The Devil's Excrement

The problem of whether Venezuela will or not have to pay over the oil warrants issued in 1990 with the PAR bonds and DCB’s is beginning to percolate the international markets even if some analysts say there is nothing to worry about yet. From today’s El Universal digest on the issue:

-Jan Dehn from Credit Suisse First Boston says he suspects it will be difficult for people to verify the necessary data of whether Venezuelan has to apy or not. “Clearly, given the doubts that surround the levels of production of PDVSA and the generalized lack of transparency, the inherent conflict of interst in the Government’s position undermines its credibility”

-Roger Scher, General Director of Fitch ratings notes that concerns “over the ability of the bureaucracy in the area of debt management and about the systeam that are applied to insure that the correct calculations are made”

-Benito Berber, HSBC: “Any impact on the sovereign credit rating is very low.. Our position is that it is not having an influence on credit right now”

So, will Venezuela be able to issue foreign debt as required by the 2005 budget anytime soon?

From today’s Financial Times, I post the whole article because in three days you have to have a subscription

Oil traders and companies factor in a Chávez premium By Andy Webb-Vidal

Oil futures traders in London and New York have come up with a catchy term to describe an additional source of uncertainty when it comes to judging potential volatility in supplies: the Chávez premium.

There is as yet no established formula that serves to precisely calculate how many dollars should be added to the price of a barrel of oil because of Venezuela‘s President Hugo Chávez, from whom the term derives.

However, one thing is clear: political uncertainty stemming from Mr Chávez and his policies is becoming not only a factor in the oil markets, but it also has implications for Venezuela‘s sovereign bond holders and for oil multinationals.

As the world’s fifth largest oil exporter, for decades Venezuela had been seen as a secure source of oil, particularly to the US. Tens of billions of dollars have been invested to extract oil from the South American country.

However, Mr Chávez is uncomfortable with Washington, which he sees as the centre of an imperialist “empire” bent on dominating the rest of the world, and intent on overthrowing him and his self-styled “revolution” for the poor.

Mr Chávez’s repeated threats to “cut off” oil supplies to the US used to be dismissed by analysts as mere rhetoric.

It is becoming clear that Mr Chávez means business, inasmuch as he is planning to ship the oil he controls to anywhere but the US.

“He’s trying to align his business movements with his political aspirations to have closer relations with non-US countries,” says Rob Cordray, analyst at PFC Energy, a consultancy based in Washington. During a visit to Beijing in December, Mr Chávez offered to send oil to China.

Mr Chávez has wasted no time in fulfilling his pledge. Since the start of this year, Venezuela has sold two 3m-barrel cargoes of crude oil to China.

Some observers point out that because Venezuelan crude is heavy, it will be unusable in Chinese refineries. Also, because China is far more distant than the US, a strategy of diverting oil to China is an exercise that has to be paid for by one of the parties, and is economically unsustainable.

“Venezuela‘s dependence on US refining capabilities and the lack of access to the Pacific will limit Chávez’s ability to diversify Venezuela‘s export market in the near future,” says Patrick Esteruelas, a Latin America analyst at Eurasia Group, a consultancy based in New York.

While that may be true, people familiar with the recent shipments say the oil is being sold at a heavy discount, in theory allowing China to be able to resell the oil at a small profit.

The re-sale of Venezuela crude oil to third parties was previously forbidden by Petroleos de Venezuela (PDVSA), the state-owned oil company.

“The reason for the dispatch of these cargos is 100 per cent political,” said a trader familiar with the deals.

Venezuela is also planning to ship oil to Asia via a pipeline across Panama.

While the diversion of oil exports to China for political reasons is at an early stage, analysts say that its expansion will damage Venezuela‘s credit rating because it will receive less income, especially if oil prices decline. The issue of Venezuela’s creditworthiness was called in to question two weeks ago when Standard & Poor’s, the ratings agency, dropped the country’s debt rating to “selective default” after the country missed a $35m payment due in October.

