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Government spending strains PDVSA
By Natalie Obiko Pearson
Associated Press - AP
CARACAS
Petroleumworld.com 03 30 07President Hugo Chávez has won friends at home and abroad with his generous spending on social programs ranging from support for Venezuela's single mothers to shipments of cheap heating oil to poor Americans from Massachusetts to Alaska.
But Chávez's cash cow, Venezuela's state oil company, can't keep paying the price forever. The long-term capacity of the U.S.'s No. 4 oil supplier to keep pumping crude is under threat because it is spending more on Chávez's ideological agenda than on badly needed investments, industry analysts say.
Petróleos de Venezuela, or PDVSA, ''is overstretched to capacity with any number of needs,'' said Patrick Esteruelas, an analyst at the New York-based Eurasia Group.
The firm is borrowing billions from foreign lenders, while independent estimates show its output falling. U.S. data shows imports from Venezuela last year hit a 12-year low after dropping 8.2 percent from 2005.
Chávez says exports to the United States are dropping because Venezuela is diversifying its oil buyers. His energy minister also notes that Venezuela, home to the largest reserves outside the Mideast, is making production cuts ordered by the Organization of Petroleum Exporting Countries.
But the decline may also partly reflect the strain put on PDVSA by Chávez's spending.
PDVSA'S SECRECY
The health of PDVSA's finances is a subject of debate, mainly because audited financial results have not been publicly released for the past two years.
A recent report by the Caracas-based economic institute CIECA estimated PDVSA had a net loss of $3.7 billion in 2006 -- a year when most major oil companies posted record profits.
The CIECA analysis shows PDVSA handed over about 70 percent of its gross revenue to the state, including $28.7 billion in taxes, royalties and dividends, and $9.9 billion for other social spending.
''Spending on social programs is not a problem in itself. But it is a problem when it's done at the expense of industry growth,'' says Enrique Sira, the Caracas-based analyst for Cambridge Energy Research Associates.
THE COMPETITION
PDVSA is not the only state oil company in Latin America to face such problems. Mexico's Petróleos Mexicanos, or Pemex, now faces rapidly shrinking reserves and outdated technology. Company executives agree they must reinvest much more but are hamstrung by Mexico's constitution. Nearly 60 percent of Pemex's revenues go to the federal budget each year, while debt and pension obligations total upward of $100 billion.
In contrast, Brazil's Petróleo Brasileiro -- considered one of the world's best-run state energy companies -- is planning $87.7 billion in investments in the next four years, and there are few doubts about its ability to contribute to the Brazilian government. According to the most recent figures, Petrobras handed about 35 percent of its gross revenue to the government in 2005. Over $30 billion went mostly to dividend payments, royalties and taxes but also to funding social programs.
SPENDING BUDGET
PDVSA, meanwhile, is now spending about 40 percent more on Chávez-backed social initiatives than on total investments in its oil and natural gas operations: $9.9 billion last year compared to $5.9 billion. Though comparable figures are not available for the pre-Chávez era, oil industry experts say less went toward social programs in the 1980s and '90s.
And PDVSA has other financial commitments as well as social programs, new farming projects and discounted oil exports. The company is footing the bill for nationalizing power companies and buying majority stakes in oil projects in the Orinoco River region from BP, Exxon Mobil, Chevron, ConocoPhillips, France's Total and Norway's Statoil.
Aging oil fields that make up the bulk of Venezuelan production require heavy investment. PVDSA must inject natural gas to raise the pressure of deposits underground and spend on improving wells and facilities to keep the oil flowing. Largely untapped deposits in the Orinoco River region are among the world's most promising, but they also require enormous investment to convert the heavy tar-like crude into usable products.
With foreign investment falling sharply as Chávez increases state control over the oil industry -- Chávez himself says foreign investment in the oil sector fell 55 percent last year -- PDVSA is making new overtures to international lenders.
FINANCING
PDVSA plans to launch a $5 billion bond issue Thursday, and it recently secured $1 billion in credit from French bank BNP Paribas and $3.5 billion from Japan's Marubeni Corp. and Mitsui & Co. in advance payment for future oil shipments.
Venezuelan officials, meanwhile, insist their oil industry could not be healthier. Oil Minister Rafael Ramírez, who is also president of PDVSA, denies any cash flow problems and says the funds raised from the bond issue will go toward an ambitious $56 billion expansion of production to 5.8 million barrels a day by 2012.
Given PDVSA's current condition, that goal could prove elusive.
There have long been disputes about how much crude Venezuela now pumps from the ground. Venezuela claims it produces 3.3 million barrels a day, while the International Energy Agency and OPEC said production is down to around 2.4 million barrels a day from as much as 2.7 million in 2005.
''It is clear that cash is tight,'' the IEA, an agency of 26 member countries including the United States, said in its March oil market report.
PDVSA's troubles aren't good news for the United States, which relies on Venezuela for about 12 percent of its oil imports, but analysts don't expect significant disruptions or sudden gas price hikes for American motorists.
Associated Press writer Natalie Obiko Pearson is in Caracas, and Tales Azzoni in Sao Paulo and Lisa J. Adams in Mexico City contributed to this report.
Associated Press29 03 07
Copyright© 2007 Associated Press. All Rights Reserved.
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