Archive for February 17th, 2008

Who the true traitors in Venezuela really are

February 17, 2008

Over the last week there has been a cry for Venezuelans to outright reject ExxonMobil’s threats against the country and a call for Venezuelans to all rally around this issue over this “common” enemy. If you don’t, say those that are making this call, who are both in the Government and in the opposition, you are simply a traitor to your country.

Sorry, I just don’t buy, you can not make me rally behind the irresponsible behavior of the Venezuelan Government, any more than you will not find me in favor of war against Colombia over any incident caused by Hugo Chavez. This is simply false patriotism at its best. I know exactly who the traitors are and let me tell you it is not those who objectively analyze the situation and realize that it is a clash between a commercial entity (ExxonMobil) and Venezuela’s oil company who sought to take advantage of its position to force ExxonMobil to give up its property and the rights it had acquired via a contract.

ExxonMobil is no saint, they went into this project in good faith in partnership with the Venezuelan oil company and the reason they have bean able to obtain injunctions against PDVSA’s assets, is precisely because PDVSA and the Venezuelan Government decided to bypass valid contracts over and over until ExxonMobil decided it had enough and started fighting it. In a very real sense, this is no different than the expropriation of farms, companies such as Invepal taken over by the Chavez Government without any compensation and even the buyout of telecom company CANTV where the Chavez Government forced everyone to sell to it at a value below fair value. Everyone lost, because the Government had the upper hand, even the Venezuelans who invested in CANTV in good faith in the IPO.

A country will not function well until a contract signed between two parties is as solid as the paper it is signed on, respected not only by all that sign it, but also by the Courts. A society can not work if there is no rule of law. I expect contracts to be respected not only by my country, but also by the company I work for, or by my relatives. If they don’t respect them, I want nothing to do with them. It’s called principles, not treason, as many want to make it out to be.

Just to make sure, let’s review a little bit of the history of the Cerro Negro project, how it came about to be and how and why it was set up as it was and has led to the events of the recent weeks. If anyone finds a detail that is not correct, please let me know, I am relying on my own memory for the details:

In the 1990’s, the Orinoco Oil belt was long on promise but short on results. The price of oil was oscillating in the low to mid teens and it was difficult to make a profit improving oil from the Orinoco Oil belt unless one took the best of the best of the oil from the area, which was not the idea. (Oil from the area can vary widely from fairly light to almost shale)

PDVSA decided to partner with those that had the technology for improving heavy oils, which happened to be mostly the major oil companies of the world. It was then still a risky proposition, as the projects would only be profitable at the time at US$ 12 per barrel. There were basically two countries involved in this field: Canada and Venezuela. Canada, particularly the province of Alberta, offered very attractive conditions, still valid today, in which companies pay a royalty of 1% until the revenues of the project reach the initial investment at which time it would jump to 16.5%. Additionally, these companies pay income tax of 25% in Alberta.

To make the projects attractive, PDVSA then matched the 1% condition of Canada, even if it could not match the income tax rate, as Venezuela had a 33% rate on corporations which could not be changed. All companies required majority in the projects, mainly because it was their own technology that would be used and because they were going into unknown territory.

This was not enough. In order to do the projects, PDVSA and its partners had to get quite creative with the financing in order to make it asufficiently ttractive. In those projects in which the projects issued bonds (Cerro Negro and Petrozuata), the parent companies offered guarantees on the bonds, which expired on the day the project reached its production potential. Moreover, because the length of the bonds was so long, the bonds were issued in most cases as “sinking fund”, which means that the bonds not only pay interest, but at some point in time also begin paying back capital every six months. Thus, when the bond matures at the end (The bonds had maturities from 12 to 30 years) you don’t get a final payment of 100%, but only a small fraction, as most of the bond has paid back its capital already. This structure has the advantage that even if the price of oil had fallen, the price of the bonds would not be impacted as much as it did not pay all of the capital at the end, but in steps with the interest payments.

Thus, not only were the projects risky, but to make interest payments attractive to investor, capital had to be paid early. Only in this manner was it possible to find financing for the projects at a level that would make it profitable, even if oil prices stayed down in the mid teens. Moreover, the projects had to create an escrow account abroad which had to contain sufficient funds to cover the next interest payment, as an additional sweetener to make the project’s financing possible.

The Venezuelan Congress approved the projects and only Causa R, the predecessor of part of PPT voted against it, together why three or four additional Deputies.

