Pdvsa spending, expansion plans face scrutiny

In recent years, Venezuela's state oil company Petroleos de Venezuela SA (Pdvsa) has been at the forefront in the race to strike up new deals with private companies at home and abroad, attract billions of dollars in new investment to Venezuela's state oil industry, and prepare itself to become one of the world's leading oil producers early in the next century.

But all that may be reshaped or placed on hold under the new administration of President-elect Hugo Chavez, who won a landslide victory in the Dec. 6 presidential election to replace President Rafael Caldera on Feb. 2, 1999.

Pdvsa is preparing to shift gears after President-elect Chavez made it clear that Pdvsa will have to "rationalize" its ambitious 10-year expansion plan, which requires billions of dollars in investment to jump Venezuela's oil production to about 6.2 million b/d by 2010.

Chavez, a former paratrooper-turned-politician, has vowed to carry out a full audit of Pdvsa's accounts, take a closer look at the company's investments abroad, roll back its spending, and replace its current board of directors, including Pdvsa Pres. Luis Giusti.

Giusti was first appointed by President Rafael Caldera as the head of Pdvsa in 1994 for a 2-year term and subsequently was approved for a second term in 1996, and a third term in 1998, which is scheduled to expire in 2000. Although Chavez has said publicly he will fire Giusti, the executive says he plans to remain on the job until President Caldera hands over power to the president-elect on Feb. 2, 1999. Under Venezuelan law, the nation's president has the power to appoint or remove the Pdvsa president and board members.

Pdvsa investments scrutinized

Pdvsa's investments abroad will have to be looked at "with a magnifying glass," said Chavez, who quickly explained that he was not proposing the sale of such Pdvsa subsidiaries as Citgo Petroleum Corp. in the U.S.

"We have the suspicion that we Venezuelans have several thousands of millions of dollars floating around the world, but PDV America (the holding company for Pdvsa assets in the U.S.) is not reporting significant profits for the national treasury. That must be audited," he said.

During a Dec. 11 news conference shortly after being officially proclaimed president-elect, Chavez, who during the electoral campaign called for a 15% cut in Pdvsa spending, said "We are revising all Pdvsa investments abroad: the refinery in Curacao, Citgo, Veba Oel, all of that, we are going to look at with a magnifying glass, because there are things out there that we do not understand. I hope to understand them sometime.

"I would like to understand how our oil company has assets abroad that involve several millions of dollars and reports almost no earnings for the national treasury. That I cannot understand. Therefore, I have requested information to be able to decipher a mystery that is there," said Chavez.

The president-elect said, however, that his government "will conserve" the refinery that Pdvsa operates under a long-term lease at Curacao.

Giusti defends policies

Giusti, however, has defended Pdvsa's expansion policy and justified its investments abroad, labeling those assets "a marketing arm" for the corporation. He also stressed that the company and all its assets are "the most audited" of any Venezuelan firm by Venezuelan and foreign authorities.

The executive, who has spearheaded his company's so-called la apertura, or oil "opening" policy that has opened the door to private capital in upstream and downstream activities in the state oil industry for the first time since nationalization more than 2 decades ago, also noted that Pdvsa's investment has been slashed by about 29%-almost double the amount Chavez originally suggested. According to Giusti, Pdvsa's 1999 investment budget now stands at about $3.8 billion, down from $4 billion in 1998 and substantially below the average $6 billion/year level it had been investing in recent years.

Although that is the lowest level of investment the corporation will have seen in 10 years, private sector investment through joint ventures, strategic associations, et al., during 1999 is estimated at $7.2 billion, which means that total investment in the industry during next year will be $11 billion, a record level for the sector, said Giusti.

"This is an unprecedented number in the history of the Venezuelan oil industry," he said.

The breakdown of the private-sector investment for 1999 includes $2.6 billion in operating contracts, $3.3 billion through strategic associations, $450 million in exploration and production risk contracts, and $500 million in petrochemical joint ventures.

Scores of foreign oil companies have been granted contracts to operate in Venezuela under the oil opening policy, including Exxon Corp., Mobil Corp., Amoco Corp., Chevron Corp., Conoco Inc., Texaco Inc., Phillips Petroleum Co., British Petroleum Co. plc, Total, and Veba Oel.

