Saturday, November 12, 2005

More good news out of PDVSA 

Today any interesting piece of information came out regarding PDVSA. It seems that over the last 4 years PDVSA has reduced its debt by 5.6 BILLION dollars. In 2001 PDVSA's debt was almost $9 billion and it has now been reduced to about $3.4 billion This is clearly quite an accomplishment and obviously good news.

There are a couple of things to note along with this. The first question is why did an oil company like PDVSA, which earns billions of dollars and has very strong cash flow, ever have any debt in the first place? That is indeed a very good question. Of course many private oil companies such as Exxon-Mobil or British Petroleum have very large amounts of debt. But there is an obvious reason for that. They have to go out and buy the rights to whatever oil they intend to exploit. For those exploration and production rights to oil they generally pay billions of dollars which they later expect to earn back through the profits from oil sales. So for them going into debt makes sense.

But PDVSA doesn’t need to buy its oil rights. By virtue of it being the Venezuelan State oil company it is given access to Venezuela’s oil for free. Given that fact and given that it took over already existing oil facilities in 1976 when it was formed out of the nationalization of Exxon and Shell operations in Venezuela it had no reason to go into debt.

So why did it go into debt? Mainly as a result from the bad oil policies from the period prior to Chavez coming to power. First, the government wanted as much money from PDVSA as it could get. There is certainly nothing unreasonable about that. But PDVSA itself had other ideas. Its management wanted to aggressively expand oil production and turn itself into one of the largest, if not the largest, oil firms in the world.

The problem is that these two goals are mutually exclusive. For example if the government were to take the money that it needed from PDVSA than the oil company wouldn’t have the tens of billions of dollars it would need to expand oil production. Worse still, by expanding output and breaking OPEC production quotas PDVSA was helping to contribute to the collapse of oil prices which led to Venezuelan oil only selling for $8 a barrel in 1998 right before Chavez took office.

So with the government needing money, PDVSA needing more money for its expansion, and Venezuela getting less money from oil do to prices collapsing something had to give. Not everyone could get the money they wanted. The solution was for PDVSA to borrow a lot of the money it needed to expand its production. Needless to say, borrowing money to fund something, in this case expanded oil production, which only serves to reduce your oil revenues is not smart policy.

It was this disastrous oil policy that Chavez vowed to stop when he was campaigning for President in 1998. And upon assuming office he did stop it immediately, one of his first steps being the firing of Luis Guisti who was the President of PDVSA and chief proponent of the tremendous expansion of PDVSA. Not surprisingly, once Venezuela started respecting OPEC quotas under Chavez oil prices and revenues went up sharply. It is those increased revenues that have now enabled PDVSA to pay down the debt it should never have had in the first place.

Another thing that this paying down of the debt shows is how successful PDVSA has been in recovering from the opposition led oil “strike” of 2002/2003. As we saw previously, despite what opposition propagandists say, PDVSA did fully recover from the strike and did so rather rapidly. It is this rapid recovery that enabled them to have the funds not only to help pay for the governments social programs but also to pay down debt.

While the opposition deserves condemnation for the billions of dollars that they cost Venezuela the employees of PDVSA who stayed on the job and those who came out of retirement to help restart production deserve all the credit in the world. If not for their hard work the losses could have been even worse. Every time where hear more good news out of PDVSA, such as we are hearing today, which should keep their hard work under difficult circumstances in mind. They really are authentic Venezuelan heroes.


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