Setty and PDVSA's creaking pension scheme

Not content with exposing financial shenanigans amongst junior and not so junior quoted oil companies, Setty has now taken it on himself to go after the biggest, chunky oil company in the region, Venezuela's State-owned PDVSA and its wobbly-looking pension scheme. Go read this because it's dynamite stuff.

If you owe the bank $10,000 you have a problem.....

......(and as the old saying continues) if you owe the bank $1,000,000 it's the bank that has the problem. On the other hand, if you owe one of the world's five biggest oil companies $232,469,958 and agree to pay it off over a term of 17 years at a 2% interest rate, then nobody has a problem and everyone's happy.

Here's Bolivia's La Razon on the story about Bolivia's State run YPFB oil company's debt to Venezuela's PDVSA (excerpt translated):

La Paz: To June 30 2010 Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) owed Petróleos de Venezuela (PDVSA) U$232,47m for diesel imports, according to Bolivian Central Bank (BCB) data.

Import volumes for diesel in the first six months of this year accounted for 54% of total national sales according to YPFB statistics.

The State report on medium and long-term public debt published by the BCB stated that YPFB owed U$232,469,958 for diesel imported, an amount that will be paid off over 17 years at an annual interest rate of 2%. Diesel is the most popular fuel in Bolivia's internal market CONTINUES HERE

Venezuela rig count stupidity (this week's coveted award)

One of the classic potshots aimed at Venezuela from time to time is the imminent decline, or implosion or just plain death of its oil industry. This has been going on for the last five years at least, but those with their rabid hatred for all things Chávez have never let facts get in the way of their made up bullshit and continue banging the drum.

The latest salvo against Venezuela's oil industry is one of their old chestnuts, that of the rig count. In a nutshell, by counting the number of rigs in operation you can get a decent idea as to how the sector is operating...the more rigs, the more dynamic and healthy things are. Makes sense, right? So here's the chart for the Venezuelan rig count, as supplied by industry leaders Schlumberger (resource page here). It discounts the 50 nationally owned rigs and just concentrates on foreign owned rigs (and as such matches the latest Vzla government figure of 140 rigs to a tee).

As we can see, in the last few months we've seen a drop-off in Venezuelan rig activity and there's not much doubt about that. So as day follows night, this is being jumped upon by the myopic oppos as clear evidence of the imminent etc etc blah blah we're all gonna die. (helped along by slanted reports from people who should know better). What we need here is a bit of context, so this chart below isn't the kind of thing the Chávezhaters will be showing off to their sycophants any time in the near future.

Yup you got it; apart from that oil strike period in late 2002/early 2003, the world rig count pretty much matches the evolution of rig counts in Venezuela. So rather than predict the end of PDVSA these Chávezhaters should be wailing about the death of the whole freakin' world oil industry, shouldn't they? Or maybe they should just cut to that Mayan 2012 prediction about the end of times and blame Chávez for that too. Or maybe, just maybe they should learn a little bit more about their subject and then they might just...

Oh Noes!! PDVSA almost bankrupted!

Bloomberg screams the headline this morning that "PDVSA Supplier Debts Doubled to $7.56 Billion in 2008" which must be bad news and PDVSA is going under and we's all gonna dies, right? Hmmm....buried down the note is the minor detail that PDVSA sales ran to $126.4Bn in 2008, which means it'd take a massive and uncontrollable 22 days of sales to pay off said debt.

What makes me suspect there's a spin going on around here? Y'know call me cynical and that, but.......

Tyler Bridges admits he's a liar

On his blog today, soon-to-be unemployed LatAm hack Tyler Bridges (after all, he works for McClatchy) screams the title "Venezuela: economic squeeze begins".

Begins, Tyler? Begins?

B-b-b-b-but you and your merry band of helpers at The Miami Herald said Venezuela was in economic trouble in 2003.... and 2004.... and 2005..... and 2006.... and 2007..... and 2008...how come the squeeze you've been reporting all this time is only just starting? You must have been lying to the world and misleading them for years on end if you're now saying the squeeze has just started.

Ah, right, wait a minute....you're going for it now cos now you're linking other people saying the same thing, right? In the link you provide to an equally silly FP report, we get to hear:

"Unless crude oil prices continue to rebound and stay relatively high, we should expect substantially lower oil output from Venezuela in the coming years because of a lack of investment and possibly political instability."

