BN PDVSA 2013_2014

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PDVSA: A need for change

BName r i c a s . c om

JANUARY 20

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Contents

Introduction 3

Figure 1- Proven oil reserves / Figure 2 -Oil production / Figure 3 - Refinning Capacity 4

Reasons for the downturn 6

Impacts of oil diplomacy 8

Figure 4-Average oil production in Venezuela 8

Financial partners10

Figure 5- PDVSA: production costs 10

Figure 6- Investment plan 2013/2019/Figure 7-Joint ventures of the orinoco oil belt 13

Less tax burden and more devaluation14

Figure 8- Sales revenue and tax contributions of PDVSA 15

Higher gasoline prices15

Figure 9- Hydrocarbon sales in Venezuelas domestic market 16

Conclusion16

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Introduction

Venezuela has the largest oil reserves in the world. With 297.6 billion barrels ofcrude oil, by the end of 2012 the country controlled 17.8% of all proven globalreserves. Although recently the country has managed to significantly increaseits oil reserves through new technologies that make the exploitation of heavyand extra-heavy crude oil feasible, oil production levels have fallen steadily since1999, when former president Hugo Chvez began his first term.

Te state-owned oil company Petrleos de Venezuela (PDVSA) is theprotagonist of this decline. PDVSA holds a monopoly on hydrocarbons in thecountry, forming partnerships with private partners but always retaining controlof the projects.

Te key reason that PDVSA has not been able to transform its enormouspotential into concrete resources is that the company is used as a central elementin the Venezuelan economy, contributing nearly 60% of government revenues,says Asdrbal Oliveros, managing partner of the consulting firm Ecoanaltica,in Caracas.

While the increasing support the company gives to social programs was oneof the main factors in the decline in Venezuelas poverty levels from 49.4% in1999 to 23.9% in 2012, according to figures from the Economic Commissionfor Latin America and the Caribbean (ECLAC), the tax burden on PDVSAwas also used in the last fifteen years to finance items ranging from governmentoperating costs to purely political objectives, such as the election campaigns ofthe ruling party.

Tis ended up being too heavy a burden on PDVSA, especially consideringthat oil is also used as the enforcement arm of the so-called oil diplomacy,a strategy that began under President Chvez and consists of bartering oil formoney or goods at very favorable conditions for importing countries. Tis drainon resources is compounded by heavy losses in the local market due to the verylow prices at which gasoline is sold.

opping off the mix is a legal and policy framework that is far from

encouraging private investment in the hydrocarbon sector. Te result is a state-owned oil company that is overburdened with work and has a negative cash flowthat prevents it from increasing its production levels, plus a financial debt thatwas around US$40 billion at the end of 2012, up 150% from 2007.

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But even in this bleak picture there is hope. Te highest expectations lie in the

Orinoco Belt, a still underdeveloped area containing the worlds largest depositsof heavy and extra-heavy oil. Here there are 1.36 billion barrels of original oil inplace, located, among other areas, inJunn 4 andJunn 10, two of the biggestonshore exploration and production projects in Latin America.

New trends in the global oil industry make prospects look even better.Historically, oil companies have not prioritized heavy and extra-heavy oilbecause its extraction, transportation, and refinement costs much more thanlight crude oil, but this has been changing. In addition to technologicaladvances, the high oil prices forecast for the coming years and the shortageof light hydrocarbons are factors spurring a resurgence of interest in heavy oilaround the world.

Capitalizing on these opportunities depends on the course PDVSA takes in theshort and medium term. While President Nicols Maduros administration hascontinued with the policies of the late Hugo Chvez, there are many in the oilindustry who believe that the severe fiscal, exchange, and energy restrictionsthat Venezuela is subject to will end up forcing change earlier rather than later.

Tis report will offer a description of PDVSAs current situation, its mainchallenges, and where opportunities lie. It will also list the main changes that theVenezuelan government could implement in the coming months and the impactthese changes would have on the oil company in the short and medium term.

