How Rafael Ramirez bankrupted Petroleos de Venezuela

I like this information, but I am so glad we are not producing 5 MBD, because the politicias would have had more money to steal.
vdebate
How Rafael Ramirez bankrupted Petroleos de Venezuela?
Gustavo Coronel
http://infodio.com/190913/rafael/ramirez/bankrupt/pdvsa
19/09/2013

Rafael Ramirez is the Minister of Energy and Petroleum of Venezuela.

For the past 11 years he has also been the President of the state-owned petroleum company, Petróleos de Venezuela (PDVSA). I would like to describe in this article how he led the company into bankruptcy. In so doing he has also generated economic and social chaos in the country, since petroleum is the only source of foreign currency for our nation. It represents 96% of all Venezuelan exports.  Bankruptcy is essentially a financial term, but it can also be applied to the operational, organizational and ethical aspects of a corporation. I argue that PDVSA is bankrupt in every one of these aspects. I will use the official data provided by the company in its Annual Report for 2012 to support this assertion.  

1. OPERATIONAL BANKRUPTCY 

(a) PDVSA currently produces about 2.5 million barrels of oil per day. The official production figure is 2.9 million barrels per day, which includes the production of the foreign partners in the Orinoco area, about 0.4 million barrels per day (BPD). PDVSA’s production, therefore, is about half a million barrels of oil per day less than in 1998. In 15 years the company has not only failed to increase production, but has lost production capability. Previous management had left a plan in place to increase oil production to 5 million barrels per day in 2012. This plan was abandoned by Ramirez. Therefore, PDVSA is now producing half of what it should have been producing, if the plan had been executed.The loss to the nation is enormous. 

(b) The huge heavy-oil deposits of the Orinoco area have not been developed. Upgrading plants that are essential to convert these heavy oils into a commercial product have not been built. Instead, the area has been divided into blocks, mostly given to state-owned companies from ideologically friendly countries -Vietnam, Cuba, Russia, China, and Belarus- that lack the technical, managerial or even financial capability to develop these deposits. International private companies have been largely excluded and two of them, ExxonMobil and ConocoPhillips, have resorted to legal actions against the expropriation of their assets. 

(c) The traditional oilfields of light and medium gravity oil are in great neglect and, as a result, the Venezuelan composite basket has lost much value in the international markets. No light oil deposits have been discovered in the last 15 years due to lack of exploration. Only two exploration wells were completed in 2012, compared to about 200 in Brazil. 

(d) The refineries are now operating at some 70 percent of design capacity, while the index of industrial accidents is 10 times greater than the international averages (link). The explosion of the Amuay refinery in August 2012 has been the worst tragedy, but not the only one that has afflicted the installations of the company, due to lack of proper maintenance. 

(e) The deficit of natural gas is increasing, while In Anaco, Eastern Venezuela, there are up to 22 trillion cubic feet of gas reserves undeveloped due to the ineptitude of the company (link). Offshore deposits have not been produced because foreign partners, ENI and REPSOL find it undesirable to invest in development to sell the gas at subsidized prices in the domestic market. Natural gas continues being imported from Colombia. 

 2. ORGANIZATIONAL BANKRUPTCY 

(a) PDVSA is no longer an oil company, much less an energy company. It is a multipurpose company that has been ordered by the central government to engage in the most diverse activities, e.g: food imports and distribution, building houses, raising pigs, planting cassava and ideologically indoctrinating its employees against capitalism. It has created dozens of affiliates that spend millions of dollars doing tasks unrelated to its core business. This has led to organizational chaos and to much corruption. In this type of organizational environment no company can be efficient. 

(b) The president of the company is also the minister of the sector. He supervises himself, a no-no in management. The company has no checks and balances. It is simply the political tool of the executive government and has no managerial autonomy. 

(c) The number of employees of the company has quadrupled, from 32,000 in 1998 to about 120,000 today. Not only the number has increased, but their average credentials have deteriorated, as they are selected on the basis of “loyalty to the revolution”. In 2002-2003 about 22,000 technical staff and managers were dismissed by Hugo Chavez, during a two-day period, for political reasons, and their legal severance payments never made. 

