PDVSA

1. PDVSA Petróleos de Venezuela, S.A.

2. Introduction • 1976 – early 2000’s • Most capable forward-thinking, autonomous NOC • 2002 – 2003 • Launched a series of politically disastrous strikes against President Hugo Chavez • 2003 • Chavez purged PDVSA of dissidents & converted co from commercially oriented to a less proficient firm with more attention to state objectives

3. Introduction – Cont’d • Currently • PDVSA functions simultaneously as an operating company, developing agency, political tool, and government cash cow • Maintains status as one of the world’s 50 largest companies and one of the largest NOCs • Since the 1980’s, has held extensive international interest, including US gas chain CITGO • Since 1990’s, Partner with IOCs in domestic upstream operations

4. History of Venezuelan Oil Sector • IOC’s turned Venezuela into an early and important oil producer • Commercial development began in 1914 when Caribbean Petroleum started producing from the Mene Grand field • Major discoveries followed in fields at Las Cruces (1916) and especially at La Rosa (1922) • Control under General Juan Vicente Gomez • Existing taxation framework allowed IOC’s, • Paid low royalty rate (3%) • Subsurface tax rates • IOCs enjoyed tremendous success under these conditions • By 1920’s, Venezuela became the world’s leading oil exporter and second-largest oil producer (behind the US)

5. History of Venezuelan Oil Sector • In 1935, after Vicente Gomez’s death, the government began pressing for changes in taxes and concession terms • Landmark Laws in 1943 and 1948 • Created 50-50 profit splits • Government and IOCs reached 40 year concession agreement under this taxation framework • Relations remained steady for the next 15 years • From 1944 to 1958, • oil production increased at annual rate of 19.5% • capital stock grew by 14.3% annually • Oil sector wealth spilled over to the broader Venezuelan economy • By 1960, Venezuela became the wealthiest country in Latin America

6. Nationalism • Economics • Venezuela’s Military civilian regime raised taxes in 1958, shattering the long-established 50/50 profit • Government chose not to renew the 40 year concessions • In 1958, new law and fee system for foreign workers • By the time of nationalization, nearly all Venezuela’s oil sector employees were Venezuelan • In 1960, OPEC was founded in Baghdad, Iraq. • Five countries namely Islamic Republic of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.

7. Nationalism • In 1970, Congress passes law mandating • reversion of oil sector concession • government approval of IOC changes to operation • prohibitions on movement of assets • 1974 – Presidential Commission on Nationalization • Commission brokered compromises among different groups • Government agreed to compensate private companies for the value (paying an equivalent of $1.02B over time • 1976, January 1 – PDVSA is 100% state owned

8. Private Business Under Government Control • Venezuelan IOC employees immediately joined PDVSA, holding same roles and responsibilities as before • Through the 1980’s, some PDVSA managers followed the private sector tradition • PDVSA adopted a “federal model” • PDVSA implemented broader scale reforms balancing the benefits of increased economies of scale and intra-firm competition • Between 1976 and 1978, PDVSA cut the number of major operator subsidiaries from 14 to 4 • Promoted competition among its operating subsidiaries • Operator subsidiaries also had the power to negotiate with individual clients over services, delivery, and time (price competition was discouraged)

9. Private Business Under Government Control • During the late 1970’s, PDVSA and Venezuelan state thrived • Nominal PDVSA investment in exploration grew by more than 500% • Production grew by more than 600% • Venezuela became known as “Saudi Venezuela”

10. PDVSA Goes International • 1980 –Internationalization strategy to secure downstream markets for its production and place assets outside direct reach of the state • Initial joint ventures were for refineries in overseas markets • In 1982 – first contract with German counterpart VebaOel • 3 yrs later, acquired further refinery interests in Belgium, Curacoa, Sweden, and UK, and US

11. PDVSA Goes International • Targeted downstream consumers • In 1986, purchased a 50% stake in Citgo • Paid out $120M in cash and $170M in crude supplies • 1990, acquired remaining 50% share • By 1999, had 13K Citgo gas stations and controlled more than 10% of the US market • Internationalization promotes conflict between PDVSA and the Venezuelan state • Congress blasted PDVSA for not seeking its approval for overseas acquisitions • Academics would later condemned internationalization for its high costs and for depriving Venezuela of tax revenues

