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JANUARY 2014

PDVSA: A need for change

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Contents

Introduction 3
Figure 1 - Proven oil reserves / Figure 2 - Oil production / Figure 3 - Refinning Capacity 4

Reasons for the downturn 6 Impacts of oil diplomacy 8


Figure 4 - Average oil production in Venezuela
8

Financial partners10
Figure 5 - PDVSA: production costs Figure 6 - Investment plan 2013/2019 /Figure 7 - Joint ventures of the orinoco oil belt
10 13

Less tax burden and more devaluation14


Figure 8 - Sales revenue and tax contributions of PDVSA
15

Higher gasoline prices15


Figure 9 - Hydrocarbon sales in Venezuelas domestic market
16

Conclusion16
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Introduction
Venezuela has the largest oil reserves in the world. With 297.6 billion barrels of crude oil, by the end of 2012 the country controlled 17.8% of all proven global reserves. Although recently the country has managed to significantly increase its oil reserves through new technologies that make the exploitation of heavy and extra-heavy crude oil feasible, oil production levels have fallen steadily since 1999, when former president Hugo Chvez began his first term. The state-owned oil company Petrleos de Venezuela (PDVSA) is the protagonist of this decline. PDVSA holds a monopoly on hydrocarbons in the country, forming partnerships with private partners but always retaining control of the projects. The key reason that PDVSA has not been able to transform its enormous potential into concrete resources is that the company is used as a central element in the Venezuelan economy, contributing nearly 60% of government revenues, says Asdrbal Oliveros, managing partner of the consulting firm Ecoanaltica, in Caracas. While the increasing support the company gives to social programs was one of the main factors in the decline in Venezuelas poverty levels from 49.4% in 1999 to 23.9% in 2012, according to figures from the Economic Commission for Latin America and the Caribbean (ECLAC), the tax burden on PDVSA was also used in the last fifteen years to finance items ranging from government operating costs to purely political objectives, such as the election campaigns of the ruling party. This ended up being too heavy a burden on PDVSA, especially considering that oil is also used as the enforcement arm of the so-called oil diplomacy, a strategy that began under President Chvez and consists of bartering oil for money or goods at very favorable conditions for importing countries. This drain on resources is compounded by heavy losses in the local market due to the very low prices at which gasoline is sold. Topping off the mix is a legal and policy framework that is far from encouraging private investment in the hydrocarbon sector. The result is a stateowned oil company that is overburdened with work and has a negative cash flow that prevents it from increasing its production levels, plus a financial debt that was around US$40 billion at the end of 2012, up 150% from 2007.

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But even in this bleak picture there is hope. The highest expectations lie in the Orinoco Belt, a still underdeveloped area containing the worlds largest deposits of heavy and extra-heavy oil. Here there are 1.36 billion barrels of original oil in place, located, among other areas, in Junn 4 and Junn 10, two of the biggest onshore exploration and production projects in Latin America. New trends in the global oil industry make prospects look even better. Historically, oil companies have not prioritized heavy and extra-heavy oil because its extraction, transportation, and refinement costs much more than light crude oil, but this has been changing. In addition to technological advances, the high oil prices forecast for the coming years and the shortage of light hydrocarbons are factors spurring a resurgence of interest in heavy oil around the world. Capitalizing on these opportunities depends on the course PDVSA takes in the short and medium term. While President Nicols Maduros administration has continued with the policies of the late Hugo Chvez, there are many in the oil industry who believe that the severe fiscal, exchange, and energy restrictions that Venezuela is subject to will end up forcing change earlier rather than later. This report will offer a description of PDVSAs current situation, its main challenges, and where opportunities lie. It will also list the main changes that the Venezuelan government could implement in the coming months and the impact these changes would have on the oil company in the short and medium term.
Figure 1

Proven oil reserves


(Millions of barrels)
Dec,2012 Venezuela Saudi Arabia Canada Iran Iraq Kuwait United Arab Emirates Russia Nigeria United States 297,600 265,900 173,900 157,000 150,000 101,500 97,800 87,200 37,200 35,000 % of world total 17.8 15.9 10.4 9.4 9.0 6.1 5.9 5.2 2.2 2.1

