The Devil's Excrement

Things we did NOT hear today:

Chief Justice of the US Supreme Court Rehnquist: “Now that I wanted to go to Margarita, I might not be able to get a visa”

MVR Deputy Iris Varela: “I think Maria Corina and George looked very good together”

US State Department: We will extradite Posada Carriles even if these guys gave us no documentation”

Fidel Castro: “If the US sends Posada Carriles to Venezuela, I will extradite Shakur to the US, even if they send me no documentation”

Venezuelan Chief Justice Mora: “If I don’t get a visa, who will go with my kids to Disneyworld this summer”

Maria Corina Machado: “This guy is really weird and he made a pass”

Hugo Chavez: “I never said I wanted to break relations with the us”. Uups, sorry we did hear that

Minister of Oil Ramirez: “I prefer to work with the Chinese and the Brazilians rather than the Americans, they are all about goodwill, they don’t care about profits”

Miss Venezuela and Miss Universe contestant Monica Spear: “Jeez, they rebuilt my body, but forgot to rebuild my brain”

VP Jose Vicente Rangel: “You could never even come close to imagine what a mess PDVSA is in”

Primero Justicia Julio Borges: “They picked me, because the other guys were doing a very good job as Mayors, I was expendable”

MVR Deputy Nicolas Maduro: “I wish Maria Corina was my girlfriend, Celia is just too loud”

COPEI President: “We were going to have a meeting of the party, but nobody came”

MAS President: “We had a meeting of the party, but nobody came”

MVR President: “We don’t have meetings of the party, Chavez may come”

French President Jacques Chirac: “Merde!”

Hugo Chavez: ” I was not missing, I was misplaced”

Last week, in the testimony of the Minister of Energy there was a phrase that criticized the fact that in the old PDVSA the objective was to maximize the value of the company to the shareholder which is the State, rather than maximizing the value of the natural resource for the same State.

I have pondered about that sentence over and over in the last few days, but to tell you the truth, I am not sure that there really is a difference between the two. In fact, the first statement is much clearer and well defined to me than the second. There are three contributions to the Government by the production of oil. The first is the royalty; every barrel exported pays a royalty tax directly to the Government, which depends on the type of oil. Later, PDVSA pays taxes on the earnings it has for the year based on quaterly estimates and pays it also pays dividends to the owner, which is also the State. I am sure you could write a complicated algorithm that would tell you how to maximize the total, but the business is more complicated than that and I think the Minister’s  words are very empty, they are simply political rhetoric.

The PDVSA strategy, circa 1997-1998

The PDVSA strategy that was being carried out in the mid 90’s has to be understood in its context: PDVSA wanted to maximize its earnings (and thus contributiosn to the State), given its finite resources for investment purposes. It could have decided to leave things as they were, continue producing what it was producing with its own investment capabilities. This was the lowest return path for the Government and for the company. Why? Because PDVSA was exploiting a large number of old fields that needed heavy investments to keep them going, but were fields past their peak production levels. The margin for exploiting those fields was much lower than for the newer fields. This implied lower profits and thus lower earnings, lower taxes and lower dividends for the Government. All of this for the same level of investment.

The oil opening, the “Apertura”

This was the origin of the oil opening: Take those fields; sell the right to exploit them at a price to mostly  foreign or Venezuelan companies, which paid over US$ 2 billion in the 1997 round of the opening. If it was such a sweet deal, how come some fields received no bids in the public auction? Even more interesting is that these paymenst seem to have been forgotten.

Of course, this presupposes that the strategy that the PDVSA Board had at the time of producing six million barrels of oil a day was “correct”. At the time, Chavez and his supporters were highly critical of it, but the latest plan by PDVSA is to produce 5 million barrels, so you can not say that one or the other was trying to get the highest price for the natural resource for the shareholder.

In fact, what about giving away gasoline in Venezuela? Gasoline is currently 20 cents a gallon, what right do current Venezuelans have over future generations to waste away gasoline at these prices?

As usual I digress.

With the oil opening, the Government gets the same amount in royalties, PDVSA does not have to invest any of its own funds and the company that bought the rights has to pay taxes on its profits. Yes, the Government gets fewer dividends, but in theory, it gets more dividends and more profits because it is investing those funds elsewhere, in more profitable, higher margin projects. Notice that I said “in theory”, because such investments are not being done today

The oil partnerships

.The oil partnerships in the Orinoco heavy crude belt are a totally different strategy. At the time, the question was, Venezuela has some gizillion barrels of heavy oil in the Orinoco Oil Belt, can we get any of it out and make a profit?