(d) The company has practically abandoned outsourcing, in favor of a policy to own most auxiliary services to the core business. This has impacted negatively the overall efficiency of the company, has increased operational costs and led to the expropriation of numerous small and mid-size contractors without adequate compensation. 

 3. Moral Bankruptcy 

This is the worst aspect of the company: the loss of transparency, accountability and ethics that prevails within the corporation. 

 (a) The company has been totally politicized. Mr. Ramirez openly says that the company is an arm of the “revolution”, and that no one can work there unless is totally loyal to the government. Any employee showing signs of political dissidence is immediately expelled or called a saboteur. See speech of Ramirez to PDVSA managers (part 1) and, in particular, part 2. 

 (b) Oil income has been diverted from the Venezuelan Central Bank, where it should go by law, to parallel funds without transparency (like FONDEN). Money is handled by four persons: the president (Chavez and now Maduro), Jorge Giordani, Nelson Merentes and Rafael Ramirez. As Mr. Ramirez said to Hugo Chavez: “fortunately we don’t have to account to anyone…”. 

(c) No-bid contracts are the norm, given to friends and relatives, as I have documented in previous papers and articles. See here and here. Newer cases of extreme corruption within the company include the case of the barge Aban Pearl (see here) the case of Derwick Associates (see here) and the case of the oil tanker Carabobo (see here). 

(d) The giving of subsidized or, even, free oil to Cuba, Nicaragua, Ecuador, Bolivia and to Caribbean states in exchange for bananas, black beans and other staples. In particular the delivery of 100,000 BPD to Cuba during the last 7 years or so, in exchange for bodyguards, sport trainers, pseudo medical staff and other diffuse services, represent an act of political treason involving a loss to the country of some $3-4 billion per year. 

 4. Financial Bankruptcy Thanks to Sergio Saez and his very detailed analysis of the financial situation of PDVSA (personal communication) I can summarize the extent of the financial catastrophe of PDVSA, as reflected in the Consolidated Financial Statements of the company for 2012. 

 (a) Income effectively received by PDVSA in 2012: $59,579,000,000 

This is the net income because of the $121,000,000,000 of total gross income during 2012, PDVSA had to spend $40,000,000,000 in oil bought abroad and 24,000,000,000 had to be paid to other countries. Less: Operational costs $24,401,000,000 Contribution to the National Budget $26,404,000,000 Given to Parallel Fund, FONDEN $8,311,000,000 Total $59,116,000,000. As we can see the income only served to cover the above expenses. In order to finance “social” programs and to attend to capital investments the company had no other alternative than to borrow money. 

(b) The total production of the company and foreign partners was 2,9 million BPD. 

 Less: 

 Volume required by the domestic market 0,8 million BPD Given to Cuba, practically free*

 0,1 million BPD Distributed via PetroCaribe and ALBA, highly subsidized**

 0,3 million BPD Given to China to pay for loans

 0,4 million BPD Given to Belarus, Portugal and Iran to pay for loans 0,1 million BPD 

 Total deductions 1,7 million BPD 

*Note: Venezuela paid Cuba $284 million, in cash, on top of the oil. 

**Note: Price obtained averages $62 per barrel, little paid in cash. 

Therefore, the net volume that PDVSA sold at commercial prices in the world markets was only about 1,2 to 1,3 million BPD. The average income received by PDVSA for every barrel of oil was only about $54. The nation is only receiving half of the world commercial price for very barrel of oil produced. This would be enough to dismiss Mr. Ramirez and place him under criminal investigation. 

(c) As a result of this tragic financial situation PDVSA is now forced to borrow money to invest and, even, to help paying ordinary expenses. 

They owe the Venezuelan Central Bank the equivalent of $30 billion that this bank has printed in order to give it to the company. They owe China about $30 billion. They have issued about $25 billion in bonds. They have received about $6 billion in loans from foreign companies, theoretically to be used in the Orinoco área. They owe suppliers and contractors about $27 billion. They have financial contingencies of the order of $10 billion. As a result PDVSA had debts or financial commitments of some $128 billion by the end of 2012 and surely a greater amount by the end of 2013. 

