The Devil's Excrement

President Chavez announced today that he was increasing oil royalties to the heavy oil projects from 1% to 16.66%. These projects are Petrozuata, Hamaca, Cerro Negro and Sincor. Reportedly hamaca already pays the 16.6%. These are all projects in which heavy crudes are transformed into synthetic fuels. These four projects produce a combined total of about 500,000 barrels a day today, but production is expected to reach 600,000 barrels within the next two years. Venezuela’s state oil company PDVSA is a minority partner in all of these projects.

Three years ago, Venezuela’s National Assembly approved a new hydrocarbons bill, that increased all royalties from oil exploitation to 16.6% but in Venezuela, laws can not be applied retroactively, so it did not apply to projects approved before the law. In general, at current levels of oil prices, this should not be a problem for these projects, most of which were planned assuming West Texas Intermediate prices of US$ 15 per barrel. They were all given a 1% tax for the first nine years of the production as an incentive to start them. Before these projects came into existence, there were no similar projects in Venezuela.

Most of these projects were built using debt issued in US dollars by the projects themselves. Bonds were issued which were guaranteed by the company’s partners until the projects met certain technical specifications of actual production. Many of the bonds are of the sinking fund type, in which after a certain date, they pay not only interest on the principal, but also part for the principal. This structure is used whenever investors may find that it is hard to look down the line to the maturity of the bond.

As an example, the Cerro Negro 2009 bond has a coupon of 7.33% per year, but has returned principal since three years ago at a rate of 6% per semester, so that only 70% of its principal is still outstanding. It currently has a yield of 5.75%, which is quite attractive given worldwide interest rates. Another project, Petrozuata, has a bond maturing in 2017 which pays no principal until 2008 and has a coupon of 8.22%. I consider this bond to be one of the most attractive fixed income investments in Venezuela.

While it is reasonable, given current oil prices, to increase the royalty to this level, I am not comfortable with the way it has been done. First of all, these were contracts signed by PDVSA in which that royalty percentage was negotiated. Second, it would seem more reasonable to negotiate it with the companies, establishing a sliding schedule in case prices go down in the future. Third, I understand that all of the projects are looking to expand their operations in Venezuela; maybe this could have been negotiated rather than imposed, as it does not send the best signal to investors looking for new oil deals in Venezuela.

The biggest problem in my mind with the decision is one of competitiveness; Canada and Venezuela have the biggest heavy oil reserves in the world. These projects are similar to much larger projects in Canada such as Suncor, which have found a way to exploit these heavy crudes. In Canada, according to the Suncor report, the royalty is 1%, which is probably the reason why PDVSA negotiated that rate when the projects were started. Note that there are royalties and there are taxes, in both countries the royalty was 1% until today. Suncor as a company pays an effective tax rate of 36% which is probably similar to Venezuela’s. Thus, Canada is more attractive from that point of view.

I am in no position no to know or evaluate at this time whether this hurts Venezuela’s competitive advantage in heavy crudes or not. There are other issues to consider such as production costs. These projects make use of natural gas, which is cheaper in Venezuela, so that may be an advantage. Financially at current oil prices the decision should not affect any of the projects as they were planned for much lower oil prices. The one affected the most is Hamaca, which only came on line recently, the rest have benefited for quiet a while of the lower royalty.

In any case, you read The Devil’s for free and today you get, also for free, two investment recommendations: If you are aggressive buy Suncor stock (NYSE:SU), the company’s cash flow is fantastic and if oil prices stay high it will keep going up. If you just want income, buy Petrozuata’s 2017 bond with a coupon and yield of 8.22% for the next 13 years and you start getting back you principal in 2008. Benefit from the Devil’s Excrement, not this one, the real one!

(You also get to see my new blooms for free!!!)