Figure 1

Proven oil reserves(Millions of barrels)

Dec,2012% of world

total

Venezuela 297,600 17.8

Saudi Arabia 265,900 15.9

Canada 173,900 10.4

Iran 157,000 9.4

Iraq 150,000 9.0

Kuwait 101,500 6.1United Arab Emirates 97,800 5.9

Russia 87,200 5.2

Nigeria 37,200 2.2

United States 35,000 2.1

Source: BP Statistical Review of World Energy June 2013
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Figure 2

Oil production(Thousands of barrels per day)

2012% of worldproduction


Russia 10,643 12.8


China 4,155 5.0

Canada 3,741 4.4

Iran 3,680 4.2

United Arab Emirates 3,380 3.7

Kuwait 3,127 3.7Iraq 3,115 3.7

Mexico 2,911 3.5

Venezuela 2,725 3.4


Figure 3

Refinning Capacity(Thousands of barrels per day)

2012% of world

total


China 11,547 12.5

Russia 5,754 6.2

Japan 4,254 4.6

India 4,099 4.4

South Korea 2,887 3.1

Italy 2,200 2.4


Germany 2,097 2.3

Canada 2,063 2.2

Brazil 2,000 2.2United Kingdom 1,631 1.8

Mexico 1,606 1.7

France 1,478 1.6

Singapore 1,395 1.5

Venezuela 1,303 1.4


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Reasons for the downturn

Coming up with a diagnosis based on PDVSA statistics is not an easy task,given that the figures differ depending on whether they are released by theVenezuelan government or by private agencies. In fact, crude oil productiondata from the state-owned company range from 2.3 million barrels per day(Mb/d) to the 2.79 Mb/d on average reported by PDVSA to the Organization ofPetroleum Exporting Countries (OPEC) between January and November 2013.

Where there is in fact consensus (even using PDVSA statistics) is that the stateoil company is producing less volume than that reported before the start of theChvez administration. In 1998, when oil prices were slightly above US$20 perbarrel five times less than its current value, the companys production was

3.12 Mb/d, according to OPEC.

While the decline has slowed in the past three years, Venezuelas prominencein the global oil market is waning. Te countrys crude oil production rosefrom 11.2% of OPEC production in 1998 to 8.6% in 2013. Tis decline is alsomeasured in foreign currency. With recent high oil prices, if Venezuela hadmaintained the same production as in 1998, it would have obtained around anadditional US$111 billion for its oil exports in the last fifteen years.

What are the reasons for the drop in PDVSAs production levels? For JorgePin, associate director of the Latin America and Caribbean Program of theCenter for International Energy and Environmental Policy at the Universityof exass Jackson School of Geosciences, and former president of Amoco OilMexico and Latin America, the biggest obstacle is management. Unlike otherstate-owned companies in the region, such as Petrobras or Ecopetrol, PDVSAsmanagement has become politicized in recent years and is in absolute disarray,he says.

Among other effects, this politicization has caused a sustained increase inPDVSAs costs. Te companys payroll went from 40,000 employees in 1998 to145,439 including contract employeesin 2012. Tis is in addition to recentacquisitions of companies not directly related to hydrocarbon activities. All thishas brought the cost of producing a barrel of oil (from subsurface extraction to

packaging) from US$3.85 in 2003 to US$11.09 in 2012, according to PDVSA.Te estimate for 2013, according to the oil company, is about US$12.

Another aspect of PDVSAs politicization is that it took on increasingly morenon-energy related responsibilities. Te companys tax contributions totaledUS$25 billion in 2012, and it contributed US$56.9 billion to the NationalFund for National Development (Fonden) and US$41.7 billion to SocialDevelopment between 2005 and 2012. Te increasing assistance to the treasuryand the consequent reduction of resources available for investment are made

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even more evident considering that the portion of heavy and extra-heavy oil

within total Venezuelan production is growing: it went from 31.3% in 1999 to50.1% in 2008.

Tis requires higher expenditures on upgraders (smaller scale than a refinery)to improve oil quality, given the natural decline in conventional oil fields in theMaracaibo-Falcn basin (western region) and El Furrial field (eastern region),which is where most of PDVSAs production has come from in recent years.

Te delay in constructing upgraders is not the only infrastructure issuepending. Te lack of infrastructure development in the Orinoco Oil Belt is aserious constraint on increasing PDVSAs production, says Igor Hernndez,coordinator of the International Center on Energy and the Environment

of the Institute of Management Studies (IESA) in Caracas. Tis is an areathat has not traditionally focused on oil, and therefore it lacks development,such as pipelines to transport production to the ports, for instance. Tis iscompounded by a lack of human capital. For example, Chinese drills havebeen bought, but there is no one trained to use them, says Hernndez.