Which is kinda cool to hear on the very same day that PDVSA announces a U$13Bn investment program for 2009! And to drive home the asinine nature of this analysis, the FP report thinks that it is revealing some hidden oracle-like truth when it says

"Venezuela is looking more and more like an "oil republic."

Oh for f***'s sake! Venezuela has been a full-on no-doubts oil republic for longer than most anyone can remember and will be an oil state long after Chavez's time is up. This Vincent Lauerman is actually getting paid to write this? And Bridges thinks it's worthy of linkage to prove a point? Stupid, stupid, stupid.

So, Tyler Bridges, you win this week's coveted award. You're even stupid enough to link IKN on your page, so do your readers a favour and remove the link.....after all, the last thing you'll want them to read is a bit of truth. Here's your prize, dumbass:

Venezuelan finances on my mind

I was sent the report linked here last night by a friend and the article cannot be recommended highly enough. Written by Juan Carlos Boué and dated May 4th 2009, it is all about the Venezuelan oil industry and lays to rest the old argument about just how much oil is produced by PDVSA.

Really, it does. As well as being a solid argument, it is also rigorously academic (but fortunately also readable by the layman). It looks into the recent history of oil production reporting in Venezuela and shows exactly how the foreign secondary bodies deliberately underestimate Venezuela's oil production numbers. It also suggests a couple of reasons as to why...interesting stuff.

At the end of the show, Boué nails down the last five months of numbers and shows that, once internal demand figures are factored in, Venezuela's oil production is running at around 3.1m barrels per day. This is just where PDVSA says it is and importantly it's demonstrated without relying on company figures because detractors and know-nothings are always quick to shout 'propaganda' at PDVSA's reported numbers. Three-point-one-million is, of course, a mile away from the 2.35m barrels that is quoted by English speaking media and gleaned from bodies such as the IEA that are shown by Boué to use simple statistical manipulation in their underestimations. However it's always the lower IEA figures that are picked up by the rabid Anti-Chávez brigade as they wail how PDVSA is going to hell in a handbasket (amazingly, the same song is sung every year....every year they're proved wrong and every year they say "yeah, but you wait til next year!"). Strange that, innit?

It got me thinking about the importance of oil to Venezuela, too. To put into context (for the miningheads that read this page anyway), try this: Consider all the gold that's underground in the Bolivar state region of Venezuela, including all the gold underground at Las Cristinas, Brisas, the Chocos and all the other concessions parcelled off and owned by Rusoro and all the other smaller players down there. Now dig up all that gold, process it and sell it all at once. The revenues from that gold would be the revenues from six months or so of Venezuelan oil production, and at current rates of extraction there's enough oil to last for the next 200 years.

Ever wondered why Chávez cares more about oil than he does about gold?

Anyway, go read Boué's most excellent English language note about Venezuela's oil production. It really is the recommended link of the week, superbly educational and wise. Here's the link again, just in case.

Unemployment in Venezuela: Sssh! Don't tell anyone!

This week Venezuela announced a further cut in its headline unemployment rate, with the percentage dropping to 7.3%. Ten years ago the country's unemployment rate ran at 14.6%.

Fortunately for all you non-Spanish speakers, Associated Press managed to ignore any comparison with the ever-rising 8.9% US headline rate (or UK rate, or Spanish rate, or Mexican rate, or German rate, or Peruvian rate....I could continue), forget to report the figures and decide to concentrate on this story which has 22,000 oil workers that "may lose their jobs".

Gotta laugh.

Venezuela's 2009 budget, oil revenues, deficits and all that jazz

Of all the black box economics available to play around with in South America, perhaps the worst (should that be 'best'?) is the projected revenues that Venezuela expects in any given year from its state-run oil company, PDVSA. Not only are there a mountain of pricing variables, you have the neverending argument about actual production levels in the country, basically revolving around what actually constitutes a barrel of oil. Suffice to say that, if you so wish, you can "prove" that Venezuela is in great shape financially or about to go bankrupt next week just by choosing your own favourite dataset. Thus what is needed by people who don't live in partisanlandia is a fair estimate of how oil revenues are going and, eschewing as much politics as possible, a fair estimate about the state of play in the country's economy as a result.