Richard Francis, analyst at Standard & Poor’s, said: “It was more for technical issues, we don’t believe that the ability or willingness of the government is really in question, at least at this point.”

Venezuelan officials said the payment was missed because of an “error”, but other observers are concerned.

“The selective default reflects the state of disarray the public administration is in,” said an investment banker dealing in Latin American debt.

PDVSA has become far more poorly managed since a strike two years ago that led to the summary dismissal of 18,000 experienced employees.

Today, rather than the seat of a $100bn oil company, PDVSA’s headquarters is the hub of a chaotic social welfare agency, with distressed mothers breast-feeding babies in a foyer scattered with “revolutionary” pamphlets.

Indeed, such is the lack of control at PDVSA, which has to maintain a $2bn-plus revolving “social fund” under orders from Mr Chávez, that no one knows the state of its financial health.

“How can anyone assess a company that has not presented its financial statements since 2002?” asks Pedro Burelli, a former director of PDVSA.

Foreign executives who deal with PDVSA also allege irregularities such as the issue of parallel contracts that allow for personal fortunes to be made by “mafia-like” factions inside the company.

Today, PDVSA sells most of its oil-derived products on a spot basis or via contracts of no more than 12 months’ duration. Some crude is also sold “spot” for immediate delivery.

However, there is another related issue that is complicating Venezuela‘s capacity to continue pumping oil.

Because of declining output at PDVSA, due to the diversion of money away from essential investment, poor management and alleged corruption, a greater share of Venezuela‘s oil supply is coming from private companies.

Yet the investment conditions for foreign oil companies is deteriorating fast rather than becoming easier.

In recent weeks Mr Chávez has ordered a unilateral overhaul of dozens of oil contracts in an effort to raise tax revenue.

Alarm bells are ringing in Houston. Harvest Natural Resources, a US company, has seen its shares collapse in the past two weeks after it was told by Venezuela to suspend exploration in its main project.

At least one investment bank downgraded its outlook for ConocoPhillips after its plan to develop its promising Corocoro oil field was stopped by the government.

Venezuela, which currently produces about 2.6m barrels per day, predicts it will increase daily oil output to 5m barrels by 2009.

In practice, say experts, Venezuela is every day shipping less oil to world markets, in effect bolstering the “Chávez premium”.

From today’s Financial Times, I post the whole article because in three days you have to have a subscription

Oil traders and companies factor in a Chávez premium By Andy Webb-Vidal

Oil futures traders in London and New York have come up with a catchy term to describe an additional source of uncertainty when it comes to judging potential volatility in supplies: the Chávez premium.

There is as yet no established formula that serves to precisely calculate how many dollars should be added to the price of a barrel of oil because of Venezuela‘s President Hugo Chávez, from whom the term derives.

However, one thing is clear: political uncertainty stemming from Mr Chávez and his policies is becoming not only a factor in the oil markets, but it also has implications for Venezuela‘s sovereign bond holders and for oil multinationals.

As the world’s fifth largest oil exporter, for decades Venezuela had been seen as a secure source of oil, particularly to the US. Tens of billions of dollars have been invested to extract oil from the South American country.

However, Mr Chávez is uncomfortable with Washington, which he sees as the centre of an imperialist “empire” bent on dominating the rest of the world, and intent on overthrowing him and his self-styled “revolution” for the poor.

Mr Chávez’s repeated threats to “cut off” oil supplies to the US used to be dismissed by analysts as mere rhetoric.

It is becoming clear that Mr Chávez means business, inasmuch as he is planning to ship the oil he controls to anywhere but the US.

“He’s trying to align his business movements with his political aspirations to have closer relations with non-US countries,” says Rob Cordray, analyst at PFC Energy, a consultancy based in Washington. During a visit to Beijing in December, Mr Chávez offered to send oil to China.

Mr Chávez has wasted no time in fulfilling his pledge. Since the start of this year, Venezuela has sold two 3m-barrel cargoes of crude oil to China.