Lastly, another major reason that PDVSAs production levels remain low is themassive debt that the company has been accumulating with suppliers.

In late 2012, its debt was US$16.5 billion dollars. According to PDVSA, thisamount fell at the end of the first half of last year to US$12.5 billion, althoughthis has not yet been audited. What is certain is that debt to suppliers ended up

affecting PDVSAs productive dynamic, especially in mature and conventionalfields, which account for nearly 100,000 Mb/d of reserves.

While the large multinational companies are interested in the Orinoco Belt,service companies like Schlumberger and Halliburton are looking to developmature fields, says Pin. But for this to happen, these companies have to berespected and their bills have to be paid.

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Impacts of oil diplomacy

Te result of all this is a delay in project development, which exacerbatesPDVSAs cash flow problems. Tis is compounded by the fact that 20% ofthe companys crude oil exports, since they are included in internationalagreements, are not entering the companys cash flow, either because they are

paid in kind or because they are part of the shipments used to repay loans takenout by the Venezuelan government.

Under the Petrocaribe program, an oil alliance created in 2005 betweenVenezuela and Caribbean nations, PDVSA covered 43% of the energy needsof Antigua and Barbuda, the Bahamas, Belize, Cuba, Dominica, Granada,Guyana, Haiti, Jamaica, Nicaragua, the Dominican Republic, St. Kitts andNevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Honduras, andGuatemala in the last eight years with the provision of 255 million barrels of oil.

But this political game has a high impact on PDVSAs cash flow. Barclayssaid in a recent report that the signatory nations of Petrocaribe and of supply

agreements like those with Cuba, Argentina, and Uruguay receive 390,000 b/d,but PDVSA only receives immediate payment for 48% of this volume.

Venezuela finances part of the rest of the bill at a rate of 1% per year with aterm of up to 25 years to repay the debt, plus a grace period of up to two years.Another portion is paid by products ranging from rice, meat, and milk tocement and pants, as well as services like health or education from Cuba and

Figure 4

Average oil production in Venezuela(in thousands of barrels per day)

1960 2,846,1

1970 3,708,0

1980 2,165,0

1990 2,135,2

2000 2,891,0

2008 2,957,5

2009 2,878,1

2010 2,853,6

2011 2,880,92012 2,803,9

Source: OPEC

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English teachers sent from Jamaica. Te value of these products and services is

not determined by market prices, since the agreement states that Venezuela canoffer special prices as a mechanism of solidarity with the recipient countries.

Also, there is the impact of the payment of a revolving credit for around US$40billion that Venezuela has with the China Development Bank for investments indifferent economic areas, including housing and agriculture, transportation andindustry, roads, electricity, mining, health, science, and technology.

In this agreement, between 270,000 and 300,000 b/d, or about half ofVenezuelas shipments to China, go just to pay the loan, says Oliveros. Sincethe agreement is managed by the Bank for Economic and Social Developmentof Venezuela (Bandes), PDVSA does not see these resources reflected in its

cash flow, and this ends up having a strong financial impact on the company.Te agreement is designed for the Venezuelan government to cover its extra-budgetary expenditures and not to benefit PDVSA.

But international agreements are not the only reasons that the state-ownedoil company has a reduced foreign exchange flow. Low gasoline prices in thedomestic market and the growing use of gasoline and diesel in thermal powerplants have caused an increase in domestic demand in recent years.

Te conclusion is that the export volumes that bring PDVSA actual cash are less than1.7 Mb/d, well below the 2.4 Mb/d in 2007. Tis decline means there is betweenUS$80 million and US$90 million per day that the company no longer receives.

On the other side of the equation, imports are on the rise. Te fall in productioncombined with a sharp rise in domestic demand and a precarious networkof refineries has transformed Venezuela into a net importer of gasoline. Tecountry bought 25,000 barrels per day of gasoline and 21,000 barrels per day ofdiesel from the United States alone between January and July of 2013. Betweenthe two fuels, purchases abroad in seven months of 2013 totaled US$1.161billion, 78% more than in the same period of 2012.
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Financial partners

After taking office in March 2013, President Nicols Maduro has stayed thecourse outlined by Chvez for PDVSA. However, analysts believe that due tothe plight of the oil company and of the Venezuelan economy in general, anumber of changes are looming.

