6 February 2005

Chavez' plan to sale CITGO and the Oxford Institute for Energy Studies

London 03.02.05 | My involvement in this business of writing
and reporting the crisis of Venezuela started in October 2002 when I
learned that Hugo Chavez had been invited by Oxford's Center for Socio
Legal Studies to give a conference, as a guest speaker, in a human
rights seminar. At a latter date I found out that the convener of the
seminar and visiting fellow of the said center, William F. Pepper,
received a handsome payment of $137.527, 42 from the Venezuelan
government via the Venezuelan Information Office in Washington DC. I
was astounded by the discovery that a visiting scholar to one of Oxford
University's colleges could be so easily, and cheaply I must add,
bribed by Hugo Chavez.

My attention has turned now to the Oxford Institute for Energy
Studies (OIES). With the precedent aforementioned ever daunting me, I
have started investigating a couple of individuals that have done/are
doing research in that Institute and currently sit in the board of
directors of PDVSA, namely Bernard Mommer and Juan Carlos Boué.

Bernard Mommer

Platt's Oilgram News reported on December 22, 1994 "fallout about PDVSA's foreign investment plan". The brief read:

"The first signs of internal conflict in PDVSA over its much
heralded profit-sharing agreements have emerged with the surprise
resignation of senior strategic planning advisor, Bernard Mommer. PDVSA
vice president Claus Graf admitted Dec. 15 that Mommer's resignation
resulted from his disagreement with the way the oil industry is being
opened up to foreign participation. But he said he didn't believe
Mommer's views were widespread or that they would affect the scheme.
Mommer, who will remain at PDVSA until Jan. 15, declined to comment in
detail on the issue, but indicated that his views had been made clear
in a paper delivered to the Fifth Petroleum Conference in November.

Hence Mommer was, already in 1994, a senior strategic planning
advisor of PDVSA. It is puzzling to imagine how such a leftist radical
made it to the senior echelons of the company. Nonetheless, sources
report that he was asked to leave and he headed for greener pastures.
Mommer is quoted as an Andres Bello fellow of St. Anthony's College by
The Times on October 20, 1993; then again on October 4, 1996. His name
appears associated with the OIES for the first time in 1994 in a paper
published by the OIES entitled "The Political Role of National Oil
Companies in Exporting Countries: The Venezuelan Case". In 1998 he
published another paper under the OIES umbrella called "The New
Governance of Venezuelan Oil". Both papers reflect Mommer's own
understanding of how commercial relationships between the State,
through its vehicle PDVSA, and foreign companies should be modeled. He
argues that Venezuela, in regards to the public administration,
possesses an appalling record of economic performance and even goes on
to admit that PDVSA was "…the only profitable, stable and dynamic
institution" [sic] of the country. Alarmingly Mommer condemns the
management of the oil giant for having, effectively, taken control away
from the Venezuela's Minister of Mines vis-à-vis energy policy and
related activities. The State has a role of administrator of a system,
coined by Mommer, as rent-capitalism (little he seems to know about

The FT Energy Newsletters - Energy Economist of June 1, 1998,
carries an article whereby it is argued that the policy of opening up
Venezuela (Apertura Petrolera) to foreign firms to recuperate marginal
oil fields, augment production and in some cases initiate exploration
activities had been a resounding success:

"PDVSA began in 1991 to put various of its marginal or low-yield
fields out to tender to domestic and foreign firms to reactive under
operating contracts. Proven reserves in the marginal fields, mainly
situated in western Venezuela, are estimated at close to 2 billion
barrels of light and medium crude oil. Together with a second round in
1993, a total of 15 contracts were awarded to companies, although one
was subsequently cancelled.

A third round of 18 marginal fields offered last year was
massively oversubscribed, with a record 240 investors queuing up to
participate. PDVSA eventually received GBP 2.1bn, more than twice what
the company had anticipated (see FTEE 188/10). The total investment for
these third round fields alone is now estimated at between GBP 8bn and
GBP 10bn. Venezuela will also benefit from foreign technology and
expertise; foreign operators now expect to boost production from the 18
fields from 150,000 bpd to 500,000 bpd, far greater than PDVSA's
original forecasts of 350,000 bpd.

Mommer, begged to differ though, he advocated from the get go that
the internationalization plan of PDVSA was flawed, unprofitable and
prejudicial for Venezuela's interests. Mommer went on to become adviser
to OPEC Secretary-general Ali Rodriguez, then back to managerial
positions in PDVSA. In 2002 Mery Mogollon published an article entitled
in which one can read the tactics devised by Mommer, by this time
already in company of Boué, to have the management of PDVSA removed and
replaced by a group of revolutionary supporters of Hugo Chavez. Said
group, structure created by Mommer, was formed by Adina Bastidas,
Gustavo Perez Issa, Vladimir Lazo, Carmen Romero, Yolanda Vetencourt,
Victor Poleo, Gaston Parra, Carlos Mendoza Potella, Alfreda Riera,
Argenis Rodriguez, and Felix Rodríguez.