President Chavez announced today that he was increasing oil royalties to the heavy oil projects from 1% to 16.66%. These projects are Petrozuata, Hamaca, Cerro Negro and Sincor. Reportedly hamaca already pays the 16.6%. These are all projects in which heavy crudes are transformed into synthetic fuels. These four projects produce a combined total of about 500,000 barrels a day today, but production is expected to reach 600,000 barrels within the next two years. Venezuela’s state oil company PDVSA is a minority partner in all of these projects.

Three years ago, Venezuela’s National Assembly approved a new hydrocarbons bill, that increased all royalties from oil exploitation to 16.6% but in Venezuela, laws can not be applied retroactively, so it did not apply to projects approved before the law. In general, at current levels of oil prices, this should not be a problem for these projects, most of which were planned assuming West Texas Intermediate prices of US$ 15 per barrel. They were all given a 1% tax for the first nine years of the production as an incentive to start them. Before these projects came into existence, there were no similar projects in Venezuela.

Most of these projects were built using debt issued in US dollars by the projects themselves. Bonds were issued which were guaranteed by the company’s partners until the projects met certain technical specifications of actual production. Many of the bonds are of the sinking fund type, in which after a certain date, they pay not only interest on the principal, but also part for the principal. This structure is used whenever investors may find that it is hard to look down the line to the maturity of the bond.

As an example, the Cerro Negro 2009 bond has a coupon of 7.33% per year, but has returned principal since three years ago at a rate of 6% per semester, so that only 70% of its principal is still outstanding. It currently has a yield of 5.75%, which is quite attractive given worldwide interest rates. Another project, Petrozuata, has a bond maturing in 2017 which pays no principal until 2008 and has a coupon of 8.22%. I consider this bond to be one of the most attractive fixed income investments in Venezuela.

While it is reasonable, given current oil prices, to increase the royalty to this level, I am not comfortable with the way it has been done. First of all, these were contracts signed by PDVSA in which that royalty percentage was negotiated. Second, it would seem more reasonable to negotiate it with the companies, establishing a sliding schedule in case prices go down in the future. Third, I understand that all of the projects are looking to expand their operations in Venezuela; maybe this could have been negotiated rather than imposed, as it does not send the best signal to investors looking for new oil deals in Venezuela.

The biggest problem in my mind with the decision is one of competitiveness; Canada and Venezuela have the biggest heavy oil reserves in the world. These projects are similar to much larger projects in Canada such as Suncor, which have found a way to exploit these heavy crudes. In Canada, according to the Suncor report, the royalty is 1%, which is probably the reason why PDVSA negotiated that rate when the projects were started. Note that there are royalties and there are taxes, in both countries the royalty was 1% until today. Suncor as a company pays an effective tax rate of 36% which is probably similar to Venezuela’s. Thus, Canada is more attractive from that point of view.

I am in no position no to know or evaluate at this time whether this hurts Venezuela’s competitive advantage in heavy crudes or not. There are other issues to consider such as production costs. These projects make use of natural gas, which is cheaper in Venezuela, so that may be an advantage. Financially at current oil prices the decision should not affect any of the projects as they were planned for much lower oil prices. The one affected the most is Hamaca, which only came on line recently, the rest have benefited for quiet a while of the lower royalty.

In any case, you read The Devil’s for free and today you get, also for free, two investment recommendations: If you are aggressive buy Suncor stock (NYSE:SU), the company’s cash flow is fantastic and if oil prices stay high it will keep going up. If you just want income, buy Petrozuata’s 2017 bond with a coupon and yield of 8.22% for the next 13 years and you start getting back you principal in 2008. Benefit from the Devil’s Excrement, not this one, the real one!

(You also get to see my new blooms for free!!!)

CNE Directors Carrasquero and Rodriguez in separate (here and here) statements, laugh at us and take us for fools on the issue of voters with no addresses. Maybe they are right, we were quite foolish on everything we accepted on the day of the recall vote and the weeks leading to it, but their sheer arrogance on this issue is just incredible. They want to turn the problem of 1.8 million voters without addresses in the electoral registry into an issue of social justice and compassion, arguing that these people have a right to vote even if their houses have no proper address. This is simply not the issue at all and shows their actual ignorance about the reality of life in the barrios when they want to turn the controversy into whether barrios have proper addresses or not.