Since the electoral landscape cleared at the end of 2013, the Venezuelan governmenthas made some indications that there will be adjustments, says Hernndez.

Tese changes will pave the way for PDVSA to at least begin approachingmedium term production goals. Te company has repeatedly failed to reach itstargets. For instance, in 2005 Chvez launched his Oil Sowing plan, whichwas set a production goal of 5.8 Mb/d in 2012. Te company, from achievingwhat would have been a 76% increase in production levels, experienced adecline of 8.5% in this period, according to official PDVSA reports.

Authorities set a new target of 4 Mb/d of crude oil production in 2014 although this was reduced to 3.3 Mb/d in December last year and 6 Mb/d

in 2019. Te great hope lies in the Orinoco Belt, which has 4 blocks Junn,Boyac, Ayacucho, and Carabobo, plus neighboring fields like Morichalthat have been appended. In 2010 the Venezuelan government tendered a largenumber of areas, which allowed two consortia led by PDVSA, in alliance withthe Spanish company Repsol and the US company Chevron, to participatein the Carabobo block in the Belt. It also directly allocated several areas inthe Junn block to the Italian company Eni, Vietnams PetroVietnam, ChinasCNPC, and Russias Rosneft and Lukoil, among other companies. In every

Figure 5

PDVSA: production costs

Year US$/Boe *

2008 7.10

2009 6.33

2010 5.53

2011 7.53

2012 11.09

Source: PDVSA

* The production cost per barrel is calculated by dividing the sum of direct and indirectproduction costs (excluding depreciation and depletion) by total volumes

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case, PDVSA has more than 60% of the shareholding. Tese projects add to

the joint ventures that emerged after the nationalization of hydrocarbons in theOrinoco Belt was decreed in February 2007.

According to PDVSAs audited financial statements, production in the Belt was1.17 Mb/d in 2012, and the Venezuelan government wants to raise this numberto 4 Mb/d by 2019. It is an ambitious plan, but PDVSA has not yet begun tobridge the gap between its current levels of production and target levels.

An example: in early 2012 the goal was set that new business in the Orinoco(the joint ventures Petromacareo, Petrojunn, Petromiranda, Petrourica,Petrocarabobo, and Petroindependencia came into being in 2010) would reachbetween 160,000 and 180,000 b/d of early crude oil production, in which the

heavy crude is mixed with a diluent in order to generate exports before thelaunch of the upgrader. In September of the same year this target was reducedto 100,000 b/d, but with the promise that 2013 production would reach400,000 b/d. However, these projects plus the Junn 10 block currently produceless than 30,000 b/d.

Not only have the partners not guaranteed new investment for the upgraders,there are also significant problems with transporting early production,says Hernndez. Tere are no pipelines to move it: only 6,000 b/d can betransported. Te failure of new businesses in the Belt to meet the earlyproduction targets is very problematic, because without these expectedcontributions, cash flow is insufficient to further the development of the

joint ventures. Tus much of the current production still stems from the firstprojects (Petropiar, Petrosivensa, Petrocedeo, and Petromonagas), created viaagreements signed in the 1990s.

o help production, last October PDVSA announced an ambitious investmentprogram of US$257 billion by 2019. Besides disbursements to increaseproduction, there are upgrader projects in the Belt to convert heavy crudeof 8 API to 42 API with a total processing capacity of 1 Mb/d, and twonew refineries (one in Cabruta and the other in the Jose Antonio AnzoteguiIndustrial Complex) with a total processing capacity of 720,000 b/d.

Te big question in the oil industry is where these investments will come from,

given PDVSAs serious problems generating cash flow.

Analysts agree that since the oil company is looking for less burdensome debtmechanisms than debt issuances, a large part of the capital could come from anew scheme that the company agreed upon with some of its minority partnersin the Orinoco Belt. Tese companies use loans to finance joint ventures, withthe aim of increasing production levels. Te proceeds from oil sales go to trusts,from which private companies withdraw their part based on their shareholdingwithout PDVSAs intervention. Tis is a secure way to recover their investments.

