The Devil's Excrement

Since most people do not read the comments in the blog I thought I would post here a comment made by a PDVSA worker:

“The only ones listening to the recent saber rattlings of Chavez and
Ramirez are the captive audiences of the “Nuevo PDVSA” employees for
fear of losing their new positions within the companies. From the anti
Exxon rallies Wednesday to the rumoured “Alo President” broadcast at
the Cero Negro facility Sunday, we have to put on our red shirts and
hats and cheer our support regardless of how stupid the message. Please
let this regime end quickly and allow Venezuela to become the
successful country it wants to be.”

 concerned

Thats is what this country has come to and what the workers of PDVSA have to endure. Very sad.

Mr. Chavez’s Bluff

If Venezuela’s strongman cut off oil exports to the United States, the first victim would be his regime.

Washington Post Friday, February 15, 2008; Page A20

ONE OF the more regrettable ironies of international relations is that the United States, through its voracious consumption of oil, underwrites President Hugo Chávez’s regime in Venezuela. In November alone, the United States bought more than 41 million barrels of Venezuelan crude, roughly 10 percent of all U.S. oil imports that month. If the Bush administration were really as committed to overthrowing Mr. Chávez as Mr. Chávez claims, the administration might be tempted to declare a boycott of Venezuelan oil. That would make a small but easily repaired dent in the U.S. economy, but it would devastate Venezuela, since it produces high-sulfur oil that, for the most part, can be refined only in special U.S.-based refineries.

So imagine our astonishment when Mr. Chávez himself threatened this week to cut off exports of crude oil to America. Perpetually angry at the United States, Mr. Chávez made this particular outburst because of his conflict with ExxonMobil, the American oil multinational whose operations in Venezuela he nationalized last year. While other oil companies accepted Mr. Chávez’s compensation terms and went quietly, Exxon Mobil fought the takeover through international arbitration and courts around the world. Last week, the company successfully moved to freeze $12 billion of Venezuelan assets, pending the outcome of the dispute. Enraged, Mr. Chávez announced: “If you end up freezing [Venezuelan assets] and it harms us, we’re going to harm you. Do you know how? We aren’t going to send oil to the United States.” In an interview published Tuesday in the Venezuelan newspaper Ultimas Noticias, Energy Minister Rafael Ramirez declared the country “ready” to make good on the threat.

But someone apparently explained to Mr. Chávez that Venezuela’s oil industry, already in decline because of Mr. Chávez’s mismanagement, might collapse if he actually carried out his threat. And without oil money, Mr. Chávez, who lost a referendum on extending his rule two months ago, cannot finance the subsidies and social spending that buy what’s left of his popular support in Venezuela. Mr. Chávez has now announced a modified, limited boycott: Henceforth, his state oil company will no longer sell crude directly to Exxon Mobil. This gesture will eventually prove meaningless as third parties come forward to buy the oil and then resell it to Exxon Mobil for refining. Also, Mr. Chávez’s government declared that the boycott does not apply to high-sulfur oil from the Cerro Negro field, which can be refined only at a facility that Venezuela and Exxon Mobil jointly operate in Chalmette, La. Two cheers for Exxon Mobil. In standing up to Mr. Chávez through peaceful, legal means, it has once again exposed the hollowness of the anti-imperialism with which he justifies his rule.

There has always been a very bizarre side to Chavez’ revolution. Bizarre in the way Government officials, including the leader himself, say absurd things or accuse the Empire or whatever obscure force they want to in being behind all of the problems the country faces. Then, there are the bombastic accusation such as murder plots, spying via Direct TV boxes or saying the CIA is in every corner of Venezuela sabotaging the actions of the revolution..

But lately, as the popularity of the Government has dropped like a stone and the infighting inside Chavismo has gained strength, things have actually become simply comical. While the whole thing may be too pathetic, one can only laugh at the things being said and the irresponsible behavior of Chavista Government officials and Deputies of the National Assembly as they all try to claim their revolutionary turf and look good in front of the autocrat. But in the end, all the comic relief does is accelerate the demise of the regime, as people are simply tired and find it hard to understand how yesterday’s heroes are today’s enemies. Additionally, people are beginning to blame Chavez and his Government for shortages and inflation, but see Chavez concerned more about international problems, instead of the reality the Venezuelan people are facing every day.

