The Devil's Excrement

It is not easy to build a power plant, complete a project, maintain a dam, keep a company from losing money. You need experts, professionals and the like. Because Chavismo prefers people who are very loyal, they have problems with all of this.

But even more surprising, the Chavez Government has had problems with completing bidding processes which are key to the country´s future. The reasons are many, they also have to do with the quality of people running the processes, but the main stumbling blocks that slows progress is simply ideology.

Last Thursday, PDVSA was supposed to finally give companies that want to bid for the heavy crude Carabobo oil field as part of the “Oil Sowing” program the final terms for the bids. This process has been delayed over and over and when the company failed to hand them over on Thrusday, it guaranteed that at least another six months will go by without the fields being awarded to anyone.

To give you an idea, when these projects were conceived, the scheduled called for the bidding process to be finished by December 2007 and the first barrel was supposed to be produced in August 2009 and the first upgraded barrel by 2011. Just to remind you, when you exploit a filed of heavy crude, you begin production of very low grade crude fairly rapidly, but the real deal comes when you finish the upgrader, a chemical-heat plant/process that allows you to improve the quality of the oil and sell it for much more. (More profit for PDVSA and the partner)

While the deadline was likely to be optimistic, the real delay is that idelogy has dominated the Government’s thinking and conditions are not that attractive.

Compare Venezuela’s Conditions with those of Alberta, Canada which has heavy oil fields of shale oil (These were Alberta’s conditions two years ago, they may have chanegd):

Venezuela                                Canada

Onwership         60% PDVSA                        100% company

Tax Rate              50%                                    25%

Royalty                33%                                    0% to 16% in time

Arbitration         Not International                    International

Financing           100% but you own 40%        100%, you own 100%

And therein lies the problem. A Government that has nationalized similar operations, breaking contracts and confiscating property, not only wants no international arbitration, but also wants to impose very tought conditions on minority partners, including that they provide 100% of the financing, given that PDVSA has no money to invest.

People always argue that the oil business is always good, however, think about it, if oil company X has to fund the project from its own credit lines, those are funds given to PDVSA, that you could use elsewhere to fund 100% of your ownership in a project.

Contrast this with the way this was funded in the terrible days of the IVth. Republic, where the projects were partnerships and these partnerships either issued bonds or borrowed money from banks as stand alone entities.

Remarkably, Chávez needs this. As oil income drops and production drops, one way out of this trap is to produce more oil and that was the idea of the Oil Sowing program, but any new revenue from this looks far into the future.

The Minsiter of Oil an Mines has said that he is willing to lower the royalty rate, but none of the other conditions. This seems to be the main reason while conditions were not announced, companies privately said that they would not participate under those terms.

Ideology has held back the process so far, we shall see in the next few days if a little pragmatism prevails . It probably will, after all, you can always nationalize them later.

This entry was posted on November 16, 2009 at 11:09 am and is filed under Venezuela.