All that preamble is to introduce this short but very informative report from Banca y Negocios (run by consulting firm Aristimuño Herrera & Asociados) that makes as good an estimate as any I've seen recently about the whole oil revenues caboodle. It's Spanish language, but there are plenty of numbers to help those who aren't so proficient (hey...there's always Google Translate). The whole thing is very much worth reading, but here are three points made:

• Oil revenues estimated at U$19.57Bn less than the original 20o9 budget and are now roughly equivalent to 2005 revenue levels

• However, government spending is up some U$32Bn from 2005 level (The shortfall is to be made up from tapping the Fonden fund, the extra revenue from the 3% rise in sales tax and by looking to Venezuela's private banks as a credit source)
  

• The adjusted budget barrel price of U$40 takes the pressure off PDVSA as the prime mover of revenue collection and will allow the company to get on with its job. It will also allow revenues to flow into FONDEN if the Venezuela basket price rises above $40/bbl.

There are plenty more in the link. The report sets out good ballpark estimates and doesn't try to thrust any ideology down your throat, thus it is recommended. It also gives me yet another reason to suppose that 1) Venezuela is not under any great fiscal pressure this year (this will come as a disappointment to many) and 2) a devaluation will happen in the second half of this year if oil prices don't pick up. As such, inflation will become a headline-grabber.

May you live in interesting times.

Codelco to invest U$2Bn in 2009

This note from BN Americas really rams home the difference between a nationalized company and a private company. Chile's Codelco, the world's largest copper producer, will match 2008 capex next year to the tune of U$2Bn. In the words of big cheese José Pablo Arellano;

"The investment plan is comparable to the one last year.....We expect to go ahead with a vigorous investment plan next year in spite of this difficult situation"

Or in other words, while the rest of the sector tucks, trims, cuts and slashes spending, Codelco rolls on as usual. Y'see, the whole mindset of a country-controlled company is different. Bottom line profits come down the list of priorities (as long as the company adds to GDP and pays its tax and royalty bills the State won't moan so very much). In the case of Codelco it may be a hypothetical for you, dear investor. However here's an extract from something I wrote in this post back in early September about Petrobras:

It's at this point the plain, boring, simple fact that Petrobras is a state run company needs emphasizing. Bottom line results are not the be-all-and-end-all of PBR's corporate philosophy. Never have been and never will be. Do you honestly believe that the company will continue to pay enormous dividends to foreign shareholders while at the same time taking out massive debt lines to pay for the capex? If so, you are in for a rude awakening.

On rude awakening later.....


.....so with Petrobras due to spend $20Bn or so in Capex next year, don't expect the company to leave much for dividends next year. Not with oil at $50, anyway.

But the funniest thing now is listening to the 15,000 or so professional economists registered in the USA. Due to the total failure of everything they've taught and been taught for the last 15 years, suddenly nationalization is good, beneficial and acceptable. Have you noted that phrase "counter-cyclical" being used more often in polite society, too? So expect Chile's Codelco to get plenty of praise for forging ahead with its expansion plans. And expect analysts to concur with PBR's vision for adding GDP growth to its parent, Brazil. But don't expect a single good word for Venezuela's PdVSA or Bolivia's YPFB or Ecuador's PetroEcuador. I mean...waddya think we are....a buncha of commie bedwetters?

Venezuela: Let the Austerity Begin

Today's lesson in political symbolism

Today PdVSA announced that the new refinery it planned to build in Nicaragua would go ahead, and would be refining 170,000bbl/d of crude by the year 2018.

What? Sorry? What was that? When the first stone was laid in a joint ceremony between Presidents Chavez and Childmolest last year, the thing was supposed to get going in 2011. Then a few months later Chávez mentioned the year 2013 as most likely. So now we have 2018 pencilled in, and that may as well be 2028 for the wants and needs of Nicaraguans.

Yep, the oil price drop has started to show itself in proposed budgets at PdVSA. Quite right, too, as they'd be damned to merry hell by all and sundry if they didn't cut back on some of the more lavish projects in the books.

