Posts Tagged ‘Pdvsa’

PDVSA and its Hong Kong Exchange Plans: Ignorance or Deception?

March 12, 2012

Once the Venezuelan press began writing about the intention of Chavez’ Government to place shares of part of PDVSA in the Hong Kong Stock Exchange via the sale of stakes in joint ventures to China’s Citic, as reported here and in Setty’s blog and Caracas Chronicles, the Government went into denial mode, having been caught rojo-rojito-handed with the fingers in the privatization till.

First, there was a curious Bloomberg story, in which a company official anonymously confirmed the story, but denied that this was strictly a privatization, “as shares will be offered in a holding company created to manage PDVSA’s stakes in the joint ventures and not in the state oil company itself”.

Jeez, these people really must think we are stupid,as the share of a company that just manages PDVSA’s stakes, can’t be worth as much as the stakes themselves. But, Mr. anonymous, pardon me, selling any company owned by PDVSA is a privatization, no matter how much you like or dislike euphemisms.

But that explanation was not noted much by the local press, so that none other than the President of PDVSA and Minister of Energy and Oil Rafael Ramirez, declared not once, but twice, that PDVSA was not planning to sell shares of any part of the company, because PDVSA has “never done much in the Hong Kong Stock Exchange and the idea is to negotiate, via Citic, any sort of transaction, but mainly bonds”

And you have to wonder, whether this statement reveals the absolute ignorance of the Minister or just another incredible attempt to lie and deceive about the true plans of PDVSA with its Citic sale.You see, if you take Minister Ramirez words at face value, PDVSA has never had anything to do with any Stock Exchange in the world, as far as I know, except the Caracas Stock Exchange. This is the only exchange where its bonds have ever traded.

The reason is simple: Bonds rarely trade in exchanges, they are usually traded by professionals “over the counter” and PDVSA’s bonds are no exception, so the explanation is extremely suspect. The reasons for this are many, you can read most of them here, but basically, bond issues are small, many bonds are fairly illiquid, they are affected by slow moving news like changes in credit quality and interest rates, so they move slower than stocks. But in the end, brokers have no vested interest in making their markets more transparent. It is a good business.

And the Honk Kong Stock Exchange is no exception, while some bonds are issued and registered in it, they trade rarely. For example, you can see here , that of the bonds registered in that exchange only, one, uno, traded in all of January 2012 , a Government of Hong Kong bond maturing in 2014 . And December 2011 was not much better. So, Mr. Ramirez, there is no true opportunity in doing what you said. You hear!

The question then boils down to whether this was simple ignorance or just another attempt to hide the true intentions of PDVSA and the Chavez Government to do whatever they want or feel with our country and its resources.

Once again, the idea of selling these pieces of the joint ventures is not a bad one, PDVSA needs money, but somehow it would seem as if Venezuelans should have a priority, no? Imagine, for example, getting US$ dividends on your Petropiar shares under the current exchange controls.

That’s how you distribute wealth…away from the Government.

But clearly, this plan to sell Petropiar shares was never meant to be made public. Only the revolution was privy to it.

What else is new?

Why I Think PDVSA Plans To Sell Stock In One Heavy Crude Oil Project Via The Chinese Governement

March 1, 2012

It’s hard to stop thinking about the bizarre plan or project by PDVSA to sell stock in one of its units via the Chinese Government’s CITIC Group (China Investment Trust Investment Corporation). With more details known at this time of the agreement between PDVSA and CITIC signed by Chavez right before his departure from Cuba, I believe I have some idea about what this is all about. For background, you can read the few press notes on this here and here, (Note none are in Venezuela’s press) or the contributions by bloggers here, here and here.

Recapping, PDVSA signed an agreement to sell 10% of it’s Petropiar unit to China’s CITIC. Nothing strange there, PDVSA can, according to the Hydrocarbons Law, sell up to 40% of these joint projects to anyone. In the case of Petropiar, formerly known as Hamaca or Petrolera Ameriven, PDVSA holds (or held) 70% and Chevron holds 30%. (In the original project, ConocoPhllips held 40%, but refused to sell its stake to the Government and it was expropriated). Petropiar uses very heavy crude (8 to 9 API) which through mixing with other oil and processing through an upgrader generates much higher quality 26 degree API oil, about 180,000 barrels a day of them.

