Venezuela’s Energy and Oil Minister: “We are Rethinking Our Oil Industry”

In a wide-ranging interview with the newspaper El Universal, the Minister of Energy and Oil, Rafael Ramirez, discussed the renegotiation of contracts, new investments, and future strategy of the state-owned oil company.

For a summary of this interview, see: Venezuela’s Pdvsa President Outlines State of Company and Strategic Goals

Minister of Energy and Oil and PdVSA President Rafael Ramirez
Credit: El Universal

Instead of sitting at his desk, Rafael Ramírez, anticipating a long conversation, made himself comfortable in a leather chair that adorns his office. His double role as the President of Petróleos de Venezuela, S.A. (PdVSA) and Minister of Energy and Petroleum has left him with little time to talk to reporters, although he recognizes that many issues have been left unexplained.

In his large and well-lit office, he gathered together documents that would help illustrate what could be called the new energy landscape of the country. A copy of the book The Internationalization of PdVSA: A Costly Illusion (La Internacionalización de PdVSA, Una Costosa Illusion) by Juan Carlos Boué, now vice-president of PdVSA affiliate Commerchamp, divided the space between journalist and subject.

Q: What is the current petroleum output?

“We are at 3.1 million barrels per day. Our financial situation and our investments have been extraordinary. By November 2004, net earnings reached USD 6.6 billion, compared to USD 2.4 billion in 1999 and USD 3.5 billion in 2003.”

Ramírez reviewed, page by page, a small booklet that contains PdVSA’s economic expectations for this year, the operating and financial results of past years, and development plans for the next half decade.

Ramírez pointed out that during 2003-2004, PdVSA’s short-term debt dropped from 22% to 11%: USD 55.2 billion to USD 432 million. Meanwhile the corporation’s assets grew from USD 55.2 billion to USD 65.0 billion, improving the asset/debt ratio.

In this landscape, operational agreements cloud the horizon. The 2005 budget foresees a cost of USD 628 million to cover cap fees on these agreements, versus USD 559 million paid in 2004. “We have done a comparison with the contracts of other companies and none of them have indexed operational costs to market prices. These are not operational accords, but rather hidden concessions: they explore, drill, produce, and in addition receive money for the price of the oil.”

Q: Do you suppose this situation will change this year?

“It has to do with accounting negligence on the part of those living abroad and those in charge of PdVSA. We are reviewing costs. This includes people living in the exterior and those in charge of PdVSA. Here there has been a clear political orientation toward handing over the rights of production to third parties. As the law does not permit this, they looked for any loophole through which to slip the Trojan horse of privatization, along with a complementary strategy to evade taxes.

Q: There are different views as to how much Pdvsa should invest in 2005 in order to raise oil output to 3.4 million b/d, considering that production did not grow in 2004.

“In 2004 we sustained a production level; that is what was important. Growth will come from Tomoporo and Tácata explorations in eastern Venezuela. Our areas of growth will be in secondary recovery: the average recovery factor is just below 12%, we need at least 20%. We have had to work hard to overcome the damage done by the sabotage. You say that a year has passed; I believe that it will take five years (for the industry to recover). We are rethinking our industry.”

Ramírez explained that the decision to cancel the Conoco Phillips Corocoro field project because of a “deviation of USD 300 millon” is an example of this restructuring.

Q: Will a final agreement be reached on this project?

“On the 11th we will visit with Conoco representatives and we will announce any agreement then.”

Q: Is this change in vision what has caused the stoppage of other projects such as Mariscal Sucre?

“Yes, we are setting our priorities.”

Q: Is the second phase of strategic partnerships beginning?

“Yes, but under the new law. They wanted to continue under the old law, but the volumes authorized by the extinct congress have been replaced by the new law.”

Q: Is PdVSA’s Special Development Fund rotating? Do you have agreement on this with the Central Bank of Venezuela (BCV)?

Before answering the question, Ramírez took out a large dossier containing the 2004 results of the Fund: 6% went to agriculture; 21% to transportation; 33% to roads; 6% to endogenous development plans; and 25% in electricity projects, etc. Shining examples of these investments are projects such as El Diluvio, Conviasa, Ezequiel Zamora, La Vueltosa, Palavecino, Pedro Camejo thermoelectric, and the metros of Los Teques and of Maracaibo.

Q: How does PdVSA manage these resources?

“The resources are transferred in Bolivares and USD (outside Venezuela) to the Economic and Social Development Bank which administers the accounts and turns over money to the executors of designated entities.”

Q: Are the funds for this year already deposited?

“Yes, USD 160 millon. Dr Maza (Zavala), director of the (BCV), says that this is not so (that it is not rotating). As with all other funds, we renewed this again this year, but to avoid confusion we will send another communication to the Central Bank. So far we have not received any instructions to the contrary.”

Q: Was it necessary to create a parallel mechanism to achieve results?