The projects had yet to produce a single barrel of oil when Hugo Chavez reached power. In fact, Chavez as late as 2001 was offering some of the same oil companies that were partners, additional projects in partnership with PDVSA and under the same conditions as the original projects. It is in the newspapers when Chavez hailed the projects and told the President of France’s Total that he was willing to start new projects under the same conditions (1% royalty and 33% tax with PDVSA a minority).

Then in 2004, after the projects’ bonds were quite depressed in 2003, oil prices jumped up and that is when PDVSA started reviewing the projects as the PDVSA representatives saw the huge increase in profits of the projects. At that time, PDVSA, in violation of the original contract, unilaterally told the projects that the 1% royalty would be increased to 16.5% even if the project had yet to reach the level of revenues required for that increase. None of them had.

The companies partnering accepted it, because they could do very little about it. They could go to Court locally. but were likely to lose and gain the antipathy of the Government and it was not worth going to international arbitration if you planned to have future projects in Venezuela.

About six months later, the Government and PDVSA struck again. First, they created a new “extraction tax” of 16% which is nothing more than an additional royalty on the oil, but also increased income taxes on the projects from 33% to 50%. Once again, the companies did nothing to stir the boat, fearing that local Courts would not benefit them and going to arbitration would be bad for future business. But clearly, the original contractual conditions had been unilaterally breached by the Venezuelan Government, even if the projects remained very profitable.

But note that Venezuela’s future competitive position has been weakened by these changes. Canada’s conditions have yet to change, if a company were considering the two it would obviously choose Canada, unless you have no expertise, are given special conditions and have to put up little money as Chavez and PDVSA have been doing recently to State Oil companies with no experience in the field.

The final drop to these companies came in 2006 when the Government announced, once again unilaterally and changing the same rules of the game the Venezuelan Ambassador to the US claims to want
ExxonMobil to respect
, that the partners had a date to give up controls of the projects, selling to PDVSA enough of their stake so that PDVSA would have 60% of each project at a price specified by PDVSA. PDVSA even had a price: the book value per share of the project, an absurd concept more so in an atmosphere of increasing oil prices. Even worse, if any partner did not want to accept the change, it had to leave the country and PDVSA would buy all of its stake, at the same low price.

The thinking was that everyone would accept, it was still a good business after all. However, it did not happen. Total and Statoil asked out of their project and ExxonMobil and ConocoPhillips. also decided to leave the country. ConocoPhillips even wrote off the project as a loss, taking a big hit o its profits, while negotiating with PDVSA and then asking for arbitration in parallel with negotiations. ExxonMobil barely negotiated in the belief that PDVSA was not going to budge from its book value price and wanting to set an international precedent for the contracts it signs. It is after all a for profit institution.

Curiously, arbitration is guaranteed by a decree for the protection of investments issued by none other than…

Hugo Chavez in 1999…not the IVth. Republic… but that is a different story.

In any case, ExxonMobil went to arbitration, but the investors in the Cerro Negro project were left hanging. Under the terms of the original bonds, the expropriation of the partners, or change in partners became “default” events, but PDVSA was negotiating with the bond holders so as not to pay the steep premium required by the original conditions, but a smaller fee. In early December PDVSA agreed to pay about 30% of the original to bondholders and did so on December 27th. ExxonMobil waited until payment was made to introduce its injunctions all over the place. It did not want to hurt those that bought the bonds while ExxonMobil was running Cerro Negro. (No such an agreement has been reached for Petrozuata bondholders, which may be why ConocoPhillips has yet to be as aggressive)

Meanwhile, PDVSA has been selling parts of CITGO and not precisely at book value. I wonder what Ramirez and company would say if a US court valued CITGO at US$ 3 billion for the purposes of ExxonMobil’s injunction, that is precisely CITGO’s last published book value, but the company is probably worth around the US$ 12 billion asked by ExxonMobil.

And ExxonMobil did that, because of the mismanagement of PDVSA. If PDVSA’s cash flow was not as tight as it is, if the company did not need to borrow money abroad as much as it needs to and if the whole operation had not been mismanaged as badly as it has for the last few years, ExxonMobil’s injunction would be essentially meaningless. But ExxonMobil rather than wait three or four years for arbitration, want to negotiate a fair payment now. It is PDVSA that is weak, not ExxonMobil. And it is weak because of the mismanagement and treason, yes treason, of Hugo Chavez and Minister Ramirez who have run PDVSA as if it was their own political fiefdom and not for the benefit of all Venezuelans.