Recall that oil was at $15 per barrel of WTI, when this question was being posed. What was proposed then, was to upgrade these heavy crudes to make synthetic fuels. There was only one country in the world which was offering similar projects, Canada, which was charging 1% royalties until a certain benchmark in production was reached. Venezuela offered a similar deal for partnerships with PDVSA itself. This is where Sincor, Cerro Negro, Petrozuata and Hamaca were born.

These deals were funded with either publicly traded bonds or bank loans. The owners of the projects were forced to offer a guarantee for the bonds until the projects reached certain production benchmarks. Moreover, all of the bonds were “sinking fund” whereby bondholders are paid part of the capital partially at the same time they get the interest. In this way, part of the risk gets diluted with the passage of time.

Why all the complication? Easy, the price of oil was low, the projects had not been proven, and not everyone was convinced they would make money. It was not high tech, but it was not “proven tech” either.. Even today, with WTI at US$ 50, the bonds for most of these projects which mature in 2009 offer a yield to maturity of 8%. Obviously they are not as risk free as the Government makes it look (Although the Government itself is now creating part of the risk with rules changes and noise)

Perhaps somebody should have thought then about a sliding royalty. (I haven’t heard anyone mention it now either, it is just a thought of I have had). Maybe it would have made more sense to say, the partnerships will pay 1% for x years, after that 16.6% over the first billion dollars of production per year, 30% over the next half billion and son on and so forth. Nobody imagined oil prices would get this high. Nobody proposed a sliding scale, nobody has. All we have is these accusations and unilateral decisions.

Conclusions

In the end, I think that PDVSA’s purpose should be to maximize profit and dividends for the shareholders (The “people”!). PDVSA should also be a motor of growth for the country. To do that it has to establish an adequate level of borrowing and devote that to those projects with the highest profit margins. Lower margin projects should be sold to the highest bidder, if it is in the interest of the country. Heavy oil projects should be promoted given that the country has such ample reserves.

What does not make sense is to have a company with US$ 40 billion in sales have almost zero debt if such debt can help the company increase both profits and revenues. PDVSA has less than US$ 100 million in debt, zero for all practical purposes. This is certainly without justification.

PDVSA should also not cancel existing projects because the profits are small, such as Orimulsion, of such projects already exist. If they create substantial amount of jobs. Who cares?

In the end, the starndard of living of a large fraction of Venezuelans will not improve until there is real sustained growth in the economy. PDVSA is a perfect engine for such growth, but is not being used that way. It may sound really “neat” to have PDVSA give all the funds to social programs, but if doing that is simply taking capital away from the company you are simply killing the golden goose in the long run. In the end, seeing PDVSA as a commercial enterprise tells you exactly what you can or can not do, what you should and should not do. It can be run as a not for profit organization, giving away all of its profits, but it can not be run as a “for loss” organization, because it does not make sense to give to the Venezuelans of today, taking away from those of the next generations.

In the end, I still don’t know what “maximizing the value of the natural resource means”. It could mean increasing the price of gasoline. It could mean producing less oil to save for the future at higher prices, something this Government claims not to be doing, and it could mean only producing a certain type of project, something which is not happening. I still think PDVSA should maximize royalties and profits (And thus taxes and dividends). I can’t think of any other strategy that may benefit the average Venezuelan. The rest is simple rhetoric.

Quotes from Hugo Chavez about the partners in the heavy crude partnerships who have suddenly become the bad guys (Taken from Friday’s Tal Cual):

March 20^th. 2002:

“I was telling the President of Total and the Vice-President of Statoil, that they should be given a trophy, because they decided to start a project when it was claimed-it was 1998-that the devil had arrived to Venezuela. The devil was me, I was candidate Chavez, I was going to destroy all this, I was not going to recognize the contracts of the oil opening, I was going to disavow the agreements of Venezuela. However, they either have a very clear intelligence, or they have a courage that is devil proof, and because of this we have to congratulate them.

I am sure that they always knew that what this project is to make Venezuela a more decent country (sic).

Then, this is Venezuela’s reality, a country, a revolutionary Government, a legitimate Government that respects agreements, compromises and not only respects them, it backs them and I am here to confirm it and ratify it.

Thus, I am very interested in that you-Total Fina Elf and Statoil-and many other companies, together with us advance the gas project, not only in the Delta Platform, but also over there or right next to here the Paria project and even further the development of Venezuela.

Hugo Chavez, France, March 9^th. 2005:

“We have decided that Total will go to from 200,000 to 400,000 barrels a day, doubling its production with an investment of a few million dollars. With Venezuela’s technology and allied with companies like Total, we extracting heavy oils and extra heavy oils from the Orinoco oil belt, taking it to the Jose terminal and transforming it in what we call nectar, oil that is worth gold and which it is sold anywhere in the world as synthetic oil.