I am not a financial expert, by any means, but I suspect I am looking at a bankrupt company, especially since the value of their assets is lower than this figure, specially since the oil reserves are the property of the nation and are not a part of PDVSA’s assets. 

 5. CONCLUSION 

As a Venezuelan citizen it is my duty to denounce this situation to fellow Venezuelans and to international public opinion. I believe a gigantic crime against the nation of Venezuela has been committed by Mr. Rafael Ramirez and his collaborators. I believe this crime has to be the object of immediate intervention by Venezuelan authorities. I am also aware that there are no independent Venezuelan authorities existing at this moment in time. However, I hope this accusation finds an echo in international public opinion and contributes to a proper understanding of the Venezuelan tragedy, one that many of my countrymen still do not comprehend.

A session with the US Energy Security Council

Gustavo Coronel 10/16/13
A session with the U.S. Energy Security Council 

The U.S. Energy Security Council is a group of very distinguished Americans: former Washington cabinet members, top military leaders and former CEO’s from big corporations, coming together to address the issue of oil’s monopoly over transportation fuel. 

The Council “advocates proven transformational policies designed to diminish oil’s strategic value by opening the transportation fuel market to competition”. 

See http://www.usesc.org/energy_security/index.php/members

In March of this year I was honored to address this group by telephone on the outlook of the oil Venezuelan oil industry, see http://lasarmasdecoronel.blogspot.com/2013/03/my-opinion-on-pdvsa-in-oil-journal.html . 

Tuesday, October 15, I was invited to a meeting of the Council, held at the National Press Club, in downtown Washington. I took it to be an invitation to listen, but I ended up as a member of a round table, sitting together with many legendary figures: TV’s Ted Koppel, James Schlesinger (former Secretary of Energy and of Defense), Norman Augustine (Former CEO, Lockheed Martin), John Hofmeister (Former CEO, Shell), Robert McFarlane (former National Security Advisor) and several other political and corporate big leaguers. 

The meeting began with a conversation between Ted Koppel and James Schlesinger about the Arab Oil embargo of 1973. Both Koppel and Schlesinger were main actors in that drama and they recounted it for us, Schlesinger providing very interesting recollections. After the Koppel-Schlesinger conversation, the Council discussion began. I felt more like asking for autographs from these people than as a participant in the round table. 

I was the second person to be asked for comments by the Moderator, Anne Korin. Her question had to do with the current situation within OPEC, given that some of the members have an excess of money (Saudi Arabia) while others need it desperately (Venezuela). I said that (see  http://www.c-span.org/Events/Energy-Security-Conference-Looks-at-Alternatives-to-Foreign-Oil/10737442057-1/  , at about minute 57) Venezuela was no longer a powerful member of OPEC and that OPEC itself had lost much power since it was not a monolithic block. 

In parallel the U.S. was riding a big wave of energy abundance, thanks to shale gas and oil and did not need to import as much oil as before. I added that Venezuela/PDVSA were technically broke and depended on China to provide funds since oil production had declined and much of the oil exports went to ideologically friendly countries that did not pay. I said OPEC was no longer the powerful cartel of yesteryears. 

This opinion of mine seemed to run against the perception of some of the members of the Council that still see OPEC as holding consumers hostage. 

The fact is that OPEC provides today a much smaller share of the global oil supply. Consuming countries, on the other hand, enjoy many energy source alternatives: conventional oil, unconventional oil (Canada), shale oil and gas (several countries), and renewables, particularly the rather new alternative of producing Methanol (not to be confused with Ethanol) from natural gas. 

This alternative is gaining great momentum in the U.S. since it is both economically and technically feasible. 

An article in the Wall Street Journal, October 10 , : “A chemistry breakthrough that could fuel a revolution”, by George Olah and Chris Cox, describes how shale gas and recycled carbon dioxide can be converted into methanol, a fuel that can be mixed with gasoline to be used as transport fuel. 

As this technological breakthrough is taking place, the Council’s priority task is to promote the legislation that could put methanol on the same tax footing as ethanol, in order for the new technology to become an alternative at the pump. Dr. George A. Olah, the co-author of the WSJ article, is a Nobel laureate in Chemistry. 

