Caracas Chronicles

You hear it everywhere: PDVSA’s production will fall in 2017 but oil prices will rise so Venezuela’s exports vis-a-vis 2016 will increase, but only slightly. Coupled with a cut to imports from last year’s record lows, that means the country’s hard currency financing needs will be a few billion dollars lower this year. The verdict?

“Venezuela can probably muddle through and pay its bills in 2017.”

These quick-and-dirty assessments of Venezuela’s external accounts are great if you’re a bondholder looking to get paid.

These quick-and-dirty assessments of Venezuela’s external accounts are great if you’re a bondholder looking to get paid. But they’re useless if you’re an ordinary Venezuelan trying to get a sense of the long-term damage wrought on PDVSA and Venezuela’s public finances by incompetence and neglect. They ignore that PDVSA, the golden goose that rakes in 95% of Venezuela’s exports and feeds the county, is falling apart.

The truth is, PDVSA has been slammed with bad news recently; news that’s bad enough to impact the firm’s value and viability, even in the long-term.  

PDVSA, the golden goose that rakes in 95% of Venezuela’s exports and essentially feeds the county, is falling apart.

First there was a dangerous round of crony musical chairs in January. Maduro “created a new post of executive vice president” in PDVSA and named “vice presidents in areas including finance and exploration.” Even with PDVSA’s back against the wall, he put PDVSA’s management in the hands of political appointees with zero industry experience, whose role is to act as placeholders for some political cacique.

Take Ismael Serrano, a “Venezuelan navy rear-admiral, Hugo Chavez’s former Twitter manager and a leader of the late leftist president’s failed 1992 coup.” Serrano got the job because he’s a Tareck El Aissami man. Hell, even Delcy Rodríguez is now a PDVSA executive.

Then there was the news about delayed cargoes. Everybody knows that after years of underinvestment, PDVSA’s production has been falling. But the issue isn’t just that production is falling, it’s that no minimally competent person is managing the decline.

At the end of January, PDVSA was late on nearly 10 million barrels of refined products that the company owes the firms.

Au contraire: from October to January, “PDVSA canceled or delayed delivery of almost 7 million barrels of crude” to regular clients, such as U.S. Phillips 66 and Thai TIPCO Asphalt. Seven million barrels sell for some 300 million dollars and are almost three and a half full days of all of PDVSA’s production. Not exactly change. Reportedly, PDVSA is also late in its loan-for-oil deals with Russia and China, even after China effectively gave a grace period to Venezuela last year:

“The total worth of the late cargoes to state-run Chinese and Russian firms is about $750 million, according to a Reuters analysis of the PDVSA documents. At the end of January, PDVSA was late on nearly 10 million barrels of refined products that the company owes the firms.”

What happens if PDVSA’s delays or fails to deliver shipments too often? Its clients get sick of it, don’t renew contracts, don’t roll over loans, and eventually replace PDVSA with new suppliers or demand a price discount for continued business. Not good.

PDVSA is producing less oil, lower quality oil, and a growing share of its exports aren’t generating cash.

Then there was the news of PDVSA’s non-cash sales. Marianna Párraga and Brian Ellsworth from Reuters report that “PDVSA aims to boost crude deliveries to China by 55 percent in 2017.” This is serious, considering that deliveries to China are largely repayments and don’t generate fresh cash. You know which sales do generate cash? Sales to the U.S. But, as reported by Marianna Párraga, those are at a 25-year low.

The story here is not just that PDVSA’s production has been falling and that non-cash exports to repay Chinese and Russian debts have risen. The story is also that the quality of Venezuelan crudes has fallen and that Joint Venture (Empresas Mixtas) partners are taking a growing share of export revenues.

According to a recent paper by Igor Hernández and Francisco Monaldi, even though PDVSA’s production fell 8% between 2010 and 2015, production in traditional east and west regions (light, medium crudes) dropped disproportionately by 24% and 16%, with production in la faja (heavy gunk) growing by 12% to compensate. In the same period, production in fields operated solely by PDVSA fell 28% from 2.1 mbpd to 1.5 mbpd while production in fields operated by JVs rose 42% from 0.8 mbpd to 1.2 mbpd. Overall production fell by another 10% in 2016.

On balance, PDVSA is producing less oil, lower quality oil, a growing share of its exports aren’t generating cash, and a growing share of production is happening with JVs, which keep a cut of export revenues.

Production in fields operated solely by PDVSA fell 28%  while production in fields operated by JVs rose 42%.

Coupled with low oil prices, these developments have crippled PDVSA’s cash-flow which in turn has exacerbated production problems. It’s a vicious cycle, a negative feedback loop. The cash crunch at PDVSA has forced it to cut its investment and operations budgets from already record lows, again. PDVSA is now at the point where it’s not just scrimping on maintenance and equipment —which it shouldn’t shortchange, but can— and is now cutting the purchase of genuinely vital inputs and services.

As this Reuters story by Alexandra Ulmer and Brian Ellsworth points out, PDVSA faces “a sizable deficit of light crude and naphtha [in 2017.]” Without these lighter crudes to mix with the heavy gunk pumped out of la Faja (about 45% of overall production), the gunk will sell for much less than it could.

It’s depressing.

Diluent should be a sure bet for PDVSA and any financier looking to bankroll a sound business venture. For every barrel of diluent you buy and mix with gunk from la faja, you get a new mixture that’s worth more than the two things sold separately. You add value just by stirring the damn things. That PDVSA can’t even secure financing for diluent is the best example of the meteor that hit its operations and credibility.

This is the kind of problem native to chavismo mágico that no MBA prepares you for. Sort of like this other story by Marianna Párraga, which explains how tankers full of oil are stuck at sea because PDVSA doesn’t have enough cash to pay to clean their hulls. Pathetic.

That PDVSA can’t even secure financing for diluent is the best example of the meteor that hit its operations and credibility.

As if that wasn’t enough, we recently learned of PDVSA’s latest stealth attempt to privatize oil fields. According to Alexandra Ulmer and (you guessed it!) Marianna Párraga, PDVSA recently offered a 10% stake in the Petropiar venture to Russia’s Rosneft. Nobody knows at what valuation PDVSA will sell equity in that project for, but my guess —given that the sale is transparently illegal without congressional approval, low oil prices, and PDVSA’s desperation for cash— is much, much less than it’d be worth in normal circumstances. (And that’s assuming Chevron waives its right of first refusal, which they may not!)

In exchange, PDVSA will forego the revenues of 10% of that project in perpetuity. Bread today, hunger tomorrow. It’s an outrage.

In sum: Pana, se le estan cayendo los cauchos al carro. Your excel model might tell you that 2017 looks a lot like 2016 for PDVSA and Venezuela. But there’s no model that captures chavismo mágico’s wanton destruction, no accounting shorthand for the putrefaction of a whole management culture from within. Our golden goose is beginning to look like the rest of the country: like it’s in collapse.