As Venezuela tries to defend itself from the asset freeze ordered by judges in three different countries, Chavismo tries to destroy with one hand what the very expensive lawyers PDVSA has hired are trying to accomplish with the other. Only yesterday, the lawyers were arguing that PDVSA was a serious company that would abide by the arbitration ruling whatever it may be, but then today the Venezuelan National Assembly, the same one that approved the expropriation of ExxonMobil’s stake in the Cerro Negro project, approves a motion encouraging the Government to withdraw from the World Bank.

Talk about being silly! You see, the arbitration panel in the contracts between PDVSA and ExxonMobil is an entity within the World Bank. Thus, by asking the Government to leave he World Bank, these Deputies are trying to prove exactly the opposite of what the Government’s lawyers are trying to show in Court. Even worse, when last year Chavez threatened to withdraw from the multilateral organizations such as the World Bank and the Interamerican Development Bank, the idea was set aside when Government authorities realized that some of the country’s sovereign bonds would enter in default if Venezuela stopped being a member of these organization, something included in the prospectus of the bonds, mostly issued under Chavez, so you can’t blame the IVth. Republic for it. But the Deputies appear to have a short attention span and have already forgotten this important detail.

Then, of course, there is Minister of Energy and Oil Ramirez, who must be in Chavez’ doghouse, because he finds the need to speak daily on the subject of the freeze of assets by the international Courts. This can only hurt you, particularly when you speak as a revolutionary radical trying to make amends with your boss or addressing the populist gallery of Chavismo.

Ramirez first said that PDVSA needs to be as radical as possible with ExxonMobil. How silly can you be? You are trying to sell yourself in Court abroad as a serious oil company that will honor the results of the arbitration and then you say your should be as radical as possible. How stupid can you really be? It would be much better to just shut up. But the revolution as no control over itself.

Even worse, Ramirez makes statements that strictly speaking would get him into trouble, if there was rule of law in Venezuela. First he says that PDVSA owes at most US$ 750 million for its stake in Cerro Negro, the book value of the enterprise. This is stupid. First of all, book value would never be acceptable in any negotiation. But even worse, Venezuelan law would never allow him to pay more than what he said, so that if the arbitration panel said PDVSA has to pay more or if he negotiates a settlement which is higher, he could be jailed for paying more than it was worth it.

Even worse, Ramirez also made statements suggesting an agreement with ConocoPhillips was close, which may be the case, but it is clear PDVSA wold like to close the negotiation just to show the Courts it is willing to do it and it is ExxonMobil which is the bad guy. But until your agreement is final, all you are doing is giving an edge to your adversary in the negotiations. You never negotiate in public!

But the most comic relief was supplied by the Governor of Miranda State
Diosdado Cabello, who once had a positive image but is looking more and
more clownish with time. You see Cabello’s brother replaced Tax
Superintendent Vielma Mora recently. Vielma Mora, who is supposed to be
a good manager and very efficient, was suddenly replaced ostensibly to run
for Mayor of the Metropolitan area of Caracas. Apparently, this was
just an excuse and he was replaced because of some sort of monkey
business he was associated with.

No sooner was Cabellos’ brother appointed to the position, that Deputy
Luis Tascon, of fascist list fame, and one of the symbols of the
revolution, accused him of paying 50% more for some vehicles in his previous position at the Ministry of Infrastructure. But the robolution has yet to figure out how to deal with corruption after nine years in power, so the Head of the Comptrolling Commission of the National Assembly did not accept the evidence.

But even worse, Cabello decided to attack Tascon publicly today accusing him, please don’t laugh, of being an “instrument of the Empire”, that old worn out excuse for everything that goes wrong in the country. But just as I started laughing about tis, Cabello added: “That Deputy (Tascon) recently went and spent one month at Bill Gates’ office, the man that has the most money from informatics in the US. It must be that the injected him with a chip in his blood”

Jeez, this from the man that is supposed to be the smartest one around Chavez, the IT expert of the revolution, defending his brother at any cost with the silliest statement anyone could come up with. This is the guy that wants to succeed Chavez! No wonder this country is in such bad shape!

But by now, the whole thing is funny, as Chavez and his buddies try to be radical, when polls suggest people are tired of that. But there is nothing funny about rampant corruption, runaway inflation and shortages. But we have gone from the bizarre to the theatrical and the revolution seems simply to be striking a pose, a la Maddona, as if it were in charge, but it is clear it is in a disarray as everyone jockeys for position to survive a possible implosion of the revolution.

And there is nothing comic about that!!!