Juan Carlos Boué

In the current version of the OIES' website one can see the profile of Juan Carlos Boué.
Dr Boué is meant to be an expert in "Microeconomic and logistical
aspects of oil markets and oil trading. Oil geopolitics. Oil and gas
taxation. Oil and development. OPEC. Political economy of oil in Latin
and North America". His professional career appears to be linked solely
to PEMEX, the national oil company of Mexico, his own country. Boué has
also written about the petroleum industry of Venezuela; a book
published in 1993 entitled "Venezuela: The Political Economy of Oil"
and more recently a paper entitled "the Internationalization Programme
of PDVSA". Boué's opinions are almost a repetition of Mommer arguments
and strikingly similar to those of Mark Weisbrot;
i.e. the whole purpose of PDVSA in its internationalization campaign
was to divert revenues that should have ended up in Venezuela's
treasury coffers, in the form of fiscal contribution and taxation, to
the USA. That is the reason why Chavez, a complete ignorant of the oil
business, keeps hammering upon the argument that CITGO is 'financing'
Bush. The chemical composition and characteristics of the Venezuelan
crude lacks relevance in the view of these experts, the issue revolves
around the unpatriotic conduct of former PDVSA management and the
evident ideological collision of market oriented method of management
with obsolete socialist utopias.

Last month I received a copy of the recent appointments of the new PDVSA board of directors
produced in a meeting held on January 19 2005. Surprisingly enough the
name of Juan Carlos Boué pops up as Vice President of Commerchamp
(subsidiary of Petróleos de Venezuela S.A. that sells aviation fuel,
lubricants and services related to PDVSA). It is a given that said
appointment came to fruition thanks to the good auspices of old pal and
now multitasked-PDVSA's-executive-director Bernard Mommer. Sensing a
potential conflict of interests between Boué's role as a senior
research fellow of the non-partisan OIES and his executive position at
Commerchamp, I decided to send him an email to his electronic address
at the OIES. He kindly replied, although his arguments are, in my view,
not only flawed but extremely ignorant.

From: A. Boyd

Date: 03/02/05 13.13 GMT

To: Juan Carlos Boué [juancarlos.boue@oxfordenergy.org]

Subject: Information request

Dear Dr Boué,

It is with great interest that I have read your recent paper
entitled "The Internationalisation programme of PDVSA". My attention
was drawn particularly to this argument:

"...covenants have probably become the best protection for the
internationalisation programme against the interference of the
Venezuelan government. For instance, in the hypothetical case that the
Venezuelan government had tried to force through the sale of PDVSA’s
refining assets in the United States, the fiscal agent for the special
purpose vehicle could have declared PDVSA in breach of covenant and
then proceeded to retain the whole of the accounts receivable generated
by designated clients in the United States until enough funds were
available to pay off the creditors of the vehicle (the balance of PDVSA
Finance bond issues to the end of 2001 was 3,300 MMUSD)".

Ergo according to that predicament, Hugo Chavez would be seeking to
sell CITGO in order to hedge himself against possible actions of the
fiscal agent.

Could you please confirm that indeed that is the reason behind the recent move to get rid of CITGO's assets?

Cordially, A. Boyd


From: Juan Carlos Boué [juancarlos.boue@oxfordenergy.org]

Date: 03/02/05 14.13 GMT

To: A. Boyd

Subject: Re: Information request

Dear Aleksandr:

Actually this argument is now rather passé, because
most of the debt issuance for which these considerations applied
(specifically PDVSA Finance) was retired by PDVSA in the latter part of
last year. In any case, the sale of Citgo would not have been a hedge
against the actions of the fiscal agent. To the contrary, such a sale
would have been taken by the fiscal agent as a breach of covenant, with
appropriate actions following. Bear in mind that the fiscal agent is
merely a large bank working on behalf of the investors in a special
purpose vehicle (in this case, the vehicle was called PDVSA Finance).
The reason why the President wants to sell Citgo has to do with
discounts: owning Citgo is bad business because crude oil sold under
the supply contracts that Citgo has realises, on average, 1.10 dollars
per barrel less than the same crude sold in the open market. Hope that
this is of use. JCBoué


From: A. Boyd

Date: 03/02/05 14.18 GMT

To: Juan Carlos Boué [juancarlos.boue@oxfordenergy.org]

Subject: Re: Information request

Dear Dr Boué,

Many thanks for your rapid response. Thinking aloud, wouldn't it be
better, from a strategic point of view and taking into account the
network of outlets for refined products that CITGO possesses, to revise
and adjust, instead, the supply contracts between PDV and CITGO?

Cordially, A. Boyd


From: Juan Carlos Boué [juancarlos.boue@oxfordenergy.org]

Date: 03/02/05 14.31 GMT

To: A. Boyd

Subject: Re: Information request

The idea that one needs outlets for refined products in order to
sell crude oil is a fallacy. Product marketing is a low return business
as was, until very recently, refining. A company like PDVSA, with a
limited capital budget, will always be better off dedicating all of its
investment capital to exploration and production activities. Notice
how, until very recently, all the large oil companies in the world were
very keen to get out of refining and marketing and concentrate on
E&P. Why should it be that what is good for them is not good for
us? Furthermore, the internationalisation programme has cost the
Venezuelan people around 20 billion dollars in foregone revenues since
1982. Today, it would be possible to recoup a far larger proportion of
this loss than would have been the case in the past.