Total has understood what the new Venezuelan legislation is about, with a new royalty payment”

Last week, the National Assembly approved the Tourism Law, a bill aimed at promoting tourism in Venezuela. Among other things, the Bill compels banks to devote a fixed amount of their loan portfolio to tourism projects. This amount will be set at between 2% and 7% of the loan portfolio of private commercial banks and 12% of that of Government owned banks.

While I disagree with forcing banks to devote a fixed percentage of their loans to a particular area (with this, compulsory lending goes up to 35% of the portfolio), I can not disagree with the goal of turning Venezuela into an attractive tourist destination.

But what is being done with one hand appears to be destroyed by the other. In a strange interpretation of reciprocity, the National Civil Aviation Institute suspended the initiation of flights by American Airlines affiliate American Eagle to Margarita Island in Eastern Venezuela. The reason? The US’ FAA lowered the category of Venezuela’s aviation many years ago, because it did not satisfy the technical and training requirements of that Administration. The main impact of lowering Venezuela’s category is that no new Venezuela airline can begin flying to the US until the minimum requirements are again satisfied. It has been eight years (before Chavez!) since Venezuela was lowered in category and in that time the country has failed to pass the requirements to have the higher category reinstated. Because of that, American Eagle, will not be able to begin its flights between San Juan, Puerto Rico and the island of Margarita.

Who do you think loses with this political decision? I would bet if it were any country other than the US, no retaliation would be made. In fact, Panama decided not to extradite Posada Carriles to Venezuela four years ago and nothing happened between the two countries. other silly emotional decision that damages the country’s credibility.

Yesterday there was some confusion when the US Government rejected the request by Venezuela to arrest Posada Capriles, essentially the US Government said that Venezuela had not supported the case and reiterated that Venezuela had yet to request the extradition of Posada Capriles. Some newswires carried the news as “US rejects extradition” and too many loudmouths of the Chavez administration criticized the action.

But today the situation is quite clear. First, there is the press release by the Venezuelan Embassy in the US, which leaves no doubt as to the status of the request and makes quite clear that despite all of the noise, protests and criticisms, Venezuela has yet to request the extradition:

1.- The Embassy of the Bolivarian Republic of Venezuela in Washington, D.C. received this afternoon a diplomatic note from the U.S. Department of State concerning the request for preventative arrest with the purpose of extradition of Mr. Luis Posada Carriles. This request, which U.S. authorities have denied, was presented when clear evidence emerged that Mr. Posada was in the United States. The request for Mr. Posada’s arrest was a preventative nature, made while the Government of Venezuela compiled the necessary documentary and legal documentation necessary for a formal extradition request.

2.- According to the note sent to the Embassy of Venezuela, the denial of the request for preventative detention does not prevent Venezuela from formally requesting extradition of Mr. Posada, a Venezuela citizen, pursuant to the Extradition Treaty in force between the two countries.

Even today the Vice-president says that the extradition request “still stands”, despite the fact that it has yet to exist. Just part of the charade, when he was prompted by the reporters about the fact that no request existed he said that the request has 700 pages and the Venezuelan Government ahs two months to present it. In fact, the Vice-Minister of Interior Relations said today that it will not be until Tuesday when the formal extradition request is presented by the Venezuelan Government.

I have been told by a good source that Chavez said in private that he did not want Posada Carriles extradited to Venezuela. According to this report Chavez said something like “I don’t want that old man here, imagine he may die and I would be blamed for it”. Thus, like so much of this Government this is just hot air for political gain, nothing else. I still think the US should extradite Posada to Venezuela, but I am not sure whether they will or not.

One could only watch the sorry spectacle in awe. The Supreme head of injustice in Venezuela, denouncing the loss of his Mickey Mouse rights, outraged at the insult to the majesty of the institution he claims to represent. Decrying the fact that the dignity of his institution had been attempted against. Asking for explanations for what is essentially irrelevant for the affairs of state. Talking about morals and ethics and calling himself an honorable person.

But where was selfless and immoral Mora when the rights of thousands of Venezuelans were being violated by the same unethical and amoral Government, which he supports with adoration, was destroying the lives of truly honorable citizens and their families, eliminating the only livelihood or destroying the civil service careers of normal citizens whose only crime was to exercise their constitutional right to request the recall of the President? Or why didn’t he hold a press conference to denounce how the rights of dozens of poor citizens of the state of Guarico had been violated, as they were violemtly exterminated and eliminated, under orders of the Governor of that state, who is still backed and supported by his adored leader? These were truly members of the “pueblo” he and his leader claim to love and work for and it is a political party, rather than the Justice system who is deciding the fate of the case. More Venezuelans than Posada Carriles ever killed in his lifetime have been killed in the state of Guarico by its own Government, but has Mr. Mora signed any order against the Governor of that state, or anyone for that matter?

