PDVSA cuts and delays production goals, raises capex forecast

PDVSA cut its output goal by 9%, pushed back its target for that goal by 2 years, and expanded the amount of money it expects to ante up in order to fulfill the plan, according to a comparison of the company’s 2009 annual report with its 2008 edition.

Take a look at p. 43 of the report released Aug. 2 (my translation):

Review of Investment Plan and Principal Development Projects
Developing these business strategies, PDVSA estimates that its investment plan will require, in the 2010-2015 period, about $252 billion to reach a sustainable output of 4.46 million barrels a day (crude + natual gas liquids + ethane [sic – should be natural gas, most of which is methane]) by 2015. PDVSA expects to provide about 78% of the funds required for this plan ($197 billion), 15% from outside investors ($38 billion) and 7% from investments associated with the Socialist Orinoco Project ($18 billion).

That’s a change from the 2008 report, published June 2009 (my translation):

Review of Investment Plan and Principal Development Projects
Developing these businesses, PDVSA estimates that its business plan will require, in the entire 2008-13 period, about $139 million [sic – should be billion] to reach a sustainable output of 4.9 million barrels a day by 2013. PDVSA expects to provide about 75% of the funds needed for this plan, and 25% from outside investors.

That’s a lot of changes. The only thing they didn’t cut back on was the number of editing errors.

This is part of a trend. Back in the 2007 report (p. 35), they said (my translation):

Developing these business strategies, PDVSA estimates that its business plan will require, in the 2007-2012 period, about $78.116 billion to reach a sustainable output of 5.8 million barrels a day by 2012. PDVSA expects to provide about 75% of the funds needed for this plan, and 25% from outside investors.

Look ma, no major editing errors. Just a bit OPUD.

The good news is that PDVSA is starting to calibrate its goals with reality. The bad news is that the company has little cash flow to invest in these projects. If recent years are any indication, it may be able to come up with $15 billion a year, but that’s not even a third of what it needs. The rest, if it’s going to come, has to come from debt (or an IPO!).

Who is going to loan PDVSA $140 billion? And can this work out? Using optimistic assumptions — 5% annual GDP growth, no other new debt (!), and interest rates of 10% on new financing — this sort of borrowing would work out to the country having $287 billion in loans, the huge bulk being foreign debt. Venezuela would have to pay debt service at a rate of about $30 billion a year. In human terms, that’s almost $1,000 per capita leaving the country and enriching bankers and bondholders. In technical terms, it’s a debt-GDP ratio of 64%. I can see why the PDVSA bonds maturing in 2014 and 2015 yield almost 20%.

PS: Thanks to state newswire Agencia Venezolana de Noticias for covering the annual report 6 weeks late and leading on the new output number, which I had missed in my various prior perusals of this report. I bet some of you clever readers had already noticed this change, but from the Google I don’t see any evidence that it was covered at the time.

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21 thoughts on “PDVSA cuts and delays production goals, raises capex forecast

  1. Kepler

    This is horrible. I wish we could read this in Spanish in Venezuelan newspapers.

    Where is the government going to get that amount of money, you ask. They probably will get a fraction of that from the Chinese…on condition that we give the Asians our first child and one kidney. What a mess!

    Do you remember how many thousands of barrels the government has to give to them for well under the market price for the next decade? And all for $10b + yuan purchases in value of $10b to survive a bit more.

    Not for nothing the PDVSA chef said we need 100 dollars for each barrel.

  2. Simon's Ghost

    What impressed me the most is how the amount of money required nearly doubles with every new iteration of the plan while the expected output loses over 10% each time.

    Yeah, this is a result of reality sinking in, but not in the way you suggest. The rats managing PDVSA simply realized that if they don’t steal a couple of billions from PDVSA today, they might not have a chance to do it next year so they’re pumping their commissions all the way to Mars.

    The increase of projected expenses is clearly not the result of them finally learning how to do math, but a result of their near-infinite capacity for corruption.

    1. sapitosetty Post author

      If you have evidence of this, send it to me off-line. Your anonymity guaranteed.

      On the other hand if you don’t have evidence, you probably shouldn’t speak in such definitive tones.

      1. Simon's Ghost

        Do you have the details for what causes the differences in the various budget estimations? Have things really changed so much from 2007 that a budget of $78 billion was enough to pump production up to 5.8 million barrels, but in 2009 it required $252 billion just to raise it to 4.46? Where the hell are those extra $174 billion supposed to go? How it is possible to for the costs to triple in just 2 years?

        You might say, “well, they’ve been pulling numbers out of their asses all along, so the numbers are bound to be funny. It’s not like they care about making them realistic.”