Coincidentally (?), the $4Bn budget for the Nicaraguan refinery is precisely the same number as the line of credit that RBS cut to PdVSA today (according to CNBC anyway, but I haven't seen any official confirmation of that yet). However that cut line of credit is more of a "errr...yeah....I know we said we'd lend you the money if you wanted it, but now ....errr...we don't want to do that business any more". When bankers refuse finance business you know there's a totally different kettle of fish in play. PdVSA will get on just fine without a relatively piddly (for them at least) $4Bn credit line it hadn't even touched, and it shows the Northern bankers in a far more precarious situation than the the local oil producers.

Venezuela, and why $70/bbl is enough in 2009

I've had several mails and comments about this blog written last night in which I said that Venezuela won't "squirm" unless crude oil drops below U$70/bbl. Quite a few of the mailers wrote words to the effect of "wanna show me how you figure that one, Otto?", so here we go with some ballpark calculations.

First thing to point out is that there is a lot of misinformation about the Venezuelan oil business. Some of it is the typical uninformed crap and can be easily ignored, but other parts are more subtle propaganda. As an example, pro-Chávez propaganda includes the way PdVSA says it pumps 3.1m or so barrels of oil per day (bbl/d). Anti-Chávez propaganda exaggerates to the downside. An example of anti-Chávez oil BS is in this AFP report right here, where ex-central bank head Domingo Maza Zavala says that as Venezuela exports 700m barrels a year, if barrel price goes under $90 in 2009 Venezuela won't be able to support itself. He does this via the following logic:

700m barrels X $90 = $63Bn
Venezuelan imports = $50Bn
Venezuela debt servicing = $10Bn

With this Maza Zavala says the U$63Bn revenues from oil won't be enough to cover the $50Bn + $10Bn + other stuff obligations that the country faces. But this is just so much BS, and Señor Maza knows it. If you actually go round and do some fact checking you'll see that Venezuela exports around 2.25m bbl/d, which works out at around 820m bbl/year, and when it comes to covering Maza Zavala's U$65Bn or so in external obligations this makes a lot of difference to the calculations. Check out this table and see why:

Venezuela Gross Export Revenues for Crude Oil 2009
bbl/d payable export(m)	1.9	2	2.1	2.2	2.3	2.4
bbl/year export(m)	693.5	730	766.5	803	839.5	876
Avg barrel price
$50	$34,675	$36,500	$38,325	$40,150	$41,975	$43,800
$60	$41,610	$43,800	$45,990	$48,180	$50,370	$52,560
$70	$48,545	$51,100	$53,655	$56,210	$58,765	$61,320
$80	$55,480	$58,400	$61,320	$64,240	$67,160	$70,080
$90	$62,415	$65,700	$68,985	$72,270	$75,555	$78,840
$100	$69,350	$73,000	$76,650	$80,300	$83,950	$87,600
$110	$76,285	$80,300	$84,315	$88,330	$92,345	$96,360
$120	$83,220	$87,600	$91,980	$96,360	$100,740	$105,120
source: incakola finger-in-the-air

First let's assume that Maza Zavala's numbers are ballpark correct and Venezuela needs to cover $50Bn in imports, $10Bn in debt servicing and a few billion more to break even with the world (i.e. be a net creditor nation). Maza Zavala seems to be suggesting $65Bn as the break even number, but let's make it even more difficult and set the bar even higher to give room for extra imports or growth or whatever. So let's set our minimum at U$70Bn in total exports to cover 2009.

Maza Zavala is saying that Venezuela exports 1.9m bbl/d, and so at $90/bbl we have U$62.415Bn in gross revenues according to the table. But if we use the true export number of 2.2mbbl/d, $90 brings in U$72.27Bn and Venezuela is easily covered. Even if we take our export number at 2.1mbbl/d of payable exports (taking into account the amount of oil that goes to pre-paid customers and Venezuelan oil donation programs) we still end up with $68.985Bn in gross revenues. Hey, we're covered!

However, that's not the whole story. Maza Zavala conveniently forgets that oil is not 100% of Venezuelan exports, but around 90%. So add 10% to all those table figures up there to get the real amount of revenues that Venezuela enjoys from exports. This means that $64Bn from oil is in fact $70Bn in total exports for the nation.. This means that even 2.2m bbl/d at $80 is enough to cover the bills.