Source: BP Statistical Review of World Energy June 2013

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Figure 2

Oil production
(Thousands of barrels per day)
2012 Saudi Arabia Russia United States China Canada Iran United Arab Emirates Kuwait Iraq Mexico Venezuela 11,530 10,643 8,905 4,155 3,741 3,680 3,380 3,127 3,115 2,911 2,725 % of world production 13.3 12.8 9.6 5.0 4.4 4.2 3.7 3.7 3.7 3.5 3.4

Source: BP Statistical Review of World Energy June 2013

Figure 3

Refinning Capacity
(Thousands of barrels per day)
2012 United States China Russia Japan India South Korea Italy Saudi Arabia Germany Canada Brazil United Kingdom Mexico France Singapore Venezuela 17,388 11,547 5,754 4,254 4,099 2,887 2,200 2,127 2,097 2,063 2,000 1,631 1,606 1,478 1,395 1,303 % of world total 18.8 12.5 6.2 4.6 4.4 3.1 2.4 2.3 2.3 2.2 2.2 1.8 1.7 1.6 1.5 1.4

Source: BP Statistical Review of World Energy June 2013

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Reasons for the downturn


Coming up with a diagnosis based on PDVSA statistics is not an easy task, given that the figures differ depending on whether they are released by the Venezuelan government or by private agencies. In fact, crude oil production data from the state-owned company range from 2.3 million barrels per day (Mb/d) to the 2.79 Mb/d on average reported by PDVSA to the Organization of Petroleum Exporting Countries (OPEC) between January and November 2013. Where there is in fact consensus (even using PDVSA statistics) is that the state oil company is producing less volume than that reported before the start of the Chvez administration. In 1998, when oil prices were slightly above US$20 per barrel five times less than its current value, the companys production was 3.12 Mb/d, according to OPEC. While the decline has slowed in the past three years, Venezuelas prominence in the global oil market is waning. The countrys crude oil production rose from 11.2% of OPEC production in 1998 to 8.6% in 2013. This decline is also measured in foreign currency. With recent high oil prices, if Venezuela had maintained the same production as in 1998, it would have obtained around an additional US$111 billion for its oil exports in the last fifteen years. What are the reasons for the drop in PDVSAs production levels? For Jorge Pin, associate director of the Latin America and Caribbean Program of the Center for International Energy and Environmental Policy at the University of Texass Jackson School of Geosciences, and former president of Amoco Oil Mexico and Latin America, the biggest obstacle is management. Unlike other state-owned companies in the region, such as Petrobras or Ecopetrol, PDVSAs management has become politicized in recent years and is in absolute disarray, he says. Among other effects, this politicization has caused a sustained increase in PDVSAs costs. The companys payroll went from 40,000 employees in 1998 to 145,439 including contract employeesin 2012. This is in addition to recent acquisitions of companies not directly related to hydrocarbon activities. All this has brought the cost of producing a barrel of oil (from subsurface extraction to packaging) from US$3.85 in 2003 to US$11.09 in 2012, according to PDVSA. The estimate for 2013, according to the oil company, is about US$12. Another aspect of PDVSAs politicization is that it took on increasingly more non-energy related responsibilities. The companys tax contributions totaled US$25 billion in 2012, and it contributed US$56.9 billion to the National Fund for National Development (Fonden) and US$41.7 billion to Social Development between 2005 and 2012. The increasing assistance to the treasury and the consequent reduction of resources available for investment are made