A Federal Judge in Manhattan ratified the freeze of over US$ 300 million ordered by a lower Court in the Sourthern District of New York in late December.

PDVSA’s “dream team” of lawyers tried to argue that the measure should be suspended because there was no ruling against PDVSA by the arbitration panel and the only requirement for PDVSA was to subject the case to arbitration. They argued that if PDVSA were to lose, it would abide by the decision and it made no sense to assume that ExxonMobil would receive no compensation.

Of course, the lawyers arguments contradicted most of the statements made by PDVSA and Venezulan Government officials this week who have been trying to argue the case publicly, threatening to cut off oil exports to the US if any of PDVSA’s property is frozen (will they announce it tomorrow?), arguing they will not pay if they lose in arbitration because tis is a sovereign issue and this is all a part of an economic boycott by the US Government. (I am sure the judge did not like this part). Moreover, PDVSA did not wait long to announce that it was stopping exports to Exxon, which while only a boast, given that contracts will be respected, is an announcement that had no place at this time given that it was Venezuela that expropriated ExxonMobil’s share of the heavy crude Cerro Negro plant without compensation. Thus, the Venezuelan authorities did not help their cause and the judge did not buy the arguments by the great team of PDVSA lawyers who have to carry the weight of Chavez and Ramirez around in their legal arguments.

After the Government’s loss in December’s referendum, German born Sociologist Heinz Dieterich wrote an essay, which was very critical of how Chavismo was handling things. What was most remarkable about it was that Dieterich, supposedly the intellectual creator of Chavez’ XXIst. Century Socialism seemed to be speaking with the same words the Venezuelan opposition does.

Today, Dieterich’s latest piece reaches me and I find it remarkable how lucid it is, given that it is not an economist talking, but an educated sociologist, who seems to understand how the world works better than any of the men Chavez has put in the Ministry of finance or the Ministry of Planning in the last nine years. (There was one woman, but she was a leftover from Caldera’s time and she was quite knowledgeable).

Unfortunately, Dieterich’s solution to “saving” the revolution is as bad and absurd as the actions and the policies he criticizes Chavez for: He wants more stop gap policies and wasteful solutions so that Chavez can win the election and have the people pay the price later in the form of more shortages, distortions and inflation.

The truth is that Chavez failed to use his popularity to attempt to fix the problems creating too many new ones as I have detailed before in this blog. Dieterich is quite clear in his Draconian criticism of Chavez, his policies, his Government and the people that surround him. In fact, he is so critical, that he runs the risk of being accused of being an agent for the Empire.

I have not found a copy of the document on the Internet, I am sure it will show up soon, Tal Cual published a copy today, but it is by subscription only. Here are the highlights:

The revolution on its path to suicide by Hans Dieterich

1.Chavez has yet to assume the lesson from December 2nd.

Chavez’ defeat on December 2nd. 2007 was not a small misstep, as the President seems to think, but a qualitative change in the correlation of forces.That is why it is hard to understand why the President continues to apply a discursive-political-economic model, which failed on December 2nd.

The pre-December continuism is evident: there has not been a serious debate about the defeat: the critics and self-criticism of Government officials have been rhetorical; the dominant fraction of the New Political Class has been strengthened: the naming of improvised Ministers for the important Cabinet position continues and the behavioral structure continues to be alive. In two fronts of continuism, economic policy and the discourse, are the real dangers to his own future.

2. How the Government functions.

In this section Dieterich talks about recent announcements by the Government, which generate inflation, but then blames the private sector for it.

3. Incongruous economic discourse by the Government

The Governments economic discourse is superficial and it does not take advantage of its control of state media to give the population a real economic conscience of the situation. With frequency it is mostly rhetoric or mystification (of the problems)

Or can any economist find any sense in the following statement by the Minister of Planning that “the inflation we are having is the product of inertia. Inertial effects tend to stabilize in the medium term”. This is misinforming people, because all economists know that the peak in inflation was generated by bonuses, massive outflows of additional monetary liquidity, motivated mainly by the referendum and the easy credit given to the banking system.