BUT WAIT, THERE'S MORE! Oil production is about to go up by 200,000bbl/d thanks to new fields coming on line (because all that recent investment from Norway, Brazil, Iran, Portugal, Russia, China etc isn't just lip-service; they are actually truly ramping production and it starts to come on line very soon). This means that exports are likely to be in the 2.3 to 2.4mbbl/d ballpark in 2009. And by checking that chart again, even U$75 oil covers all obligations once other exports are factored in.

AND THEN FINALLY, there's the one thing Maza Zavala definitely didn't want to mention. In the course of the recent oil boom, Venezuela has squirreled away international currency reserves to the tune of U$38Bn. So if there is any shortfall in the balance of payments, Venezuela does not have to go to the world market and float very expensive new debt paper (that would start a rather nasty vicious circle). It can easily cover obligations by tapping reserves or even buying back its own debt instead of rolling it over. After all, the "safety net" of international reserves is designed to help out at exactly that kind of moment. So if necessary, Venezuela can use up to $10Bn of reserves in 2009, taking the pressure off oil revenues and allowing a $70/bbl average to be enough to pay its way.

Of course, Venezuela can't rely on its currency reserves forever, but one year will not hurt its cause. As a sidebar there's also the austerity plan that Chávez announced on September 19th, and we can expect certain non-Venezuelan expenses to be cut down. For example the ALBA foreign aid costs around U$7Bn a year...that one is likely to be trimmed substantially by popular appeal. Arms purchases can wait a year. Import bills can be cut, of course. Hey, that's what the word 'austerity' means. Etc etc.

So there you have it; a very ballpark lesson in why $70/bbl might not make for a boom year in Chávezlandia version 2009, but it will be enough and the squirm can be delayed indefinitely. Any questions?

A bit more about those Venezuelan oil reserves

The announcement today from Venezuela that the country now has 142.3 billion barrels of oil in proven reserves really is quite significant, and here's why:

For a start, "proven reserves" is a strictly defined term in the world of oil. It means that there is at least a 90% probability that the crude oil underground can be recovered economically (i.e. at a profit). These are the only reserves that are allowed to be counted as assets by the big international oil companies when they make their financial reports, and differ significantly from "probable reserves" which are a 50% chance of being economic and "possible reserves" which can be as low as a 10% chance of being recovered at a profit to the company.

Therefore Venezuela can now say they're sitting on 142.3 billion barrels of profit (and there's likely more to come). But how long are these reserves likely to last? Well at the moment there is debate as to the real production figures for the country; detractors say there is as little as 2.5 million barrels pumped per day (Mbbl/d), while PdVSA claims up to 3.5Mbbl/d. What's certain is that production is set to rise, so let's imagine that Venezuela pumps a steady 4Mbbl/d. This means, using the quick'n'dirty math:

4m per day X 365 days = 1.46Billion bbl/year
142.3/1.46Bn = 97.46

And yes, that 97.46 number is exactly what you think it is. It means Venezuela has proven (repeat proven) reserves that will last over ninety-seven years at a production rate significantly higher than that of today.

But the USA's interest in Venezuela is all about freedom and democracy, ya knowz. It's not about oil. Oh no no no no no no no no no..........

Lehman Brothers, Moris Beracha and Venezuelan Bonds

Albert's back with another riddle!

There's something going on that involves Lehman Brothers, Moris Beracha and a whole heap of Venezuelan bonds. There's something about the combo of these three elements that's making a few people break into cold sweats today.

• We know that Lehman Brothers (LEH) was the original emissor of structured debt paper currently being held in the Venezuelan "FONDEN" development fund holding tank.

• We know that Beracha advised Lehman on the deal.

• We know that a lot of the debt was paid off by the Central Bank under an initiative devised by Beracha and ex Finance minister Isea, but that policy was stopped in its tracks before the Treasury guys got round to paying off the Lehman debt.

• We know that the structured debt is worth around U$300m and is currently at a discount to face value (we don't know what kind of discount, though).

• We know that out of the blue last week Lehman issued a "buy PdVSA debt" call (though it should be stressed that PdVSA debt is not the same paper as the Lehman emitted structured debt in FONDEN).

