Friday, June 11, 2004

Sell CITGO, or Make It Pay?

One of the tasks of the Bolivarian Revolution in Venezuela has been to nationalize oil, i.e., to repatriate the profits of the state-owned oil company Petroleos de Venezuela, S.A. into the hands of the Venezuelan masses who are the rightful owners of national wealth. Mark Weisbrot and Simone Baribeau write:
[A]ccording to the SEC statements for PDVSA and PEMEX, for the last three years for which data are available, the two companies produced about the same amount of crude oil: PDVSA produced 3.094, 3.085, and 2.950 million barrels per day (mbpd) in 2001, 2000, and 1999 respectively; PEMEX produced 3.127, 3.012, and 2.906 mbpd in those same years. . . . .

. . . [I]f we take the last three years for which data are available [2001, 2000, and 1999], and subtract off the gasoline taxes that PEMEX collects, and correct for PDVSA's gasoline subsidy, there is still a large difference in the amount of revenue that the two companies turn over to the government, in the range of $11 billion over the three years. ("CEPR [Center for Economic and Policy Research] Responds to Criticism of Paper on PDVSA," March 25, 2003)
According to the CIA Factbook, the Venezuelan government's revenues totaled $21.5 billion in 2000, and its expenditures, $27 billion. If Hugo Chávez Frías could make PDVSA pay the same percentage of its revenue per barrel of oil produced to the government as PEMEX, Venezuela's budget deficit would be wiped out!

One of the reasons for PDVSA's low returns to the Venezuelan government was the company's de facto privatization and internationalization even while it nominally remained a state-owned enterprise:
  • When the 1982 debt crisis hit, and oil prices had fallen through the floor, the government raided PDVSA’s $5 billion reserve investment fund in order to maintain expenditure levels. In response, PDVSA began an internationalization policy, whereby all profits would be re-invested in the form of long term supply contracts abroad. This culminated in CITGO, a US network of refineries and 14,000 gas stations wholly owned by PDVSA. Furthermore, PDVSA eventually converted most of its contracts into debt relationships, meaning any subsequent attempt by the Venezuelan state to take over the operations would imply a full paying down of outstanding debts. PDVSA thus began a long-term strategy of revenue deprivation of the state.

    This bizarre form of nationalization also led oddly to the return in the 1990s of foreign investors, who came back under the aegis of "operating service agreements" (OSAs), which as of 2000 accounted for 25 percent of Venezuelan oil production. Designated as "service providers", these extractive companies passed on rent and royalty responsibilities to PDVSA as the holding company, and were only responsible for non-oil taxation. Ostensibly returning to exploit the most marginal fields, these foreign companies found the entire regulatory regime re-suited to their interests. In the event of legal disputes, the companies could choose Venezuelan or international arbitration. If the return on their investment fell below a certain guaranteed rate, they would receive compensation from PDVSA. The exploration and exploitation depths permitted by the contract were refashioned to the depth that was profitable to them. Furthermore, their specialization in synthetic crudes meant that these OSAs were not as strictly constrained by OPEC quota obligations. (Todd Tucker, "Oil State in Revolt: Chávez, Venezuela and US Reaction," January 16-21, 2004, p. 5)

  • From the early 1980’s to late 1990’s, PDVSA engaged in a program to vertically integrate the company on a global level. What this meant, in essence, was the purchase of refineries and of the U.S. gas station network Citgo. In all, in the period between 1983 and 1998, PDVSA purchased 23 refineries in Europe and the U.S. While other state-owned oil companies initiated vertical integration projects, Venezuela’s was the most ambitious. One of the official reasons for this was that Venezuelan oil is mostly of a very heavy crude variety, with many components that are undesirable for finished oil products, such as sulfur, nitrogen, and several metal elements. In other words, Venezuelan crude requires a fairly sophisticated refining process, which not all refineries can handle. The logic of acquiring foreign refineries was that such refineries could be retrofitted to process Venezuelan crude and to then provide finished oil products to the market closest to the refinery. The idea thus was to guarantee a market for Venezuelan heavy crude oil.