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even more evident considering that the portion of heavy and extra-heavy oil within total Venezuelan production is growing: it went from 31.3% in 1999 to 50.1% in 2008. This requires higher expenditures on upgraders (smaller scale than a refinery) to improve oil quality, given the natural decline in conventional oil fields in the Maracaibo-Falcn basin (western region) and El Furrial field (eastern region), which is where most of PDVSAs production has come from in recent years. The delay in constructing upgraders is not the only infrastructure issue pending. The lack of infrastructure development in the Orinoco Oil Belt is a serious constraint on increasing PDVSAs production, says Igor Hernndez, coordinator of the International Center on Energy and the Environment of the Institute of Management Studies (IESA) in Caracas. This is an area that has not traditionally focused on oil, and therefore it lacks development, such as pipelines to transport production to the ports, for instance. This is compounded by a lack of human capital. For example, Chinese drills have been bought, but there is no one trained to use them, says Hernndez. Lastly, another major reason that PDVSAs production levels remain low is the massive debt that the company has been accumulating with suppliers. In late 2012, its debt was US$16.5 billion dollars. According to PDVSA, this amount fell at the end of the first half of last year to US$12.5 billion, although this has not yet been audited. What is certain is that debt to suppliers ended up affecting PDVSAs productive dynamic, especially in mature and conventional fields, which account for nearly 100,000 Mb/d of reserves. While the large multinational companies are interested in the Orinoco Belt, service companies like Schlumberger and Halliburton are looking to develop mature fields, says Pin. But for this to happen, these companies have to be respected and their bills have to be paid.

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Figure 4

Average oil production in Venezuela


(in thousands of barrels per day)
1960 1970 1980 1990 2000 2008 2009 2010 2011 2012 2,846,1 3,708,0 2,165,0 2,135,2 2,891,0 2,957,5 2,878,1 2,853,6 2,880,9 2,803,9 Source: OPEC

Impacts of oil diplomacy


The result of all this is a delay in project development, which exacerbates PDVSAs cash flow problems. This is compounded by the fact that 20% of the companys crude oil exports, since they are included in international agreements, are not entering the companys cash flow, either because they are paid in kind or because they are part of the shipments used to repay loans taken out by the Venezuelan government. Under the Petrocaribe program, an oil alliance created in 2005 between Venezuela and Caribbean nations, PDVSA covered 43% of the energy needs of Antigua and Barbuda, the Bahamas, Belize, Cuba, Dominica, Granada, Guyana, Haiti, Jamaica, Nicaragua, the Dominican Republic, St. Kitts and Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Honduras, and Guatemala in the last eight years with the provision of 255 million barrels of oil. But this political game has a high impact on PDVSAs cash flow. Barclays said in a recent report that the signatory nations of Petrocaribe and of supply agreements like those with Cuba, Argentina, and Uruguay receive 390,000 b/d, but PDVSA only receives immediate payment for 48% of this volume. Venezuela finances part of the rest of the bill at a rate of 1% per year with a term of up to 25 years to repay the debt, plus a grace period of up to two years. Another portion is paid by products ranging from rice, meat, and milk to cement and pants, as well as services like health or education from Cuba and

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English teachers sent from Jamaica. The value of these products and services is not determined by market prices, since the agreement states that Venezuela can offer special prices as a mechanism of solidarity with the recipient countries. Also, there is the impact of the payment of a revolving credit for around US$40 billion that Venezuela has with the China Development Bank for investments in different economic areas, including housing and agriculture, transportation and industry, roads, electricity, mining, health, science, and technology. In this agreement, between 270,000 and 300,000 b/d, or about half of Venezuelas shipments to China, go just to pay the loan, says Oliveros. Since the agreement is managed by the Bank for Economic and Social Development of Venezuela (Bandes), PDVSA does not see these resources reflected in its cash flow, and this ends up having a strong financial impact on the company. The agreement is designed for the Venezuelan government to cover its extrabudgetary expenditures and not to benefit PDVSA. But international agreements are not the only reasons that the state-owned oil company has a reduced foreign exchange flow. Low gasoline prices in the domestic market and the growing use of gasoline and diesel in thermal power plants have caused an increase in domestic demand in recent years. The conclusion is that the export volumes that bring PDVSA actual cash are less than 1.7 Mb/d, well below the 2.4 Mb/d in 2007. This decline means there is between US$80 million and US$90 million per day that the company no longer receives. On the other side of the equation, imports are on the rise. The fall in production combined with a sharp rise in domestic demand and a precarious network of refineries has transformed Venezuela into a net importer of gasoline. The country bought 25,000 barrels per day of gasoline and 21,000 barrels per day of diesel from the United States alone between January and July of 2013. Between the two fuels, purchases abroad in seven months of 2013 totaled US$1.161 billion, 78% more than in the same period of 2012.