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Loans provided by partners can be good, because they go directly to increasing

production and not to financing the expansion of the Venezuelan state, as is thecase with other agreements, says Pin.

For instance, in the agreement signed with Chevron in May 2013 to increaseproduction in Petroboscn, the U.S. oil company will grant financing of US$2billion, which will be deposited in a trust in installments. PDVSA agreed topay the loan with a Libor interest rate plus 4.5% tied to increased production(expected to grow from 107,000 to 127,000 b/d). In other words, to repaythe loan, production has to increase. Under similar schemes, PDVSA reachedagreements for more than US$9 billion with CNPC, Rosfnet, Repsol, theRussian financial institution Gazprombank, and the transnational companySchlumberger.

So far, PDVSA has been responsible for everything from hiring services tocommercializing the products of these projects. But the declared aim with theseagreements is to involve partners in the task of increasing production levels. LastOctober, Rafael Ramrez, vice economy minister, oil minister, and presidentof PDVSA, said that this scheme would work within the framework of theprojects approved by the National Assembly, with the agility and flexibilitynecessary for these projects to be in the scheduling stage (for production). It isin all our interests to increase production in order to finance the joint ventures.

Funding in exchange for greater management control and more responsibility incommercialization are repeated claims by PDVSAs partners. Te oil companies

demands are to make sure that the past experience of suppliers, who developeda financing scheme with PDVSA and ended up accumulating unpaid loans,is not repeated. While until now PDVSA had not taken the complaints ofinternational companies into account, for some analysts the gravity of thesituation is already forcing change.

It seems that PDVSA has to give private companies more participation, andeven encourage this type of agreement, says Hernndez.

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Figure 6

Investment plan 2013/2019(In millions of US$)

2013 2014 2015 2016 2017 2018 2019 Total

Exploration and Production 16,940 20,294 22,998 28,500 32,941 34,095 33,439 189,207

PDVSA Gas 1,305 3,466 4,438 4,559 3,040 2,730 2,510 22,048

Refnement 2,671 6,344 5,761 4,393 2,942 1,441 2,168 25,720

Trade and Supply 868 900 900 900 900 900 900 6,268

Other Organizations 3,537 1,701 1,701 1,701 1,701 1,701 1,701 13,743

Total 25,321 32,705 35,798 40,053 41,524 40,867 40,718 256,986

Source: PDVSA

Figure 7

Joint ventures of the orinoco oil belt

Date ofEstablishment

ParticipacionPDVSA %

Minority Shareholder Country

Petr. Indovenezolana Apr. 08 60 ONGC India

Petrocedeo Dec. 07 60 Total/Statoil Hidro France/Norway

Petroanzotegui Feb. 08 100

Petromiranda Apr. 10 60 Cons. Nac. Petrolero Russia

Petromacareo Sept. 10 60 Petrovietnam Vietnam

Petrourica Dec. 10 60 CNPC China

Petrojunin Dec. 10 60 Eni Italy

Petrodelta Oct. 07 60 HNR United States

Petro. Sinovensa Feb. 08 64.25 CNPC China

Petromonagas Feb. 08 83.33 Rosneft Russia

Petrocarabobo Jun. 10 60 Repsol and others Spain

Petroindependencia Jun. 10 60 Chevron and others United States

Petrokaria Aug. 06 60 Petrobras and others Brazil

Petroven-Bras Sept. 06 60 Petrobras and others Brazil

Petroritupano Sept. 06 60 Petrobras and others Brazil

Petronado Sept. 06 60 CGC/BPE/KNOC Argentina/Ecuador/Korea

Petrocuragua Oct. 06 60 Open/CIP Venezuela

Petrozumano Nov. 07 60 CNPC China

Petr. Kaki Nov. 06 60 Inemaka Venezuela

Petr. Vencupet Dec. 10 60 Cupet Cuba

Petr. Sino_Venezolana Nov. 06 75 CNPC China

Petr. Bielovenzolana Dec. 07 60 UEPB Belarus

Petropiar Dec. 07 70 Chevron. United States

Petr. Vengangocupet Nov. 12 60 Comercial Cupet and Sonangol Cuba

Petr. Gurico Oct. 06 70 Teikoku Japan

Source: PDVSA

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Less tax burden and more devaluation

Another effort to boost production in the Orinoco Oil Belt is taking placein the legal framework. Within the package of regulations included in theso-called Enabling Law, which grants President Maduro the right to rule thecountry by decree for 12 months, the government included an initiative toestablish a Special Economic Zone covering the settlements that have beencreated around the Belt.