• We know that LEH stock is under severe pressure at the moment.

• We know that Warren Buffett is famous for saying "Only when the tide goes out do you discover who's been swimming naked." Now whatever made me think of that one?????

So what's going on here? Can anyone put these pieces together and make a pretty picture?

Related Posts
Moris Beracha and the Venezuelan parallel exchange rate
Venezuela's currency slide: Mo' Moris
Lehman Bros and Venezuela Bonds and Otto

Venezuela: Financial justice, financial injustice

Justice: Gold Reserve (GRZ) is up 8% today and Crystallex is 12% down.

Injustice: Lehman Brothers (LEH) issues a "buy PDVSA debt" call today and informs Bloomberg, Reuters, Dow Jones Newswires, AP, AFP, and all the other necessary newswires (see the actual release below). Not one of these services has issued the news so far. I mean, actually passing on a buy recommendation on anything Venezuelan just isn't right, is it?

UPDATE: Justice is fleeting in Venezuela. GRZ closed a point down.

UPDATE 2: Injustice is done, as Bloomie is finally running the Lehman Brothers story (undoubtedly because they read this post and thought "oh cripes! Otto's on to us!")

Lehman Bros and Venezuela Bonds and Otto

Ok, hands up who remembers this line from yesterday's snippets;

"Why has Lehman Brothers (LEH) suddenly become interested in the Venezuela parallel rate and the role of Moris Beracha in the country's finance policy? All will be revealed shortly, I'm quite sure."

Well, we didn't have to wait long. Here's a PR from Lehman this morning, and while you're reading through, reflect on how incredibly connected this little Otto must be:

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

----------------------------------------
Lehman Brothers | Fixed Income Research
----------------------------------------
Emerging Markets Intraday Comment
-------------------------------------------------------
Gianfranco Bertozzi September 4, 2008
-------------------------------------------------------

Buy PDVSA
We think that investors should look to own PDVSA bonds at current levels. We
see several reasons to own these assets. All three bonds appear attractive from
different standpoints.

PDVSA 2017s are currently yielding over 11%. We think this is very attractive
for a bond with less than 10-year maturity, and the bonds trade about 80bp wide
to Venezuela 2016s and 100bp above N2018s in z-spread terms. Furthermore, the
2017s appear cheap relative to CDS, as shown in the basis chart below. On a
switch basis, this is the attractive part of the curve, and meanwhile, default
risk is extremely low, in our opinion, for this quasi-sovereign issuer.


[http://llpublic.lehman.com/LAS/UnauthProxy/RSL/jsp/researchDispatcher.jsp?dispatchID=PUBLIC_IMAGE&docID=102105190&streamFile=YES]

Yet while a payment default seems highly unlikely, current CDS spreads are
suggesting a 46% probability of default within 5 years and up to 74%
probability over a 10-year period. Bond-implied probabilities of default are
even higher. Using a constant hazard rate model, we find that the 10-year
cumulative probability of default is 87%. PDVSA has no history of default, and
we believe that oil prices are destined to be higher in the next 10 years than
they have been in the previous 10 years. In addition, PDVSA's recent efforts in
cleaning up Petrozuata debt sends a strong signal to markets about
its commitment to avoiding default.

PDVSA 2027s and especially 2037s may look a little less compelling on a switch
basis, but we think that they are more compelling credits to own outright. Both
are trading near all-time lows on a price basis and are trading close to
recovery levels - these very low dollar price bonds give investors nearly
unparalleled convexity in EM. The bonds have also underperformed CDS in recent
weeks.

Moreover, because VOD is much lower on these bonds, investors can hedge their
position at minimal cost. The investor will need $2.5 million notional of 10-
year CDS to hedge $10 million notional of PDVSA2027s and $2.2 million notional
of 10-year CDS to hedge $10 million notional of PDVSA 2037s to make the trade
VOD-neutral (assuming 40% recovery rate). We think that in a rally fueled by
liability management, stronger oil prices, or improved market sentiment, these
bonds could rally several points. When we look across the asset class, we see
few places where an investor has as much upside and such capped downside.

Gianfranco Bertozzi

Phil Yuhn