By Mark Weisbrot and Simone Baribeau: Executive Summary: The conflict between the management of PDVSA (Petroleos de Venezuela, S.A., the state-owned oil company) and the government of Hugo Chavez Frias has often been at the center of recent political turmoil there. The conventional wisdom is that the management of PDVSA has taken advantage of its increasing independence from the government over the last decade and a half to build an efficiently-run, modern oil company, and has made sound business decisions that were, as much as possible, free from unnecessary political interference.
This paper challenges these beliefs by evaluating PDVSA’s performance from the perspective of standard financial accounting. From this viewpoint, the objective of any corporation is to produce a sustained flow of income for its shareholders. Since PDVSA is wholly owned by the Venezuelan government, its performance can be measured most simply and directly by its contribution to the fiscal revenues of the government. By this measure, the company has fared badly.
q Compared to the other regional oil companies (Mexico’s PEMEX and Brazil’s Petrobras), PDVSA provides a much lower return to government per barrel of oil produced.
q The percentage of export sales going to the government of Venezuela has declined from an average of 71% from 1976-1992 to an average of 36% from 1993-2000.
Among the key reasons for PDVSA’s poor performance are the company’s high operating costs and its unsuccessful investments in non-extractive activities. For example:
q Compared to other national and private oil companies, PDVSA’s operating expenses are a much higher percentage of total revenue. In 2001, PDVSA’s operating costs of 22.5% were about three times the size of ChevronTexaco, Conoco, and ExxonMobil.
q PDVSA’s costs are driven up by the high cost of operating service agreements that PDVSA has signed with private corporations. In 2001, these agreements accounted for only 12.6% of production but 43.9% of production costs.
q On downstream operations in Venezuela, PDVSA’s losses have climbed from $75 million in 1998 to $1.35 billion 2001. At the same time, its capital expenditures on domestic downstream operations have skyrocketed.
The mismanagement of PDVSA has serious implications for the fiscal and social needs of the country. For example:
q If PDVSA were to have paid the same percentage of its revenue per barrel of oil produced to the government as PEMEX, this would amount to 12.4 billion dollars additional revenue. This is 54% of the government’s budget in 2001, and almost four times the government’s spending on health care.
In sum, this paper indicates that the poor and deteriorating performance of PDVSA is a serious problem, and that a restructuring of the company and its operations may be necessary.
Venezuela’s oil industry has been the subject of considerable controversy, with the conflict between the management of PDVSA (Petroleos de Venezuela, S.A., the state-owned oil company) and the government of Hugo Chavez Frias often at the center of recent political turmoil there. The military coup of April 11, 2002 was precipitated by a strike led by PDVSA’s management and union leadership. Most recently, a 64-day national strike and business lockout (December 2, 2002 to February 3, 2003) was led by the company’s managers and most of its work force. They were able to inflict tremendous damage on the Venezuelan economy by curtailing oil production, which is the source of 80% of the country’s export revenue and as much as half of its government budget.
The conventional wisdom is that the management of PDVSA has taken advantage of its increasing independence from the government over the last decade and a half to build an efficiently-run, modern oil company, and has made sound business decisions that were, as much as possible, free from unnecessary political interference. The company’s “meritocracy” is often cited as contributing to its efficient management. In its conflict with the government, the latter is often portrayed as “interfering” in this management by injecting political considerations into investment or production decisions.
This paper looks at PDVSA’s performance from the perspective of standard financial accounting. From this viewpoint, the objective of any corporation is to produce a sustained flow of income for its shareholders. Since PDVSA is wholly owned by the Venezuelan government, its performance can be measured most simply and directly by its contribution to the fiscal revenues of the government. By this measure, the company fares very badly. For example, in fiscal year 2001, the state-owned oil company in Mexico, PEMEX (Petroleos Mexicanos), had sales of $46.5 billion and contributed $28.8 billion to the government budget. By contrast, in 2000 PDVSA took in $53.2 billion and paid only $11.6 billion to the government of Venezuela.
In what follows, we look at the performance of PDVSA, its operating costs, payments of taxes and royalties, and other arrangements in order to ascertain what has gone wrong. We also discuss some of the implications for the future of PDVSA, as production recovers from the strike and the company undergoes a likely restructuring.
Table 1 shows the amount of money that the government receives from state-owned oil companies, per barrel of oil or oil equivalent. As can be seen from the table, by this measure PDVSA ranks the lowest among regional state-owned companies with comparable available data. Mexico’s PEMEX, over the last three years for which data is available (1999-2001), returned between 3 and 5 times as much revenue to the government per barrel of oil. In 2001, PEMEX paid $24.66 to the government per barrel of oil produced, whereas PDVSA paid only $8.34. This difference is enormous not only in absolute and relative terms, but also in terms of government finances. (see Table 2).