Te objective is to create, through tax incentives and special tax-free zonesforimports, an industrial complex comprised largely of Venezuelan companies inorder to provide the infrastructure and services required for the development ofthe area. Te goal is to speed up the construction of 6 upgraders, 2 refineries,

282 drilling rigs, and 2,570 kilometers of pipeline, and the activation of 10,800wells. Its an initiative that has been under discussion for some time, so we willsee if this time it takes shape, says Hernndez.

Another hope for the industry is possible changes in the tax system. After the2005 nationalization of all of PDVSAs business with foreign companies, theVenezuelan government increased the royalty from 1% to 30% and the incometax from 34% to 50%. In addition, a new 3% extraction tax was created, alongwith an entrance fee to the Venezuelan state for the right to have a shareholdingof at least 60% in the new joint ventures, and the condition that the Venezuelanstate receives 50% of revenues from the sale of hydrocarbons.

Options under discussion range from a royalty rate reduction (30% to 20%) toa temporary exemption in income tax payment.

Politically, modifications can be made on the grounds that Orinoco is a specialzone and, therefore, the rules of the game are going to change, says Pin,who was the former president of Amoco Oil Mexico and Latin America. Infact, the expectation that at some point the rules will change is what keepsmultinationals like Chevron, Eni, and Repsol in Venezuela.

Te definitions to be created in the legal and tax framework are tied to theexchange rate in Venezuela in 2014. In early January, the Central Bank ofVenezuela (BCV) published Exchange Agreement No. 24, which states thatthe buying exchange rate applicable to PDVSA and its subsidiaries, as wellas joint ventures, will be equal to the exchange rate resulting from the latestforeign currency allocation of the Supplementary System for Foreign CurrencyExchange (Sicad). Tis is a system of auctions that the Central Bank dependent on the government holds for buyers, and is organized by sector. Inmid-January, the average rate of these auctions was 11.50 per dollar, a value wellabove the official rate of 6.30 bolivars per dollar.
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Analysts believe that with the ability to sell dollars at the Sicad auctions rate,

operating costs and liabilities in bolivars of oil companies in Venezuela canbe reduced by approximately 80%. For PDVSA, the change also means asubstantial improvement in cash flow: it can get a larger amount of bolivarseach time it sells dollars from crude oil sales to the BCV. Nevertheless, withouta more fundamental change in company management, analysts believe that thebenefits of devaluation will be limited in time.

Despite the fact that past devaluations have resulted in short-term profit,PDVSAs operating expenses in dollars have almost doubled in the last twoyears, says Lucas Aristizbal, director of Fitch Ratings in Chicago.

2004 2005 2006 2007 2008 2009 2010 2011 2012

Sales revenue for crude oil

and products60,972 81,105 96,764 93,820 122,488 70,636 92,744 122,267 121,480

Royalties 9,247 13,318 18,435 21,981 23,462 12,884 13,904 17,671 17,730

Income tax 5,420 5,793 4,031 5,017 4,280 3,310 3,849 2,007 7,279

Total fscal contributions

(excluding dividends)14,667 19,111 22,466 26,998 27,742 16,194 17,753 19,678 25,009

Tax contributions/Salesrevenue (%)

24 23.56 23.22 28.78 22.65 22.93 19.14 16.09 20.59

Figure 8Sales revenue and tax contributions of PDVSA(In millions of US$)

Source: PDVSA

Higher gasoline prices

Another adjustment that could help improve the outlook for PDVSA is anincrease in gasoline prices in the domestic market. Venezuela is the countrywith the cheapest gas in the world: less than two cents per liter.

