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
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.