What seriousness in terms of information can one give to the Minister of Feeding when he says that “it is not a secret that foodstuffs like rice, wheat and corn are going to enter critical shortages due to worldwide shortages due to the insistence by the empire of using them as bio fuels.” The reality is that in 2007 barely 1.25% of the productive land of the world is being used for bio fuels and the main factor in the price increases is the large growth of China, India and Russia and the economic recovery of Latin America:

The President also generates illusions when he says when increasing the price of milk. “I hope producers respond, instead of making cheese or taking it to Colombia, which I consider to be treason, a s that milk is for Venezuelans” In a chrematistic economic, and Venezuela is a chrematistic economy of markets, economic activity is founded on the basis of profit and interest, not based on value judgments such as fatherland or treason: until Chavez introduces structures of value in the economy, complaints about patriotism are worthless.

And the President generates an illusion when he says that he will expropriate the great food and medicine production networks. If today he is not capable of guaranteeing chicken and milk in the markets, with what state logistic will he substitute the function of those same networks? Why threaten, Sun Tzu used to say, if you cannot fulfill your threats?

4. Inflation and shortages in the light of economic science

(After describing the economic variables and relation between goods and money, Dieterich then describes how inflation and its counterpart deflation originate as disequilibrium between money and supply of goods and then):

The main causes of inflation are four: 1) Increase in the price of imports. 2) Economic boycott. 3) A natural catastrophe and 4) A disproportionate increase in monetary liquidity. The first two factors are the main argument in the Government’s discourse, the third does not apply in Venezuela and the fourth is the fundamental factor in Venezuela’s inflation. (You’ve read that here before, no?)

The shortages in merchandise in a chrematistic economy occurs when the sale price (profit margin) are not attractive for the producer or seller (capitalist). This is the case of Venezuela. Many of the prices fixed by the State which affect 400 items are so low that the offer of products disappears, either because they stop producing or because they sell in markets with higher prices, such as Colombia or black markets.

5. Economic policy and the political future of Hugo Chavez

When inflation reached 17% in 2006, the Government established an official inflation target of 12%. That target was not reached. According to the Central Bank, the CPI was 22.55. However, if you take into account that many of the basic goods have frozen prices, it is realistic to assume that real inflation was around 28%. Such a high rate has two negative consequences: It destroys both the economy as well as the Government responsible for it.

One has to mention, of course, black markets and hoarding for speculative purposes as negative factors for the Government’s policies. This, however, with two considerations: a) its causes are more economic than political, resulting from the distortion of relative market prices and b) the only way to end with these are economic mechanisms, not police or political ones.

6. Electoral Year 2008: How to avoid an economic-political crisis?

The massive injection of money in the economy in electoral times for any Government and even in some cases, price controls and basic services is quite normal. This recipe was possible for electoral year 2006 and electoral year 2007, but in this manner, it’s dysfunctional and unsustainable for electoral year 2008.

To control inflation and end shortages, the President only has two options: a) Reduce excess liquidity via fiscal policies (higher taxes) monetary (interest rates) or redistribution. b) Assume as the State the cost of inflation. Option (a) will not be applied in an election year. Option (b) requires that you resolve the cost-benefit relatio
nship to small and medium size producers via realistic prices with guarantees or subsidies. It is a rentist model such as those of small farmers in the European Union or the US, but guarantees the political loyalty of those social classes and will allow time to look for a way out of the economic straight jacket self imposed by price controls.

Combined with that you need a massive program of imports in which the State will assume all of the expenses that exceed desired prices. Even if the price of oil oscillates between $65 and $80 the Venezuelan state will have sufficient capacity (I disagree with this). There is probably no time to create the logistics before the November 2008 elections, which means you have to use existing infrastructure. Only the church, the schools and the military have the presence in all corners of the country:

This is the only remaining path left to the President to avoid a crisis in 2008: To find the required inputs the President will have to get rid of the courtesan feuds of the New Political Class that surround him. If he can’t or does not want to take that step, in December 2008 he will repeat at a much larger scale what he had to love on December 2nd. 2007.

7. The ethics of truth and the President’s dilemma

One of the most worrisome political phenomena in the Venezuelan process is the growing emptiness of the ethical discourse of the Government. Instead of explaining scientifically (!) reality to the citizens, they are treated discursively with the same manipulative techniques used by bourgeois Governments. With that procedure you don’t create revolutionary conscience but clientele.

To the atrophy to the discursive veracity you have to add the progressive exhaustion of the two strategic discourses of the President: Bolivarianism and XXIst. Century Socialism. The first, because it does not offer new horizons internally in the country and the second, because the President has not created even one single economic institution qualitatively different from market economies, that is, post-capitalist.

The President faces the following dilemma: either he breaks with the pre-December status quo or continuism will end up being the end of the Bolivarian revolution.