Table 1—Dollars to Government per Barrel of Oil Produced
Company 2001 2000 1999
$8.34 $8.07 $4.75
24.66 28.06 20.52
13.54 14.63 10.05
Source: PDVSA, Pemex and Petrobras’ (Petroleo Brasileiro, S.A.) 20-F SEC filings, authors’ calculations.
Note: In some years government revenue from PEMEX exceeds the market price of oil, because of revenue from downstream operations.
The percentage of export sales going to the government of Venezuela has declined dramatically in the 1990’s. PDVSA was first nationalized in 1976. From 1976 to 1992, the government collected 71% of export sales. For 1993-2000, this percentage declined to about 36%.
Mommer [2001, 1998] has examined in detail some of the reasons for this decline in the percentage of oil revenue accruing to the government. These included a number of changes which allowed production to escape taxation: outsourcing and joint ventures taxed at much lower rates, transfer pricing done in co-operation with both foreign and domestic affiliates, and legislative lowering of tax rates.
These changes have had a drastic effect. Table 2 compares current revenue (for 2001) with the revenue that the government would have collected if they had continued to tax export sales at the pre-1992 average annual rate and had allowed the rest of PDVSA’s income, more than half of its revenues, to be tax free. Annual revenue would be nearly 20% higher, and as shown in the table, the government’s budget would increase by 10.3%. This difference is almost three quarters of government spending on health care.
Table 2 also compares PDVSA’s current contribution to fiscal revenue with the amount that it would contribute if it matched the rate of PEMEX or Petrobras. If PDVSA were to have paid the same percentage of its revenue per barrel of oil produced to the government as PEMEX, this would amount to 12.4 billion dollars additional revenue. This is 54% of the government’s budget in 2001, and almost four times the government’s spending on health care. Even at the lower rate paid by Petrobras (Petroleo Brasileiro, S.A.) in Brazil, the Venezuelan government would take in an extra two and a half billion dollars, or 10.5% of the budget. That would be more than three quarters the government’s current spending on health care.
Table 2—Increase in Venezuelan Government Revenue in 2001 at Different Rates of Taxation for PDVSA
Rate of Taxation Dollar Amount (in billions) /% Increase in Government Revenue / Increased Government Revenue as a percentage of Public health expenditure, 2000
At Pemex’ rate of taxation
$12.42 / 54.1% / 389.6%
At Petrobras’ rate of taxation
$2.49 10.5% 76.1%
At PDVSA’s former rate of taxation
$2.37 10.3% 72.4%
Source: PDVSA, Pemex and Petrobras’ 20-F SEC filings; World Bank, “Country-at-a-glance—Venezuela”; World Health Organization, “Selected Health Indicators for Venezuela”; authors’ calculations.
High and Growing Costs
Table 3—Operating Expenses as a percentage of Total Revenue
2001 2000 1999
23.5 18.6 26.1
12.5 12.5 17.0
8.5 7.7 9.1
Amerada Hess Corporation
14.0 12.7 17.7
7.2 7.0 9.1
7.7 5.6 7.5
Source: Income statements of above companies; authors calculations.
A lower and declining rate of taxation is not the only reason for PDVSA’s relatively poor return to its shareholders. The company also has very high operating costs as compared with other producers. Table 3 compares PDVSA’s operating costs with other oil producers, public and private, for which comparable data are available. In 2001, PDVSA’s operating costs of 22.5% were about three times the size of ChevronTexaco, Conoco, and ExxonMobil.
One source of increased costs in recent years has been the Operating Service Agreements (OSAs) that PDVSA has signed with private corporations, which give them the right to reactivate marginal oil fields that PDVSA has deemed not to be profitable enough to reactivate by itself. Under these agreements, the private companies make capital investments in the oil fields and recover their investments by collecting operating fees from PDVSA. PDVSA maintains ownership of the hydrocarbons produced and of the capital assets in the fields..
Table 4 shows PDVSA’s cost per BOE in constant 1997 dollars, with and without the oil produced under OSAs included. From 1997 to 2001, the cost of a producing a barrel of oil equivalent increased by 35.6%, from $2.33 to $3.16. However, as shown in the table, almost all of this increase was due to the increase in the cost of OSA production. Non OSA production costs increased by only 4.6%, from $1.94 to $2.03 per barrel, while the cost of OSA production rose 44.5%, from $7.57 to $10.94 per barrel. This latter cost was more than 5 times that of non-OSA oil ($2.03) in 2001. Although this production is from marginal fields and a profit can still be made, it is questionable whether it is worth it for PDVSA to produce such high cost oil, since it presumably counts as part of the country’s OPEC quota and displaces other oil that could be produced at much lower cost.
Table 4—Cost of Production per Barrel of Oil Equivalent in 1997 Dollars
2001 2000 1999 1998 1997
$3.16 $3.31 $2.65 $2.72 $2.33
2.03 2.11 1.95 2.30 1.94
10.94 12.28 8.54 7.04 7.57
Source: PDVSA’s 20-F SEC Filings.
