Sunday, January 30, 2005

n 30/05 - The Chavez "discount", commentary on two FT Articles: "Beyond Borders: The Chávez premium" & "Iran to help Venezuela sell more oil to Asia"

PMBComments: these days it is increasingly tricky to write about Venezuela. If one is not bewildered by Chávez’s male chauvinist vulgarity (our heartfelt apologies to Condi Rice), one is aghast at the depth of the national security challenge posed by Colombian guerillas freely roaming our streets and voting in our cartersanctioned referendum. What words should I use to describe the plan to arm and re-train our military (and militias) to go into an asymmetric war with the “empire”? If packing the Supreme Court, gagging the press and shackling the Central Bank aren’t sufficient proof for some; what do we do about growing evidence of chavista foul play behind the deaths of a “martyred” prosecutor (Danilo Anderson, a highly publicized affair) and of a “doctrinaire” army general (Brigadier General Moncanaut, a hushed up imbroglio)? And how do we adequately report on the unprincipled spectacle of a visiting US Senator suggesting we all “turn the page on the recent past” while Hugo Chávez rips out every remaining one from the democratic rule book? And with regards to the death of the OAS, should it continue unnoticed? Or, should we notify the next of kin? Amazement my reader friends is not an exceptional word but the norm when relating the state of our oil-propelled calamity.

Since it is oil – and oil alone - that keeps this deadly-serious farce on track, it is important to focus on articles such as these two appearing on the European and US editions of the FT. Webb Vidal, always vigilant and in the forefront of developments in Venezuela, highlights what the oil markets now label the “Chávez premium”. This oil price surcharge, attributable to the volatility brought about by Chávez antics, has a corollary in Venezuela which we should start calling “the Chávez discount”. This would account for the loss in domestic values (moral and financial) and the deterioration of every measurable indicator used to objectively, or subjectively, measure progress. It is a scandalous travesty that this “discount” concurs with a “premium” that regales Venezuela with immense oil wealth. Chavez’s apologists (should we start labeling them “the page turners”) should focus a little bit more on this shameful dichotomy. The evolution of a democratic society can never be measured by a government’s ability to plunk cash to cover-up problems, but by its ability to empower its citizens to become sustainable net contributors to society. Hugo Chavez has made poverty a wicked political asset, and as such is perversely content to be cheered on by those whose future he is decimating and by those who live too far to really give a damn. PMB

Note on oil: given the rapid shift in Venezuelan oil strategy: i.e. threat to reduce or cut oil supply to the US, increased sales to China, help from Iran, sudden and unilateral changes in contractual terms, never ending PDVSA management musical chairs, “Citgo is robbing us” accusations and other such jewels, I will soon write a stand alone commentary on the demise of PDVSA and the upcoming demise of Venezuela as a serious or significant player in the oil market. Until then keep an eye on one Bernard Mommer, Eminence gris of the destruction of PDVSA, who was recently promoted to the Board of PDVSA but whose “real and current” master is still a mystery to most of us who strive to understand the reason behind such consistent and shortsighted stupidity.

Financial Times

Beyond Borders: The Chávez premium
By Andy Webb-Vidal in Caracas
Published: January 30 2005 20:19 | Last updated: January 30 2005 20:19

Oil futures traders in London and New York have come up with a catchy term to describe an additional source of uncertainty when it comes to judging potential volatility in supplies: the Chávez premium.

There is as yet no established formula that serves to precisely calculate how many dollars should be added to the price of a barrel of oil because of Venezuela's President Hugo Chavez, from whom the term derives.

However, one thing is clear: political uncertainty stemming from Mr Chávez and his policies is becoming not only a factor in the oil markets, but it also has implications for Venezuela's sovereign bond holders and for oil multinationals.

As the world's fifth largest oil exporter, for decades Venezuela had been seen as a secure source of oil, particularly to the US. Tens of billions of dollars have been invested to extract oil from the South American country.

However, Mr Chávez is uncomfortable with Washington, which he sees as the centre of an imperialist "empire" bent on dominating the rest of the world, and intent on overthrowing him and his self-styled "revolution" for the poor.

Mr Chávez's repeated threats to "cut off" oil supplies to the US used to be dismissed by analysts as mere rhetoric.

It is becoming clear that Mr Chávez means business, inasmuch as he is planning to ship the oil he controls to anywhere but the US.

"He's trying to align his business movements with his political aspirations to have closer relations with non-US countries," says Rob Cordray, analyst at PFC Energy, a consultancy based in Washington. During a visit to Beijing in December, Mr Chávez offered to send oil to China.

Mr Chávez has wasted no time in fulfilling his pledge. Since the start of this year, Venezuela has sold two 3m-barrel cargoes of crude oil to China.

Some observers point out that because Venezuelan crude is heavy, it will be unusable in Chinese refineries. Also, because China is far more distant than the US, a strategy of diverting oil to China is an exercise that has to be paid for by one of the parties, and is economically unsustainable.