        The problem with that reasoning is that cooking numbers in that direction makes them look bad and it’d make it less likely to attract investors, since it not only shows PDVSA’s abysmal incompetence at calculating costs (one of the worst possible traits for a potential partner to have), but it also increases the initial investment of any outside investors while reducing their expectations of revenue.

        So there are only 2 possibilities:

        1- The people at PDVSA are so frakking clueless they can’t even properly make up numbers that are both believable and useful for their purposes.

        2- The increase in projected costs are real, and resulted not from an increment in the cost of materials, equipment, etc. (whose costs could never have increased sufficiently to justify the tripling of the project’s cost), but an increase of the salaries, commissions, etc. required for the project.

        But then again, you’re right. I have no proof of anything other that the experience that in every single contract by the bolibanana government, the biggest chunk of money almost invariably goes to someone’s pockets rather than the project itself.

  3. ow

    I have never taken any of the future projections seriously. There is no way they can produce 4MBPD when their OPEC quota is 3 MBPD. Are they getting OPEC to change their quota? Or are they going to radically change policies and ignore the quotas?

    Off topic. Don’t know if you read this blog:
    http://miguelangelsantos.blogspot.com/

    It is good. You should check out the Barclay’s report he posted. They have an excellent break down of the debt and from eyeballing it it looks thorough and correct.

    Venezuela is really running up the debt, and with oil at $70 per barrel.

    I wouldn’t want to be Venezuela if the U.S. economy double dips.

  4. aschachh

    It’d be interesting to see how closely this revised “Plan A” matches up with those of China, the AVHI, the Camara Petrolera, et al. I suspect the new realism on the part of PdVSA is the result of some coordination and not a little hand-holding here. But scraping up the $252 billion that would be required to make these projects happen is not a realistic proposition, so the far more interesting question to me is: what is everyone’s “Plan B”?

  5. HalfEmpty

    Just out of curiosity, is the OPEC production quota for oil sold or oil produced?

    Does it effect internal consumption? Oil to Cuba? Since oil is fungible, I suspect it must. But I don’t know for sure.

    1. sapitosetty Post author

      OPEC quotas are for oil produced, but there’s no difference. Storage is expensive.

      PDVSA considers its oil shipments to Cuba to be sales. Each barrel shipped is one barrel less in royalty that it pays to the Venezuelan government.

      Does what affect internal consumption?

  6. moctavio

    With Venezuela’s debt at around US$ 100 billion and GDP at Bs. 760 billion, you can take a stab at what is the Debt/GDP ratio:

    If you believe the “equilibrium exchange rate” is Bs. 4.3 per US$, then Debt/GDP= 56%. High but ok.

    However, if you think the weighted average “equilibrium” rate is near Bs. 6 per US$, then the number becomes 80% which is too high.

    Unfortunately, under current economic policy, Debt will go up next year, it is likely there will be a devaluation which will make GDP smaller in US$ and the economy will grow very little in Bs.

    You can see where Venezuela is in Pimco’s “Ring of Fire”, with a Public Setor Deficit of around 10-12%:

    http://europe.pimco.com/LeftNav/Featured+Market+Commentary/IO/2010/Investment+Outlook+February+2010+Bill+Gross+The+Ring+of+Fire.htm

    1. Marcus Anonymous

      Miguel,

      But surely you recognize that what Venezuela calls an exchange rate is not what the other countries in the “ring of fire” analysis call an exchange rate. It is the rate at which you may freely buy foreign currency.

      In Venezuela, you may not buy dollars at 6Bs/$ except with special permission and under special circumstances. Foreign exchange is rationed. To eliminate that rationing, the value of the dollar would have to be allowed to go much higher. We don’t know how high, because it is illegal to do the experiment. It may not be the 60bs/$ rate posted on some of the blogs, but it easily might be 10bs/$ or more. In that case, the appropriate, comparable GDP is well below $100 billion. (Remember, even if you accept the official Bolivarian statistics, net oil exports are only running a little over $50 billion and may be one-third less.)

      So Venezuela may have a debt ratio as high as 120% of GDP if the appropriate (free convertibility) exchange rate is 10bs/$.

  7. moctavio

    Marcus: Of course, the point is that at Bs. 6 we are already in trouble, however, if you let the currency float, my feeling is that it would reach equilibrium somewhere around 7. Whenever we have had a free exchange, the rate is about 10-25% below the “implicit” value, what you get from diving M2/Reserves, today that number is near Bs. 9 per US$.

    1. Marcus Anonymous

      Miguel,

      Are you sure that you are not being too optimistic? The parallel rate did hit 8 bs at times with a tremendous amount of suppressed demand, including CADIVI and PDVSA arrears + a lot of unrepatriated profits. A true floating rate allows for none of that and that drives the value of foreign exchange up.

