VENEZUELAN GOVERNMENT ACTIONS CLOUD PDVSA'S OUTLOOK

Petroleos de Venezuela SA (Pdvsa), Venezuela's state oil company, faces an uncertain future after a flurry of political developments. Pdvsa is shifting its strategic focus upstream after a 4 year period of acquiring foreign downstream interests. Its $15.8 billion investment program for 1990-95 centers on an ambitious program of exploration and development to increase Venezuela's productive capacity to 3.5 million b/d of oil by 1995 from 2.775 million b/d projected for 1990. Pdvsa plans
March 12, 1990
12 min read

Petroleos de Venezuela SA (Pdvsa), Venezuela's state oil company, faces an uncertain future after a flurry of political developments.

Pdvsa is shifting its strategic focus upstream after a 4 year period of acquiring foreign downstream interests.

Its $15.8 billion investment program for 1990-95 centers on an ambitious program of exploration and development to increase Venezuela's productive capacity to 3.5 million b/d of oil by 1995 from 2.775 million b/d projected for 1990.

Pdvsa plans to hike reserves of conventional crude oil to 70 billion bbl by 1995 from 59 billion bbl at yearend 1989.

Most of those reserve additions will entail light and medium gravity crudes from fields under development or under study in eastern Venezuela.

Pivotal to that effort is the Venezuelan government's new stance on foreign participation in upstream ventures in the country.

Venezuelan President Carlos Andres Perez recently announced, in a major policy turnabout, that Pdvsa will be allowed to seek international participation in Venezuelan upstream work-the first time since petroleum industry nationalization there in 1976 (OGJ, Feb. 19, Newsletter).

Further, the government is liberalizing rules governing foreign investment as a move to attract new sources of capital.

In addition, the Perez government has responded to Pdvsa complaints about the company's onerous tax burden by trimming its tax bite.

At the same time, however, the restructuring of Pdvsa's board and Perez's selection of an outsider to head the giant oil company poses concerns about the government's future role in Venezuelan industry operations.

Equally uncertain is the degree of future downstream investments overseas by Pdvsa.

The government and Pdvsa have given conflicting signals on that policy during the recent acquisition of the remaining interests of Citgo Petroleum Corp., Tulsa, from Southland Corp., Dallas.

PDVSA TARGETS

Pdvsa has set these operational goals for 1990:

  • Exploration will highlight northern Monagas state and portions of the North Andean Front, Catatumbo in Zulia state, and Guarumen in Portuguese state.

  • Crude production will average 1.945 million b/d.

  • Exports of crude and products will average about 1.774 million b/d, earning $10.8 billion compared with $9.4 billion in 1989 and $8.2 billion in 1988.

  • Productive capacity will increase to 2.775 million b/d from 2.667 million b/d in 1989. As part of that effort, Pdvsa's three upstream operating companies-Corpoven, Lagoven, and Maraven-will boost the number of service rigs in the country's older fields to maintain production potential. The companies had trimmed workovers in recent years as a cost cutting measure.

  • Reserves will rise to 59.5 billion bbl of oil and 106 tcf of gas.

  • Refineries in Venezuela will process 865,000 b/d.

  • Refineries in the U.S. and Europe in which Pdvsa holds interests will process about 618,000 b/d.

  • Pdvsa's Curacao refinery will process 185,000 b/d.

In addition to boosting oil productive capacity, Pdvsa plans these objectives for 1990-95:

  • Jumping domestic refining capacity to 2.105 million b/d from 1.515 million b/d.

  • Developing gas fields off Venezuela to support a $2.5 billion LNG project, aiming for exports to the U.S.

  • Expanding the tanker fleet by about 20 vessels from 19 in 1988.

  • Increasing storage capacity outside Venezuela from the current total of more than 100 million bbl of oil.

  • Expanding petrochemical capacity to 10 million metric tons/year by 1995. Petrochemical production was 2.3 million metric tons in 1988.

  • Boosting coal production to 5 million metric tons by 1995 from 773,000 metric tons in 1988.

NEW LEADERSHIP

Pdvsa's new leadership reflects Perez's pledge during the 1988 election campaign to name an "outsider" to the company's presidency.

He appointed Andres Sosa Pietri to head Pdvsa for a 3 year term. Pietri, founder and chief executive officer of an oil field equipment supply company, replaces Juan Chacin Guzman, retiring after 35 years in Venezuela's petroleum industry and 3 years as Pdvsa president.

