-BP, while SURGUTNEFTEGAZ pulled out of Venezuela,
with ROSNEFT picking up stake. More damaging, however, was LUKOIL’s 2013
decision to withdraw. Within the consortium, LUKOIL arguably had the greatest
technical knowledge and capability for operating in Venezuela, and its pullout
left ROSNEFT with a difficult challenge to absorb LUKOIL’s stake and execute
the concession.
Despite
such problems, Russian companies remaining in Venezuela have decided to
continue with PDVSA and “ride out the
storm.” In November 2013 GAZPROM agreed to loan PDVSA U$D 1 billion to help
it to bring production on line. At an industry conference the same month, ROSNEFT
committed to invest U$D 65 billion in Venezuela through 2022, although industry
experts are doubtful of the credibility of such commitments.
India: The third significant extra-regional actor in Venezuela is
India. Its potential participation expanded significantly at the end of 2013,
yet its companies have actually committed very little real money. Indian
companies have been participants in the Venezuelan petroleum sector since the
2008 formation of PETROINDOVENEZOLANA (which included ONGC VIDESH) to develop
the San Cristobal project in Junin, followed in 2010 by the formation of PETROCARABOBO
(including ONGC-VIDESH and India Oil) to develop Carabobo-1.Indian engagement
with PDVSA has also included contracts to purchase oil through Venezuela for Reliance
and other Indian refineries.
A
September 2013 summit in India between PDVSA head Rafael Ramirez and Indian
Energy and Mines Minister Veerappa Moily, followed by the visit of an Indian
delegation to Caracas in October, produced multiple new agreements including
with Reliance to evaluate the Ayacucho-8 block and with ONGC VIDESH to evaluate
Ayacucho-3. The agreements also included potential work for ESSAR and Oil India
on transportation infrastructure. Also mentioned was the possible expansion of
the ONGC VIDESH investment in Carabobo-1, to pick up the share being abandoned
by the Malaysian company PETRONAS. The Carabobo-1 investment would also
potentially include a multi-billion dollar investment in an upgrading facility
so that the product extracted from the block could be transported to and
processed in conventional refineries. Reportedly, Indian companies also
continued to be interested in Ayacucho 3 and Boyaca-4 (previously earmarked by
PDVSA for the Chinese company CNPC).
For
PDVSA, the pursuit of new concessions with India were arguably motivated by hoped-for
royalty payments from a potential future agreement. For India, possible
motivations included controlling more of the oil used to feed its refineries
and decreasing direct oil purchases from Iran, although the imperative for the
later diminished as Tehran and Washington moved closer to a nuclear deal that
could re-legitimize the latter as an international oil producer. India’s
initiatives also reportedly were facilitated by its Ambassador in Caracas, Smita
Purushottam, who had written a graduate thesis while at Harvard on using China
as a model for India’s engagement in countries such as Venezuela.
Other
Actors: As noted previously, Chinese, Russian and Indian companies are
not the only ones who have made the calculation that the best of bad options is
to remain in Venezuela and help PDVSA to bring online the oil production that
will repay their extra-contractual collaboration. Although EXXON MOBIL and CONOCO
PHILLIPS pulled out years ago, western companies electing to stay for the
moment include CHEVRON, Spain’s REPSOL, and Italy’s ENI. Indeed, the estimated U$D10
billion in loans provided to PDVSA by its partners this year (although some are
simply conversion of accounts receivable with PDVSA to debt) includes an
announced U$D 2 billion from Chevron, U$D 1.2 billion from REPSOL, and U$D 1.5
billion from Schlumberger.
Conclusions: Looking toward the future, Venezuela experts consulted for
this article generally agree that the country’s present trajectory is
unsustainable. Perhaps the greatest cause for hope is suggestions by persons
close to PDVSA that the current crisis is forcing a greater role of foreign
firms in the operational, financial, and strategic management of joint
ventures.
The complex truth is that PDVSA will be able to bring up production in
some areas, and address some problems in refining, transportation and other
areas. It will not, however, be able to meet all of its increasingly desperate
future commitments to its partners, while simultaneously passing enough money
to the government and society to stave off public disorder. The calculus of
government and industry actors is thus arguably evolving from desperate
attempts to save the ship of state to an ugly struggle over “who gets the last lifeboat.” In this
game, the only rule is ruthlessness, and competitors and partners alike are the
enemy. Someone will eventually end up in control of 300 billion barrels of
recoverable oil, even if market developments in other areas like shale gas
diminishes their value, and even if, in the process, Venezuela descends into
chaos and bloodshed.