  8. moctavio

    Not really, if you devalue, demand will contract significantly, it happened in 1995, the parallel rate was at 540 when it was allowed to float and it actually went down to 450 where it stayed for about two years. It’s simple, at the new rate, it becomes very expensive for people to buy things, demand contracts, imports drop, local products become competitive, reserves go up, seems counterintuitive, but this is what has happened.

    1. sapitosetty Post author

      Marcus, one way of thinking about it is, what is the average exchange rate today? On average people probably pay around 6 bolivars per dollar, considering all the people who get their Bs for 2.6, 4.3 or 5.3. So even if all those people really need $ and would buy at any price, the price would drop to 6 if everyone had to pay a floating rate.

      Of course demand for $ is very elastic to price. People with access to $ at 2.6 buy far more than they need. Without the subsidy, they would only buy what they needed, which would also bring down the price of dollars.

      Miguel, are you sure that demand contracts significantly in devaluations? Did you see that happen with this year’s deval? Some of the 2.6 dollar sales are for unneeded machinery and educational trips to study basket-weaving in St. Barths, and even those importers who get dollars at 2.6 still sell their products at inflated prices for lack of competition. I don’t think costs have anything to do with prices in Venezuela. Demand constantly pushes prices up, while Indepabis (the price control regulator) pushes down. I don’t see much effect from competition other than in beer and telecommunications.

    2. Marcus Anonymous

      Miguel,

      It may be counterintuitive, but that is the general textbook answer. You made local products more competitive, eliminated rationing and all the inefficiencies associated with the rationing scheme, encouraged exports, and allowed the markets to work. And, in general, the black market rate is usually higher than the equilibrium rate. The losers are the people with the ration cards.

      The question in Venezuela today is “What is the real black market rate?” Is it the new central bank “auction” rate or is it closer to the “airport rate”

      1. sapitosetty Post author

        The bolivar is a fair bit weaker than the airport rate. The airport people give you 7. I talked to a guy in industry the other day who is now doing his calculations at 8.6.

        1. Marcus Anonymous

          Do you have any accurate source for such data? I’ve seen blogs that say you should be paying 80, which I don’t believe. But I don’t have a better source.

  9. moctavio

    Yes, I think demand has contracted this year, otherwise inflation would have been much higher. People had to hold off spending of the items at Bs. 4.3 and 2.6, not those purchased at the old parallel rate.

  10. Marcus Anonymous

    Setty,

    You clearly get economics, but you (and many people with graduate degrees in the field) sometimes forget the basics. I agree with what your wrote above:

    “..one way of thinking about it is, what is the average exchange rate today? On average people probably pay around 6 bolivars per dollar, considering all the people who get their Bs for 2.6, 4.3 or 5.3.”

    It is ONE way of thinking about it, but it is the wrong way. You pulled the ripcord on your knapsack. This is a mistake (but a common one) because.. (drum roll please!) – prices are set at the margin. Price = marginal cost.

    If you are an importer, your marginal cost is the most depreciated exchange rate. That you must use. The government can choose to devote foreign exchange to one purpose or imported good and keep its price low (corn flour) and keep another commodity scarce and expensive (scotch whiskey). But in order to keep the price of the priority goods low, it must make enough foreign exchange available to satisfy ALL demand at that lower price and exchange rate. If it’s only 80% or 90%, then there will be shortages and a higher black market price.

    So let’s say that corn flour can be imported for $1/bag. At $1/2.6 bs, the price is 2.6 bs/bag. If people want to buy 5 million bags per day, then the government must make $5 million per day available to keep the price at 2.6 bs. If they only allocate $4 million, the price will be higher because of shortages. Let’s say that as an alternative, the government sells $4 million at 2.6 and then as much as people want at 4.3 – then the domestic price is 4.3 bs per bag. Without an effective rationing system, it will probably be 4.3 bs for ALL Bags.

    Alternatively, lets say computer hard drives sell for $100. At an exchange rate of 4.3 bs/$, the domestic price would be 430 bs and people would want to buy 2 million hard drives. But CADIVI will only allocate $100 million, enough for only one million hard drives and if people want more they have to go to the black market at 10 bs/$. Then the domestic price for hard drives is 1000 bs. If you are lucky enough to get a CADIVI allocation, you buy each drive for 430 bs and then turn around and sell it for 1000 bs. You make 570 bs in pure profit just for wearing a red shirt.

    So the real issues for inflation are how much CADIVI allocates and what the MARGINAL exchange rate is for each product. The average rate is just a curiosity.

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