In the round table the person sitting next to me was Dr. Surya Prakash, a partner of Dr. Olah in Methanol research. It was announced during the meeting that this team had been awarded a one million dollars prize by the government of Israel, as the best energy initiative of the year to find alternatives to gasoline as a transport fuel. I congratulated my neighbor. 

Statements supporting methanol as an alternative to gasoline came from MIT expert Daniel Cohn ( MIT Energy Initiative), Greg Dolan( Methanol Institute), Deron Lovaas (Natural Resource Defense Council), Joseph Cannon ( Fuel Freedom Foundation) and Frank Gaffney ( Center for Security Policy). 

The meeting was open to members of the China Embassy in Washington and to Chinese experts such as Dr. Liu Quiang. I had a brief talk with Dr. Liu and he said they were producing methanol from coal and that this process proved to be economic. I asked him about the position of China in Venezuela but he just smiled.

The message of the Council is that there is a need for free choice of fuel at the pump. This choice should not simply be, as Mr. Augustine pointed out: premium, extra and regular, but it should include alternatives that would make transport fuels cheaper and environmentally safer, certainly methanol. I will elaborate on this topic in another post.

Corruption, poor governance and inflation

Corruption, poor governance and inflation = chaos
Troubled Currencies: Exchange Rates and Inflation
Country: Argentina
Date: 7/9/2013
Black-Market Exchange Rate*: $7.98
Official Exchange Rate: $5.42
Implied Annual Inflation Rate:  24.60%
Current Official Inflation Rate: 10.34%
Country: Iran
Date: 7/9/2013
Black-Market Exchange Rate*:  $33,100.00
Official Exchange Rate:  $24,777.00
Implied Annual Inflation Rate: 73.70%
Current Official Inflation Rate: 31.00%
Country: North Korea
Date:  6/25/2013
Black-Market Exchange Rate*: $8,043.00
Official Exchange Rate: $131.70
Implied Annual Inflation Rate: 78.64%
Current Official Inflation Rate: N/A
Country: Syria
Date:  7/9/2013
Black-Market Exchange Rate*: $295.00
Official Exchange Rate: $131.17
Implied Annual Inflation Rate: 336.50%
Current Official Inflation Rate: 36.43%
Country: Venezuela
Date: 7/9/2013
Black-Market Exchange Rate*: $31.59
Official Exchange Rate: $6.29
Implied Annual Inflation Rate: 240.10%
Current Official Inflation Rate: 35.24%
Source: aliqtisadi.com, dailynk.com, dolarblue.net, gate.ahram.org.eg, dollar.nu, eranico.com, Federal Reserve Economic Database, various news sources, and calculations by Prof. Steve H. Hanke, The Johns Hopkins University.
*Local Currency per USD

Professor Steve Hanke,  Johns Hopkins University and Senior Fellow at the Cato Institute,  has been working on a project called “Troubled Currencies”, which he defines as very unstable and associated with high rates of inflation. In the countries having those currencies the statistics are often adulterated in order to hide the true extent of their economic problems.  Professor Hanke has selected the following countries for his work:  Argentina, Iran, North Korea, Syria and Venezuela (see table above).  In the case of Venezuela the table shows an official rate of exchange of Bs. 6.29 to the dollar while the parallel rate is today Bs. 31.59 to the dollar. According to Professor Hanke this implies that the Venezuelan annual inflation rate is 240.1 percent rather than the official rate of inflation of 35.24 percent estimated by the government. Only Syria, a country immersed in a cruel and generalized civil war, has a higher rate of inflation than Venezuela.

Although the emphasis of the study is economic one cannot resist the temptation to link the chaotic economic conditions of these countries to the nature of their political regimes and the quality of their governance. All exhibit authoritarian styles of a militaristic (North Korea, Venezuela, Syria), religious (North Korea) or populist nature (Argentina, Venezuela) and share generally high levels of corruption. The Corruption Index of Transparency International for 2012  places countries with troubled currencies as follows, in the list of 175 countries:

Argentina       102
Iran               133
Syria             144
Venezuela     165
North Korea 174

Raul Castro lands in the Planet of the Apes

Raul Castro lands in the Planet of the Apes
the end of all our exploring will be to arrive where we started and know the place for the first time.
T. S. Eliot

In a speech before Congress last Sunday Raul Castro reminded me of Charlton Heston in “The Planet of the Apes”, facing the ruins of the Statue of Liberty in the shores of what he thought was an alien planet. He had merely returned to Earth many years later.  In his speech Castro sounded like landing, once more, in Batista’s Cuba implying, candidly, that their revolution had been a geometric turn rather than a radical change, a complete rotation about the Cuban social axis. 

