Venezuelan Default Suggested by Harvard Economist

Venezuelan Default Suggested by Harvard Economist
By Sebastian Boyd  Sep 8, 2014

Sept. 8 (Bloomberg) -- As Venezuela racks up billions of dollars of arrears with importers that are fueling the worst shortages on record, one of the nation’s top economists is questioning the government’s decision to keep servicing its foreign bonds. Katia Porzecanski has more on "Bottom Line." (Source: Bloomberg)
As Venezuela racks up billions of dollars of arrears with importers that are fueling the worst shortages on record, one of the nation’s top economists is questioning the government’s decision to keep servicing its foreign bonds.
A “massive default on the country’s import chain” is part of what has allowed the nation to keep paying its foreign bonds, Ricardo Hausmann, a former Venezuelan planning minister who is now director of the Center for International Development at Harvard University in Cambridge, Massachusetts, said by phone from Boston. “I find the moral choice odd. Normally governments declare that they have an inability to pay way before this point.”
While Hausmann declined to say if he’s specifically recommending a default, he said he found “no moral grounds” for the government and state-owned oil company Petroleos de Venezuela SA to make $5.3 billion of bond payments due in October. With foreign reserves at an 11-year low and arrears to importers growing, Venezuelans are struggling to find everything from basic medicines to toilet paper. And prices are surging on the goods that they can buy, saddling the country with the world’s highest inflation rate.
The nation’s bonds are sinking as President Nicolas Maduro fails to stem the crisis, extending declines today. The extra yield investors demand to own Venezuelan sovereign bonds instead of Treasuries jumped 2.99 percentage points in the past month to 13.39 percentage points at 3:12 p.m. in New York, the highest since February, according to data compiled by JPMorgan Chase & Co. The spread is the highest in emerging markets.

Ramirez Departure
Bonds slumped last week after Maduro removed Rafael Ramirez, the country’s main economic policy maker, fueling concern the government may delay or scrap measures to ease the hemorrhaging of dollars, including a currency devaluation and increase in gasoline prices.
Marcos Torres, the head of economy and finance at the central bank, didn’t reply to an e-mail seeking comment on Hausmann’s statements. An official at the Information Ministry declined to comment when reached over the weekend.
Hausmann has been a public figure in Venezuela for more than two decades, having served as planning minister in the government that the late Hugo Chavez, Maduro’s predecessor and mentor, tried to topple in a 1992 coup attempt. Hausmann then joined the Inter-American Development Bank, where he was chief economist, before leaving for Harvard in 2000.
In a Sept. 5 piece published in Project Syndicate that was titled “Should Venezuela Default?”, Hausmann and Miguel Angel Santos, a Harvard research fellow, highlighted how the import arrears and shortages are imposing hardship on Venezuelans.
“The fact that his administration has chosen to default on 30 million Venezuelans, rather than on Wall Street, is not a sign of its moral rectitude,” they wrote. “It is a signal of its moral bankruptcy.”
Francisco Rodriguez, an economist at Bank of America Corp., said that defaulting now would be a mistake. Distortions created by the government’s price and foreign-exchange controls, rather than a lack of hard-currency, are causing the shortages, he said.
“Venezuela has more than enough foreign currency earnings to both ensure an adequate supply of imports and meet its foreign obligations,” Rodriguez said in a Sept. 5 note to clients. “Current scarcity levels are caused not by the need to service on the country’s external debt but by the massive distortions to relative prices that have resulted from the country’s tight price and exchange controls. Resolving these relative price distortions, rather than defaulting, is the key to restoring Venezuela’s macroeconomic health.”

Subsidized Food
The rout in Venezuela’s bonds this year stands in contrast to the returns they generated during Chavez’s tenure. While the currency and price controls, along with state takeovers of companies, caused investor concern, soaring oil prices allowed the government to keep serving its debt. Venezuelan bonds returned 677 percent from his inauguration in 1999 until he died in March 2013, beating the 387 percent average gain for emerging-market debt during that span, according to data from JPMorgan.
One of the problems the government could face in defaulting is that bondholders may seek to seize the assets of Citgo Petroleum Corp., the U.S. refining and distribution arm of Petroleos de Venezuela, to recoup their money.
Petroleos de Venezuela has said that it’s looking to sell Citgo for at least $10 billion. Even that amount wouldn’t cover arrears to importers that Morgan Stanley estimated in June may be as much as $13 billion, a figure that equals more than half the country’s foreign reserves.