The truth is that even the poorest barrios do have a system of addresses, it may not be Manhattan and it may be complicated, but barrios have calles, veredas, senderos, sectores, parcelas,  carreras and dozens of complicated nomenclatures that do lead to where people live. This is not a case of incomplete addresses it is a case of NO addresses which violates the electoral law that requires it, mostly as a way of insuring that political parties do not move voters across municipalities and even states in order to manipulate the outcome of elections.

The charge by Carrasquero and Rodriguez is so ridiculous, that in the Chacao municipality of Caracas, where the barrios are quite well established and have well defined addresses, 40% of new voters do not have an address in their registration. The total numbers are 2.11 million new voters out of which 1.73 million have no address in their registration. In some states, the total number of new voters without addresses reaches 99% and yes, the accusation is that many of these voters do not even exist.

Meanwhile while Carrasquero and Rodriguez are so careless about something that is explicitly stated in the electoral law, the CNE President signed a letter to the Coordinadora Democrática saying that they will simply not hand over any of the information requested about the recall vote on August 15^th. including the notebooks that could be used to check if the number of voters per machine equals that of the notebooks. The argument is that they “tacitly renounced to that right” when they asked that the process be declared invalid. Thus, the CNE refuses to hand over data, when Venezuelan legislation grants the citizens the right to public data, using a convoluted legal argument. Thus, legality becomes for Carrasquero, who is a lawyer, something to be used if convenient and ignored if it fails to fit his political purposes and he laughs at us again.  

They keep laughing at us, but we keep trying…should we?

Another great Editorial in Thursday’s Tal Cual

The Curse by Teodoro Petkoff

My subtitle: The Devil’s Excrement revisited

Those that do not learn from history are condemned to repeating it, said a philosopher (and another one had said before him that repetition, in general, is like a farce). Venezuela is living anew under the sign of the oil boom; once again the umbrella of oil prices beyond all delirium, envelopes our economy…and our politics. In the 70’s we live through this and also in the 80’s. For the third time, the country is literally swimming in petrodollars.

What remained of those booms? Were the dreams of development, social well being and political stability fulfilled? On the contrary! a long period of economic decline that has now lasted for a quarter of a century, accompanied by the horrifying impoverishment of our society, both in its middle levels as well as the most humble ones.

Well into the 90’s, the signs of crisis in the political system were visible. The “Caracazo”, the military coups of 1992, the victory of Caldera the outsider, leading a coalition of “groupuscules” from the left, that announced the Chavez’ subsequent victory, were the tolls of a gigantic bell of destiny that was ringing for a weakened political system.

In the happy years of the “fat barrels”, the state apparatus hypertrophied itself, it turned heavy and obese, the bureaucratic fat covered its muscles, state institutions were sacrificed in the altar of presidentialism and executivism (the parliament was minimized, justice mediatized, the mechanisms of control notched down). The State expanded into dozens of new organizations and companies, whose inefficiency ran even with the out of orbit job mania that populated them. Rentism and the search for income were the dominant variables both in the public and the private sector.

The maximization of oil income exaggerated social, economic and political pressures coming from all interest groups of society, to put their hand, legally or illegally, to the largest possible piece of that income. The overflow of corruption was the inevitable excrescence that appeared on the body of the administration.

CAP had offered to manage abundance with criteria of shortage. It was not possible.

Even before the “thin barrels’ had returned, the oil income had diluted in an out of control current public spending, in expensive projects and of little or null profitability and an important part of it moved abroad, in a colossal capital flight. It is the curse of the petrosates.

Can we escape this time that unknown force? Up to know in the behavior of Chavez Government there is nothing that point to it. They are repeating the patterns of behavior that once left the bitter retaste of failure. Countering the dynamic and logic of petrostate societies requires political will, together with the knowledge of them, which does not appear to exist in the Government.