End of messages

There have been mixed reactions to the above exchange. On the one
hand some experts believe that the new policies of PDVSA are been
modeled on those implemented by PEMEX, which need be stressed, are not
to be heralded as a showcase of profitability or excellence. Others
feel that the selection process of investment banks that surely shall
broker the sale of CITGO will represent fantastic opportunities for
some to make a killing, for corruption and obscure decisions will
dictate Venezuela's course of action. To Boué's claim that "the
internationalization programme has cost the Venezuelan people around 20
billion dollars in foregone revenues since 1982" an expert replied "it
can easily be demonstrated that the six year presidency of Hugo Chavez
has cost PDVSA shareholders, i.e. the people of Venezuela, at least 60
billion dollars in nominal capital value losses".

Sources also report that there is a somewhat valid apprehension that
Boué is one of the key elements in instilling the sudden motivation of
Chavez to sale CITGO. Furthermore it has been suggested that this
detrimental action to the network of international holdings of PDVSA
may be the result of Boué's acting in cohorts with old employer PEMEX.

My own take is pragmatic. I do not see the purpose of selling
strategic assets due to unworkable supply contracts between a
subsidiary and a parent company. Neither do I understand how
refineries, which according to Boué have turned of late into a
lucrative business, need be disposed of. I firmly believe, this may be
interpreted by experts as an idiocy, that there is a fundamental
difference between "large oil companies in the world" (making their
money out of refining and marketing) and PDVSA like enterprises for the
vertical integration that the latter have can only be envied and
desired by the former. Imagine Shell or BP actually owning, without
contractual time constraints, the reserves that PDVSA has got, without
having to pay royalties of any sort to "rent-capitalist" governments.
It's like comparing a supermarket (with the accompanying overheads)
that buys its products from middlemen, to a farmer who actually grows
his produce, transports it in his already paid of van and sells
directly to the end buyer in the farmer's market at full price.

The fundamental questions that arise are; how come Mommer, a German
citizen, and Boué, a Mexican citizen, have got so much leverage with
Venezuela's current administration? Does the chavista concept of
sovereignty apply only to US citizens? How come Boué admits quite
candidly "Why should it be that what is good for them is not good for
us?" Boué is not part of us, he's Mexican, and his actions are defined
in my Venezuelan sovereignty taxonomic dictionary as treason.

What would be the OIES' stance, in light of the partisan profile of
one of its senior fellows? Have PEMEX, Statoil, Saudi Aramco, Total,
Shell, Exxon, etc., got 'autonomous researchers' at the OIES?


Anonymous said...

Dear Mr. Boyd,

The heart of Mr. J.C. Boué's critique of PdVSA was that CITGO's pre-tax profits have been more or less equal to the discounts at which the parent provides the crude. On a consolidated basis, the net effect is simply to transfer the taxable profit from Venezuela to the USA, benefiting the US Treasury over Venezuela's. Meanwhile, the costs of debt, shipping, and other "services" get charged at the parent company level, further lowering the surplus taxable in Venezuela. He also points out that the compliated offshore structures obfuscate any tax audit. He suggests that, except for this elaborate transfer pricing to reduce taxes paid in Venezuela, CITGO and the rest of the overseas network is unprofitable.

See: http://www.pdvsa.com/pdf/publicaciones/public_02.pdf

The fact that Boué's consulting firm got paid for the analysis does not in itself refute his analysis. Nor does it invalidate his report to point out coincidences between Boué's views and people sympathetic to Chávez. The only valid complaint would have to be a point-by-point set of counter-proofs, best offered by someone with extensive financial control experience. If you are aware of any, please share.

Boué's arguments do not appear ideological. They could also be employed by a free-market libertarian to point out why state-control and efficiency are an oxymoron, that PDVSA's expansion was riddled with inefficiencies, and that the best solution would be divestiture from CITGO and leveling of taxes to reduce fiscal artbitrage.

Boué was certainly not asked, and did not address, whether PDVSA's home operations are run well or not. I do not see him recommending PEMEX as a model, either. Few people at PEMEX are happy with its tax and overhead situation.


AB said...

Dear Mr Koch,

Please read my exchange with Mr Boue and pay extra attention to my
comments regarding the so called unprofitability due to the supply
contracts between CITGO and PDVSA. The truth of the matter is that Boue,
currently sitting in the board of PDVSA and CITGO, aren't water tight
for it's a know fact that refining has indeed turned into a highly
profitable business.

The argument that the internationalization of PDVSA has produced $20
billion in losses, otherwise known as diverted taxes and income, over a
period of 20 years pales when compared to the $60 billion losses of
PDVSA under Chavez control, which started effectively in 2002.

Mr Boue is not fit for the job he's assigned to do for the academic
flair of his papers doesn't hide his outstanding ignorance on the
particular subject matter of PDVSA or his political colours. His but a
pupil of Bernard Mommer, that other pundit who thinks that PDVSA reached
world class status by mere chance.