Journalist Round Table with Rafael Ramirez

(Energy Analytics Institute, Piero Stewart, 31.Jul.2013) – PDVSA President Rafael Ramirez held a small round table with journalist in Caracas, Venezuela.

What follows are excerpts from the discussion.

Rafael Ramirez on the petroleum sector and the current government administration under Venezuelan President Nicolas Maduro:

Rafael Ramirez: We have firmly established our political strategy related to the oil sector.

We are currently entering a stage of production expansion and will concentrate all of our work and energies on reaching our goals and increasing production capacity in Venezuela.

If we look back, we received the petroleum sector (in late 1999) during a phase of privatization in the downstream, midstream, and upstream sectors, especially PDVSA.

But Venezuela has entered a new expansion stage of petroleum sector policies and PDVSA is entering into the Expansion Phase of the Faja development.

In terms of the sabotage that our oil industry has seen, we continue to feel the effects of these actions and damage mostly in Western Venezuela where we have experienced a drastic drop in production.

After the oil sector strike in 2002-2003, we established our petroleum sector plan. We oversaw the migration of operating contracts (of 33 companies with contracts we saw 31 of the companies migrate to the new contracts without problems, only ExxonMobil and ConocoPhillips decided to exit the migration process and eventually exit Venezuela altogether). We also oversaw changes and modifications to laws, fiscal changes such as reestablishing royalties and taxes.

The year 2010 marked the beginning of the new expansion stage for the Venezuelan oil sector. From 2004-2010 we worked on nationalization, migration process to new contracts, and PDVSA regaining control of the oil sector by increasing its participation from an average 49% in JVs to a minimum of 60%. We are now in the stage of increasing the production of oil.

In all, we spent ten years (2000-2010) recuperating PDVSA, under the watch of late-President Hugo Chavez Frias.

Ramirez: We are employing many engineers from public schools here in Venezuela for various jobs, including rig operations.

On the petroleum sector expansion process:

Ramirez: In 2013, we have been concentrating our efforts on recuperating production capacity of 4 MMb/d by year end 2014 and 6 MMb/d by year end 2019 (of which 4 MMb/d will come from the Faja). For this to happen, it is fundamental that we move two elements: development of the Faja and development of an industrial base. [See also information on industrial meetings with private sectors across the country].

We need to construct a production capacity of 3 MMb/d in the Faja. This runs parallel with work we have been conducting in the Faja related to the industrial meetings with the private sector.

The government is working hard with the private sector for the second phase of the Faja development. Hence the Six National Productive Meetings we had to gauge interest in the private sector to participate in projects with the government and PDVSA.

We are working with private (transnationals) companies as well as the Venezuelan Hydrocarbon Association or AVHI but I must reiterate: “The companies that do not want to help PDVSA increase its production capacity can simply leave the country.”

We have received positive feedback from CNPC and Chevron and we are awaiting response from other companies such as Repsol, among others, in terms of new financing deals related to petroleum sector projects.

We plan to create investment funds for all the Faja JVs whereby “the Venezuelan citizens” will participate.

The government will create four investment districts in the Faja. In Sep.2013 the government will announce plans and create development schemes, special fiscal schemes for the four districts that are located in each of the four Faja blocks.

Ciudad Bolivar will be the main city that Venezuela will use for the development of the Faja since it already has an airport and universities.

Development of the Faja will be the most important prospect for Venezuela in this Century.

The government is working with private companies regarding funding and the use of money solely to increase production.

The government realizes that a number of private companies that have converted to JVs have had problems increasing production (operating costs around $12/bbl, including G&A). Regardless, the government wants the companies to maintain operations in Venezuela and increase production. However, private companies that cannot maintain these operating costs should be operated by PDVSA. We are looking to drastically reduce overhead costs. Again, we don’t want small operators to leave, but we want them to merge their operations to reduce overhead so that they can focus on increasing production.

We are starting a push for reduction of costs and more efficiency in our production. In the Western region of the country we have had a lot of success implementing this strategy and we have stopped the production declines in the region.

The government wants companies in Zulia in Falcon state to be more efficient and is trying to help them reduce their overhead.

On the Faja reservoir spanning into Colombia:

Ramirez: The Faja does not extend to Colombia, only to Guarico state in Venezuela in its most western extension. There are individuals in Colombia that are trying to convince investors that Colombia shares the same geology as Venezuela, which is not true. Pacific Rubiales has sold a lot of stock selling this story to investors. The Faja formation in Venezuela is different than the one in Colombia.

On the Chinese Fund and other financing issues:

Ramirez: Close to 94% of foreign income that Venezuela generates comes from the petroleum sector.

Venezuela will sign a $5 bln funding (Fondo Chino or Chinese Fund) in Sep.2013 in the presence of President Nicolas Maduro in China.

The amount of barrels that are sent to China to repay loans varies each month due to changes in oil prices. When oil prices are high, the barrels that need to be sent to China decline, while any excesses are returned to PDVSA.

We sold $21.9 bln to the Venezuelan Central Bank or BCV during 2001-Jun.2013. In 2013, we plan to sell $47 bln to the BCV.