    However, many, if not most, of the refineries that were acquired were purchased at a bargain, mainly because the vendor could not find a way to make it profitable. As a result, PDVSA tried to avoid losses in these refineries either by providing Venezuelan crude at below market rates or by avoiding the costly retrofitting process altogether and providing the refinery with lighter crude from other countries, such as Russia.[19] The net result of the internationalization process and of the new accounting procedure was that tremendous PDVSA costs that were incurred outside of Venezuela were "imported" to the national branch of PDVSA, thus lowering overall profits and transfers to the government. (Gregory Wilpert, "The Economics, Culture, and Politics of Oil in Venezuela," Venezuelanalysis.com, August 30, 2003)
Reversing this sorry state of affairs has not been easy for the Chávez government, weary of the revolt of the rich and US interventions. Weisbrot and Baribeau suggested that PDVSA get rid of CITGO: "the company can divest itself of some or all of its overseas assets, especially in refining and its service stations (e.g. CITGO). With oil prices at very high levels (and possibly higher in the event of a war in Iraq), this would not necessarily be a bad time to sell these assets. This would not only shed PDVSA of some of its least profitable operations, but also provide the government with needed revenue after a strike which cost the economy more than 6% of GDP, and help bridge a large projected budget gap for the coming year" ("What Happened to Profits? : The Record of Venezuela's Oil Industry," VHeadline, April 6, 2003). The government, however, has been trying to make CITGO a paying proposition, for the time being:
  • One of Citgo’s goals is to get closer to Venezuelan society. In this sense, Citgo has implemented a “buy Venezuelan” program though which more than $18 million have been spent in last 6 months buying Venezuelan products and services. Citgo is also investing in a project with 46 micro-entrepreneurs (small businesspersons) from Caracas, in collaboration with the Venezuelan government’s social programs for the promotion of small businesses. ("Venezuela’s CITGO Contributes to Social Programs Thanks to Record Profits in 2003," Venezuelanalysis.com, March 12, 2004)

  • Petroleos de Venezuela SA, the state-owned oil company, will seek to end discounts in oil sales contracts, including those with its U.S. affiliate, Citgo Petroleum Corp., the country's oil minister said.

    The company is working with international law firms to open discussions with existing buyers regarding changes. The discounts of as much as $4 a barrel are "illegal," Energy and Mines Minister Rafael Ramirez said in an interview.

    Venezuela, the world's fifth-largest supplier of oil, exports 2 million barrels a day in oil and products, of which about 300,000 barrels a day goes to Citgo. Venezuelan President Hugo Chavez has said the former management of Petroleos de Venezuela often signed contracts detrimental to the country.

    "Contracts can always be renegotiated," said Tom Knight, director of trading for Truman Arnold Cos., a Texarkana, Texas, independent wholesale supplier. "Whether changes are accepted is another matter."

    Agreements under review include those to Citgo and U.S. refineries, Ramirez said. Some of the contracts date from before 1999, the year Chavez took office.

    The contracts under question reflect the company's previous efforts to keep profits off shore, where tax rates are more favorable, said David Voght, managing director of energy consulting firm IPD Latin America, which has offices in Caracas and Mexico City.

    "The former management tried to keep the profit centers outside of Venezuela," Voght said. "It was transferring profits to have a more favorable tax situation. It was perfectly legal. Now there's a new government, and it wants to keep the money at home."

    Old PDVSA

    Petroleos de Venezuela, which had 2003 revenue of $46.2 billion, fired 18,000 employees last year to break a two-month nationwide strike that slashed output and exports. New managers were brought in to replace many of the strike leaders.

    "We are reviewing all contracts that the old Petroleos de Venezuela signed," said Ramirez. "The old managers that signed these contracts will also be investigated."