Inflation Data
Venezuela has delayed regular reporting of economic statistics and has yet to publish inflation data for June, July or August after annual consumer-price increases reached 61 percent in May. That was the highest among all economies tracked by Bloomberg.
The increasing difficulty of finding dollars is forcing Venezuelans to the government’s official distribution depots, where they line up for subsidized goods with numbered tickets that give them the right to buy items including frozen chicken, rice and cooking oil. Protests sparked in part by the shortages have led to 43 deaths this year.
It’s “a completely unsustainable situation,” Hausmann said in the telephone interview.

Credit-Default Swaps
Venezuela’s foreign-currency debt is the most expensive in the world to insure against default with credit-default swaps after similar securities for Argentina stopped trading when it couldn’t make a payment due July 30. Venezuela’s CDS have surged 3.73 percentage points in the past month to 14.47 percentage points. That implies a 63 percent chance of a disruption in payments in the next five years, according to data compiled by Bloomberg.
Venezuela’s $4 billion of notes maturing in 2027 dropped 3.53 cent to 70.13 cents on the dollar at 12 p.m. in New York.
When asked what he would do if he were in Maduro’s position, Hausmann’s answer illustrated both his lack of confidence in the government as well as the magnitude of the challenge facing the country.
“I would immediately resign and call democratic elections,” he said.

To contact the reporter on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

To contact the editors responsible for this story: Brendan Walsh at bwalsh8@bloomberg.net Lester Pimentel, David Papadopoulos

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.

Rafael Ramirez: Venezuela oilman control the world's bigges oil reserves

Rafael Ramírez (center), Venezuelan minister for energy and PDVSA CEO
By Virginia Lopez / The Guardian published by The Guardian.co.uk, on August 18, 2011

Rafael Ramírez should be ranked as one of the most powerful men in the world. As the Venezuelan minister for energy, he is also head of the country's state oil company – and, therefore, now controls the world's biggest proven oil reserves.
In a little-reported development, Opec recently certified that the South American nation was number one in national reserves, after a vast field of what was previously classified as tar was redefined as extra heavy crude. La Faja, as the heavy oil belt along the Orinoco river is referred to, contains nearly 220bn barrels. That takes Venezuela 's reserves to 297bn – close to 20% of the world's oil – and leapfrogs it over Saudi Arabia on 265bn.
Although Ramírez has been in his job for almost a decade, he gives all the credit for the country's preeminence in oil to its controversial president, Hugo Chávez . If it hadn't been for the colonel, he says, Venezuela would have surrendered its reserves to multinationals long ago – and the price of oil would be nowhere near its current level.
"If President Chávez had not arrived to power," he says in his Caracas office, "we would be out of Opec, the price of oil would have not recovered, and Venezuelan oil would be in the hands of privates. At the international level, we strengthened Opec and called for a meeting of all its members … We established a fair price and gave unity to the market."

Jam-making
All of which should make Ramírez just as important a figure as the powerful Saudi oil minister, Ali al-Naimi, and make the country's state oil company, PDVSA, a force to be reckoned with. But this is Chávez's Venezuela and PDVSA is far more than an oil company. In fact, critics say that its huge diversity of operations – it's involved in health and welfare programmes, importing food, housebuilding and even making jam – means that PDVSA does not have what it takes to capitalise on the bounteous wealth beneath the Orinoco basin.
But Ramírez disagrees. "My greatest satisfaction [after 10 years as minister] is my team. We all come from the left, and I feel great pride in having recovered the industry for all of the Venezuelans," he says. "Before, PDVSA was an oil enclave. It had nothing to do with the rest of the country. I worked at one of its subsidiaries and I quit. I couldn't stand their almighty attitude and their disdain for the people. They referred to themselves as a first-world company within a third-world nation."
Ramírez, 48, was born into a communist family. His father was a well-known guerrillero and Ramírez's surname has led some to suspect that he is related to the notorious Venezuelan terrorist Carlos the Jackal (real name Ilich Ramírez), who was also an Andean communist.
He laughs off the link, joking that the name Ramírez is as common as Smith is in Britain, but the trail doesn't end there: one of his vice ministers was Lenin Ramírez, Carlos's brother.