Some observers point out that because Venezuelan crude is heavy, it will be unusable in Chinese refineries. Also, because China is far more distant than the US, a strategy of diverting oil to China is an exercise that has to be paid for by one of the parties, and is economically unsustainable.

“Venezuela‘s dependence on US refining capabilities and the lack of access to the Pacific will limit Chávez’s ability to diversify Venezuela‘s export market in the near future,” says Patrick Esteruelas, a Latin America analyst at Eurasia Group, a consultancy based in New York.

While that may be true, people familiar with the recent shipments say the oil is being sold at a heavy discount, in theory allowing China to be able to resell the oil at a small profit.

The re-sale of Venezuela crude oil to third parties was previously forbidden by Petroleos de Venezuela (PDVSA), the state-owned oil company.

“The reason for the dispatch of these cargos is 100 per cent political,” said a trader familiar with the deals.

Venezuela is also planning to ship oil to Asia via a pipeline across Panama.

While the diversion of oil exports to China for political reasons is at an early stage, analysts say that its expansion will damage Venezuela‘s credit rating because it will receive less income, especially if oil prices decline. The issue of Venezuela’s creditworthiness was called in to question two weeks ago when Standard & Poor’s, the ratings agency, dropped the country’s debt rating to “selective default” after the country missed a $35m payment due in October.

Richard Francis, analyst at Standard & Poor’s, said: “It was more for technical issues, we don’t believe that the ability or willingness of the government is really in question, at least at this point.”

Venezuelan officials said the payment was missed because of an “error”, but other observers are concerned.

“The selective default reflects the state of disarray the public administration is in,” said an investment banker dealing in Latin American debt.

PDVSA has become far more poorly managed since a strike two years ago that led to the summary dismissal of 18,000 experienced employees.

Today, rather than the seat of a $100bn oil company, PDVSA’s headquarters is the hub of a chaotic social welfare agency, with distressed mothers breast-feeding babies in a foyer scattered with “revolutionary” pamphlets.

Indeed, such is the lack of control at PDVSA, which has to maintain a $2bn-plus revolving “social fund” under orders from Mr Chávez, that no one knows the state of its financial health.

“How can anyone assess a company that has not presented its financial statements since 2002?” asks Pedro Burelli, a former director of PDVSA.

Foreign executives who deal with PDVSA also allege irregularities such as the issue of parallel contracts that allow for personal fortunes to be made by “mafia-like” factions inside the company.

Today, PDVSA sells most of its oil-derived products on a spot basis or via contracts of no more than 12 months’ duration. Some crude is also sold “spot” for immediate delivery.

However, there is another related issue that is complicating Venezuela‘s capacity to continue pumping oil.

Because of declining output at PDVSA, due to the diversion of money away from essential investment, poor management and alleged corruption, a greater share of Venezuela‘s oil supply is coming from private companies.

Yet the investment conditions for foreign oil companies is deteriorating fast rather than becoming easier.

In recent weeks Mr Chávez has ordered a unilateral overhaul of dozens of oil contracts in an effort to raise tax revenue.

Alarm bells are ringing in Houston. Harvest Natural Resources, a US company, has seen its shares collapse in the past two weeks after it was told by Venezuela to suspend exploration in its main project.

At least one investment bank downgraded its outlook for ConocoPhillips after its plan to develop its promising Corocoro oil field was stopped by the government.

Venezuela, which currently produces about 2.6m barrels per day, predicts it will increase daily oil output to 5m barrels by 2009.

In practice, say experts, Venezuela is every day shipping less oil to world markets, in effect bolstering the “Chávez premium”.

Today’s Quotes from the crypt, in no particular order, all inconsistent, even if coming from the side of the political spectrum:

–Presidential communiqué: “Venezuela finds Colombia’s communiqué positive, since they will review how they captured guerilla member Rodrigo Granda and hopes it will not be repeated”

–Vice-Presidential statement: “The VP considers that the impasse between Venezuela and Colombia was resolved satisfactorily”.