Is a simple email grave enough to upset him, but the daily death of a Venezuelan in prison goes by unnoticed by him? This, while various Government offices and the same judicial system he presides over forgets the thousands of men and women without sentencing, without lawyers, sometimes even without formal charges, who live in infrahuman conditions in Venezuelan prisons, without anyone taking responsibility for it? And what of the immoral removal of judges at all levels anytime a decision is made by one of them, which goes against the whims, moods and wishes of the supreme leader?

Mr. Mora wants the US Embassy to treat him with courtesy. I want Mr. Mora as the impersonator of the Chief of Justice in Venezuela to have that same courtesy and respect he demands for our beleaguered and battered Constitution. I want him to go out and hold a press conference with the same outrage, intensity and passion, every time the basic and fundamental principles that are supposed to be guaranteed by our Constitution are trampled over and violated by this fake revolutionary Government.

Morals, ethics and majesty are big words. They should be handled with care. Particularly by those who have the power, who have the ability to affect the course of events. When the highest Court of the land is simply placed at the service of a man and his ideas and not of the Constitution, there is no morality or ethics to defend. As for Majesty with a capital M, a Court that has had no respect for the Majesty of the Law, has no majesty that can be respected. There has not been lese majesty in the case of Justice Mora and the Court he represents; only when dignity is restored to that body, could such a crime be committed.

Teodoro Petkoff is so mad about what is being said about PDVSA that he broke his tradition of not writing the Friday Editorial, to write this:

Buffoonish Nationalism by Teodoro Petkoff in Tal Cual

Minister Ramirez attacked this week the oil opening projects. He affirmed that the operating agreements approved by the National Congress in 1995 said one thing and that the multinationals have done something else.

It just so happens, however, that of the ten years that the oil opening has been in place, ALMOST SEVEN have been under the administration of the “revolution”. Thus, if these companies have cheated, as Ramirez affirms, it has been under the noses of these shoddy nationalists that today govern us. If we suppose that the foreign companies have not paid what they owed, the blame is on those that were obligated to collect from them.

Nevertheless our “anti imperialists” have played leading roles in remarkable contradictions. Chavez assured us on March 200^th. 2002 that “Total” and “Statoil”, precisely the two companies that Ramirez pointed to as cheaters, “should be given a trophy” and on March 9^th. of this same year, only two months ago, Chavez was filled with pride with the alliance with Total: “With Venezuela’s technology and allied with companies like Total, we are extracting heavy and super heavy from the Orinoco Oil belt…Then? Surely, we are like in the case of the “revision” of the relations with the US (The Foreign Office is explaining to everyone that Chavez did not mean to say what he said), our President will tell “his friend Jacques Chirac” that the thing with “Total” (a French company for those that don’t know it) was a “misunderstanding”.

Not long ago, when his anti imperialistic measles broke out, Chavez said that “it can’t be that an oil company comes and pays 1% of royalties (…) I have given orders to PDVSA and the Tax Office to collect retroactively and with interest what they owe us (…) If they don’t pay they have to leave”. All the stupid jerks, Ramonet-style, must have had an orgasm confronting such courage. However, Ramirez in his speech could not avoid saying the truth, Chavez, apparently, was not informed that the stuff about increasing the royalties was in the law and the contracts with the companies. The Minister explained that according to the Law of Hydrocarbons of 1943, one could reduce royalties “to economically support projects under development”, but, according to the same law, once those economic conditions were overcome, the Minister of Energy could adjust the royalties to the normal levels.

“That’s what we did” said Ramirez candidly. Nothing then about the exploits, Lazaro Cardenas style, when he nationalized Mexican oil or Mossadegh style, when he did the same thing with Iranian oil.

No, it was a simple matter of “revising the numbers” according to the law. What Ramirez should explain is why they took so long in discovering that after three consecutive years of stratospheric crude prices “it was illogical that the companies pay a royalty of 1% “and because of this “we adjusted the royalty to 16%” and “we did not go to 30% for legal protection”. Nothing about the “clear clarions” of the revolution. Just accounting adjustments. The rest is pure show. Read our central pages of today’s edition, where, through the words of Chavez along these years, one can follow the trajectory of this fake and erratic policy.