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Editorial Commentary
Oliver L Campbell: PDVSA’S national
contribution is the figure that counts
A report by Global Insight, dated 17 March 2008, makes much of the fact that PDVSA’S net profit of $3.52 billions in 2007 dropped by 35 percent to $5.45 billions when compared with 2006. But does this matter? No, not really because the figure of net profit is distorted by expenses incurred on social projects which have nothing whatsoever to do with producing, refining and selling oil.
The net profit in 2007 is further reduced by higher royalty charges, which are tax deductible. Royalties are calculated on the value of oil sold and, as oil prices have escalated, so the royalty charges have increased.
The statement, “The decline in profits, despite higher oil prices, show that President Hugo Chavez's increasing reliance on PDVSA'S revenue to help fund increased government spending have affected its bottom line” is true, but it is not the fault of PDVSA. When the results for 2007 are published in full, hopefully by 31 March, we will see by how much PDVSA’S national contribution--composed of royalties, social expenses, income tax and net profit--has gone down when compared with 2006.
The point is that the important figure is not net profits, which is a residual amount, but the total contribution which PDVSA has made to the nation’s coffers. This national contribution in 2006 amounted to $40,000 million, some 28 percent up on 2005.
The large sums spent on social projects reduced PDVSA’S net profit. Had PDVSA not incurred those charges, of course, it would have made a much larger net profit. The government could then have achieved exactly the same result by asking for a large dividend payment which it would use to pay for the social projects itself. This would have left PDVSA short of funds for new investment in exactly the same way,
There are many people who believe this second course of action is preferable--the government takes a large dividend, pays for the social projects, and leaves PDVSA to concentrate on the oil business i.e. PDVSA generates the funds and the government spends them--as is the norm with State companies in most countries.
The government has decided PDVSA should borrow its way out of its cash shortage with loans which now amount to some $16.000 millions. This is a short term solution but, in future, the government will have to leave PDVSA with higher net profits to finance capital expenditure, and that will mean PDVSA can contribute less for social projects.
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.
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Petroleumworld News 03/18/08
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