PDVSA's radical transformation came about after Chávez cemented his control of the country following a coup attempt in 2002 and, later that year, a two-month-long strike during which Chávez's opponents cut off the oil supply in an effort to force his resignation.
"We knew something was going to happen. It was not a secret to anyone, so we prepared. If there was another coup, we knew our advantage lay with the oilfield workers, so we went from oilfield to oilfield talking to the workers. The oil sabotage didn't find us in the office, but in the field [with the people]," Ramírez says.
By February 2003, Chávez was firmly in power, and PDVSA changed forever. Close to 20,000 of the 50,000 people who worked there at the time were fired and its private, corporate approach was substituted for what came to be known as "the new PDVSA", run by political ideology more than by market rules or production standards.
Ramírez describes this ruling ideology as national, popular and revolutionary. A very tall man, Ramírez sits in front of a wall lined with paintings of Fidel Castro, Che Guevara, Chávez and Simón Bolívar, the Latin American figures that have inspired Chavismo, and redefined Venezuela's oil production.
"We are national, because our interest lies in charging what any nation that is in the least bit nationalistic would charge to favour their national interests," he says. "It is popular because we will not turn our backs on the people. And it is revolutionary because we are proposing a development model that is socialist – where we must go against the previous rentist model – where we have taken close to $300bn and invested it in the social areas of the country: literacy, education and food."
But for all the good intentions, eight years of social programmes have taken their toll on the company's core business, resulting in a decline in oil production. And with that comes criticism. Asdrúbal Oliveros, director of Ecoanalítica, a public policy consulting firm, says: "With the old PDVSA, you had an oil policy with no relation to the development policy, but now you have a company that builds houses, buys electricity plants, imports food and even makes jam. In the end, you do wonder if all this must make part of the oil industry. "It became a heavily politicised company that looks more like a ministry of social works, and both extremes are bad."

Sabotage
Ramírez denies that diverting attention to the misiones , as PDVSA's social programmes are called, has affected productivity. He claims it was opposition-led "oil sabotage" that led to the slump in production, and that they have since succeeded in bringing it back to close to 3m barrels a day (about4% of the global total). Measures are under way to ensure it reaches 4m barrels per day (bpd) by 2015, he says.
Depending on whom you talk to, PDVSA's exports range from 2m bpd to 3m bpd. This discrepancy in the numbers reflects one of the company's main problems: that even if its productivity has not decreased, its credibility has.
Francisco Monaldi, an oil expert at Venezuela's IESA business school, says: "Nobody believes in this government. They announce they will invest $150bn in the next six years and investors take it as a token gesture because to date none of these types of announcements have come to fruition."
For all the fear and distrust it inspires, PDVSA has succeeded in signing agreements with close to 20 multinationals to develop La Faja. Nor does Ramirez see a problem with the recent nationalisations of some multinational oil companies' assets in Venezuela. For the new PDVSA it was a matter of reestablishing the country's sovereignty, he says.
"Today, I can tell you that we have total control of our industry and total control over all the oil businesses in our country under a mixed capital scheme. All of the companies that were operating in Venezuela accepted this, except for ExxonMobil and ConocoPhillips, which left the country." Both of these companies are in a legal battle with PDVSA that could see the latter lose one of its refineries.
Ramírez prefers in any case to look at the big picture and is confident that Venezuela's total reserves will rise to 313bn barrels.
"One thing is oil on site, of which we have 1.3 trillion barrels, and another thing is to be able to extract that oil," he says. "The concept of reserve means that you have the oil and that you have the ability to extract it. With the technology we have, we can extract 20% of that oil … But the US department of geology has said that with our present technology we could actually extract close to 45%. That would be 511bn barrels – or oil for about 140 years."

Virginia Lopez escribe desde Caracas para The Guardian.

Venezuela paying italian company over oilfield takeover

Venezuela paying Italian company over oilfield takeover

CARACAS, Venezuela (Reuters) — Venezuela has agreed to pay Italy's Eni $700 million in cash for the takeover of an oil field but hardened its stance in a fierce compensation battle with ExxonMobil (XOM).
Oil Minister Rafael Ramirez said Tuesday that the government would make the payment to Eni for the Dacion heavy crude project over a seven-year period.
"The book value of the investments made by the transnational company in the Dacion field are $700 million and we have agreed to pay it over seven years," he said.
He said the agreement left Exxon isolated as the only company fighting with the government over a drive to increase state control of Venezuela's huge oil resources.
Exxon in recent weeks won court orders freezing up to $12 billion of Venezuela's assets, prompting state oil company PDVSA to sever commercial ties with America's biggest company.
Ramirez warned that Venezuela could pull out of its Chalmette, La., refinery joint venture with the Texas company over the dispute. He said the fight with Exxon was one factor helping support world oil prices.
Venezuela took over the Eni field in 2006 after negotiations with the government of socialist President Hugo Chavez to convert the Dacion subcontracting venture into a state-majority joint venture fell through.
"Eni believes this settlement represents an important step toward improving and consolidating the cooperation with local authorities and with PDVSA," the company said last week in statement.
Ramirez thanked Eni for its willingness to negotiate an agreement with Venezuela while slamming Exxon for challenging PDVSA over compensation for the nationalization last year of one of four Orinoco heavy oil projects.
"Eni never lost trust in our country," Ramirez was quoted as saying by the local Globovision television channel, which posted his comments on its website. He criticized what he called Exxon's "aggressive attitude."
Ramirez on Tuesday denied that Exxon's investments in the Orinoco region are worth billions of dollars, saying the company's "total assets in Venezuela are less than one billion dollars."
Contributing: Associated Press
Copyright 2008 Reuters Limited.