The Pdvsa chief also noted that, as a result of the prolonged decline in world oil prices, his company expects to post $1.4 billion in net profits for this year, a sharp decline from last year's $4 billion.

New policy approaches

Turning to some aspects of his government's proposed oil policy, Chavez said, "We must insist on increasing our refining capacity, more so than our production capacity, which also will have a rational expansion rhythm. Much more urgent is to increase refining capacity so that refineries in the Caribbean, in Venezuela, and in (other) Latin American countries form part of a continental vision of oil internalization."

Shortly after his electoral victory, Chavez met with Giusti, Energy and Mines Minister Erwin Arrieta, and Pdvsa's chief economist, Ramon Espinasa, to discuss the company's expansion plans as well as the nation's overall policy regarding oil prices and production.

Following that meeting, Chavez reiterated that the corporation's expansion plans "must be rationalized," and expressed concern that Pdvsa held a board meeting only days before the Dec. 6 presidential election to approve its $9.8 billion 1999 budget.

"We must rationalize Pdvsa's expansion plan. It's not just about cutting investments, it is about drafting a long-term plan. If that means reducing by a certain percentage the investment, we will do it," he said.

"We cannot continue pursuing the objective of reaching more than 6 million (b/d) by the year 2006. That is impossible. We have to push that project in line with the international market and the budgetary requirements of Venezuela. We are not going to attempt (to go) against the oil industry, but will cut back if we have to cut back," he said.

The president-elect also has referred to Pdvsa as "a state within a state" and has criticized its "Saudi-style use of airplanes, costs out of control, and 'gold-card' culture." "We have to subordinate Pdvsa to the Venezuelan state," said Chavez.

Chavez oil adviser Ali Rodriguez Araque, who during the previous session of Congress served as chairman of the Chamber of Deputies (Lower House) energy and mines committee, said Pdvsa's $8.9 billion budget for 1999 will be subject to a complete revision, "which is a measure that any administration would take before receiving a business, and above all, if it is the country's principal business."

He further noted that Pdvsa's expansion plan also will be subject to revision.

"We had a plan for a very violent expansion, and aspects such as these have to be pondered. We have to see how objective and realistic is this expansion plan in 10 years because, in fact, this plan has been modified. The production capacity target was postponed, and not by Chavez, but rather by the market. All these factors have to be the object of an analysis," said Rodriguez Araque, who has been mentioned as a candidate to become Chavez's Energy and Mines Minister.

JV, OPEC accords upheld

The President-elect, however, has pledged to honor all agreements the company has reached with private companies already operating in Venezuela, and has said the country will comply with the oil production cut agreements struck with other members of the Organization of Petroleum Exporting Countries and with non-OPEC nations.

Over the past few years, Pdvsa's oil opening policy has attracted scores of large, medium, and small foreign oil companies to invest billions of dollars in projects aimed at substantially increasing the country's oil production in the next decade.

Although Venezuela had managed to increase its oil production well above 3 million b/d, Pdvsa agreed to cut output earlier this year when oil prices plummeted.

Venezuela "will comply with those agreements for oil production cuts" that already are in place, said Chavez. "We need to defend oil prices."

"We need to defend oil strategy in order to defend prices, and to avoid a price war that could take oil prices down to $4-5/bbl," he said.

Following his election, Chavez met with Mexican Oil Minister Luis Tellez, whose country, along with Venezuela and Saudi Arabia, were the first to put in place production cuts earlier this year in an effort to shore up weak oil prices.

After the meeting, the president-elect said energy officials from Mexico, Saudi Arabia, and Venezuela agreed to meet in Madrid last week to analyze the current market situation and the continued decline in world oil prices. Chavez will send his own representatives to attend that meeting.

"We feel very pleased with that first encounter, and as we have said before-and we confirmed it with Minister Tellez-we will honor the agreements for concerted production cuts. In this regard, we are going to meet this week in Madrid and during the first days of January to agree on strategies," said Chavez, who is scheduled to visit Mexico later this month.

Venezuelan President-elect Hugo Chavez Frias

Venezuela will comply with those agreements for oil production cuts that already are in place. We need to defend oil prices. We need to defend oil strategy in order to defend prices, and to avoid a price war that could take oil prices down to $4-5/bbl.