Te price of gasoline has not changed since 1996, even though oil prices aremore than seven times higher, the exchange rate has increased 14 times, and

there has been accumulated inflation of 4,435%, says a recent report fromBarclays Capital. Te current subsidy structure reveals that the production costsare 28 times the sale price of 95 octane gasoline, 39 times the current price of91 octane, and 50 times the price of diesel. Ramrez admitted last Decemberthe Venezuelan state suffers a yearly loss of US$12.6 billion for the cost ofproducing the fuel alone.

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Te gasoline subsidy has not only generated losses in terms of production costs.

Increased domestic consumption has also meant a high opportunity cost inshipments abroad, says Hernndez. For example, 95 octane gasoline could besold abroad at a value 51 times higher than that of the domestic market.

Faced with this scenario, in recent months Maduros administration hasindicated that it is considering a gasoline price adjustment of between 700%and 3,000%. Tis measure would give PDVSA some oxygen, although analystsbelieve that the companys benefits will be marginal.

An adjustment of gasoline prices in the domestic market would not improvePDVSAs financial situation in any way; the deficits and debts of the companyare too big, says Diego Gonzlez Cruz, Senior Associate E&P and Natural Gas

at GBC Global Business Consultants in Caracas.

Figure 9

Hydrocarbon sales in Venezuelas domestic market

2012 2011 2010 2009 2008

Liquefed natural gas (*) 89 77 82 81 81

Refned products (*) 592 569 592 518 493

Natural gas (**) 265 253 304 313 307

Total 946 899 978 912 881

Source: PDVSA

(*) Thousands of barrels per day

(**) Thousands of barrels of oil equivalent

Conclusion

PDVSA is at critical point. Production levels continue to fall, debt is rising, andOrinoco Oil Belt projects are not taking off. Paradoxically, this gloomy outlookcould open the door for change.

Te new credit schemes with partners in the Belt projects, announcements of alikely reduction in the tax burden, the devaluation of the bolivar for the oil sector,

and the possible increase in prices in the domestic market are all reasons to beoptimistic, and more so considering that politically there is room to implementthese measures, since there will be no elections until the last quarter of 2015, saysOliveros. But we have to wait. Different forces are at work in the government andwe dont know whether these measures will ultimately materialize.

Tis uncertainty also extends to the big global oil companies. While companiessuch as Chevron, ENI, and Repsol remain in Venezuela, waiting for conditionsto change in order to profit from the countrys enormous hydrocarbon potential,

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Oil & Gas

Intelligence Series

others have decided to retreat. Last October, Lukoil, the second largest oil

producer in Russia, announced that it wants outof the consortium developingthe Junn-6 project in the Orinoco belt, which is led by Rosneft. Te membersof the Surgutneftegas and NK-BP consortium also decided to abandon theirproject. And last September, the Malaysian oil company Petronas announcedthat it was leaving Petrocarabobo, one of the largest projects in the Belt.

For now, signals remain mixed. Te more flexible and open oil policyimplemented by some sectors of the Venezuelan government exist alongsidemeasures that go in the opposite direction, like the expropiationlast Novemberof two platforms from the U.S. provider Superior Energy Services, which hadtaken its units out of service after months of not being able to collect aboutUS$9 million owed.

Tese contradictory messages increase doubts about the path the Venezuelangovernment is going to take. What is certain is that the high tax burden, the useof PDVSA resources to finance not only social programs but also governmentoperating costs, extremely low gas prices in the domestic market, and exportsof crude oil to neighboring countries at disadvantageous terms are some ofthe factors that have made PDVSA the antithesis of successful state-ownedcompanies like Petrobras or Ecopetrol.

Te direction the state-owned oil company will take in the coming years willdepend on the result of infighting in the Venezuelan government between thosewho seek to improve PDVSAs conditions and those who prefer to stay the

current course.
http://www.bnamericas.com/news/petroleoygas/salida-de-lukoil-es-asunto-interno-segun-ministro-venezolanohttp://www.bnamericas.com/news/privatizacion/pdvsa-carece-de-competencia-tecnica-para-operar-taladros-expropiados-a-superiorhttp://www.bnamericas.com/news/privatizacion/pdvsa-carece-de-competencia-tecnica-para-operar-taladros-expropiados-a-superiorhttp://www.bnamericas.com/news/petroleoygas/salida-de-lukoil-es-asunto-interno-segun-ministro-venezolano

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