It would be the worst time politically for Chavez to cut oil shipments to US

"It would be the worst time politically for Chavez to cut oil shipments to the U.S.," said Patrick Esteruelas, Latin America analyst at the Eurasia Group in New York.

Oil analysts dismiss threat by Chavez on sales to U.S.
Dan Caterinicchia

Associated Press

Feb. 12, 2008 12:00 AM
WASHINGTON - Venezuelan President Hugo Chavez's latest threat to cut off oil sales to the U.S. produces tantalizing headlines and rattles some oil traders' nerves.But analysts say it presents no long-term danger to global oil supplies or prices and makes no economic or political sense for his own country.Chavez's threat was in retaliation to Exxon Mobil Corp.'s efforts in U.S. and British courts to freeze billions of dollars of assets belonging to Venezuela's state oil company to resolve an oil-production contract dispute.

"If you end up freezing (Venezuelan assets) and it harms us, we're going to harm you," Chavez said Sunday. "Do you know how? We aren't going to send oil to the United States. "His comments helped stir anxiety on oil markets on Monday, sending crude futures prices up by nearly $2 a barrel. (Violence in Nigeria, refinery outages and colder weather in the U.S. also propelled prices higher.)

If Chavez actually cuts off supplies to the U.S., the impact would be mostly symbolic, said oil analyst Peter Beutel of Cameron Hanover in New Canaan, Conn. Any short-term supply disruption would dissipate as other nations make arrangements to take the Venezuelan crude and the U.S. makes up its shortfall by purchasing additional barrels from the Middle East, Africa and other regions.

"It makes no sense for Mr. Chavez to follow through on his threats" because the U.S. refining industry's plants, some of which are owned by Venezuela, are customized to handle much of Venezuela's high-sulfur crude oil, said Tom Kloza, chief oil analyst at the Oil Price Information Service in Wall, N.J. If Venezuela's crude was low in sulfur content, making it more valuable on the global market, he might have a better hand to play, Kloza said.

Indeed, the U.S. remains the No. 1 buyer of Venezuelan oil, purchasing more than 41 million barrels in November, accounting for roughly 10 percent of all crude-oil imports that month, according to the most recent Energy Department data available.

With oil prices hovering above $90 a barrel, Chavez relies largely on U.S. oil money to stimulate his economy and bankroll social programs that have traditionally boosted his popularity. Nevertheless, Chavez in December lost a vote on constitutional changes that would have let him run for re-election indefinitely."It would be the worst time politically for Chavez to cut oil shipments to the U.S.," said Patrick Esteruelas, Latin America analyst at the Eurasia Group in New York.

This isn't the first time Chavez has tried to use the oil weapon. He has repeatedly threatened to cut off shipments to the U.S. if Washington tries to oust him, but many analysts have dismissed that scenario as highly unlikely. Chavez, meanwhile, has been vague about precisely what actions by the U.S. government could constitute an attack against his government worthy of halting oil shipments.

Exxon Mobil has gone after the assets of Petroleos de Venezuela SA in U.S. and European courts as it challenges the nationalization by Chavez's government of four heavy oil projects in the Orinoco River basin, one of the world's richest oil deposits. Other oil companies including Chevron Corp., France's Total, Britain's BP PLC and Norway's Statoil Hydro ASA have negotiated deals with Venezuela to continue as minority partners in the project, but ConocoPhillips and Exxon Mobil balked at the tougher terms and have been in compensation talks with Petroleos.

It still remains unclear how much Venezuela stands to lose economically from Exxon Mobil's lawsuits in courts in New York and London.Although a British court last month issued an injunction "freezing" as much as $12 billion (euro 8.3 billion) in Venezuelan assets, initial reaction from Venezuela's top oil official suggested that Chavez's government does not expect to face much harm.

