May 29, 2012 / 4:12 PM / 6 years ago

Analysis: Lower prices, deals with allies strain PDVSA finances

CARACAS (Reuters) - Venezuela’s state oil company PDVSA PDVSA.UL was not paid directly for almost half the crude it pumped last year due to preferential deals with foreign allies, putting more pressure on its finances amid declining prices and heavy local subsidies.

A Reuters analysis of figures published by PDVSA last month, the fiscal motor of President Hugo Chavez’s socialist policies, show it was not paid directly for 43 percent of its barrels of crude and oil products in 2011. That left it delaying payments to suppliers and putting parts of its own investment plans on hold.

It is also likely to add to growing pressure on big foreign companies such as U.S. major Chevron (CVX.N), Spain’s Repsol (REP.MC) and Italy’s ENI (ENI.MI) that have partnered with PDVSA to develop Venezuela’s enormous Orinoco extra heavy crude belt.

PDVSA’s debt leapt 40 percent to nearly $35 billion last year - debt to suppliers hit a record $12.4 billion - at a time when the company was doubling its contributions to Chavez’s government programs to almost $50 billion.

All this comes amid falling crude prices that are putting increasing strain on PDVSA’s unique financial model.

“The problem is not 2012. What will be difficult is 2013,” said Roger Tissot, visiting energy fellow at the Institute of the Americas at the University of California, San Diego. “If the price falls below $90, Venezuela’s fiscal situation becomes very complicated.”

Global oil futures have declined by almost 13 percent this quarter - their biggest drop since late 2008 - mostly due to euro zone worries and weak Chinese economic data - and analysts see scope for more weakness. On Tuesday, global oil benchmarks were trading lower with U.S. crude futures just above $90 a barrel and Brent crude was above $106.

At the heart of PDVSA’s latest problems are growing numbers of controversial export deals to supply oil under preferential terms, including exchanging fuel for food and other products, as well as government policies on domestic prices.

The proportion of Venezuelan crude and oil products that was not paid for in cash rose from 32 percent in 2009 to 36.5 percent in 2010, before reaching last year’s record level.

Chavez, who is seeking re-election in October despite suffering cancer, has increased his influence abroad by offering crude on credit and in exchange for other goods and services to nations in Asia, Latin America and the Caribbean.


Many of the agreements are criticized by his opponents, especially those signed over the last decade with China, Cuba, Argentina, Uruguay, and the more than a dozen countries that are members of Venezuela’s Petrocaribe supply program.

Opposition leader Henrique Capriles, who is trailing Chavez in opinion polls ahead of the October 7 election, says if he wins he will prioritize building relations with “democratic” nations - as opposed to Chavez’s close ties with governments that have questionable rights records, such as Iran, Syria or Belarus.

Because of the preferential deals, PDVSA only received cash for about two-thirds of its exports last year, which amounted to 2.47 million barrels per day (bpd).

Energy Minister Rafael Ramirez denied any partners had been scared off by the delays in payments and said PDVSA was managing its accounts well - supported by its vast reserves.

“We haven’t seen anyone who has packed their bags and gone. I can have debts of $34 billion but with the amount of assets I have and shareholder equity that I am showing here, I don’t have any problem,” he told reporters last month.

By far the biggest of the preferential supply deals is with Beijing: China has loaned Venezuela some $32 billion since 2007, repaid with oil. Venezuela sends about 415 million bpd to China, and Chavez wants to increase that to 1 million bpd - steering sales away from PDVSA’s biggest customer, the United States.

Last year alone the company missed out on revenue of nearly $8 billion due to the China deal, data published by PDVSA’s auditors shows, because of the complex way Chavez’s government uses the funds to service its debts to Beijing and support non-oil projects.

The auditors say the value of PDVSA’s fuel shipments to China rose from $4.1 billion in 2009 to $6.3 billion the year after, then more than doubled to $14.6 billion last year.

Little is likely to change soon: parliament voted last week to double the amount the government can borrow from China under the deal to $8 billion at any given time.

A further 332,000 bpd went to Latin American and Caribbean countries last year under the government’s preferential supply agreements, an increase of about 30 percent on the year before.

Venezuela lets those customers pay up to 70 percent of their bills over the long term, at an interest rate of just 1 percent annually after a grace period of two years.

    In some cases, receiving nations have also had their debts canceled or benefited from refinancing deals with PDVSA, and can choose to pay with services or goods such as food and livestock.


    The situation makes Venezuela’s state oil giant more dependent on its few clients who pay in cash, notably its U.S. refining subsidiary Citgo.

    One result is that PDVSA’s investment in increasing production from its older fields and developing the huge extra heavy deposits in Venezuela’s Orinoco belt - one of the world’s biggest reserves of crude - lags behind its counterparts.

    Mexico state oil company Pemex invested more than $19 billion last year, about 17 percent of its income, while Brazil’s Petrobras (PETR4.SA) spent $42 billion, or 29 percent.

    PDVSA invested $11 billion, or just 9 percent, in its oil sector. It also funds everything from free health clinics in slums to culture and sports projects for the Chavez government.

    If global prices fell further, that would prompt PDVSA to step up its pressure on foreign energy partners who are already being pushed to find more financing, drive ahead with ambitious Orinoco projects and boost output from mature fields.

    PDVSA also stacked up extra debt by issuing bonds worth more $10 billion last year, and said this month it had sold $3 billion more in a private offering.

    The company has few options to increase revenue from the local market in Venezuela, where it supplies 646,000 bpd but only recovers a fraction of the market price. Subsidies mean locals enjoy the cheapest gasoline in the world: a liter costs 2 U.S. cents and you can fill up a big sport utility vehicle (SUV) for less than $2.

    The domestic gasoline price has not been increased in 14 years, and the subject remains a touchy one for Venezuelans who remember deadly riots over price hikes in 1989.

    “There comes a time when the viability of the model is put in doubt to matter how much oil you have,” said Tissot, of the Institute of the Americas. “If everything you produce is used to pay debts, what do you use to live on?”

    Editing by Kieran Murray and Marguerita Choy

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