"Venezuela's dependence on US refining capabilities and the lack of access to the Pacific will limit Chávez's ability to diversify Venezuela's export market in the near future," says Patrick Esteruelas, a Latin America analyst at Eurasia Group, a consultancy based in New York.

While that may be true, people familiar with the recent shipments say the oil is being sold at a heavy discount, in theory allowing China to be able to resell the oil at a small profit. The re-sale of Venezuela crude oil to third parties was previously forbidden by Petroleos de Venezuela (PDVSA), the state-owned oil company.

"The reason for the dispatch of these cargos is 100 per cent political," said a trader familiar with the deals.

Venezuela is also planning to ship oil to Asia via a pipeline across Panama.

While the diversion of oil exports to China for political reasons is at an early stage, analysts say that its expansion will damage Venezuela's credit rating because it will receive less income, especially if oil prices decline. The issue of Venezuela's creditworthiness was called in to question two weeks ago when Standard & Poor's, the ratings agency, dropped the country's debt rating to "selective default" after the country missed a $35m payment due in October.

Richard Francis, analyst at Standard & Poor's, said: "It was more for technical issues, we don't believe that the ability or willingness of the government is really in question, at least at this point."

Venezuelan officials said the payment was missed because of an "error", but other observers are concerned.

"The selective default reflects the state of disarray the public administration is in," said an investment banker dealing in Latin American debt.

PDVSA has become far more poorly managed since a strike two years ago that led to the summary dismissal of 18,000 experienced employees.

Today, rather than the seat of a $100bn oil company, PDVSA's headquarters is the hub of a chaotic social welfare agency, with distressed mothers breast-feeding babies in a foyer scattered with "revolutionary" pamphlets.

Indeed, such is the lack of control at PDVSA, which has to maintain a $2bn-plus revolving "social fund" under orders from Mr Chávez, that no one knows the state of its financial health.

"How can anyone assess a company that has not presented its financial statements since 2002?" asks Pedro Burelli, a former director of PDVSA.

Foreign executives who deal with PDVSA also allege irregularities such as the issue of parallel contracts that allow for personal fortunes to be made by "mafia-like" factions inside the company.

Today, PDVSA sells most of its oil-derived products on a spot basis or via contracts of no more than 12 months' duration. Some crude is also sold "spot" for immediate delivery.

However, there is another related issue that is complicating Venezuela's capacity to continue pumping oil.

Because of declining output at PDVSA, due to the diversion of money away from essential investment, poor management and alleged corruption, a greater share of Venezuela's oil supply is coming from private companies.

Yet the investment conditions for foreign oil companies is deteriorating fast rather than becoming easier.

In recent weeks Mr Chávez has ordered a unilateral overhaul of dozens of oil contracts in an effort to raise tax revenue.

Alarm bells are ringing in Houston. Harvest Natural Resources, a US company, has seen its shares collapse in the past two weeks after it was told by Venezuela to suspend exploration in its main project.

At least one investment bank downgraded its outlook for ConocoPhillips after its plan to develop its promising Corocoro oil field was stopped by the government.

Venezuela, which currently produces about 2.6m barrels per day, predicts it will increase daily oil output to 5m barrels by 2009.

In practice, say experts, Venezuela is every day shipping less oil to world markets, in effect bolstering the "Chávez premium".

Iran to help Venezuela to sell more oil to Asia
By Andy Webb-Vidal in Caracas
January 30 2005 22:04 | Last updated: January 30 2005 22:04

Venezuela has enlisted Iran's help to steer its oil exports to China and away from its traditional US market. A team of traders from Petroleos de Venezuela, the state-owned oil company, is to be trained in London by Iranian advisers in how to best place oil in Asian markets, people close to the industry say.

The move is part of an effort by Venezuela, the world's fifth-largest oil exporter, to strengthen ties with China at the expense of the US, with whom relations are again becoming strained after a two-year period of calm.

Iran is Venezuela's closest ally in the Organisation of the Petroleum Exporting Countries, which has agreed to keep output quotas unchanged in the short term to support oil prices.

At the weekend, Hugo Chávez, Venezuelan president, signed accords with Zeng Qinghong, China's vice-president, to allow the China National Petroleum Corporation to develop oil and gas reserves in Venezuela.

China has come here as a sister nation to extend a friendly hand to the neediest in Latin America,” Mr Chávez said.

Venezuela is in talks with Panama to find ways of transporting oil across the Pacific Ocean, which would allow it to send oil to Asia more cheaply.

Mr Chávez, who has been in power for six years, has threatened to cut off oil supplies to the US on several occasions in response to what he asserts are persistent attempts by Washington to meddle in domestic affairs.

Venezuela settled an intense, two-week diplomatic dispute with the US-backed government of Colombia at the weekend after claims of a US-assisted “kidnapping” in Caracas of a Colombian rebel wanted by Bogotá.