So, to begin with, press reports suggesting that CITIC Securities, the stock market arm of CITIC will advise PDVSA on how to float Petropiar shares in the Hong Kong Stock Market are, or seem to be, incorrect.According to law, only CITIC or Chevron could do that.

Thus, the first transaction is very clear: PDVSA is selling to CITIC 10% of Petropiar at an unknown price and the Chinese are giving PDVSA cash, which it needs to fund new projects or whatever:

So far, everything is OK, the Chavista Government or PDVSA gets more money from the Chinese. The problem is that the Chinese have no “exit” strategy, to use venture capital parlance. They give money and give money, but they have no way of either realizing the gain, or they may not want to commit ever increasing amounts of money to Venezuela for the heavy oil crude fields. But they do want more oil.

On the other side is PDVSA, that needs ever increasing amounts of money to develop the Heavy Crude Oil fields, but has found resistance from the Chinese in funding the projects. Essentially, the Chinese are willing to fund their 40% share, but expect PDVSA to finance its 60% majority stake in any new project.

Enter the very capitalistic Chinese people at CITIC Securities, who suggest buying a stake in a mature project like Petropiar, which is fully operational, at what I am sure is a good price, and have PDVSA allow CITIC to place part or all of the shares of CITIC in Petropiar in the Hong Kong Stock Exchange. Thus, sometime in the future, CITIC would sell its shares and get money in return. This is what would happen:

What has been accomplished? A number of things. First, CITIC recouped its investment and more than likely made a profit, knowing the Chinese, it will be a nice profit. Thousands of investors will now own the shares.

But more importantly, the market, the much hated by Chavismo capitalistic-Stock Market, will establish a price for a 10% stake of a heavy oil crude project in Venezuela’s Faja Petrolifera.

A couple of notes here. First, note that the upside of the sale goes to the Chinese, not to, for example, to Venezuelan investors. Perverse, no?. Two, for Venezuela this is a no-brainer, PDVSA gives up dividends (investors will have to be paid somehow), but the Venezuelan Government will continue to charge royalties, taxes and windfall taxes on each barrel produced, which is where the big money really is.Three, the Chinese have realized a profit in their investment and can now plow the money back into Venezuela. Simply recirculate it, they can buy 40% of Petroanzoategui (formerly Petrozuata, fully owned by PDVSA) or they could buy 23.3% of Petromonagas (formerly Cerro Negro, where BP has a small stake). Then, they can turn around and sell these in the Hong Kong Stock Exchange.

And they can take their money and their profits or whatever they sell their shares for and plow it back into Venezuelan oil fields.

But more importantly, PDVSA has found a way to raise money for the new projects, which are not producing yet and the Chinese to establish how much they will be worth when producing, a nice way to know your return in investment ahead of the project. After all, a barrel of improved oil from any of these projects is worth roughly the same in all of them. The Chinese get some money back, likely have clauses that the oil from new projects will be shipped exclusively to China and more importantly, they can sell their stakes in the new projects once they are fully functioning too.

And in a virtuous circle, an almost pyramid, as long as people need oil, they can invest the money in ever new projects in Venezuela’s heavy oil fields. The much-hated markets will provide the endless funding, like this, as long as it is profitable:

Over and over again. You can do this as many times as there is a new oil field to develop and there is investor appetite for it. Of course, oil prices and appetite for oil has to stay high too.

Of course, you don’t need the Chinese for all of this. PDVSA could have eliminated the Chinese middle-man and do a typical capitalistic placement directly in the World Stock Exchanges. This is what PDVSA was planning to do, but before Chavez. Thus, it was scrapped. It was against sovereignty, selling the country and all that revolutionary bla, bla, bla.

Except that PDVSA needs the money here and now and the revolution would look bad doing such an obvious about face about from what it claims to believe in. This is exactly what they have criticized and it is better for PDVSA to get the money now and later, after the elections, have the first transaction take place, pseudo-hidden behind the Chinese capitalists.