–Chavez’ statement: “The crisis with Colombia is not resolved and the solution will depend on the meeting with Uribe next week”

–Former Colombian President Samper: “Chavez, in contrast with his VP, who is a champion of Anti-Colombianism in the world…”

–Attorney General Isaias Rodriguez:” The process against the eight Venezuelan military will continue as well as the investigation against the Minister of Defense of Colombia”

-Primero Justicia Julio Borges (El Nacional by subscription): “Communiqué is a band aid on a deep wound”

-Domingo Alberto Rangel (La Razon, no webpage): “I am a loyal and open friend of the FARC…while Chavez attacks Rice and Bush, he is desperately looking for a relationship with Bush”

-Alberto Garrido (La Razon, no webpage): “Chavez has received an ultimatum with the Granda case”

-Manuel Isidro Molina (La Razon, no webpage): “Only the cynicism and arrogance of Uribe are bigger than Chavez’ incompetence”

Today’s Quotes from the crypt, in no particular order, all inconsistent, even if coming from the side of the political spectrum:

–Presidential communiqué: “Venezuela finds Colombia’s communiqué positive, since they will review how they captured guerilla member Rodrigo Granda and hopes it will not be repeated”

–Vice-Presidential statement: “The VP considers that the impasse between Venezuela and Colombia was resolved satisfactorily”.

–Chavez’ statement: “The crisis with Colombia is not resolved and the solution will depend on the meeting with Uribe next week”

–Former Colombian President Samper: “Chavez, in contrast with his VP, who is a champion of Anti-Colombianism in the world…”

–Attorney General Isaias Rodriguez:” The process against the eight Venezuelan military will continue as well as the investigation against the Minister of Defense of Colombia”

-Primero Justicia Julio Borges (El Nacional by subscription): “Communiqué is a band aid on a deep wound”

-Domingo Alberto Rangel (La Razon, no webpage): “I am a loyal and open friend of the FARC…while Chavez attacks Rice and Bush, he is desperately looking for a relationship with Bush”

-Alberto Garrido (La Razon, no webpage): “Chavez has received an ultimatum with the Granda case”

-Manuel Isidro Molina (La Razon, no webpage): “Only the cynicism and arrogance of Uribe are bigger than Chavez’ incompetence”

Have been following the Iraqi vote all day via the regular press, but it easier looking at Instapundit, which has a digest of everything, including that CNN says 75% of the people voted (may be only 60% according to others, but still huge by all estiamtes) and Arab countries are a little bit concerned. How did the press get this story SO wrong? It’s the usual, good for the Iraqi people! Found this cartoon expressed the whole thing so well:

The reality that Venezuela is an urban country has begun to hit the Government, but so far it is not clear to me that they are getting the message. As agricultural land has been intervened by the Government people have also begun invading private lands and buildings, looking for what thy really need: a home. The crisis is particularly severe in Carabobo state, where the Governor has been quite lax in allowing people to take over land and buildings, more so after saying that he would not throw the police at the people. But as this article in today’s El Universal tell us; only in one municipality in Carabobo, twenty plots of lands have been invaded, including land owned by an orphanage, a plot of land in a middle class neighborhood and the La Guacamaya area where the Government ahs now provided trailers to live in.

The real problem is not only that people live in the cities, but that there has been very little housing built in the last six years.  The number of new housing units built in Venezuela in the last 30 years has always been less than needed, but the Chávez Government has been particularly ineffective at this. During the first two or three years of his Government Chavez had the right people in the institutions in charge of urban planning and housing. People who had devoted all their lives to studying the problem carefully and finally had gotten to a position of power. But slowly the Government got rid of them, for reasons that I don’t know in detail.

This group of people had a study that included costs and estimates of how long it would take to reduce housing shortages in Venezuela by devoting huge government resources to the problem, using construction to jump start the economy. If I recall the numbers correctly, they were talking about US$ 60 billion and ten years to carry out the project. Instead in the first two years of Chavez’ Government, a few housing projects were built in what was said disorganized manner. I showed a graph in March of last year which shows how dramatic has been the drop in new housing units being built in the last few years.