Apparently the robolution of Hugo Chavez has decided that it is better to destroy the country for the sake of ideology than to reverse course on the failed policies of the last nine years as Hugo Chavez has ruled Venezuela as if it were his private farm, using his naive beliefs as to how things should work but, despite failure after failure, the decision is to stay the course, the country be damned.

Long gone are the days of hailing revolutionary “self-sufficiency”� as every single sector the revolution has tried to fix or adapt to its ideology is now broken by failure.

Large farm estate were expropriated, mostly without compensation of any kind and distributed in small lots to farmers that have long gone abandoned them, as the absence of know-how, advise and more importantly, financing, doomed them to failure from day one. Not only were the sizes of the plots of land too small, but since farmers were not given ownership, they had no property to guarantee loans and the famed agricultural loans at special interest rates have gone to the usual suspects: The few profitable agro-industrial enterprises in the hands of those with knowledge, experience and yes, with money, who mostly arbitrage the financial system, borrowing at preferential rates and depositing in those banks paying high yields in their deposit accounts. Or maybe simply buying US dollars in the “non-existent” parallel swap market, paying rates below local inflation and waiting for further devaluations of the currency.

Of course, the robolution also tried to get into the more industrial part of the agricultural business importing plants from Cuba for sugar processing all of which, yes all of them, are behind three years, creating further bottlenecks to the few hard souls that remained in the fields most of which abandoned sugar for crops not under regulation or which the Government has paid little attention to.

Five years of controlled prices, combined with five years of 18% average inflation have destroyed the country’s productive industries, while the Government continues to import at the official exchange rate now in its fourth continuous year at Bs. 2,150 per US$. Small increments in prices have lately been approved, at an incredibly slow pace (it was time for rice this week), but new regulated prices are imposed, insuring that nobody will make any new investments.

And if things are not working, why not intervene customs at the country’s biggest port to “audit”� where food imports are going, as if auditing them at the source will in any way change where they end up. But such is the revolution, naive, inefficient and incompetent. Who cares if you introduce weeks of delays in the middle of the biggest food shortages the country has ever experienced? The private sector can sustain the losses.

Those near the border are detained as being suspect of smuggling things into Colombia, while the reality is that people actually now go to Colombian border towns to fill up on the overflowing shelves of Colombian supermarkets in marked contrast to the empty ones on this side of the revolution.

But rather than admit the failure of the ignorant and naive policies invented by the autocrat, the reaction is to have PDVSA distribute food, threaten industries with expropriation via illegal decrees, even suggest some will be expropriated if they don’t sell their products to the Government as if it had some form of pecking order above the efficient distribution to the people.

Things are so ridiculous that milk producers are even accused of dumping milk in rivers, never producing a proof, the revolution is always right, it is private enterprise who represents the devil, the empire and yes, the CIA in the form of Bush or whomever may be elected in November from Obama to Huckabee.

To say nothing of the famous cooperatives, mostly inoperative and defunct, with billions wasted in Government financing to projects doomed to failure from day one, as predicted in this blog. Invepal may be the most dramatic case, in which a company in operation was taken over, without compensation to the owners or banks that had lent it money, only to see it disappear, together with the Deputy who made it her showcase to fame, but who carefully stays away from the same workers she drove to this crazy adventure into obvious self-destruction.

Today, to insure the final destruction of the agricultural sector the Government announces massive imports of milk, meat and wheat at the official rate of exchange just to insure wiping out local industry before they leave. All in exchange for oil, of which we have less and less as the days go by.

And then there is the Venezuelan oil industry, the same one that everyone thought was impossible to destroy. By now, even the cheerleaders of the robolution are convinced that the fabled 3.3 millions of barrels of oil a day only exist in Rafael Ramirez’ imagination. The true number is around 2.4 to 2.5 million barrels a day. With an irresponsible subsidy for gasoline and imported cars (for the rich!), gasoline consumption has gone from 420,000 barrels of gasoline a day to 700,000, barely leaving some 1.7-1.8 millions of barrels of oil for exports, as the remainder is being subsidized by a company with cash flow problems, on top of US$ 12 billion in social spending, no investment in increasing production and US$ 15 billion in gas subsidies.

Just think, at US$ 100 per barrel, PDVSA receives US$ 63 billion a year for its exports, or US$ 5.25 billion per month, not far from the US$ 3.8 billion given out by CADIVI, the foreign exchange control office in January, which corresponds to US$ 74 per barrel, scarily close to today’s value and a clear indication of how stretched things are in Venezuela, with a recession looming in the US and maybe the world.