Perez also appointed three other nonindustry business figures to Pdvsa's board as well as two individuals representing the Venezuelan Federation of Workers.

The changeover process itself is routine. Pdvsa's president, two vice-presidents, and 12 board members serve 3 year terms and are appointed by Venezuela's president.

Previously, Pdvsa has had nonoilmen on its board, but until now the board has always been dominated by experienced managers from the oil and gas industry. The appointments early this month reflect a trend against professionals from the oil sector.

While not necessarily signaling major changes in Pdvsa management policy, the appointments signal the intent of Perez and his minister of energy and mines, Celestino Armas, to exercise more control over an industry they see as dominated by "narrow" oil interests.

There remains a strong contingent of managers from industry on the board, and Pdvsa's top two vice-presidents, experienced oilmen Pablo Reimpell and Frank Alcock, were reappointed.

In the 1970's, Sosa was associated with leftist politics and was active in oil matters in Venezuela's Congress. After 1979, Sosa focused on creating companies that locally produced goods-mostly valves for the oil and gas industry-to back out imports. He also was active in Venezuela's private petrochemical sector, as were two other Perez board appointments. Perez has been unhappy with the pace of Venezuela's petrochemical development, which is controlled by Pdvsa.

INDUSTRY CONCERNS

Pdvsa executives had expected outsiders to be named to the board but not to the presidency of the company. Some officials expressed disappointment and concern that heavy political interference in the oil sector, commonplace in the past, might occur again.

Former Pdvsa Pres. and Energy Minister Humberto Calderon Berti said Perez 11 went too far" in naming Sosa to Pdvsa's top post and Perez was "calling in an old debt against a sector he had not been able to control in the past."

Agropet, an association of oil industry professionals, did not dispute Sosa's business competence but said there were a number of more competent, experienced Pdvsa executives who had been passed over.

In contrast, Venezuelan oil equipment manufacturers were elated at Sosa's appointment because they believe he will promote more purchases of domestically made goods.

Many within Venezuela's oil industry are worried that Perez may decide to exert more authority over Pdvsa by appointing people more loyal to him than to Pdvsa or that political pressure from the ruling Democratic Action party and other sectors will result in further politicization of the company. Under Venezuelan law, the Energy Ministry sets general policy for the oil industry, while Pdvsa defines policies, and the operating units are charged with implementation. Ministers of energy in Venezuela Usually are well acquainted with the oil industry, but they have been politicians, diplomats, or ministry officials, not oilmen.

There have been some differences of opinion between the ministry and Pdvsa's board but few serious discrepancies over the years. And when those occurred, they frequently were the result of a headstrong minister who wanted to become closely involved in operating decisions.

Relations between Pdvsa's current top officials and Armas have been strained, and some political observers believe Armas wants to run for president of Venezuela, using his time in the oil sector to gain popularity.

PDVSA'S RECENT STRATEGY

Chacin leaves behind a diversified, international energy company that is an important player in world oil markets.

In contract to most of Venezuela's other government owned entities, Pdvsa is well managed, highly professional, and profitable.

Chacin, a geologist trained at Southern Methodist University, Dallas, took over as Pdvsa president at yearend 1986 and has continued to develop strategies he inherited from his predecessor:

  • Maintaining the company's flexibility in all areas in order to be able to respond to major shifts in the world oil market.

  • Building reserves, especially of light and medium crudes, and increasing production potential.

  • maintaining and diversifying the refining sector, stressing new capacity for light products and a major expansion of the petrochemical industry.

  • Development of new products, such as coal and Orimulsion, so Pdvsa will become more diversified and take advantage of its large reserves of coal, bitumen, and extra heavy crude. Pdvsa also is pushing expanded domestic gas utilization to free liquid hydrocarbons for export and is planning a major LNG export project targeting U.S. markets.

  • Expansion into refining and distribution internationally to ensure placement of Venezuelan crudes and products in the country's principal markets, obtain access to new technology through joint ventures, and provide handson international experience for Pdvsa managers.

A new element in Pdvsa's international strategy has been acquisition of substantial new petroleum storage capacity offshore, especially in the Caribbean basin.

Pdvsa recently bought a 9.5 million bbl capacity depot in Bonaire and acquired the former Chevron Corp. refinery in the Bahamas. The latter deal was aimed mainly at obtaining the facility's 20 million bbl of storage capacity. No decision has been made on whether to restart the refinery. Pdvsa also controls storage at the former Shell refinery it leases from the government of Curacao.