The Operating Service Agreements, although they account for a relatively small proportion of PDVSA’s production, have grown substantially in their total cost and now make up a very large and disproportionate share of PDVSA’s costs. This can be seen in Figure 1, which shows the growth of the OSA production and costs, as a percentage of the total at PDVSA. From 1997 to 2001, OSA production grew from 6.9% to 12.6% of total production, but the cost of this output rose from 22.5% 43.9% of PDVSA’s costs.
PDVSA has also fared badly in its investments in non-extractive activities such as refining. On its downstream operations in Venezuela alone, PDVSA’s losses have climbed from $75 million in 1998 to $1.348 billion in 2001. At the same time, its capital expenditures on domestic downstream operations soared to $2.517 billion in 2001. Again, from the viewpoint of standard financial accounting these investments do not make sense if they produce a low return for the shareholders, however much they may make the company a bigger player in world petroleum markets. Furthermore, from the viewpoint of economic development, the average rate of return in countries of Venezuela’s per capita income level is 10 to 20% — much higher than the company’s returns on even its more successful overseas investment. So there is an additional public interest in the government collecting revenue that would otherwise be invested outside the country.
Conclusions and Implications: PDVSA’s Future
This brief examination of PDVSA’s production, revenues, costs, and taxation indicates that the company’s shareholders have been getting a very low rate of return, by comparison with any reasonable current or historical standard. This has implications for the restructuring of the company and the near-term prospects for the recovery of Venezuela’s economy. As of this writing (March 25, 2003), the production of PDVSA has recovered to its pre-strike levels of around 3 million barrels a day, according to PDVSA, or around 2 million according to the opposition. The government projects full recovery to 3 million barrels per day by the end of March. If we assume even 2 million barrels per day for April to December — a very conservative estimate– it would not be difficult for the government to take in more considerably more revenue in 2003 than was received in 2001 (the last year of full production). Aside from the fact that oil prices are now more than twice their 2001 level, it can be seen that, without the threat of an organized resistance by the company’s management — which has in recent years sought to keep as much revenue within the company as possible — the government is capable of collecting a much higher percentage of PDVSA’s output in taxes. Furthermore, approximately 16,000 employees, or 40% of the pre-strike work force have been dismissed, and it is not clear how many of these positions will need to be filled.
Then there is the question of the Operating Service Agreements — depending on the cost of exiting from these contracts and how long it would take to do so, there are enormous potential savings here as well. Finally, 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.
It remains to be seen how much the recently enacted hydrocarbons law, which has increased oil royalties from 17 to 30% and mandated more government control over joint ventures, will increase government revenue or lower operating expenses. However, regardless of its effects, or other specific plans are for the restructuring of PDVSA, it is clear from the company’s poor and deteriorating performance that a serious restructuring is long overdue.
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 Mark Weisbrot is co-Director of the Center for Economic and Policy Research. Simone Baribeau is a Research Associate. The authors would like to thank Dean Baker and Michael Tanzer for their helpful comments, and David Rosnick, Todd Tucker, Debi Kar and Daniel Uribe for their research.
 For example, according to a March 2002 Financial Times article, “Managers are complaining the directors [appointed by Chavez] are political loyalists with no interest in the financial well-being of the company, and that ‘corporate meritocracy’ has been ignored.”
 According to a January 2000 Financial Times article, “Mr. Chavez’s fierce criticism of PDVSA and its allegedly wasteful spending [have] raised concern about the autonomy of the company, which enjoyed a reputation as one of the world’s best- managed state companies”.
 According to PDVSA and Pemex’ SEC F-20 filings.
 In 2002, PDVSA produced 1.12 billion BOE (barrels of oil equivalent), and Mexico produced 1.14 billion BOE, roughly equal amounts. In absolute terms, Mexico paid more than twice to the government than did PDVSA.
 Mommer, Bernard. “Venezuelan Oil Politics at the Crossroads.” Oxford Institute for Energy Studies Monthly Commentary. March 2001.
 This represents the increase in taxes as a percentage of export revenue, rather than total revenue. So, this is the increase in taxes assuming that only income from exports of oil, which accounts for less than 48% of total revenue, is taxed.
 Numbers exclude depreciation and depletion costs. Inflation adjusted using the GDP deflator. These numbers do not include any bonuses that PDVSA received for use of the fields, including the $2.2 billion in 1997.
 Downstream operations are defined to be the refining, marketing and transportation of crude oil, natural gas and refined petroleum products
 Wilson, Peter. “Venezuela’s Maza Says Crude Oil Revenue Remains Low.” Bloomberg. March 17, 2003.
Mark Weisbrot is currently Co-Director of the Center for Economic and Policy Research (CEPR), in Washington, D.C. He writes a weekly column on economic and policy issues that is distributed to over 400 newspapers by Knight-Ridder/Tribune Media Services. Simone Baribeau is a Research Associate at the CEPR.