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Figure 5

PDVSA: production costs


Year 2008 2009 2010 2011 2012 US$/Boe * 7.10 6.33 5.53 7.53 11.09

* The production cost per barrel is calculated by dividing the sum of direct and indirect production costs (excluding depreciation and depletion) by total volumes Source: PDVSA

Financial partners
After taking office in March 2013, President Nicols Maduro has stayed the course outlined by Chvez for PDVSA. However, analysts believe that due to the plight of the oil company and of the Venezuelan economy in general, a number of changes are looming. Since the electoral landscape cleared at the end of 2013, the Venezuelan government has made some indications that there will be adjustments, says Hernndez. These changes will pave the way for PDVSA to at least begin approaching medium term production goals. The company has repeatedly failed to reach its targets. For instance, in 2005 Chvez launched his Oil Sowing plan, which was set a production goal of 5.8 Mb/d in 2012. The company, from achieving what would have been a 76% increase in production levels, experienced a decline of 8.5% in this period, according to official PDVSA reports. Authorities set a new target of 4 Mb/d of crude oil production in 2014 although this was reduced to 3.3 Mb/d in December last year and 6 Mb/d in 2019. The great hope lies in the Orinoco Belt, which has 4 blocks Junn, Boyac, Ayacucho, and Carabobo, plus neighboring fields like Morichal that have been appended. In 2010 the Venezuelan government tendered a large number of areas, which allowed two consortia led by PDVSA, in alliance with the Spanish company Repsol and the US company Chevron, to participate in the Carabobo block in the Belt. It also directly allocated several areas in the Junn block to the Italian company Eni, Vietnams PetroVietnam, Chinas CNPC, and Russias Rosneft and Lukoil, among other companies. In every