Chacin noted that Pdvsa now has 120 million bbl of storage capacity in Venezuela and about 100 million bbl more outside the country.

This gives Venezuela considerable flexibility in terms of managing market shifts and, in the case of its Caribbean depots, blocks competition-especially from Persian Gulf crude exporters-in an area near the key U.S. market.

Perez has said he wants the industry to halt investments overseas and to focus new investments in Venezuela. However, he showed flexibility during his first year in office when Pdvsa argued for new projects such as the joint venture involving Unocal Corp.'s Lemont, III., refinery, purchase of the outstanding 50% interest in Citgo, and the Chevron refinery purchase.

Pdvsa executives won't say if they have any more overseas ventures in mind, but one official said, "I'm always looking for a good deal."

MIXED SIGNALS ON CITGO

As soon as Pdvsa's plans to purchase the remaining interest in Citgo from Southland were made public (OGJ, Nov. 13, 1989, p. 32), Perez and Armas disclosed that Venezuela would sell that 50% stake even as negotiations were being wrapped up.

The government was also embarrassed in late November when international bankers complained through the press that Venezuela was slow in paying interest on its foreign debt but nonetheless agreed to pay a huge sum for 50% of Citgo. Pdvsa will pay for its new purchase mostly through crude deliveries, not cash.

In fact, those statements by Venezuelan officials reflected political immaturity and presumably do not represent a careless attitude that will force Pdvsa into a hasty sale of Citgo, sources in Caracas say.

Pdvsa was taken by surprise when Southland decided to put its 50% of Citgo on the block and decided to buy the remaining interest to avoid the possibility of suddenly finding itself partners with an unknown quantity.

Venezuela's policy on foreign downstream petroleum investments calls for owning 50% shares of refining and distribution systems to take advantage of a local partner's market expertise and goodwill, among other things.

Perez, who started a 5 year term as Venezuelan president in February 1989, made it clear he wants Pdvsa to halt major foreign investments and concentrate its investments in Venezuela to create jobs. He reportedly was embarrassed in domestic political circles when his government was obliged to go ahead with the Citgo deal after he said no to further international investments.

Despite contradictory public statements by Venezuelan officials, Pdvsa will wait a prudent length of time before offering to sell a half interest in Citgo.

There has been no mention of any pressure on Pdvsa to sell part of Champlin Refining Co., of which it acquired the remaining 50% it did not own from Union Pacific Corp. in 1988.

REIMPELL'S VIEWS

Pdvsa First Vice Pres. Reimpell described the Citgo deal as purely a commercial decision.

"Ever since we started in 1986, Citgo has been a commercial entity and will continue to be run that way," he said.

Reimpell suggested that if indeed there were any further foreign downstream ventures by Pdvsa, they won't occur soon.

"We no longer have pressure on the crude supply side," he said. "The logical thing for Pdvsa to do now is to consolidate what we have acquired and grow through them. We have enough on our hands."

A major consideration will be the degree of future investment in Pdvsa's domestic refining program.

"We have a very hefty investment program in refining that will increase not only the capacity in Venezuela but also the quality of the products slate," Reimpell said.

Pdvsa is looking at a near term refining capacity expansion of 190,000 b/d that could involve one grassroots plant or incremental phases, whichever would be the lower cost approach.

BENEFITS TO CITGO

Meantime, acquisition by Pdvsa together with the new foreign investment ventures by the government could mean new opportunities for Citgo in Venezuela and perhaps elsewhere in the Caribbean basin, said Citgo Pres. Ron Hall.

"I'd like to think that down the road some of our new products-finished lubes, some of our specialty motor oils, things like that-that we market could very well find their way into Venezuela," Hall said.

Hall said that growing recognition of the Citgo brand name in the U.S. together with awareness in Venezuela that Citgo is 100% owned by a Venezuelan company will boost Citgo marketing opportunities in Venezuela and elsewhere in Latin America.

He also sees possible joint venture opportunities for Pdvsa and Citgo in petrochemicals marketed outside the U.S. and Venezuela.

Hall cited propylene, lubricants, and petroleum coke that Citgo and Pdvsa might jointly produce and sell in Venezuela and elsewhere in the Caribbean area.

Thus far, said Hall, Pdvsa has given Citgo all the latitude it needs.

"We have our own corporate bylaws, and that gives me all the freedom in the world to run the business on a day to day basis and react as we need to react to the marketplace," he said.

"There have been no restrictions. As a matter of fact, that's always been their style."

Copyright 1990 Oil & Gas Journal. All Rights Reserved.

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