PDVSA turns to traders to sustain oil deal

Updated 25 June 2012

PDVSA turns to traders to sustain oil deal

CARACAS: Venezuelan state oil giant PDVSA has had to buy dozens of extra fuel cargoes from countries as far away as Estonia and Saudi Arabia to keep up its side of a 2008 oil supply deal with leftist ally Ecuador, according to traders and sales documents.
In an examination of shipping data that highlights the practical risks of political trade deals, Reuters found that half the fuel Venezuela sent to Ecuador, which cannot process its own heavy crude, came from third countries, often via trading companies including Glencore.
What was meant to be an example of cooperation between ideologically aligned states, with Venezuelan President Hugo Chavez importing Ecuadorean crude in return for refined fuel, has instead become another sign of problems in PDVSA's refining network and a profitable niche for foreign traders.
It is also the latest indication of difficulties for PDVSA, one of the world's biggest oil companies and the cash cow of Chavez's "21st century" socialism. In an election year in Venezuela, PDVSA's finances are under growing pressure as Chavez digs deep into its coffers to fund welfare programs.
The shipments to Ecuador were corroborated by some traders involved in the deals — and show that the system appeared to stumble after its first year.
So Venezuela turned to third countries and traders, often derided by Ecuadorean President Rafael Correa as speculators, for many of the supplies. Sources said Venezuela paid the transport costs for bringing cargoes from countries that also included Britain, France, the Netherlands and Colombia.
"PDVSA has made deals but then doesn't have the agreed products, whether due to problems with refining, production or quality," said one trader involved in the transactions who asked for anonymity.
The bottlenecks in PDVSA's refineries — from accidents to outages and unplanned stops for maintenance — are well-known.
But the dynamics of the Ecuador deal underscore a less familiar truth: As Chavez inks ever-growing numbers of pacts with political allies, PDVSA has found itself in the improbable role of middleman. PDVSA officials did not immediately respond to a detailed request for comment.
Trading companies Glencore, Trafigura and PRSI Trading were hired by PDVSA to buy fuel for Ecuador on the open market, the details of the transactions showed.
Between 2009 and 2011, 53 percent of Venezuela's shipments to Ecuador were sourced from third countries, with traders accounting for 39 percent, according to a database of the shipments compiled by Reuters and Armando.info, a Caracas-based network of investigative journalists.
The remaining 47 percent came from Venezuela and its overseas storage and refining facilities, according to the study. In total, shipments valued at $947 million were put in the hands of intermediaries during that 2009-11 period.
It was not clear how much traders made on the deals.
The agreement signed with much fanfare by Chavez and Correa four years ago says state oil company Petroecuador would supply Venezuela with Ecuadorean crude for processing by PDVSA refineries, and would receive fuel in return from Venezuela.
That way, the accord said, it will "eliminate intermediaries from direct participation in the buy-sell process."
Nevertheless, the Venezuelan government says it always planned for there to be scope in the agreement to vary where the crude was sent, and where the products for Ecuador were sourced.
"What we are doing is a triangulation," Venezuelan Energy Minister Rafael Ramirez said when asked by Reuters about the agreement, referring to the practice of receiving Ecuadorean crude then sourcing refined products from abroad.
"We receive their oil and we determine its value carefully. It is sold, and we get the products they need, of the quality they need, and it is sold to them."
The Ecuador deal is one of a host of oil deals that Chavez has signed with political allies — including China, Cuba and more than a dozen other nations in Central America and the Caribbean — many of which have been criticized by Venezuela's opposition before the Oct. 7 presidential election.
The opposition says Chavez rewards allies with crude on easy terms, including nations with questionable rights records such as Syria, Iran and Belarus. His government routinely dismisses such criticism as "counterrevolutionary" lies.
Chavez's government has also funded literacy programs, schools and health clinics in several leftist Latin American nations, winning him political influence in recent years and prompting some leaders to turn their backs on Washington and strengthen relations with China and Russia instead.
The oil agreements are a major factor putting pressure on PDVSA's increasingly constrained cash flow: in some cases, customers pay for shipments in exchange for goods and services.
The company also has to contend with falling global prices, and heavy local subsidies that mean Venezuelans enjoy the cheapest gasoline in the world.
To be sure, PDVSA still has a lot of financial clout. Its net profit jumped 42 percent to $4.5 billion last year on record revenue of almost $125 billion.
And it is still able to make huge contributions to Chavez's government — they doubled last year to nearly $50 billion —that help pay for his signature social programs, a central element of Chavez's re-election bid.

Companies including US majors Chevron and ExxonMobil Corp., Brazil's Petrobras and Petrochina also delivered cargoes to Ecuador on PDVSA's behalf under the deal, according to the bills for the shipments.
Individual traders confirmed the trend and various transactions involving their companies.
They said Venezuela's state oil company does the same thing to cover shortfalls in supply deals with other countries. Data on those agreements was not immediately available.
"PDVSA buys in the same way to supply Argentina, Uruguay and Bolivia," a trader told Reuters.
It would not be the first time Chavez's administration has worked with Western traders: Trafigura helped it beat a months-long, opposition-led strike that all but halted operations by PDVSA's own tankers during 2002 and 2003.
Part of the problem is that Ecuador produces heavy crude, like the majority of Venezuela's oil, meaning there is competition for access to Venezuelan refineries that process it.
That was cited by Venezuela's government in 2007 as one of the main reasons why the two nations had not signed a similar agreement earlier. But Ramirez later said it had been decided that PDVSA's US refining subsidiary Citgo would handle some of the cargoes from Ecuador, with the rest going to Venezuela.
Sourcing fuel cargoes going the other way has proved expensive.

 


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