After almost sixty years characterized by a tragic diáspora, thousands of broken homes, mass killings of dissidents, poverty and hunger, Castro describes a current Cuba essentially similar to the one he once felt should be changed by force. 

Last Sunday he spoke of intense government corruption and of an ethical crisis in Cuban society “where honesty, decency, shame, decorum and social solidarity have deteriorated significantly”. He spoke of the universal use of “an obscene language, of academic fraud, social tackiness, wholesale extortion” and of a people “less civilized (menos culta) today than in the past”, giving as example the common sight of people urinating in public.  

He spoke of the inconvenient parallel currency existing in the island and the low average salary of a government bureaucrat, which is the equivalent of $20 month.

In the final scene of The Planet of the Apes, Heston faces what remains of the statue of Liberty and understands, too late, what has happened. His final words could have been a proper ending for Castro’s speech last Sunday:  “ Damn You”.

To the James Baker III, Rice University

I heard this speech was cancelled. Anyway, I wanted to show what Gustavo Coronel wrote, related with it He is very good.

GC wrote: This is not what Chavez has been doing. He has installed in Venezuela a government of gangsters, mostly for the political and economic benefit of the 200 or so members of the gang. Today Venezuela is in political, economic and social ruin, as evidenced by all major indices in the hands of independent analysts:

vdebate reporter

FromGustavo Coronel

To the James Baker III Institute for Public policy, Rice University
Dear Sir or Madam:

I have seen in your website the notice of an event on 'Governance of Oil in Venezuela' to be held by invitation only. I can not attend since I do not live in the Houston area but I wonder what are the requisites to be invited to this type of events, where, presumably, you would be trying to find the truth about the topic under consideration and should welcome people holding different perspectives on the subject.

Looking at the explanatory summary that accompanies the description of the event, ready to be distributed to all media, I sense an explanation for the 'invitation only', since whoever put this summary together is definitely playing with loaded dice.

In other words, the event seems to be designed only to preach to the converted and to be one more official event organized by the Venezuelan Embassy in Washington DC, as part of his annual propaganda campaign.

Why would I suspect this?

Let us see what your summary (see below, your program) says:

'Venezuela is undergoing a process of dramatic political and economic change of sufficient magnitude to merit the overused term 'revolutionary'.

To describe the Venezuelan process, as a political and economic 'revolution' could be acceptable only as a major caricature of what 'revolution' should mean, a radical change in the foundations of social life and in the philosophy of government. This is not what Chavez has been doing. He has installed in Venezuela a government of gangsters, mostly for the political and economic benefit of the 200 or so members of the gang. Today Venezuela is in political, economic and social ruin, as evidenced by all major indices in the hands of independent analysts: inflation, crime rate, unemployment, social inequality, corruption in government, free market practices, competitiveness, foreign investment, country risk. To call this 'dramatic'and a 'revolution' is very black humor. An institution carrying the name of James Baker would deserve better than this travesty.

'Focused on both Venezuela domestic and international policy'.

The author of this summary is probably thinking of Chavez's alignment with the Colombian narcoterrorists or with Iran's Ahmadinejad or with Hezbollah. He is also probably thinking of the five Chavez ambassadors who were expelled from Latin American countries for their open intervention in the political processes of those countries, or in the handouts of Venezuelan oil to Castro, Morales, Ortega, Kennedy III, the Farabundo Marti Front in El Salvador and other parasites of our Venezuelan people. This could be called foreign policy, yes, but a tragic and corrupt one.

NO POLICY, on the other hand, is what characterizes the domestic policy of the Chavez's regime. There is no governance in Venezuela. No country that has had a president like Hugo Chavez and vice-presidents like Isaias Rodriguez and Adina Bastidas (one of your speakers) can be expected to have governance or a coherent set of domestic policies.