And while Ramirez and Chavez and today the former Attorney General, claim ExxonMobil’s injunction is exaggerated and should be overturned because PDVSA will pay whatever arbitration says, the truth is that everything that has been said and done in public points to exactly the opposite;

–Chavez #1 said last Sunday that he had ordered that Venezuela stop sending oil to the US if any of PDVSA’s assets were seized. This was pure bluff as some had already been seized. Of course, today Chavez #2 said that there is no plan to stop sending oil to the US, after Chavez #1 challenged the US to boycott Venezuela’s oil, which was simply mentioned in a Washington Post Editorial as something the US coudl do if it really wanted to ruin Hugo Chavez.

–Ramirez suggested that it would not pay what the arbitration Court said. he later denied it, saying he would pay but only up to book value, essentially ratifying what he had said earlier.

–The Venezuelan National Assembly passed a motion asking that Venezuela withdraw from the World Bank and thus withdrawing from CIADI, the World Bank’s body that is considering the arbitration between PDVSA and ExxonMobil and ConocoPhillips.

—Venezuela announced that it would stop selling oil to ExxonMobil, which was in reality a lot of hot air, since it clarified that it would erspect all contracts leaving a rather insignificant amount of exports that could easily be sold to a trader and then to ExxonMobil, maybe the decision irrelevant.

All of these announcements made by the highest authorities of Venezuela work in ExxonMobil’s favor, as they clearly point to an unwillingness of Venezuela to pay or abide by the ruling of the Courts of other countries or honor the contracts that it signed and even the country’s laws and Constitution.

So, who is the traitor here?

The ones that have damaged Venezuela’s reputation or the ones that understand that the rule of law is essential for modern and developed contract?

We are not the traitors, the traitors are:

-The ones that have destroyed PDVSA capabilities for political purposes
-The ones that given away our oil for essentially free to other countries, while people live in extreme poverty and malnourished in Venezuela
-The ones that lie about PDVSA’s production figures
-The ones that not only fired 20,000 PDVSA workers, but boycotted them from working anywhere in Venezuela, forcing them to go find work for the competition abroad.
-The ones that have not invested in PDVSA for the future
-The ones that have not invested in maintenance, ruining oil wells.
-The ones that destroyed over a million barrels of oil production.
-The ones that destroyed INTEVEP, Venezuela’s world class research center on oil for their own political purposes.
-The ones that have not signed a single mayor new project in nine years (Remember Cristbal Colon, later Mariscal Sucre?)
-The ones that allow corruption to be rampant in PDVSA
-The ones that give fields and form partnerships with countries with no expertise and no money in oil.
-The ones that use PDVSA money to fund political projects and candidates in other countries
-The ones that want PDVSA to be “roja, rojita”
-The ones that violate people’s rights
-The ones that send suitcases full of cash for their pet projects
-The ones that use PDVSA as part of Chavez’ political party
-The ones that allow foreigners to decide and determine PDVSA’s future
-The ones that wiped out Orimulsion
-The ones that use PDVSA planes for personal vacations
-The ones that let the Government use PDVSA to solve its problems
-The ones that buyback PDVSA’s debt at a premium to save themselves from US legislation
-The ones that have eliminated transparency in PDVSA’s numbers
-The ones that sell bonds for PDVSA and assign them in arbitrary fashion

There are many more, the point is, THEY are the traitors and one day they will have to pay for it.

I will never forget or forgive them, will you?

A morning in the life of shortages…

February 17, 2008

Went out this morning like every Sunday to get the papers and a few things needed at home:

–At the first bakery, there was coffee but no milk, had it black. Bought bread even if it’s not my favorite, you never know if that other one will have it later. There was no cheese and the owner said he could not sell me any flour, it’s in short supply.

–First supermarket. There is no flour, no Coca Cola, no milk. there are eggs, only one type of cheese, not my favorite.

–Second bakery has no bread, no flour, didn’t even ask about my “marroncito”

–Second supermarket has some Coca Cola, no milk, no cheese, no flour.

–Third supermarket had the cheese, still no flour. Time to go home.

Thanks God I get El Nacional at home, for some reason, maybe unrelated to shortages, you could not get it at the stands as they did not receive it, which also happened yesterday.

Of course, for the Government this is all virtual, invented by the media…