Add to that the firing of the country’s oil workforce, 20,000 strong, increasing personnel from 42,000 before the firings at PDVSA to 70,000 today and putting the company in the hands of the incompetent and ignorant and you have a recipe for self-destruction. PDVSA is destructible after all.

And as PDVSA begins to feel the cash flow crunch, you expropriate your partners without fair compensation, hoping against all hopes that oil will continue to go up to save the day once again. And your partners will bow to the autocrat.

Then one day one of them does not, and decides to try to get fair payment. You invoke sovereignty at the same time you violated it, firing 20,000 of your best advisers for political reasons, or compromised oil production with future sales, which is forbidden by the country’s legislation. Then you accuse the empire, bully it that you will do what you have never prepared yourself to do: cutting off oil supplies to the US Or, like today, saying you cut off oil supplies to Exxon. But wait; there is a footnote in your pompous announcement, “except for valid contracts”. Since almost all the oil you sell to Exxon is under these contracts then these are empty words, traders (your own?) can buy the rest from you and then resell it to Exxon and no harm done. But the medium is the message and the robolution is all messages, no substance as nine years of it demonstrates.

And the robolutionaries add to the histrionics, suggesting that the Prosecutor accuse of treason the members of Congress that were part of the oil opening which allowed the heavy rude partnership, when over 95% of the Deputies approved these contracts in the mid nineties. The suggestion is as ignorant as everything in the revolution, as many of the now Chavistas Deputies and officials, such as Rodrigo Cabezas, Minister of Finance until the end of 2007 were part of that almost unanimous majority which approved this “treason” against the Nation. Are we all traitors after all?

And then there is corruption. From suitcases full of cash, to financial transactions to the outright stealing of money, never has Venezuela, or any other country for that matter seen the dance of billions in corruption we have seen. A Russian friend was in Caracas rec
ently and after a few days talking to analysts and Government officials, told me that prior to his visit he had thought his country to be the most corrupt in the world, but it was little comfort to see Venezuela top it as easy as it seems to be doing it.

Lost in the PDVSA/Exxon shuffle was the sale of the Fonden structured notes to some “friendly” banks last Ftiday in order to move down the parallel swap market, which according to the National Assembly does not exist. A strange priority to have when the swap rate is not under pressure, as the Government self-induced liquidity crisis has kept it low recently.

Until you see the numbers and realize the notes are sold to friendly banks at 105% at the official rate of exchange of Bs. 2.15 per US$ Thus one million dollars cost you 2.2575 million Bolivars. But the notes can be sold for 60%, so you only get US$ 600,000 for them, but you can sell these dollars at Bs. 5 per US$, or a cool profit 850 thousand Bolivars 1.4 per dollar from which you have to subtract the commissions to those handing out this largesse to these friendly banks, for their “intermediation” efforts, or a cool 62% profit between “bankers” and handlers. Maybe they have no time to get rich like their predecessors and thus the rush.

It is as if lost in its own incompetence, the Government has decided to hand an empty shell to whomever or whatever is the opposition when this all self-destructs. Except that this is spiraling down so fast, that while they may be thinking they can survive for at least a year, their own actions will precipitate their own and revolutionary demise before the dawn of 2009.

Today, El Universal says that Ecoanalitica calculates that the value of Cerro Negro as a firm is around US$ 3.4 billion and Exxon’s compensation should be in the range of US$ 1.3 billion, well below the injunction values of US$ 12 billion requested by ExxonMobil.

The number seems low to me when compared to similar companies abroad. The problem is that it is not always easy to make such comparisons not only because the companies are in different countries, but also because Cerro Negro as a company had no future expansion, while companies like Suncor in Canada, against which we can measure Cerro Negro are aggressively expanding their productions.

But we can take a stab by looking at the numbers. Suncor today had a Price/Earnings ratio of 22, a Price to sales ratio of 3, a price to cash flow of 13.4 and a Price to Book ratio of 4.

While I have not seen a cash flow statement from Cerro Negro or earnings recently, we can try to narrow it down.

The easiest one is Price to Sales. Suncor sells US$ 13.5 billion per year, while my estimate for Cerro Negro sales are US$ 3.0 billion. Thus, this would suggest a price of US$ 9 billion for Cerro Negro, except that you would have to lower the value not only because it is in Venezuela, but also because taxes and royalties are much higher in Venezuela for these companies. How much higher? Well, royalties are 30% in Venezuela and the tax rate is 50%, compared to 16.5% and 25% in Alberta.