Once again rentism marks public economic behavior; once again pressures of all sorts are taking us to waste gigantic income, to increment the fiscal deficit and to make grow public debt. The state apparatus expands even more its jurisdiction…and its inefficiency. Super ministries, superpowers, missions express: It is a broken record. Everything has the air of something seen before.

Another great Editorial in Thursday’s Tal Cual

The Curse by Teodoro Petkoff

My subtitle: The Devil’s Excrement revisited

Those that do not learn from history are condemned to repeating it, said a philosopher (and another one had said before him that repetition, in general, is like a farce). Venezuela is living anew under the sign of the oil boom; once again the umbrella of oil prices beyond all delirium, envelopes our economy…and our politics. In the 70’s we live through this and also in the 80’s. For the third time, the country is literally swimming in petrodollars.

What remained of those booms? Were the dreams of development, social well being and political stability fulfilled? On the contrary! a long period of economic decline that has now lasted for a quarter of a century, accompanied by the horrifying impoverishment of our society, both in its middle levels as well as the most humble ones.

Well into the 90’s, the signs of crisis in the political system were visible. The “Caracazo”, the military coups of 1992, the victory of Caldera the outsider, leading a coalition of “groupuscules” from the left, that announced the Chavez’ subsequent victory, were the tolls of a gigantic bell of destiny that was ringing for a weakened political system.

In the happy years of the “fat barrels”, the state apparatus hypertrophied itself, it turned heavy and obese, the bureaucratic fat covered its muscles, state institutions were sacrificed in the altar of presidentialism and executivism (the parliament was minimized, justice mediatized, the mechanisms of control notched down). The State expanded into dozens of new organizations and companies, whose inefficiency ran even with the out of orbit job mania that populated them. Rentism and the search for income were the dominant variables both in the public and the private sector.

The maximization of oil income exaggerated social, economic and political pressures coming from all interest groups of society, to put their hand, legally or illegally, to the largest possible piece of that income. The overflow of corruption was the inevitable excrescence that appeared on the body of the administration.

CAP had offered to manage abundance with criteria of shortage. It was not possible.

Even before the “thin barrels’ had returned, the oil income had diluted in an out of control current public spending, in expensive projects and of little or null profitability and an important part of it moved abroad, in a colossal capital flight. It is the curse of the petrosates.

Can we escape this time that unknown force? Up to know in the behavior of Chavez Government there is nothing that point to it. They are repeating the patterns of behavior that once left the bitter retaste of failure. Countering the dynamic and logic of petrostate societies requires political will, together with the knowledge of them, which does not appear to exist in the Government.

Once again rentism marks public economic behavior; once again pressures of all sorts are taking us to waste gigantic income, to increment the fiscal deficit and to make grow public debt. The state apparatus expands even more its jurisdiction…and its inefficiency. Super ministries, superpowers, missions express: It is a broken record. Everything has the air of something seen before.

Another great Editorial in Thursday’s Tal Cual

The Curse by Teodoro Petkoff

My subtitle: The Devil’s Excrement revisited

Those that do not learn from history are condemned to repeating it, said a philosopher (and another one had said before him that repetition, in general, is like a farce). Venezuela is living anew under the sign of the oil boom; once again the umbrella of oil prices beyond all delirium, envelopes our economy…and our politics. In the 70’s we live through this and also in the 80’s. For the third time, the country is literally swimming in petrodollars.

What remained of those booms? Were the dreams of development, social well being and political stability fulfilled? On the contrary! a long period of economic decline that has now lasted for a quarter of a century, accompanied by the horrifying impoverishment of our society, both in its middle levels as well as the most humble ones.

Well into the 90’s, the signs of crisis in the political system were visible. The “Caracazo”, the military coups of 1992, the victory of Caldera the outsider, leading a coalition of “groupuscules” from the left, that announced the Chavez’ subsequent victory, were the tolls of a gigantic bell of destiny that was ringing for a weakened political system.