Which brings me to the last point: None of this is meant to take place until after the election for a number of reasons, the surprise is that they announced it now:

-First, you don’t want this to become a campaign issue, although it does remove the “the opposition wants to privatize PDVSA” accusation from the political debate.

-Second, you don’t want to place the shares in the market before the ExxonMobil and ConocoPhilips arbitration cases in the World Bank’s ICSID arbitration Court are decided. After all, if investor appetite were high for Petropiar, it would place a high price on its shares and could drive the compensation to the two oil companies mentioned much higher.

-Third, if Chavez does win the October election, he would have a few years to implement the above strategy, financing the development of the Faja, which would pump ever increasing amounts of money into the Government’s coffers.

And the virtuous circle of populism would just continue…They just hope…

Note Added: A friend notes that while PDVSA exercized an obligatory 60% majority on the projects when it forced control in 2007, the law says PDVSA only needs to have 50% of each Joint Venture. This implies PDVSA could sell an additional 10% of each of all the projects, a nice piece of change to add to the pot!!!

Receiver of Illarramendi Funds Sues A Former PDVSA Executive For Receving US$ 35.7 Million In Bribes

February 6, 2012
View this document on Scribd

I wrote a few posts last year about the Ponzi scheme set up by Francisco Illarramendi and his MK funds, which involved money invested from PDVSA’s pension plans (One, Two, Three). Our friend Setty has also devoted a few posts to it, here is one, there are many others. The jist of this case, was that Illarramendi, a former PDVSA adviser and  consultant, set up some investment funds that  did not work out well and then were involved in a series of complex transactions to hide the losses, which included using PDVSA funds as investments, but also using PDVSA to make transactions. PDVSA pension funds/Savings Plans lost US$ 475 million or so, if my memory serves me right, in the process, but somehow nobody in Venezuela was responsible, as both The Board of PDVSA and the Venezuelan National Assembly found that there was no responsibility for the loss within the company, exonerating every one.

Only in Venezuela and the revolution can there be so much irresponsibility, US$ 475 million missing and it was nobody’s fault.

But today, the receiver for the MK Funds, the funds that were involved in the Ponzi scheme, the man who is in charge of trying to recover the investors money, brought suit in US Court in Connecticut against “Juan Montes, corporate manager of finance, investments and property insurance at PDVSA and its pension funds” for receiving bribes and other fraudulent transfers in the amount of…drum roll…US$ 35,744,561. Yeap, you read it right thirty five million dollars…in bribes…in only five transactions.

Only in Venezuela…

Just to make it clear and put it in black and white: The PDVSA funds lost almost half a billion dollars and just one PDVSA official, functionary, whatever, received bribes in the process for US$ 35.7 million dollars. Pocket change, no? No wonder investigators found nobody responsible.

Such are the ways of the Chavez revolution.

I will not go into all the details of the accusation, you can read the document above, it reads like a detective  story, but essentially, Illarramendi is accused of using fake emails and ID’s to have Montes help him in investing the money and setting up the transactions, so that the funds could make money and hide or try to hide the huge losses in his investment funds. Montes took the fifth amendment on all the charges. The case may go to a jury trial.

Other people are mentioned, but not accused, of helping Illarramendi funnel the bribes to Montes through their banks/companies/structures. It does not sound like the case or the story ends here. Stay tuned.

At this point, let me clarify something. In the above document, the receiver, not an expert on Venezuelan financial affairs, mentions the “permutas” made by IIlarramendi’s funds with PDVSA to make money to cover its losses. But these were not “permutas” in the traditional sense, from what I have been able to gather. In the now forbidden “permuta” market, you would swap a bolivar denominated  security for a dollar denominated security. But in the defunct “permuta” market, the difference between the “buy” and the “sell” prices was typically small Bs. 0.05 or Bs. 0.1 at most.

But what the receiver seems to be saying is that PDVSA sold dollar securities for Bolivars to Illarramendi’s funds at the official rate of exchange and Illarramendi’s funds resold those dollars at the parallel rate of exchange, essentially arbitraging the Government via PDVSA. The difference was as much as Bs. 4, 5 or even Bs. 6 per dollar depending on when these transactions took place. Just recall that when the Government banned the permuta market, the “official rate” was at Bs. 2.6 per dollar , while the parallel rate was near Bs. 8 per dollar.