In terms of earnings, I estimate Cerro Negro makes about US$ 350 million a year, which would give US$ 7 billion if it had a similar P/E as Suncor, but it should be lower because of the higher risk premium of being in Venezuela.

In terms of book value, My memory suggests that this was around US$ 1.5 billion which places an equivalent number of 4 for Suncor around US$ 6 billion.

As you can see, all of the numbers I get are above US$ 6 billion which should be an upper bound given that this is a project in Venezuela. If we assume that the risk premium shaves off 25% of the value, which is reasonable, then the numbers would be from US$ 4.5 billion to US$ 7.2. Since ExxonMobil owned 42.5% of Cerro Negro, then this implies that ExxonMobil is owed somewhere between US$ 1.9 and US$ 3 billion, well below the numbers of the injunction and certainly not something PDVSA (or Fonden) can not afford to pay at this time.

The main difference between Ecoanalitica’s estimate and our own is that Ecoanalitica uses the value of the settlement between PDVSA and Sincor as a benchmark, but I believe this was a substantially low value than the true worth of that company.

For the first time since it became public that ExxonMobil had obtained Court orders to freeze PDVSA’s assets, President Hugo Chavez referred to the matter and he did it in his characteristic bully style, threatening to cut off oil supplies to the US and explicitly saying that he has given out orders to do so if any of PDVSA’s property is seized.

While Chavez can do anything, nobody really knows how he may react to anything, and I am sure markets will be rattled tomorrow when they open, the truth is that if this were truly what he intended to do, he would have ordered it already, because the order of attachment by a New York Court has already frozen US$ 325 million that PDVSA held in an account in New York. Thus, saying that “if you truly freeze something…we will stop sending oil to the US” is just playing for the gallery, it already happened. So, why wait?

The truth is that not only did Chavez illegally take over ExxonMobil’s investment in Venezuela, but has yet to compensate that company. Moreover, the whole thing has been badly handled in the belief that ExxonMobil will simply accept whatever PDVSA offered, like the state controlled oil companies of Norway and France did with their own project.

In fact, Chavez should have known that these injunctions were requested by ExxonMobil as far back as December, a fact that was hidden from the Venezuelan people. At least in the case of the US Court, ExxonMobil introduced the injunction in the Souhern District of New York on December 27th. and that same day Judge Batts ruled on the case, filed under number 07-CV-11590 and ordered PDVSA’s property attached. Moreover, the Judge ratified the measures on January 2nd and again on Jan. 8th. after talking to PDVSA’s lawyers. It was not until January 24th. that PDVSA’s lawyers actually replied to the injunction in the US.

Thus, while Minister Ramirez accuses the media of not informing or lying, it turns out that it is the Chavez administration that has been lying or hiding the information from the “people” that they claim to love so much and want to take into account in their decisions. Thus, if the letters of attachment had not reached the banks, we probably would not yet know of the injunctions, proving once again that Chavez is running Venezuela as if it was his private property and with total disregard for the law and the right of information given by his 2000 Constitution.

Thus, we will still have to find out if this is just another Chavez bully moment or if he means it. In fact, the injunctions by themselves create many problems for PDVSA that may actually make it more difficult for PDVSA to export oil not only to the US, but to many other places and actually get paid for it.

The question is whether Chavez could benefit from such a move. I doubt it. If Venezuela were to stop exporting oil to the US, it will find it difficult to export the same oil elsewhere because of its characteristics (high sulfur). This will create more financial problems in Venezuela than anywhere else, where shortages are already present and the population is tired of promises and inefficiencies. Thus, if Chavez dared to do it, it will likely become a defining moment in his demise, as people have put up with his rants and ideology because there were unrealized promises attached to them. But somehow it seems this is the wrong time to ask the people to sacrifice in the name of his revolution.

The ExxonMobil injunctions would only become significant if Chavez were to take the “nutty” road, as I suggested the first day I heard about them, such a road will only be bad for us Venezuelans but I still believe there is a very low probability that Chavez will take it.

P.S. Just out of curiosity, the firm representing Venezuela Curtis, Mallet-Prevost, Colt & Mostle is the descendant of the one that represented Venezuela in its case against Great Britain over the British Guayana, not a promising precedent…