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case, PDVSA has more than 60% of the shareholding. These projects add to the joint ventures that emerged after the nationalization of hydrocarbons in the Orinoco Belt was decreed in February 2007. According to PDVSAs audited financial statements, production in the Belt was 1.17 Mb/d in 2012, and the Venezuelan government wants to raise this number to 4 Mb/d by 2019. It is an ambitious plan, but PDVSA has not yet begun to bridge the gap between its current levels of production and target levels. An example: in early 2012 the goal was set that new business in the Orinoco (the joint ventures Petromacareo, Petrojunn, Petromiranda, Petrourica, Petrocarabobo, and Petroindependencia came into being in 2010) would reach between 160,000 and 180,000 b/d of early crude oil production, in which the heavy crude is mixed with a diluent in order to generate exports before the launch of the upgrader. In September of the same year this target was reduced to 100,000 b/d, but with the promise that 2013 production would reach 400,000 b/d. However, these projects plus the Junn 10 block currently produce less than 30,000 b/d. Not only have the partners not guaranteed new investment for the upgraders, there are also significant problems with transporting early production, says Hernndez. There are no pipelines to move it: only 6,000 b/d can be transported. The failure of new businesses in the Belt to meet the early production targets is very problematic, because without these expected contributions, cash flow is insufficient to further the development of the joint ventures. Thus much of the current production still stems from the first projects (Petropiar, Petrosivensa, Petrocedeo, and Petromonagas), created via agreements signed in the 1990s. To help production, last October PDVSA announced an ambitious investment program of US$257 billion by 2019. Besides disbursements to increase production, there are upgrader projects in the Belt to convert heavy crude of 8 API to 42 API with a total processing capacity of 1 Mb/d, and two new refineries (one in Cabruta and the other in the Jose Antonio Anzotegui Industrial Complex) with a total processing capacity of 720,000 b/d. The big question in the oil industry is where these investments will come from, given PDVSAs serious problems generating cash flow. Analysts agree that since the oil company is looking for less burdensome debt mechanisms than debt issuances, a large part of the capital could come from a new scheme that the company agreed upon with some of its minority partners in the Orinoco Belt. These companies use loans to finance joint ventures, with the aim of increasing production levels. The proceeds from oil sales go to trusts, from which private companies withdraw their part based on their shareholding without PDVSAs intervention. This is a secure way to recover their investments.
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Loans provided by partners can be good, because they go directly to increasing production and not to financing the expansion of the Venezuelan state, as is the case with other agreements, says Pin. For instance, in the agreement signed with Chevron in May 2013 to increase production in Petroboscn, the U.S. oil company will grant financing of US$2 billion, which will be deposited in a trust in installments. PDVSA agreed to pay the loan with a Libor interest rate plus 4.5% tied to increased production (expected to grow from 107,000 to 127,000 b/d). In other words, to repay the loan, production has to increase. Under similar schemes, PDVSA reached agreements for more than US$9 billion with CNPC, Rosfnet, Repsol, the Russian financial institution Gazprombank, and the transnational company Schlumberger. So far, PDVSA has been responsible for everything from hiring services to commercializing the products of these projects. But the declared aim with these agreements is to involve partners in the task of increasing production levels. Last October, Rafael Ramrez, vice economy minister, oil minister, and president of PDVSA, said that this scheme would work within the framework of the projects approved by the National Assembly, with the agility and flexibility necessary for these projects to be in the scheduling stage (for production). It is in all our interests to increase production in order to finance the joint ventures. Funding in exchange for greater management control and more responsibility in commercialization are repeated claims by PDVSAs partners. The oil companies demands are to make sure that the past experience of suppliers, who developed a financing scheme with PDVSA and ended up accumulating unpaid loans, is not repeated. While until now PDVSA had not taken the complaints of international companies into account, for some analysts the gravity of the situation is already forcing change. It seems that PDVSA has to give private companies more participation, and even encourage this type of agreement, says Hernndez.

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Figure 6

Investment plan 2013/2019


(In millions of US$)
2013 Exploration and Production PDVSA Gas Refinement Trade and Supply Other Organizations Total 16,940 1,305 2,671 868 3,537 25,321 2014 20,294 3,466 6,344 900 1,701 32,705 2015 22,998 4,438 5,761 900 1,701 35,798 2016 28,500 4,559 4,393 900 1,701 40,053 2017 32,941 3,040 2,942 900 1,701 41,524 2018 34,095 2,730 1,441 900 1,701 40,867 2019 33,439 2,510 2,168 900 1,701 40,718 Total 189,207 22,048 25,720 6,268 13,743 256,986 Source: PDVSA

Figure 7

Joint ventures of the orinoco oil belt


Date of Establishment Petr. Indovenezolana Petrocedeo Petroanzotegui Petromiranda Petromacareo Petrourica Petrojunin Petrodelta Petro. Sinovensa Petromonagas Petrocarabobo Petroindependencia Petrokaria Petroven-Bras Petroritupano Petronado Petrocuragua Petrozumano Petr. Kaki Petr. Vencupet Petr. Sino_Venezolana Petr. Bielovenzolana Petropiar Petr. Vengangocupet Petr. Gurico Apr. 08 Dec. 07 Feb. 08 Apr. 10 Sept. 10 Dec. 10 Dec. 10 Oct. 07 Feb. 08 Feb. 08 Jun. 10 Jun. 10 Aug. 06 Sept. 06 Sept. 06 Sept. 06 Oct. 06 Nov. 07 Nov. 06 Dec. 10 Nov. 06 Dec. 07 Dec. 07 Nov. 12 Oct. 06 Participacion PDVSA % 60 60 100 60 60 60 60 60 64.25 83.33 60 60 60 60 60 60 60 60 60 60 75 60 70 60 70 Minority Shareholder ONGC Total/Statoil Hidro Cons. Nac. Petrolero Petrovietnam CNPC Eni HNR CNPC Rosneft Repsol and others Chevron and others Petrobras and others Petrobras and others Petrobras and others CGC/BPE/KNOC Open/CIP CNPC Inemaka Cupet CNPC UEPB Chevron. Comercial Cupet and Sonangol Teikoku Country India France/Norway Russia Vietnam China Italy United States China Russia Spain United States Brazil Brazil Brazil Argentina/Ecuador/Korea Venezuela China Venezuela Cuba China Belarus United States Cuba Japan

