Aside

I’m quoted in WSJ: Why sell Citgo? Cash for Ramirez’ PDVSA-recovery projects

Last week, I was quoted in the Wall Street Journal on why Petróleos de Venezuela SA (PDVSA) is looking to sell its Citgo refining affiliate in the USA. The key motivation, in my estimation, is to finance projects critical to PDVSA-president Rafael Ramirez’ plans to rebuild PDVSA. My analysis follows the WSJ  link …

Cash-Poor Venezuela Weighs Sale of Citgo – Wall Street Journal

wsj_chart_MK-CO266_CITGO_G_20140730190004“By closing Citgo they would free up a lot of oil going to the United States and continue to service China,” said Thomas O’Donnell, a visiting Energy …


ANALYSIS:  Raising cash quickly to complete key oil and gas (O&G) projects is critical to PDVSA president Rafael Ramirez’ plan for the company’s recovery.

(Two additional motivations have been offered by analysts: To send more oil to China, and to avoid Citgo’s assets being seized to pay compensation that might soon be awarded to companies PDVSA nationalized while Chavez was alive. However, these are not  fundamental reasons, and actually there are various holes in their logic. I elaborate in an upcoming article.)

The driving interest here is to get cash.  And,  right now it’s a seller’s market forrefineries in the USA.  So, what would this cash be used for by PDVSA?

It would not be spent primarily for new Faja projects–they have a longer term horizon. Rather, it would logically go to two types of projects that promise short-to-medium-term payoffs.  These are:

  • Enhanced oil production (EOP) projects in declining “mature fields”–especially in and around Lake Maracaibo that could most rapidly raise PDVA’s lagging national oil production
  • Finishing key natural gas infrastructure–especially pipeline projects running from the Paraguaná refineries south, to and across Lake Maracaibo and into the City of Maracaibo–that are needed to end the chronic domestic natural-gas crisis, and to help end the electrical crisis where gas can cut the cost of generating electricity with imported liquid fuel.

Much-needed new gas supplies are starting to coming online from the super-giant offshore Perla fields as well as from associated gas now being captured with somewhat greater efficiency in northern Monagas State. But, pipelines to deliver this gas where it’s needed are delayed due to on-again, off-again financing.

The mature-field EOP projects are especially welcomed by the Venezuelan private sector, whom PDVSA has been actively courting as partners.  And, there have been recent advances in and around Lake Maracaibo–most notably a $1.25 billion project in the Lake contracted to a domestic firm in July, which is self’-financing the project.

Here too, PDVSA getting financing to pay domestic firms is key to rebuilding the private sector’s confidence in PDVSA as a partner.  Post-Chavez PDVSA sees that the private sector can both bring in financing (mostly from offshore partners) and provide domestic sources for many lower-tech supplies, thereby decreasing the need to spend its own and the state’s scarce US dollars for imports. I discussed these plans earlier in Americas Quarterly, here and here.

Note that Ambassador Bernardo Álvarez  Herrera has been brought home to run this post-Chavez program of partnering with the private sector initatiated last year by Mr. Ramirez.  And, Álvarez has lately been mentioned/rumored as the next Minister of Energy and Mines, to replace Ramirez in that job.

The point here is that chavismo-without-Chávez has not-unreasonable plans for recovery of PDVSA from the unsustainable taking of company funds and personnel during the years of chavismo-with-Chávez.  Right now, finding cash to finance these recovery projects and for purchase of much-needed new equipment is desperately needed.  The sale of Citgo would be a significant contribution to the process.  However, whether this will or will not prove to be too-little-too-late to stop the economic decline of the Bolivarian state is a separate question.

More details in upcoming articles.

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7 responses to “I’m quoted in WSJ: Why sell Citgo? Cash for Ramirez’ PDVSA-recovery projects

  1. I don’t know Tom. Selling Citgo really generates much less than people think. With US$ 3.4 billion in other liabilities (net) and 2.6 billion in debt, how much would really be left after a sale? Bank of America says less than US$ 2 billion.