And this is where these bribes apparently came from, from the huge difference between the two. Buy a million dollars with Bs. 2.6 million, sell the dollars for say, Bs. 8 per dollar, the difference (8-2.6)=Bs. 5.4 million was pure profit. 207% profit to be more precise.

And we are to believe nobody else knew about this at PDVSA? Only Montes knew? He could have access to “official dollars” with nobody knowing?

Yeah, sure…

Another Lie, Another Cynical Day For PDVSA’s President Rafael Ramirez

January 15, 2012

Today the direct, straight lie, like Chavez feeling offended by having MCM calling him a “thief”, which he is, comes from the Minister of Energy and Oil, Rafael Ramirez:

With a straight face, only a Bible missing from the scene, Ramirez tells us:

In the new projects of PDVSA with foreign companies, in none of them we will never establish that we will renounce our sovereignty. International arbitration does not exist in any of these new projects”

Funny, that he only mentions “companies”, because when it comes to countries, Chavez and Ramirez seem to have no problem in selling the heart, the soul and that same sovereignty of the country, as shown by the Devil himself a while back.

Indeed, in the contract between Bandes, the Chinese Oil Company, PDVSA (yes, the company Ramirez happens to be President of) and the China Development Bank whereby China lends Venezuela a gizillion dollars, guaranteed by barrels of oil sent by PDVSA. (Ramirez does not sign the contract, Asdrubal Chavez does it)

View this document on Scribd

In page 6, it clearly states in point 10:

All disputes, controversies or claims arising out of or in relation to this Agreement,including the validity, invalidity, breach or termination thereof, shall be settled exclusively by arbitration in accordance with the UNCITRAL Arbitration Rules (“Rules”) in effect atthe time of the arbitration, except as such Rules may be modified herein or by mutualagreement of the parties:
the arbitration shall be administered by the Singapore International ArbitrationCentre (“SIAC”) in accordance with its practice rules and regulations;
the place of arbitration shall be Singapore;
the language of the arbitration shall be English;
the number of arbitrators shall be three (3) to be appointed as follows;
the claimant shall appoint one (1) arbitrator in the request for arbitration.If there is more than one (1) claimant, all claimants shall jointly appointone (1) arbitrator in their request for arbitration. If they cannot agree ontheir choice of arbitrator, any claimant may request the SIAC in writingto appoint the arbitrator for them and the SIAC shall appoint thearbitrator for them as soon as practicable following receipt of suchrequest;(B)
the respondent shall appoint one (1) arbitrator within thirty (30) days following the service of the request for arbitration upon the respondent.If there is more than one respondent, all respondents shall jointly appoint one (1) arbitrator within thirty (30) days following the service of the request for arbitration upon the respondents. If at the end of the 30-day period the second arbitrator has not been appointed, the Chairman or Deputy Chairman of the SIAC shall appoint the second arbitrator as soon as practicable.
the two (2) arbitrators thus appointed shall choose the third arbitrator who will act
as the presiding arbitrator of the tribunal. If within thirty (30) days of theappointment of the second arbitrator, the two (2) appointed arbitrators fail toappoint the presiding arbitrator, the Chairman or Deputy Chairman of the SIACshall appoint the presiding arbitrator.10.1.6
the arbitral award shall be in writing and shall be final and binding on the Parties.The award may include an award of costs, including reasonable attorney’s feesand disbursements. Judgment upon the award may be entered by any court having jurisdiction thereof or having jurisdiction over party against which the award is entered or its assets;
during arbitration, all the Parties shall continue to fulfill their respectiveobligations under this Agreement and the other Transaction Documents; and
the Parties agree to waive, for purposes of arbitration pursuant to this Clause 10(Dispute Resolution), any right of application to determine a preliminary point of law or appeal to any court of law on a point of law which may be available to it under any applicable law.


So much for “sovereignty”, so much for “never again”, it is the usual gray line, these guys give away sovereignty, the Republic and whatever is needed for their political means,  whenever it is needed. They are cynics, they are liars and they do it all with a straight face.
Or, is Singapore in Venezuela? Not that I know of.
That is how cynical and liars these guys are. Just like their boss.

