Sunday, October 01, 2006

"One mistake after another" 

In today’s edition of Petroleumworld they reproduce an editorial from the opposition business journal Veneconomy. The editorial, entitled “One mistake after another” has as its second sentence:

With this decision, the Bolivarian administration has committed yet another, and this time irreversible, mistake in its management of the country’s oil policy.

Given all the mistakes that are alledgadly being made I decided I better look into the numbers on oil revenues a little as Venezuela might be about to run out of money if things are indeed being run poorly.

In late August the state oil company PDVSA published its financial results from January through the end of July.

For the period January to July PDVSA had revenues of $32 billion dollars. Of that $32 billion $3.6 billion was invested back into the oil industry, another $8.1 billion was eaten up by operating costs and $200 million was paid in interest on its debt.

That leaves a balance of $20.3 billion dollars which can be thought of as “profits” – ie money that is available to the Venezuelan government. $1.2 billion of that money was kept on hand but $19.1 billion was turned over to the Venezuelan government. $13.4 billion was turned directly over to the government treasury via royalty and tax payments. Another $5.7 billion was split between the national development fund (Fonden) which got $3.4 billion and various Missions and other social programs which received $2.3 billion.

Now this $20.3 billion in government revenues from the oil industry through July comes to an annual rate of $34.8 billion. That is, if the oil income keeps coming in at the same rate the total government take at the end of the year will be $34.8 billion. How does this compare to prior years. Recall I previously published some numbers:

1997 $13.657 billion

1998 $ 4.343 billion

Chavez takes office

1999 $ 8.347 billion

2000 $17.950 billion

2001 $11.519 billion

2002 $8.487 billion

2003 $10.510 billion

2004 $20 billion

2005 $25 billion

And now 2006 will be about $34.8 billion.

In reality actual revenues will likely be somewhat less for a couple of reasons.

First in what is largely a symbolic move Venezuela has agreed, along with Nigeria, to make voluntary cuts in production, to help shore up prices. Venezuela’s portion of the cuts will come to about 50,000 barrels per day. I say these cuts are largely symbolic because they are, in and of themselves, too small to make much of a difference. When Venezuela made production cuts back in 1998 and 1999 along with other OPEC members to boost prices it cut daily production by more than 500,000. The current cut is less than one tenth of that – so don’t look for any dramatic effects. Most likely it is an effort to prod the rest of OPEC members to make deeper cuts to defend prices.

Venezuela has also decided to stop production on one of its least profitable types of oil, Orimulsion which is a type of fuel oil made by mixing very heavy oil from the Orinoco belt with water to make a liquid which is used in electric plant boilers. As this type of oil is not very profitable and displaces other types of oil which are much more profitable this the elimination of Orimulsion has long been expected. What is somewhat unclear is if this cut is on top of the other 50,000 barrel cutback or part of it.

With production somewhat lower and with prices declining recently its unlikely Venezuela will actually bring in revenues of $34.8 billion this year. But even if the final number is significantly lower, say $30 billion, that is still higher than last year and a LOT higher than the revenues which the previous government brought in.

So when all is said and done Veneconomy is just making the usual opposition hysterical claims of the sky is falling which when examined in detail turn out to have no merit at all. And while some may choose to see Venezuela’s oil policies as “one mistake after another” with profits going through the roof I bet General Motors and Ford shareholders wish they had management that would make these kind of mistakes.


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