Source: PDVSA 13
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Less tax burden and more devaluation


Another effort to boost production in the Orinoco Oil Belt is taking place in the legal framework. Within the package of regulations included in the so-called Enabling Law, which grants President Maduro the right to rule the country by decree for 12 months, the government included an initiative to establish a Special Economic Zone covering the settlements that have been created around the Belt. The objective is to create, through tax incentives and special tax-free zones for imports, an industrial complex comprised largely of Venezuelan companies in order to provide the infrastructure and services required for the development of the area. The goal is to speed up the construction of 6 upgraders, 2 refineries, 282 drilling rigs, and 2,570 kilometers of pipeline, and the activation of 10,800 wells. Its an initiative that has been under discussion for some time, so we will see if this time it takes shape, says Hernndez. Another hope for the industry is possible changes in the tax system. After the 2005 nationalization of all of PDVSAs business with foreign companies, the Venezuelan government increased the royalty from 1% to 30% and the income tax from 34% to 50%. In addition, a new 3% extraction tax was created, along with an entrance fee to the Venezuelan state for the right to have a shareholding of at least 60% in the new joint ventures, and the condition that the Venezuelan state receives 50% of revenues from the sale of hydrocarbons. Options under discussion range from a royalty rate reduction (30% to 20%) to a temporary exemption in income tax payment. Politically, modifications can be made on the grounds that Orinoco is a special zone and, therefore, the rules of the game are going to change, says Pin, who was the former president of Amoco Oil Mexico and Latin America. In fact, the expectation that at some point the rules will change is what keeps multinationals like Chevron, Eni, and Repsol in Venezuela. The definitions to be created in the legal and tax framework are tied to the exchange rate in Venezuela in 2014. In early January, the Central Bank of Venezuela (BCV) published Exchange Agreement No. 24, which states that the buying exchange rate applicable to PDVSA and its subsidiaries, as well as joint ventures, will be equal to the exchange rate resulting from the latest foreign currency allocation of the Supplementary System for Foreign Currency Exchange (Sicad). This is a system of auctions that the Central Bank dependent on the government holds for buyers, and is organized by sector. In mid-January, the average rate of these auctions was 11.50 per dollar, a value well above the official rate of 6.30 bolivars per dollar.

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Analysts believe that with the ability to sell dollars at the Sicad auctions rate, operating costs and liabilities in bolivars of oil companies in Venezuela can be reduced by approximately 80%. For PDVSA, the change also means a substantial improvement in cash flow: it can get a larger amount of bolivars each time it sells dollars from crude oil sales to the BCV. Nevertheless, without a more fundamental change in company management, analysts believe that the benefits of devaluation will be limited in time. Despite the fact that past devaluations have resulted in short-term profit, PDVSAs operating expenses in dollars have almost doubled in the last two years, says Lucas Aristizbal, director of Fitch Ratings in Chicago.
Figure 8

Sales revenue and tax contributions of PDVSA


(In millions of US$)
2004 Sales revenue for crude oil and products Royalties Income tax Total fiscal contributions (excluding dividends) Tax contributions/Sales revenue (%) 60,972 9,247 5,420 14,667 24 2005 81,105 13,318 5,793 19,111 23.56 2006 96,764 18,435 4,031 22,466 23.22 2007 93,820 21,981 5,017 26,998 28.78 2008 122,488 23,462 4,280 27,742 22.65 2009 70,636 12,884 3,310 16,194 22.93 2010 92,744 13,904 3,849 17,753 19.14 2011 122,267 17,671 2,007 19,678 16.09 2012 121,480 17,730 7,279 25,009 20.59 Source: PDVSA

