Caracas Chronicles

Photo: Vicepresidencia de la República

The petro launch has been plagued with doubts and inconsistencies, which challenge all analysis of the subject. Something certain, however, is the Venezuelan government’s announcement that the petro will be backed by extra-heavy crude reserves in Field 1 of the Ayacucho Block, in the Orinoco Oil Strip. Allegedly, there are 5,342 million barrels of certified reserves in Ayacucho 1, at one petro per barrel ratio.

In fact, the announced referential price per petro unit is $60, close to the price of a Venezuelan oil barrel. In other words, if we invest in a petro, we have the guarantee of a physical oil barrel supporting it.

So far, this has a certain logic. A government without credibility, whose legal currency suffers a more than 80% monthly inflation rate and a fast depreciation in the black market, a government that has defaulted on some bonds (which are for sale at nearly 80% discount), knows that any currency it issues, supported on anything but the BCV’s dwindling international reserves, will have the same fate of the bolívar.

But is the petro truly backed by oil barrels?

No, it isn’t. Let’s see why:

1.- The oil in the Ayacucho 1 Field is underground. It isn’t developed and there’s not even a development plan. The required infrastructure, or the oil piping to transport crude, doesn’t exist either. We’d have to invest billions of dollars to develop the aforementioned elements, pay extraction and transportation costs and, since we’re talking about extra heavy crude, we’d have to purchase and transport diluents. We’d also have to get the authorization to export it, or sell it to PDVSA, that pays late or not at all. We’d have to pay royalties too (33% of output), and taxes and special contributions to the State.

A government without credibility knows that any currency it issues, supported on anything but the BCV’s dwindling international reserves, will have the same fate of the bolívar.

On the other hand, 51% or more of the extraction company must be owned by PDVSA, which is currently in default and doesn’t have funds to invest (it would have to borrow money from someone). This crude is usually sold on a discount, so its price is lower than the price of the Venezuelan oil barrel, which still includes conventional crudes. Out of the theoretical $60, the operational profit from extracting the oil would be $5-10 per barrel at most. With that, we must recover the original investment of more than $4 billion per every 100,000 daily barrels produced. Where’s that money coming from?

To make it more attractive, let’s say the Venezuelan State forgoes all taxes and royalties (which can only be done by the National Assembly). The operation profit would reach $30 per barrel, so investment would be recovered much faster, but we’d have to wait two years to see those barrels. Out of the projects in the Oil Strip signed a decade ago, the most productive right now doesn’t reach 50,000 barrels a day. So if you buy a petro, let’s say it gives you the right to invest on the Ayacucho 1 Field, to see your barrel in a decade. How much would you pay for that right without political risk of foul play? How much would you pay in Venezuela, a country where the current Constitution establishes that oil reserves can’t be sold or transferred? A country whose legitimate legislature, recognized by the international community, has declared the petro an illegal asset.

Using economic rationality, I’d pay a few cents at most.

2.- The certified reserves in the Ayacucho 1 Field aren’t such. What’s certified is the Original Oil on Site, meaning the magnitude of underground resources. The government used a 20% recovery rate on those resources to calculate proven reserves when, in fact, recovery rates in the Oil Strip are much lower (6-8% in the most productive blocks), Ayacucho 1 being one of the blocks with the lowest expected productivity. The actual proven reserves are, at most, half of the 5,342 million barrels reported and, since there’s not even a plan to exploit that field, we can’t speak of proven reserves. Given the argument in point 1, this might be irrelevant, but if you were still thinking that you’d get your barrel, make sure that the government doesn’t issue more than $2 billion in petros and find out how to stand in line when time to collect comes.

But since Venezuela has one of the biggest oil reserves in the world, couldn’t we assume that the petro is backed by all those reserves, in a certain way?

The actual proven reserves are, at most, half of the 5,342 million barrels reported and, since there’s not even a plan to exploit that field, we can’t speak of proven reserves.

In general terms, yes, just like the bolívar, the PDVSA bonds and the Republic’s bonds. That’s why some investors keep thinking that the recovery value of Venezuelan bonds could be attractive. In that case, the petro would only be equivalent to a fiduciary convertible currency, or a debt instrument that doesn’t generate interests. If we take the petro as a debt instrument, its discount should be greater than a PDVSA bond.

Let’s circle back to the original point: in a country that depends on more than 90% of its oil exports and whose oil output is collapsing, who really wants a petro? Those who want to convert currency in dollars anonymously, without having to go through the international banking system. If the government offers you bolívares or petros, you’d take petros, especially if the equivalent exchange rate is better than that of the bolívar’s black market.

Even though the petro could have some of these advantages, let’s keep in mind that it’s not a legal tender. It hasn’t been approved by the National Assembly and it’s been declared by the U.S. government as a debt instrument subject to financial sanctions.

Just like the infamous SUCRE, the petro will be just another way to carry out opaque transactions in which a few will profit at the expense of all Venezuelans.