    And do you think Ramirez would put the money just where he is now being criticized for not placing money on since 2003?

    I have a more devious theory about this. If Citgo is sold before October, this is all about money trapped in Espiritu Santo. Given the opaque European bankruptcy courts, I can’t prove it. But all sources indicate there was a lot there.

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    • Moctavio – you have a point with the numbers. And, the Espiritu Santo theory is interesting.

      My motivation is that I keep hearing of PDVA rather desperate for financing for specific projects.

      The thing about the new Amuay-Ulé and cross-Lago gas pipelines is that without solving the domestic gas crises, they won’t be able to start exporting the next few tranches of gas coming online from the Perla fields after the initial one (Dec. 14 or soon thereafter).

      Related is that Ramirez had a real conundrum coming in Sept. when PDVSA was supposed to start sending gas to Colombia from Maracaibo (this also depends on the aforementioned new pipelines).. They were very afraid of failing and undermining any credibility for future export contracts .. but, then, on the same day that Maduro and Santos met in Colombia, Colobia/Ecopetrol offered to keep selling gas for another year (at a 10% discount!) even though the Colombians are running short.

      Anyway, the point is PDVSA rather badly needs/wants to do these projects, and the is a similar story about EOP in the Lake, etc., and for that matter equipment –really simple stuff – the purchase of which, I am told, they really have no cash to finance.

      But, yes, if your numbers are correct, it ain’t a lot of money … though it would help. It could also be exploratory … if the offers aren’t high enough to make a difference, perhaps they’ll drop the idea.

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  2. Reuters reports today “Argus dijo que las ofertas iban entre los 10.000 millones y 15.000 millones de dólares. Ramírez dijo que Citgo vale más que eso” and Bloomberg reports that Ramirez says he won’t consider less than $10billlion. This would be more attractive.

    Meanwhile, Bloomberg reports: “Our situation is not like many analysts have said, claiming that we need fiscal revenues,” Ramirez said. “We are doing well with our fiscal revenues from the oil sector.” Sounds a bit defensive, no!?

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  3. Forgive my lack of knowledge on this issue, but to be clear: you’re saying that PDVSA wants to sell Citgo so they can acquire dollars to purchase parts from abroad for domestic oil/gas projects? What sorts of things do they need to purchase from abroad with dollars for their oil/gas projects that they don’t manufacture in Venezuela?

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    • Well, there are two sorts of things they need finance for: projects (such as the gas pipelines I referred to or the EOP in mature fields, etc.) and then there are just spare parts or parts for new projects. In all these cases, I am constantly told that PDVSA has a lack of finance and so projects stall and parts go unordered.

      Compared to ten or fifteen years ago, there are many less companies in Venezuela producing parts for the oil and gas sector. Most were driven out of business under x-president Hugo Chavez when payments to suppliers became erratic and delayed and/or the owners were pro-opposition and so their companies then were cut off from orders by PDVSA (i.e., for political reasons) and many went out of business.

      Nowadays, if a company can bring external financing, there are plenty of projects, or parts and equipment PDVSA will contract for. Payment for larger deals is often nowadays in oil — which is not something the average overseas seller of parts and equipment is accustomed to )or interested in). But, it is what PDVSA has to offer as it lacks cash.

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  4. Caracas Canadian

    Earlier this year my company was in negotiations to charter several supply/crew vessels to PDV. We walked away when it came to the payment terms. PDV, through back channels, advised that the first month’s invoice would probably be paid only 10 to 15 days late, then the second month would be paid around one month late and then subsequent invoices could be paid between 3 to 6 months late or later. Essentially they were asking us to finance them so we sent the vessels back to Nigeria where there are courts and law and respect for the law and they actually pay you.

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    • Yes, thanks for the story. Sounds consistent with others. I’m a bit surprised, if it was a big enough deal, that they didn’t offer a stream of oil (delivered to a third party, off shore, etc. …) in payment.

      They are in a deep cash hole…. and then there are the rule-of-law issues you raise (plus limited tech/managerial capacity, …)

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