Higher gasoline prices


Another adjustment that could help improve the outlook for PDVSA is an increase in gasoline prices in the domestic market. Venezuela is the country with the cheapest gas in the world: less than two cents per liter. The price of gasoline has not changed since 1996, even though oil prices are more than seven times higher, the exchange rate has increased 14 times, and there has been accumulated inflation of 4,435%, says a recent report from Barclays Capital. The current subsidy structure reveals that the production costs are 28 times the sale price of 95 octane gasoline, 39 times the current price of 91 octane, and 50 times the price of diesel. Ramrez admitted last December the Venezuelan state suffers a yearly loss of US$12.6 billion for the cost of producing the fuel alone.

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The gasoline subsidy has not only generated losses in terms of production costs. Increased domestic consumption has also meant a high opportunity cost in shipments abroad, says Hernndez. For example, 95 octane gasoline could be sold abroad at a value 51 times higher than that of the domestic market. Faced with this scenario, in recent months Maduros administration has indicated that it is considering a gasoline price adjustment of between 700% and 3,000%. This measure would give PDVSA some oxygen, although analysts believe that the companys benefits will be marginal. An adjustment of gasoline prices in the domestic market would not improve PDVSAs financial situation in any way; the deficits and debts of the company are too big, says Diego Gonzlez Cruz, Senior Associate E&P and Natural Gas at GBC Global Business Consultants in Caracas.
Figure 9

Hydrocarbon sales in Venezuelas domestic market


2012 Liquefied natural gas (*) Refined products (*) Natural gas (**) Total 89 592 265 946 2011 77 569 253 899 2010 82 592 304 978 2009 81 518 313 912 2008 81 493 307 881

(*) Thousands of barrels per day (**) Thousands of barrels of oil equivalent Source: PDVSA

Conclusion
PDVSA is at critical point. Production levels continue to fall, debt is rising, and Orinoco Oil Belt projects are not taking off. Paradoxically, this gloomy outlook could open the door for change. The new credit schemes with partners in the Belt projects, announcements of a likely reduction in the tax burden, the devaluation of the bolivar for the oil sector, and the possible increase in prices in the domestic market are all reasons to be optimistic, and more so considering that politically there is room to implement these measures, since there will be no elections until the last quarter of 2015, says Oliveros. But we have to wait. Different forces are at work in the government and we dont know whether these measures will ultimately materialize. This uncertainty also extends to the big global oil companies. While companies such as Chevron, ENI, and Repsol remain in Venezuela, waiting for conditions to change in order to profit from the countrys enormous hydrocarbon potential,
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others have decided to retreat. Last October, Lukoil, the second largest oil producer in Russia, announced that it wants out of the consortium developing the Junn-6 project in the Orinoco belt, which is led by Rosneft. The members of the Surgutneftegas and TNK-BP consortium also decided to abandon their project. And last September, the Malaysian oil company Petronas announced that it was leaving Petrocarabobo, one of the largest projects in the Belt. For now, signals remain mixed. The more flexible and open oil policy implemented by some sectors of the Venezuelan government exist alongside measures that go in the opposite direction, like the expropiation last November of two platforms from the U.S. provider Superior Energy Services, which had taken its units out of service after months of not being able to collect about US$9 million owed. These contradictory messages increase doubts about the path the Venezuelan government is going to take. What is certain is that the high tax burden, the use of PDVSA resources to finance not only social programs but also government operating costs, extremely low gas prices in the domestic market, and exports of crude oil to neighboring countries at disadvantageous terms are some of the factors that have made PDVSA the antithesis of successful state-owned companies like Petrobras or Ecopetrol. The direction the state-owned oil company will take in the coming years will depend on the result of infighting in the Venezuelan government between those who seek to improve PDVSAs conditions and those who prefer to stay the current course.

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