“Yes. Not only did we create a mechanism, but it was necessary to involve PdVSA. I don’t like when people only see PdVSA as a dollar bill because it pays the bills. PdVSA has shouldered the burdens of the country.”

Q: What will happen with the internal market? Will leaded gasoline be eliminated?

“It is inexcusable to continue adding lead to the gasoline. We are one of the few countries that still do it. Therefore we are thinking of replacing it, maybe even with ethanol. This is the plan, it may not happen this year, but it will happen. We want some stations to have cooperative associations with institutions such as Children’s Hospitals, for example. We want the people who fill up there to know where the money is going. As some contracts run out, it is our right to evaluate whether to continue them. This we will do with large stations, we will do nothing with the small ones.”

Q: Why was the CIED eliminated from the structure of PdVSA?

“It outgrew itself. We are going to return to the training as it was before, in each area. In addition, we are going to ratify an energy studies institute in La Tahona and continue supporting the Missions.”

From North to South

Q: Why wasn’t the plan for expansion of Citgo Latin America (CILA) carried out?

“Initially, we intended to embrace the Americas with CILA. But we have decided to extend it to the North American and Mexican markets only.”

“Meanwhile, consistent with the idea of Petrosur and Petroamérica, we are going to attend to Latin America through Interven and agreements with other countries.”

Q: Interven is now PdVSA Argentina, What will happen with the rest of the countries?

“We are now working with PdVSA Argentina, PdVSA du Brasil, that already exist. We will also begin working with Uruguay, where that process had been interrupted. The president of Bolivia invited us to explore joint projects there as well, and we are also supplying Paraguay with oil right now through an energy agreement.”

Q: Is this project with Argentina, whose fuel market is not buoyant, too ambitious?

“Acquiring assets of Shell was also talked about. Shell made the decision to withdraw from Latin America. Therefore, we have been presented with an extraordinary opportunity to acquire a few assets in Argentina, and in all of the Americas we are reviewing proposals. We see it as an excellent opportunity to make solid strides towards integration.”

Q: Are you making a more commercial or strategic decision?

“It has strategic origin, of course, and we pursue that which has commercial benefits as well, we will not repeat the mistakes of internationalization.”

“We are fundamentally seeing over this experience and what we are doing with much care (…) we are going to have a more integral vision, extending out even to China, that is also a strategic theme. It would be a mistake not to be there.”

Q: But does China have the capacity to process extra heavy crudes? The signed agreements are for providing derivatives.

“They have insisted in electricity generation, they are moving from the use of coal toward the use of more efficient fuel. Because of this the signed agreements are basically for products; fuel oil, that for us is very important to extract from the Atlantic. We are talking with them because they are using Boscan crude. We are beginning to establish this relationship so that they can refine our crude.”

Q: But would China have the capacity to process them?

“We have not evaluated this. They have basically asked for fuel and asphalt.”

Q: What is happening with the orimulsion in this context? A contract was signed for 1.8 million tons with China and with the other countries interested deals have not been closed.

“We have always maintained that what has been signed will be respected. The orimulsion project with China must be respected, especially as they are bringing their unit here. As this project was postponed almost one year due to the sabotage, we agreed to this, so that they wouldn’t have a paralysis with the machines that were consuming orimulsion and that already by this date should have been receiving orimulsion from their own unit, a bridge contract, and we reactivated the first unit, that when the Chinese unit is ready will cease.”

Q: What is happening with the rest of the contracts for the first unit?

“We will continue to supply them, but for the ones that are expiring we are suggesting not to offer them orimulsion but an alternative: fuel oil or Merey 14. Including a few bridge contracts that we have made for which we will include the idea of adjusting the price. We have told the companies with whom we have contracts that they must understand that it was a terrible deal for Venezuela, that we have the right to adjust the prices and these have been the conversations with New Brunswick Power, Enel…”

Q: Were new contracts that offered better conditions not signed? Corea offers $75 per ton.

“It is very dangerous for the Venezuelan State to certify that our belt is not oil bearing but bituminous. It would be a crime to extract the Belt from the oil market and instead put it in a carbon market. Why have we not certified our reserves in the Belt? Because there was a deliberate decision to leave this in a grey cloud and, during so much, to continue signing contracts in a clear anti-OPEC policy. We are going to enter a process of certification, which will form part of our strategy for participation in a world market. Right now we have 100,000 barrels/day, but it was planned to arrive at 500,000 barrels of orimulsion that would have knocked down the price of oil. Moreover, all of our official documents on the topic of bitumen have disappeared. Officially we made a reclassification of what is crude and extra heavy crude oil, so that it remains clear that what we have in Venezuela is a long-standing supply of oil.

Q: What is the status of the lawsuit filed by Canadian NB Power against PdVSA?

“We will make a proposal that favors both parties. We wouldn’t want to go to litigation.”

Translated by Dawn Gable and Katie Lahey

Source: El Universal