What the ExxonMobil Versus PDVSA Decision Means For The Country’s Bonds

January 4, 2012

We now have a decision from the International Chamber of Commerce (ICC) arbitration panel. No matter who won or lost, and I am close to ready to review my conclusion to now call it at least a tie, but I just need more info at this time.

The question is: What does the decision mean for Venezuelan/PDVSA bonds?

Well, I think it is very bullish.

It’s simple:

With the decision, I do not expect another one in 2012. While the ICSID could decide before the Venezuelan Presidential election in the Exxon case, I think it is unlikely, and if it does, it will be so close to that event, as to be essentially immaterial. (There will be a hearing in 1Q12 at ICSID) ICC could rule on ConocoPhillips, which is larger in scope, but given how it ruled in the ExxonMobil case, it would likely be also good news.

Thus, there does not appear to be any possible surprises from arbitration on the way to the election, which was one of the biggest uncertainties on the bonds for 2012. Oil could go down, but it could go up too if Iran gets tricky. Thus, based on internal politics, there will be two, maybe three scenarios:

1) Chavez’s health is fine, he leads the polls, get out of the bonds, it will not be received well by those betting on political change.

2) Chavez’ health is not fine, it deteriorates, bonds soar.

3) The opposition does well in the primaries, leads the polls, bonds soar.

But it is unlikely that there will be surprises in the middle, no decisions to screw up your strategy, to use a fairly technical term. Given 1) you get out by mid year, you may lose a little, not much. Given 2) and 3) collect the coupon and enjoy the ride. No ride, nice coupon.   If there is a ride, it will likely your best investment all year. Just like 2011 if you were in the right Venny bonds. (Mostly PDVSA’s)

It’s Venezuelan bond investment at its simplest: Enjoy the carry trade, bet on the upside!

ExxonMobil Versus PDVSA: Arbitration and Numbers

January 2, 2012

By now, people seem a little confused by the victory by Venezuela and PDVSA at the International Chamber of Commerce (ICC) over ExxonMobil.

First, there is a numbers confusion, the first headline (Bloomberg’s) was “PDVSA has to pay US$ 750 million to Exxon”, the second (Exxon’s) was “PDVSA will have to pay US$ 907 million” and now we have a third one (PDVSA’s) saying “PDVSA will pay Exxon US$ 255 million”

As noted by Setty, this is just spinning. Exxon wants to show the largest number, PDVSA wants the smallest and Bloomberg reported the net amount awarded by the arbitration panel after a claim by PDVSA against ExxxonMobil in the amount of US$ 160.6 million for debts ExxonMobil had against PDVSA.

So, these are the true numbers:

In the arbitration case for breach of contract at the ICC, the case was decided against PDVSA in the amount of US$ 907.6 million dollars, which is about the smallest number ExxonMobil could have expected to get, as it represents book value for its 41.7% in the Cerro Negro partnership. Thus, this is a victory for Venezuela, because the amount awarded is small.

From the US$ 907.6 million, you have to subtract the US$ 160.6 million in liabilities ExxonMobil had in Venezuela.

Additionally, ExxonMobil had a New York Court seize US$ 305 million from a PDVSA account, which will now be turned over to ExxonMobil.

Thus, the net amount of cash that PDVSA will have to pay is (US$ 907.6 million-160.6 million-UDS$ 305 million)= US$ 442 million. Additionally PDVSA says ExxonMobil owed Venezuela US$ 191 million from the repurchasing of the Cerro Negro bonds, which is not clear what it means. Those bonds were repurchased by PDVSA in a decision in which ExxonMobil did not participate.

Thus, PDVSA will have to pay less cash, but the award against it was indeed US$ 907.6 million. How much it really has to actually pay or take out of its pocket is a completely different matter.

However, the case is not over. ExxonMobil went to arbitration in two courts: The ICC and the Worlds Bank’s International Center for the Settlement of Investment Disputes (ICSID).

How can this be? How can two parallel cases coexist on the same case? This is the second confusing point.

