PDVSA longer-term prospects in doubt

Por Venezuela Real - 1 de Mayo, 2007, 18:40, Categoría: Petróleo/Energía

ARCAYA & ASOCIADOS
Think Tank

EVENT:
State oil company PDVSA is to take a majority stake in the Orinoco heavy crude joint ventures from today.

SIGNIFICANCE:
Despite massive cash flows, PDVSA is borrowing heavily and taking on major new responsibilities and liabilities.

ANALYSIS:
State oil company PDVSA is Venezuela's economic engine.

Future economic success depends largely on the future of the oil and gas industry, controlled almost absolutely by PDVSA, with its vast and growing range of responsibilities. Therefore, its future viability is critical to Venezuela.

With the international oil price currently moving in a range between 60-70 dollars per barrel, and Venezuela's basket of relatively heavy crude trading approximately 5 dollars below the marker prices, it might seem unnecessary to question the viability of PDVSA or any other large oil company.

However, PDVSA is 100% state-owned and its activities are closely
controlled by and aligned with the government of President Hugo Chavez; Energy Minister Rafael Ramirez is also the president of PDVSA.

Although PDVSA's role is still evolving, it is clear that:  its primary responsibilities appear to be political and social, rather than technical and economic; it embodies the intention of the state to hold and retain active sovereignty over the country's hydrocarbon resources (and indeed
energy in general) without ceding any significant degree of control to private and/or foreign entities; and it is seen as a national development vehicle which must both generate the funds to be allocated and disbursed by the state for approved social developments and, where appropriate, participate in the delivery of these resources.

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As such, PDVSA's remit is different from and much wider than most state oil companies. Nevertheless, business economics imply that an oil company must invest effectively in oil and gas exploration, or face a decline in both production and income; the latter is crucial for the Chavez administration's radical political programme.

Data doubts.

One of the challenges in evaluating PDVSA's performance is the lack of consistent and easily recognisable data: 2003 was the last year that it made an SEC submission. Since then, there has been much debate over crude oil production:

US imports of Venezuelan crude fell by 8.2% in 2006, which the Venezuelan government contends is due to the country diversifying its oil buyers.

However, overall crude production is disputed: Venezuela reports 3.3 million barrels per day (b/d) whilst the IEA and OPEC indicate some 2.4 million b/d .

Un-audited financial results indicate that, with 2006 revenue of more than 100 billion dollars, income fell 26% to 4.8 billion. A Caracas-based economic institute has even estimated that PDVSA made a net loss of 3.7 billion dollars last year, with their analysis showing that about 70% of gross revenue went to the state. In 2006, 9.9 billion dollars went on social spending, compared with 5.9 billion on oil and gas investment.

Business plan.

Venezuela has recently revealed an updated business plan as part of its prospectus for the recent issue of PDVSA bonds. The plan runs through 2012, with a 2007 budget of 10.0 billion dollars (up from 5.93 billion for 2006):

Gas.

Investments will total 16.2 billion dollars for the period, and 3.4 billion in 2007 (up from 1.2 billion for 2006). The emphasis will be on the domestic market, although there is provision for gas  exports.

Oil.

Investments for the 2007-12 plan period total 16.7 billion dollars, with 2.9 billion in 2007.

Supply and marketing. The budget envisages investments of 2.0 billion dollars through 2012, and 1.2 billion this year.

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Under this plan, oil production is forecast to expand to 5.8 million b/d in 2012, an aggressive rate of increase that will require consistent levels of effective actual investment (in exploration, drilling and development) over the period. To put this into context, it has been suggested that PDVSA needs to invest some 3 billion dollars annually just to maintain current production.

Investment commitments.

PDVSA has established the so-called 'Oil Sowing Plan', where its estimate for investment for the whole period through 2012 has increased from 56.0 billion dollars (in 2005) to 77.3 billion. There appear to be two sources for this increase in spending: new projects and an increase in costs -- oil industry inflation. The latter point, driven by increased demand for resources across the oil and gas industry, is a global phenomenon.


Investment will not all come from PDVSA: plans assume a contribution of some 25% from the private sector, which has been experiencing a series of profound changes in Venezuela. The underlying assumptions inherent in these figures are not clear. However, a reasonable judgement is that they assume private investors meeting a 40% share of the investment required in the 32 joint ventures (the former operating services agreements) with PDVSA and the four existing heavy oil upgrading projects, in line with their revised equity positions.

PDVSA also faces a range of extra charges/financial commitments:

As well as funding the government's social spending plans, it has to meet commitments on new farming projects and discounted oil sales internationally.

More fundamentally, it has to meet compensation obligations from nationalising power companies and funding its new 60% stakes in the joint ventures and the four upgrading projects in the Orinoco heavy oil belt.

It will need to fund major projects such as the planned LNG facility and associated infrastructure, the next generation of heavy oil upgrading projects and also the proposed Gasoducto del Sur gas pipeline.

Sources of money for future investment include:

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Internally generated funds; external partners (private or foreign investors); and borrowing -- which is not difficult currently but involves mortgaging the country's assets.


Bond issue.

PDVSA recently launched a 5 billion-dollar bond issue --increased to 7.5 billion owing to high demand from (domestic) investors -- with 10-30 year maturities and 5+% interest rates. It reportedly also recently secured a 1 billion-dollar financing facility from BNP Paribas, and 3.5 billion from Marubeni and Mitsui, as advance payments against future oil deliveries. It has also been suggested that deals may be cut with existing foreign investors whereby they lend money to PDVSA to fund its share of future joint venture investment, possibly recovering the loans in the form of oil.

Outlook.

While a number of international oil companies will remain in Venezuela, their future investments will be subject to tough scrutiny and hurdle rates (increased political risk). The heavy oil projects will in future be less attractive: it has been suggested that the break-even price has gone from 18-20 dollars/barrel to some 35 dollars; with enforced smaller equity shares in these companies, they are less attractive in terms of materiality, a key criterion for major oil companies.

In terms of assessing political and investment risk, perceptions regarding governance in the oil sector are important. PDVSA's dual political and technical roles are very challenging. A major risk for the government is that failure to incorporate and follow governance principles relating to roles and responsibilities, accountability and transparency in particular could lead to a sub-optimal outcome for PDVSA and the country.

CONCLUSION:
The lack of good public information prevents an achúrate assessment of PDVSA's long-term prospects. While it can continue to operate in the short-to-medium term in a context of high oil prices, this Hill not be sustained indefinitely. Key questions remain over PDVSA's ability to fund both hydrocarbons investments and the government's political and social objectives, with the risk that giving precedence to political demand could jeopardise its long-term







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