Besides Carabobo, the other region being hit by invasions is the so called “Altos Mirandinos” area. This is a region right outside Caracas to the South West along the Pan-American Highway, where a bunch of “dormitory” cities have sprung up. There are three municipalities there in the hands of both anti-Chávez and pro-Chávez Mayors. But they are all acting in very similar fashion, as it has become a security problem for all of them, as people feel threatened by the invaders in their communities.

That this is the problem is nothing new, in 1968 Rafael Caldera promised he would build 100,000 housing units a year. (He was close one year). De Soto has studied this problem well, together with that of not having title to land and homes. This is where I think the Government should concentrate. In fact, I think this is something the opposition should pick up on and run with it, as I have said before. Tell the Government to start delaying and give away all Government lands before June, tell the Government to give title to all municipal lands by June. Tell the Government to propose a housing program or grab the existing ones and ask the Government get going as soon as possible. Put a deadline. This is a real issue, not Chavez’ dream of what Barinas was like in the 60’s. Do it, because soon the Chavez Government might pick up on it and do it themselves! Knowing both of them, maybe neither will notice it!

(Posted lots of pictures in the orchids section today, enjoy and relax!)

The reality that Venezuela is an urban country has begun to hit the Government, but so far it is not clear to me that they are getting the message. As agricultural land has been intervened by the Government people have also begun invading private lands and buildings, looking for what thy really need: a home. The crisis is particularly severe in Carabobo state, where the Governor has been quite lax in allowing people to take over land and buildings, more so after saying that he would not throw the police at the people. But as this article in today’s El Universal tell us; only in one municipality in Carabobo, twenty plots of lands have been invaded, including land owned by an orphanage, a plot of land in a middle class neighborhood and the La Guacamaya area where the Government ahs now provided trailers to live in.

The real problem is not only that people live in the cities, but that there has been very little housing built in the last six years.  The number of new housing units built in Venezuela in the last 30 years has always been less than needed, but the Chávez Government has been particularly ineffective at this. During the first two or three years of his Government Chavez had the right people in the institutions in charge of urban planning and housing. People who had devoted all their lives to studying the problem carefully and finally had gotten to a position of power. But slowly the Government got rid of them, for reasons that I don’t know in detail.

This group of people had a study that included costs and estimates of how long it would take to reduce housing shortages in Venezuela by devoting huge government resources to the problem, using construction to jump start the economy. If I recall the numbers correctly, they were talking about US$ 60 billion and ten years to carry out the project. Instead in the first two years of Chavez’ Government, a few housing projects were built in what was said disorganized manner. I showed a graph in March of last year which shows how dramatic has been the drop in new housing units being built in the last few years.

Besides Carabobo, the other region being hit by invasions is the so called “Altos Mirandinos” area. This is a region right outside Caracas to the South West along the Pan-American Highway, where a bunch of “dormitory” cities have sprung up. There are three municipalities there in the hands of both anti-Chávez and pro-Chávez Mayors. But they are all acting in very similar fashion, as it has become a security problem for all of them, as people feel threatened by the invaders in their communities.

That this is the problem is nothing new, in 1968 Rafael Caldera promised he would build 100,000 housing units a year. (He was close one year). De Soto has studied this problem well, together with that of not having title to land and homes. This is where I think the Government should concentrate. In fact, I think this is something the opposition should pick up on and run with it, as I have said before. Tell the Government to start delaying and give away all Government lands before June, tell the Government to give title to all municipal lands by June. Tell the Government to propose a housing program or grab the existing ones and ask the Government get going as soon as possible. Put a deadline. This is a real issue, not Chavez’ dream of what Barinas was like in the 60’s. Do it, because soon the Chavez Government might pick up on it and do it themselves! Knowing both of them, maybe neither will notice it!

(Posted lots of pictures in the orchids section today, enjoy and relax!)