In the happy years of the “fat barrels”, the state apparatus hypertrophied itself, it turned heavy and obese, the bureaucratic fat covered its muscles, state institutions were sacrificed in the altar of presidentialism and executivism (the parliament was minimized, justice mediatized, the mechanisms of control notched down). The State expanded into dozens of new organizations and companies, whose inefficiency ran even with the out of orbit job mania that populated them. Rentism and the search for income were the dominant variables both in the public and the private sector.

The maximization of oil income exaggerated social, economic and political pressures coming from all interest groups of society, to put their hand, legally or illegally, to the largest possible piece of that income. The overflow of corruption was the inevitable excrescence that appeared on the body of the administration.

CAP had offered to manage abundance with criteria of shortage. It was not possible.

Even before the “thin barrels’ had returned, the oil income had diluted in an out of control current public spending, in expensive projects and of little or null profitability and an important part of it moved abroad, in a colossal capital flight. It is the curse of the petrosates.

Can we escape this time that unknown force? Up to know in the behavior of Chavez Government there is nothing that point to it. They are repeating the patterns of behavior that once left the bitter retaste of failure. Countering the dynamic and logic of petrostate societies requires political will, together with the knowledge of them, which does not appear to exist in the Government.

Once again rentism marks public economic behavior; once again pressures of all sorts are taking us to waste gigantic income, to increment the fiscal deficit and to make grow public debt. The state apparatus expands even more its jurisdiction…and its inefficiency. Super ministries, superpowers, missions express: It is a broken record. Everything has the air of something seen before.

Paris Hilton t-shirt for the US election with its adaption to Venezuela

Paris Hilton t-shirt for the US election with its adaption to Venezuela

From today’s Descifrado on the “Sumate” revision of the penal code:

“During a meeting with reporters from the foreign media that took place on Friday, the Venezuelan Ambassador to Brazil, Julio Garcia Montoya, confirmed that the Government’s bill for reform of the penal code includes a severe penalty for NGO’s that receive financing from abroad, was taylor made to punish Súmate. “That organization was devoted to destabilize the Venezuelan Government and that can not be” said the official. In his judgment, however, the tough penalties proposed(up to thirty years in prison) for the NGO’s that receive foreign funding should be mad softer in the case of organization that are not devoted to destabilize “because Sumate is an exception” concluded the Bolivarian ambassador.”

This my friends is called intolerance and political persecution of your enemies. This has no place in a democracy. The Ambassador admits that they are creating a law specifically to punish an organization that promotes electoral participation. Participation used to be Chavez’ rallying cry in the old days when he was a candidate and in the first three years of his presidency until people started participating against him. But then the definition was changed and when it is promoted by the opposition it is called destabilization. This is the same President that refused to sign the declaration at the end of the Quebec summit because he did not believe in the concept of a representative democracy, but only in that of a participatory democracy. Is this a cynical and undemocratic revolution or what?

From today’s Descifrado on the “Sumate” revision of the penal code:

“During a meeting with reporters from the foreign media that took place on Friday, the Venezuelan Ambassador to Brazil, Julio Garcia Montoya, confirmed that the Government’s bill for reform of the penal code includes a severe penalty for NGO’s that receive financing from abroad, was taylor made to punish Súmate. “That organization was devoted to destabilize the Venezuelan Government and that can not be” said the official. In his judgment, however, the tough penalties proposed(up to thirty years in prison) for the NGO’s that receive foreign funding should be mad softer in the case of organization that are not devoted to destabilize “because Sumate is an exception” concluded the Bolivarian ambassador.”

This my friends is called intolerance and political persecution of your enemies. This has no place in a democracy. The Ambassador admits that they are creating a law specifically to punish an organization that promotes electoral participation. Participation used to be Chavez’ rallying cry in the old days when he was a candidate and in the first three years of his presidency until people started participating against him. But then the definition was changed and when it is promoted by the opposition it is called destabilization. This is the same President that refused to sign the declaration at the end of the Quebec summit because he did not believe in the concept of a representative democracy, but only in that of a participatory democracy. Is this a cynical and undemocratic revolution or what?