Saturday, December 27, 2003

PDVSA 's refineries backyard sale
The Dowager sells the heirlooms

Saturday 27, December 2003

The State Oil Company, PDVSA, is acting like one of these old dowager from European Aristocracy that start pulling stones from their old tiara, to sell them to keep food on the table.

During the Christmas lull we became quite a ware of the real reasons of the visit of the Russian Foreign Minister early this week, incidentally on the same day as Castro. I quote from El Universal English page summary:

State-owned oil conglomerate Petroleos de Venezuela, S.A. (PDVSA) and Russian corporation Alfa Group signed a letter of intent aimed at selling PDVSA's stake in the refinery Ruhr Oel GmbH (ROG), located in Germany, to the Russian firm. The refinery was bought as part of PDVSA's globalization strategy, which was launched in 1983.

Detailed articles elsewhere reveal that one of the reasons that PDVSA is selling is that it cannot supply its own refinery in Germany. Why is it so? PDVSA states that because it is too far and Russian oil increases the refinery dividends. The set of refineries in Germany is purported to have a very good profit margin, even with Russian oil. So why sell?

The real reasons are very simple.

1) PDVSA lacks the managerial skills to rule a far flung empire. These skills were lost when Chavez had PDVSA upper management fired in January 2003. It is not easy to hire people that are able to manage the complexities of a state company that is in the middle of a political battle. People that would be able to do so demand premium salaries, clear accounting, and a certain freedom in their maneuvering. These things the current directorate of PDVSA is unable or unwilling to provide. An anecdote comes back to mind: in the first post strike major oil meeting in Houston, attendants were surprised to notice that the new management of PDVSA had a rather weak command of English. Certainly, the political hacks placed after the strike are for the most part unable to supervise PDVSA investments in Germany (or anywhere else probably, in my opinion).

2) The sale of the Ruhr Oel refineries is also the acknowledgement that PDVSA knows that it will not be able to maintain satisfactory levels of production as a consequence of the 2002-2003 strike. Mass firing of middle management and technical folks has generated a loss of maintenance and productive capacity that is very hard to reverse. To do so, assuming that the business and political decision has been made in PDVSA, will require gigantic investments that are not in the coffers these days. Only the sale of a few assets could bring the capital necessary for new drills and old oil-wells restoration. Will this work? I doubt it very much. The Chavez administration is hard pressed for cash to satisfy its populist agenda and try to remain in office were a Recall Election to take place. Or even looking forward the 2005 and 2006 electoral dates if the Recall Election were to be voided. What has carved a financial black hole in the accounts of PDVSA is the inextinguishable thirst for more and more cash by the Chavez administration, which has dug even deeper in PDVSA than previous administrations. Any monies collected from the Russian are likely to be directed in ineffectual social programs and the corruption that accompanies them.

An excellent full report on how the Venezuelan economy is mismanaged is published today in El Universal, and in English! It comes form the research of Leandro Vera, a noted economist, on how Chavez uses debt to stay afloat and the direct consequences on our economy. I recommend reading it and I will quote the part pertinent to what is written above: "an increasingly greater deviation of PDVSA cash flow to the public sector has eventually favored debt holders, and has left the country's oil industry without capacity to grow or expand in the future. This has opened the door, perhaps inadvertently, for a bigger penetration of transnational corporations." So Chavez, the champion of anti globalization folks, might end up selling PDVSA to multinationals in order to keep money coming into his pockets. You must love the irony1

All reports seem to indicate that PDVSA is not recovering, as the government would like us to believe. The PDVSA management is doing the only thing it can do: recognize its failure, albeit indirectly, by curtailing its properties to a more manageable consortium. After all, the only thing that Chavez cares is that enough oil reaches the US to keep it quiet. And to get enough money to manage his electoral base. I think it is called short term vision, but that happens when those in power have neither the education or intelligence to understand how the world works. Or just care about what commissions they can cash in while they are in office.

A few months ago I wrote a series of articles on PDVSA, the Queen of our Venezuelan companies. I am sorry to report that my predictions might come to pass sooner than later.

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