Oil Minister Rafael Ramirez said last week that the state oil company does not have "any assets in that jurisdiction that even come close to those sums."Light, sweet crude for March delivery rose $1.82 to settle at $93.59 a barrel Monday on the New York Mercantile Exchange after earlier hitting a one-month high of $94.72.

A key factor, analysts said, was that unidentified gunmen in Nigeria attacked a naval vessel that was escorting petroleum industry boats. Militant attacks have cut the African nation's oil output by nearly a quarter in the past two years.

PDVSA GOING DOWN THE DRAIN. RAMIREZ PULLING THE CHAIN.

PDVSA GOING DOWN THE DRAIN. RAMIREZ PULLING THE CHAIN.
Gustavo Coronel‏
**** The Venezuelan Oil industry in chaos: an unreliable supplier to the U.S.

The model chosen to nationalize the Venezuelan petroleum industry in 1976 was unique and very successful: four integrated operating companies under a financial and strategic planning holding company. Management was very professional, politics did not play a role and, as a result, Petroleos de Venezuela became, for the next 25 years, one of the top oil companies in the world, next to Exxon and Shell. This success story came to an end when Hugo Chavez came into power in 1999. During his presidency Petroleos de Venezuela has lost about 800,000 barrels per day of production capacity, and management has been politicized. U.S. based, fully owned affiliate, Citgo, has become a political tool that distributes subsidized fuel in the U.S. as part of Hugo Chavez’s strategy to establish a political beachhead in that country, with the willing assistance of Joseph Kennedy III and a few members of U.S. Congress.

Venezuela still is one of the key petroleum suppliers to the U.S., sending about 1.1 million barrels per day to that country. Any abrupt disruption of this flow of oil would result in a major blow to the U.S. economy, already in the threshold of a recession. Up to now the possibility of such a disruption had been based upon the unpredictable nature of Hugo Chavez as an authoritarian leader who hates the U.S. There is little doubt that Chavez would interrupt the flow of oil to the U.S if he could. But he cannot. Most of the oil coming to the U.S. can only be refined in U.S refineries and it would take China or India, the other two likely main clients, about five years to build refineries to process Venezuelan oil.

The danger of such an interruption is, therefore, negligible? Not really. There is another reason why this flow could be suddenly interrupted: because the Venezuelan petroleum company becomes unable to fulfill its contractual obligations due to poor management and to a major financial or operational collapse. Even two years ago this would have appeared extremely unlikely but, recently, the company has been deteriorating at an alarming rate. Under investment and lack of maintenance have combined to take production down to very low levels, no more than 2.5 million barrels per day, while domestic consumption is now reaching some 800,000 barrels per day, cutting into the volumes originally destined for exports. Some 300,000 barrels per day go at subsidized prices to Cuba, Nicaragua, Bolivia and some of the Caribbean states. Any further problems of an operational or financial nature would place PDVSA’s production below the volumes contractually committed to the U.S.
What are the chances of these problems getting worse in the near future? They are so high that the U.S. should be prepared for such an eventuality.

The Venezuelan petroleum industry is nearing financial collapse. Recent signs are ominous. The company is demanding payment of exports within eight days, rather than the traditional thirty days, suggesting that the company has a severe problem of cash flow. Some days ago the Venezuelan petroleum company ordered Citgo to obtain an urgent $1 billion loan on its behalf and a few hours ago it requested another $500 million from Citgo as advanced dividends. In a very unusual move cargoes of fuel oil, worth about one billion dollars, have been placed for sale in the spot market at a discount provided they are paid in cash. The Venezuelan petroleum company has obtained a $4 billion loan to China, to pay for debts of the central government that have no relation with the oil company. The Bahamas oil terminal, owned by Petroleos de Venezuela, has been put up for sale, without success. There is an air of panic surrounding the finances of the Venezuelan petroleum company.

But this is not all. As a result of the aggressive political moves during the last two years by Hugo Chavez, who practically confiscated large oil projects of Exxon Mobil and Conoco Phillips in Venezuela, Exxon Mobil has just decided to counter attack and has obtained court orders from the U.K., the Netherlands, the Netherlands Antilles and the U.S. to freeze up to $12 billion worth of Venezuelan oil assets in these countries. This legal action by Exxon Mobil might not impede the daily operations of the company but represents a major financial and psychological blow to the already very weakened Venezuelan petroleum company and to the government of Hugo Chavez. This action might be followed by a similar action by ConocoPhillips,another company that feels wronged by the Chavez government.

The possibility of a major collapse of the Venezuelan petroleum company and of its inability to fulfill U.S. contractual commitments increases as the days go by.