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Editorial Commentary
Oliver L Campbell:
Will PDVSA make further divestments?
When the Oil Minister makes declarations to the press about investments abroad, as he has just done, it is necessary to read between the lines. Like a clue in a cryptic crossword, you have to use your lateral thinking to come up with an answer. I don’t know if I have interpreted his various statements correctly, but I will share my thoughts with the reader.
Firstly, it is not clear if the minister considers investments abroad are a good thing or a bad thing. Influenced by Juan Carlos Boué’s book, “The internationalisation of PDVSA--a costly illusion” and by the latter’s mentor, Bernard Mommer, the minister has declared in the past that the purchase of refineries abroad was a huge mistake. However, latterly, the refineries of CITGO and Ruhr Oil have been making money hand over fist and his most recent statement (published in Petroleumworld on 16 November) affirms, “We shall continue to hold assets abroad, but will continue with our analysis and, if we consider any one is not strategic, we will sell it or transfer it. We want to be able to justify all our business.”
This would indicate the minister now thinks the investments abroad are a good thing unless they are not strategic. Since you can have assets abroad which, though not strategic, still make a lot of money, this is quite a bold statement. He further goes on to say, “Though the cash flows abroad are large and constant, close to 90 percent is used for acquiring crudes for processing in the refineries.”
The minister has never liked the fact the refineries process oil purchased from third parties and not Venezuela. This occurs with CITGO since PDVSA can only supply half the company’s crude requirements. It also happens with Ruhr Oil where crudes shipped from Venezuelan account for less than 10 percent of PDVSA’S input and the latter buys the balance, in light crudes, from third parties. Not only does this save freight but the light crude gives a better yield.
So what assets abroad are candidates for disposal? The following is just conjecture on my part, but I try to give some reasons.
1) Lemont refinery. This refinery in Illinois receives no crude from Venezuela, and most of its intake is bought from the Canadians across the border. The refinery yields some 75 percent of gasoline and diesel and certainly makes money. However, it has no particular strategic importance to Venezuela.
2) Ruhr Oil refineries. These process only small quantities of heavy crudes since the refineries were designed for lighter crudes which give a better yield of gasoline and diesel for the German domestic market. However, PDVSA has spent money on the Gelsenkirchen refinery in order to process a limited amount of Venezuela’s heavy crudes. PDVSA’S partner, BP, does not want to spend money modifying the refineries to process heavy crudes since it can provide its share in light crudes.
Germany is Europe’s largest market and the refineries make a lot of money. However, they are not strategic to PDVSA since the latter can sell its available heavy crudes, i.e. those not committed elsewhere, for processing in CITGO’S Lake Charles and Corpus Christi refineries which have a capacity of some 470,000 b/d. The obvious purchaser would be BP which owns the other half of Ruhr Oil.
I exclude the Nynas Petroleum refineries from the list--two in Sweden and two small ones in the UK-- since they provide an outlet for the heavy Boscan crude. The asphalt is sold for road paving throughout Europe. The refineries also produce naphthenic lubricants which are sold world-wide, and Nynas has a niche in this lucrative market. PDVSA and Nynas were talking of forming a joint venture in China, but I don’t know how this is progressing. If PDVSA decided to sell, the obvious buyer would be its Finnish partner, Fortum.Oil.
In concluding his declarations, the minister could help mentioning that old chestnut that “the business in the USA was created at a tremendous fiscal sacrifice.” Once again, he takes what Juan Carlos Boué wrote as gospel, when it was only true in the early years. Because of the formula used to calculate the price of the crude oil PDVSA sold to CITGO, the price turned out to be lower than the spot market value. However, Boué forgot to take into account that this was a transfer between one Group company and another, and the result was that though PDVSA made less profit than it should, CITGO made more profit than it should. The only loss to the Group was relatively small--the 35 percent tax CITGO paid on that additional profit in the USA.
Since oil prices shot up over three years ago, and again because of the formula adopted, PDVSA has been selling crude to CITGO at more than $5 a barrel above spot market prices. The extra profit made by PDVSA all accrues to the State since Venezuelan income tax is part of government take. Furthermore, the Group has benefited from the tax relief CITGO has obtained in the USA on the higher crude cost. At some time, I trust the minister will acknowledge the CITGO deal, rather than giving rise to a “tremendous sacrifice” has been a “tremendous success.”
As an accountant, I am interested in the bottom line rather than in theoretical postulations and, if assets are making superior returns, I am not worried if they are strategic or not, or if the oil is bought from Venezuela or not. However, there is a world-wide shortage of refinery capacity and refinery values have increased enormously. I suspect the minister may be thinking now is the right time to “cut and run.”
Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in
England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld does not necessarily share these views.Editor's note: All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.
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Petroleumworld News 11/20/07
Copyright© 2007 Oliver Campbell. All rights reserved.
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