In 2012, PDVSA paid down debt by about $4 bln, this figure stood at $34.4 bln at YE:12

Money on our Balance Sheet as of June 30, 2013 ($12 bln) includes investments (commercial credit) from Rosneft, CNPC, Gazprom, Chevron. Money from new JVs could be used in the SICAD weekly auctions when the companies need access to Bolivars. This will also reduce the companies’ needs to participate in illegal activities to obtain Bolivars.

PDVSA will not issue more debt in USA dollars but instead in Bolivars as it is easier to pay back this debt in the local market than in dollars.

On Venezuelan windfall tax scheme:

Ramirez: The following table (See Table 1) lays out Venezuela’s windfall tax scheme.

Table 1: Venezuela windfall tax payment to Fonden

Price of oil ——- Payment % to FONDEN

$80/bbl ——— 20%

$80-$100/bbl —- 80% of the difference

$100-$110/bbl —- 90% of the difference

>$110/bbl ——– 95% of the difference

Source: PDVSA

FONDEN is a national development fund which is similar to a fund that is run by the Norwegians. “I don’t see anybody criticizing the Norwegians,” but this government is overly criticized.

On oil exports, shale developments worldwide and other issues:

Ramirez: PDVSA is an operational company. We are constantly balancing things out. We have debts but we have revenues. We have financing but we have capitalization.

Increases in interest rates under the Petrocaribe initiative were not called for by PDVSA. The conditions remain unchanged.

Venezuelan oil exports are down due to increased use of diesel in the domestic market to generate electricity.

Shale oil developments do not affect Venezuela. We are not worried about shale oil developments going on worldwide. However, most of the shale resources in Venezuela are located in Maracaibo Lake area where they amount to about 13,000-19,000 MMbbls.

We are evaluating to what depths we have shale in the Urdaneta field. Venezuela has shale resources in Lake Maracaibo which are four times as much as those claimed by Colombia. We need to drive to deeper horizons where there are larger concentrations of oil. Although we have shale resources in Falcon state we will continue to look for convention oil and gas. There is tremendous liquids potential offshore Falcon state.

A $100/bbl oil price does not permit the development of shale oil. So we need a good oil price and $100/bbl is a good price, not just for Venezuela.

Oil price sensitivity: For each $1/bbl decline/rise in oil prices, Venezuela losses/gains $700 mln per year in revenues.

As a result of the Perla 3x offshore gas discovery which also unveiled large condensate potential, we have decided to drill offshore Falcon state in search of additional condensate potential.

Oil production at the Sinovensa JV is around 140,000 b/d but we expect this production to reach 165,300 b/d by year end 2013 and ultimately 330,000 b/d.

During 1992-1999, Venezuela’s 4th Republic reported fiscal revenues of just $23.5 bln, while the Revolutionary Government (under former Venezuelan President Hugo Chavez and now President Nicolas Maduro) has reported fiscal revenues of $448.8 bln during 2000-Aug.2013 (as of 1.Aug.2013), of which $310.3 bln came from changes in new laws (i.e. increasing taxes and royalties and increasing PDVSA’s participation in oil projects).

Venezuela’s oil production declines on average 700,000 b/d a year or around 20-25% per year. However, Venezuela adds an average 700,000 b/d of production to make up for the short fall and maintain production around 3,000 Mb/d.

In the Faja the production declines are not as pronounced since it is a newly developed area, but in Zulia state in Lake Maracaibo the declines are more pronounced.

On gasoline issues:

Ramirez: The government is working to install an automatic chip system and even GPS systems in Tachira state as there are reported cases of cars in Colombia with Venezuelan license plates that are crossing the Colombian/Venezuelan border each day to buy cheap gasoline in Venezuela to later sell it in Colombia.

The government is looking to implement the export of Venezuelan gasoline to Colombia to reduce the demand for gasoline in Colombia.

On refineries:

Ramirez: El Palito refinery will receive heavy oil from the Faja in the future while the Puerto la Cruz refinery will also process oil from the Faja. We will continue to use light oils for mixtures or for export.

Changes/upgrades at existing refineries are being done to increase the heavy oil processing capacity.

Plans to build three new refineries in Venezuela have not changed.

The government has proposed that companies convert upgraders into refineries or upgrade the oils to 42 degrees API so that it can be exported or mixed with other oils and thus avoiding potential bottlenecks in Venezuela.

Our agreements with Eni are to build a refinery and not an upgrader. The majority of the finished products from this refinery will be diesel with specifications established for European markets. The 300,000 b/d capacity refinery with Eni is a move by the Italian company to pay lower taxes.

On Ecuador:

Ramirez: PDVSA has reduced its interest in Ecuador’s Pacific Coast Refinery to 19% from 49% to allow entrance of CNPC with a 30% interest. Petroecuador will continue to hold a 51% interest in the project. Nonetheless, PDVSA still plans to send 100,000 b/d to the refinery for processing.

On the USA and potential divestment of CITGO refineries:

Ramirez: The US market has a large processing capacity for heavy oils. In regards to divesting of our interest in CITGO; it is not viable to sell individual refineries in the USA. It would only be interesting if they (the CITGO refineries) could be sold as a packaged deal.

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