'Venezuela's vision is one of social justice that is oriented toward the provision of basic human needs to all its citizens and of political empowerment for the country' s hitherto forgotten lower social classes'.

I have no doubt that the author of this paragraph is in Chavez's payroll but I am appalled that a major institution located at a prestigious university would accept it at face value, to be used as factual information for an official event of the institution. Are you familiar, Sir or Madam, with the situation of the Venezuelan population? : The crime rate, the absence of the rule of law, the rampant corruption of Chavez, his family and his immediate collaborators (corruption defined both as stealing public funds and as the use/abuse of the public goods/ assets for personal use), the odious social exclusion of large sectors of the population that differ from Chavez's obsolete political ideas, the nepotism, the use of public funds for handouts to foreign governments and individuals, the lack of structural programs to solve poverty? These and many other characteristics of the Chavez's regime are the precise opposite of what this paragraph states.

'For the Venezuelan government, promoting social and revolutionary reforms while maintaining the advancement of the country's oil industry remains a major challenge…

' Again, this paragraph assumes as a given that there have been social and revolutionary reforms in a country that, frankly, has only been subjected to the madness of the inept. Do you know Sir, or Madam, that Chavez has received about $600 billion during his almost 10 years in total power and that the country has virtually nothing positive to show for it?

• Have you been in Venezuela?
• Have you seen the state of infrastructure, the situation of schools and hospitals?
• Have you heard our 'president' speak?
• Do you know that excessive numbers of our children die at birth in Chavez's hospitals?
• That street beggars are routinely assassinated?
• That the former Attorney General is a crook, just to mention one single example of the deplorable moral qualities of the Chavez's gang?
• That abandoned children in the streets of our cities are in the thousands?
• That commercial papers sold by the regime are fueling the greatest corruption in the history of our country?
• That the proposed primary school curriculum is designed for political indoctrination of our children?
• That Chavez just gave Danny Glover $30 million of our money to 'make a film' and has given Castro about $2 billion per year in subsidies for the last five years?
• That, four months later, the Electoral Council still refuses to make public the final tally of the referendum lot by Chavez in December 2007?
• That Chavez has said that if the opposition defeats him in the regional elections of October of this year 'there will be war'?
• That the laptops of the Colombian narco-terrorist leader recently killed contains numerous references to Chavez's alignment with, and support of FARC?

I could go on and on, but these examples will suffice to illustrate my point. What the paragraph calls 'empowerment of the poor' is only a criminal policy of handouts that keep the Venezuelan poor acting like beggars, instead of acting like proud independent citizens, capable of being self-starters.

Chavez throws fish around but is not teaching Venezuelans how to fish.

This, Sir or Madam, is the opposite of social justice.The reference contained in the summary about 'the oil industry being maintained moving forward' will sound clearly fraudulent to any one who knows what has been going on within PDVSA: six presidents and boards in ten years, the loss of some 800,000 barrels per day of production capacity; the lack of maintenance and investment; the violation of contractual obligations and commitments; the corruption within the highest management levels; the politicization of the company; its conversion into a food importing and distributing outfit; its loss of international prestige and credibility; its financial disarray, its bureaucratic adiposity; its utilization as a political tool, all of these and more items indicate an almost total collapse of the Venezuelan oil industry.

'The Baker Institute is convening a major conference…

'Dear Sir or Madam: a major conference cannot be convoked under such biased preliminary assumptions. It should be properly convoked only by inviting people having different perspectives.

For example, I fail to see the presence of speakers from the previous PDVSA, someone like Alberto Quiros, Luis Giusti, Pedro Burelli, Ramon Espinasa, only to name just a few who could give the attendees a more balanced (and a more professional) picture of the Venezuelan energy situation than some of the chavista speakers.

The presence of prestigious members of academia such as Terry Karl and David Mares is welcome, although none of them, as far as I know, have studied Venezuela in detail during the last months or, even, years.

Let us hope that they take upon themselves to present the other side of the sugar coated fairy tale that will, no doubt be presented by Ambassador Alvarez and his entourage. As being planned, I believe your event will be somewhat incestuous.

Of course, incest is OK only as long as you keep it in the family.