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Venezuela's Real Oil Revenue Could Fall to under $30 Billion in 2009
In the wake of the Venezuelan oil basket dropping to US$ 46.35 per barrel this week, Miguel Octavio, Executive Director of Venezuela's leading investment bank BBO, tries to see through the smoke and mirrors and take us through the real numbers.

As oil prices drop and the Venezuelan oil basket closed at US$ 46.35 per barrel this week, analysts are trying to redo their estimates of possible oil revenues for Venezuela for 2009. We have found such estimates to be overly optimistic, independent of the oil price assumed. Essentially, not only do we lack reliable numbers on what the country’s production currently is, but we also do not know the precise details for local oil consumption and which exports actually generate real revenues and foreign currency, rather than credit lines to other countries.

  • What is Venezuela's Real Level of Production?

PDVSA claims to have been producing 3.15 million barrels of oil a day (mbpd) before the OPEC quota cut decided in October, but few sources give credibility to this number, with the IEA estimating production in October at 2.39 mbpd, OPEC at 2.326 mbpd and independent estimates which range from 2.37 million barrels of oil a day, to 2.6 million in the most optimistic case.

OPEC CUTS. The first problem is whether Venezuela will or will not “cut” the 129,000 barrels a day mandated by OPEC last month. We will assume in our calculations that it will not. PDVSA will simply claim it has lowered production to 3.021 mbpd, which will certainly be consistent with the OPEC numbers which indicate a lower production level. Thus, we estimate Venezuela’s oil production to be somewhere between 2.326 to 2.6 mbpd, with the likely number at the lower end of the range.

  • What is Venezuela's Domestic Gasoline Consumption Portion subtracted from that production?

The next uncertainty is what is the country’s true oil consumption. PDVSA claims current gasoline consumption is around 530,000 bpd, which as we will see below severely underestimates real consumption. There are three elements to this: the growth of the vehicle fleet, smuggling to Colombia because of the huge price differential, and the shortage of natural gas in western Venezuela, which has required replacement in electric power plants. Smuggling has also likely increased as the price differential surged, but will likely go down if oil prices stay down in 2009.

In 2002, there were approximately 2.6 million vehicles in Venezuela. This has increased to 4.07 million vehicles as of Sept. 2008, a 56.7% increase. In 2002, PDVSA stated consumption was at 510,000 bpd, which would suggest that assuming no attrition in the fleet, current consumption would be 795,000 bpd. While there has been attrition, this is more than compensated by the use of fuel oil to replace natural gas in the Western part of the country. While our number is high compared to other estimates, we feel it underestimates true consumption.

Thus, Venezuela could only export at most between 1.575 mbpd and 1.805 mbpd of crude oil, using the earlier range of production estimates, which as stated before, we believe are in the lower range.

  • What is the cost of Chavez' financed, free and bartered oil subtracted from those figures?

However, to this range of between 1.575-1.805 million barrels of oil a day, we have to subtract those barrels which provide no cash flow to PDVSA or foreign currency for the country, which is related to a number of agreements, funds, loans and inter-Government pacts the Venezuelan Government has signed over the years.

Available information suggests that Venezuela is currently exporting 138,000 barrels of oil a day to Petrocaribe, 34,000 to Argentina, 92,000 to Cuba, 80,000 to the San Jose pact and 80,000 to the joint fund with China.

Of these, the China fund does not provide any payment to PDVSA. Of the remainder, we understand payment has to be made in 90 days for 50% of the oil delivered and the rest in 15 years with low interest rates (and in some cases grace periods too). Thus, of these 424,000 bpd that are exported, Venezuela gets paid for 344,000 bpd, but 50% of that payment is deferred, thus only 172,000 barrels per day provide actual cash flow to PDVSA or foreign currency to the country.

There is one additional factor which we have not taken into account: Loans made to PDVSA which are being paid with barrels of oil.

Details of these loans are not clear, as the latest financials by PDVSA only give details for a US$ 3.2 billion loan payable with crude over 14 years, which at US$ 60 per barrel represents about 10,000 barrels of oil a day. There is at least another loan with these characteristics, but we could not determine its maturity date.

  • For the purposes of our calculation then, all of the above implies that of the 1.575-1.805 million barrels of oil a day, only 1.323 to 1.553 million bpd truly generate foreign currency.

Using these assumptions, we show in the table the real foreign currency revenues one could expect under our assumptions:

Clearly these numbers do not paint a very positive picture given that the country has been importing over US$ 50 billion in each of the last two years and that non-traditional exports are running at about US$ 6.5 billion a year.

Some evidence for the correctness of our numbers comes from the central bank’s report for the second quarter of the year, when the BCV reported US$ 28 billion in oil exports of which it stated US$ 11.1 billion had been under credit, a full 39% of reported exports and which corresponds to a higher number than our estimates. Note that our estimates include the cost to PDVSA for the gasoline subsidy indirectly.

The Government has some leeway over these numbers. It can change the terms for Petrocaribe, much like it did a month ago when it increased 90 day payment from 40% to 50%. It can also ask Cuba to pay part of the oil upfront. Only the Chinese fund represents a commitment that will require sending crude without receiving any payment.

With US$ 40 billion in reserves and the development funds Fonden and Bandes, the Government keeps sending messages that it still feels comfortable in 2009. President Chávez has even suggested that it wants the Central Bank to transfer US$ 7 billion to Fonden in early 2009.

But given our numbers, if oil prices remain where they are today, international reserves will be drawn down by mid-year to dangerously low levels, forcing the Government to execute a significant adjustment of the economy.

Miguel Octavio is the Executive Director of Venezuela's leading investment bank, BBO. International rating service Fitch has given BBO an A rating, making it the highest rated investment bank in Venezuela.

Venezuelan oil basket falls to $46.35

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