    According to PDV Finance's filings with the Security and Exchange commission, the company has longterm supply contracts with Citgo and Lyondell-Citgo Refining Co. Company officials said that other contracts exist with the Hovensa SA refinery, a joint venture between Petroleos de Venezuela and Amerada Hess Corp., Veba Oel AG, and AB Nynas Petroleum. (Peter Wilson, "Venezuela Seeks to End Discounts in Oil Contracts," Bloomberg.com, May 7, 2004

  • Venezuela hopes to increase annual income tax revenues on oil operations by as much as $3 billion largely through increased collections on the country's offshore subsidiaries, including US refiner Citgo, tax authorities told reporters Tuesday.

    Jose Vielma, superintendent of Seniat, Venezuela's tax authority, said he is opposed to offshore subsidiaries of the state oil giant Petroleos de Venezuela (PDV) paying income tax to governments other than Venezuela.

    "We cannot continue to lose millions of dollars every year in income taxes paid to foreign governments," said Vielma, indicating that Venezuela hopes to increase PDV's income tax payments to a total of $3 billion in the coming years, compared to 2003 income tax payments of $300 million.

    "This would represent a quantum leap in tax collection," he said.

    This campaign would largely be directed towards offshore facilities such as the refining and distribution subsidiary Citgo, based in Tulsa, Oklahoma, which currently pays most of its taxes to the US government.

    Vielma indicated that the Seniat was creating a special division dedicated exclusively to tax collection on oil and gas operations in order to increase the government's take on Venezuela's worldwide petroleum operations.

    He said the Seniat is working with the legislature to reform the regulations that govern income tax payment in the oil sector. Vielma added that the initiative for creating this unit comes in part from Energy and Mines Minister Rafael Ramirez, who has repeatedly insisted that PDV increase its tax burden to allow for greater social spending by the executive branch.

    The statements come only days after Venezuelan tax authorities said they had detected tax evasion of more than $3 billion on the part of multinational contractors, though they would not provide the names of the companies. Seniat authorities also indicated last week that authorities are currently investigating possible tax evasion by PDV itself during 2001 and 2002 that could total more than $9 billion.

    Other offshore ventures that could be affected by new income tax collection procedures include the Isla Refinery in Curacao, the Ruhr Oel Refining Complex in Germany and the Hovensa refinery -- a joint venture with New York-based Amerada Hess -- in the US Virgin Islands.

    Minister Ramirez indicated this month that PDV was separating its offshore subsidiaries from its books, which he said would allow PDV to avoid assuming these companies' debts and costs.

    PDV pays an average of $10 billion per year to the government through a combination of income tax, royalties and dividends.

    Venezuela's 2001 Hydrocarbons Law decreased income tax payments from 66% to 50% while increasing royalty payments from 17% to 30%. This has been a tax boon to the Venezuelan government in recent years, since royalty payments are linked to the price of oil while income tax payments are based on costs and profits.

    President Hugo Chavez and his supporters have consistently accused the previous PDV leadership of bookkeeping tricks designed to reduce tax payments to the state (OD, Mar.15,p1).

    "PDV reduced its tax payments by inflating costs and creating an enormous bureaucracy," PDV President Ali Rodriguez told Oil Daily in a recent interview.

    Rodriguez said that PDV greatly reduced costs last year by firing over 19,000 workers who were accused of joining a general strike launched in December of 2002 meant to force the ouster of President Chavez, and that could have tax consequences. "Through the reduction of personnel, as well as increased efficiency, PDV will be able to increase tax payments to the state," Rodriguez said.

    Former PDV leaders say increased tax collections are a move by President Chavez to increase government cash flow for social spending meant to fend off a potential recall vote this year. PDV itself is slated to put down $1.7 billion in 2004 for social spending initiatives to be carried out directly by the company. President Chavez is also developing legislation that would allow the government to spend the Venezuelan Central Bank's dollar reserves. (Brian Ellsworth, "Venezuela Targets Citgo, Offshore Units for Higher Taxes," Oil Daily, March 30, 2004)
Some activists wonder if it makes sense to patronize CITGO as a gesture of solidarity to Venezuela. Venezuela doesn't get as much money from CITGO as it should, but if you have to buy gas, buy CITGO, until Chávez gets to sell it.

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