Well, after calling a good friend who knows his arbitration stuff like nobody I know, it turns out this is perfectly normal.

You see, in the the 90’s when ExxonMobil decided to participate in the Cerro Negro project, it signed a contract with PDVSA and Venezuela (Which was approved by the National assembly). At the ICC, this contract is what was being disputed: the breach of contract by PDVSA or Venezuela when it expropriated the partnership or changed its conditions unilaterally. What is awarded in this court is what the arbitration panel interprets the two sides had agreed upon in that contract.

However, separately, ExxonMobil owned its 41.7% stake in Cerro Negro via a Netherlands-based subsidiary and it so happens that Venezuela and The Netherlands have a treaty to promote and protect mutual investments. This treaty has specific clauses to protect investors from both countries. It is the violations of this treaty that the World Bank’s ICSID arbitration panel is judging upon (A decision is not imminent, there will be a hearing in 1Q12), Thus, the award by the ICSID will be determined by what that treaty says and the violations that may have occurred. This could be larger in scope, as it could include additional compensations and indemnifications.

Thus, at the ICSID the panel may give (or not) ExxonMobil awards to compensate violations such as not being paid before the expropriation, modifying contracts unilaterally, not being treated fair and equitably, discriminating foreign investors from local investors, not guaranteeing payments and many others.

As an example, the treaty specifically states (my free translation from Spanish):

“The parts will not take any measure to expropriate or nationalize investments made by nationals of the other country, nor will take measures which have the equivalent effect of nationalization or expropriation, unless the public interest is invoked and subject to due process, without discrimination and with prior compensation, at market value for the investments and with payment without delay at commercial interest rates.”

Clearly many of these conditions were violated in this case and the ICSID will have to decide on what compensation to award ExxonMobil, beyond what it was established between the parts in the original contract. The wording of the treaty is clearly much different than what may have been contained in the contract (Which I have not seen). In fact, the original contract was not even signed by a Netherlands company, ExxonMobil later transferred ownership to a Netherlands company to enjoy the protection of the treaty.

Thus, it may happen that the ICC awards something and the ICSID does not, or vice versa or both award amounts that are different because they are based on different legal concepts.In the two cases that Venezuela has lost at the ICSID, the award has been roughly book value in any case, but the amounts involved were much smaller.

Thus, the ICSID could give ExxonMobil a bigger award, or not. But for now, score it as: PDVSA 1 ExxonMobil 0.

ExxonMobil Awarded US$ 750 million For Cerro Negro Nationalization by Venezuela

January 1, 2012

Well, it is early in the year, but Bloomberg last night reported that the International Chamber of Commerce awarded ExxonMobil “only” US$ 750 million in its arbitration case against PDVSA over the nationalization of its assets in February 2007. This ruling is very favorable for Venezuela, as essentially seems to recognize only book value for the expropriated properties. Exxon had been seeking compensation not only for the expropriated property, but also for the loss in cash flow from the operation of the project. ExxonMobil owned 41% of Cerro Negro, which produced on average some 95,000 barrels of heavy crude per day. The multinational company confirmed the news according to the Wall Street Journal.

ExxonMobil had been asking for US$ 7 billion of which about US$ 747 million were tangible assets. According to Bloomberg the award was for US$ 907.6 million, which was reduced to US$ 750 after a counter claim by PDVSA. But in the end the number looks exactly like book value.

ExxonMobil had also been seeking compensation at the World Bank’s ICSID Court, I am not clear how the two overlap or what judgement in one implies for the other.

If arbitration in the oil projects determines that there will be compensation only for the assets of the projects expropriated, then the total liability to ExxonMobil and ConocoPhillips should be of the order of US$ 3.5 billion, rather than the more than US$ 20 billion being sought by the two companies. Estimates put the loss of cash flow from operations around US$ 9 billion, so that a decision including book value and cash flow would have been expected to be (rough numbers) US$ 12.5 billion.

But if the World Bank’s ICISD decides in a similar manner, the Venezuelan Government would have scored a very important victory in its arbitration fights, which would impact the nineteen arbitration cases at the ICISD against Venezuela.

This should be positive for Venezuelan bonds early in 2012