12. Technological Advancements • Created a top-flight research center known as INTEVEP • Its work focused on devising marketable products from the extra-heavy oil in the ORINCO Belt • Mid to late 1980’s, research led to ORIMULSION • A patented underboiler fuel substitute made form the Orinoco’s extra-heavy • An oil bitumen-based fuel that was developed for industrial use • Company’s first revenue sources from that region

13. Venezuelan Economy • While PDVSA grew during the 1980’s, the Venezuelan economy faltered • Low oil prices and Latin American debt crisis • Venezuelan oil revenues plunged • Access to capital markets dried up • Public spending declined • Economy shrank 2.6% annually per capita

14. Investors • La AperturaPetrolera(Oil Sector Opening) • AA (Association Agreement) • 30-35 year - set low royalty (1%) and tax (34% of income) rates • Combined marginal rates were more advantageous than the rates for traditional projects • OSA (Operational Service Agreement) • Outside oil companiessoperate the oil fields • OSA’s designated outside companies as “operational service providers” rather than oil producers, those companies paid a lower than normal 34% income tax • PDVSA paid the full royalty and oil tax on the oil produced • 32 OSA’s with 22 separate co’s

15. Investors • Reduced Risk and Profit Sharing Agreements (RPSA’s) • Investment in high risk blocks • 39 year contract set a baseline 16.67% royalty rate and an income tax rate of 66.67% • PDVSA had the option to purchase up to 35% state in the project if a company discovered commercial quantities of oil in the exploration phase • Outside company would retain majority control. • Results of Apertura • Investment went from $619M in 1995 to $4.4B in 1999 • Question of Legality of Contracts • Controversial – reduced the share of revenues given to the Venezuelan state

16. Firmer State Control • 1999 – Hugo Chavez . . . • Appoints Robert Mandini as PDVSA president • Signs an investment-friendly gas hydrocarbons law • Lobbied for and won ratification of a new constitution reaffirming the pre-existing legal regime for the energy sector • New constitution prohibits privatization of PDVSA • Appoints Hector Ciavaldini as new PDVSA president • In 2000 - After Chavez’s re-election . . • Asserts greater power over PDVSA • Appoints Army Brigadier GenernalGuaicaipuroLameda as new PDVSA president

17. Firmer State Control • In 2001, New Laws are enacted • Controversial hydrocarbons laws • Required future private investment to take the form of joint ventures with majority PDVSA ownership • Joint ventures carried higher royalty rates (30%) and lower income tax rates (50%) for oil projects • Although new law granted PDVSA greater power over the oil industry and actually reduced the aggregate tax burden above $15-20/barrel, management feared the tax consequences if oil prices fell and therefore opposed it • Lameda became allied with the companies management and opposed this law as well • Ley de la tierra (law of the land) • Gave government power to tax and expropriate idle lands for the rural poor • New banking law • requires banks to allocate 15% of their lending portfolio to small farmers

18. PDVSA Current Assessment • Prior to Chavez, company was well run, vertically integrated, and ranked as best managed NOC by Petroleum Economist • Production by conservative estimates has dropped 10-15 % since before the 2003 strike • Able to perform most operations

19. Exploration and Production • PDVSA produced around 2.9 mpb of oil in 2012. Crude oil represented 2.6 mpb of this total, with condensates and natural gas liquids (NGLs) accounting for the remaining production. • Venezuela's conventional crude oil is heavy and sour by international standards. As a result, much of Venezuela's oil production must go to specialized domestic and international refineries. • The country's most prolific production area is the Maracaibo basin, which contains slightly less than half of Venezuela's oil production. • Many of Venezuela's fields are very mature, requiring heavy investment to maintain current capacity. • Industry analysts estimate that PDVSA must spend some $3 billion each year just to maintain production levels at existing fields, given decline rates of at least 25 percent.

20. Production & Consumption

21. PDVSA – Government Relationship

22. Oil Reserves • Venezuela has some of the largest crude oil reserves in the world, perhaps even more than Saudi Arabia. • The BP Statistical Review of World Energy 2012 sees Venezuela's reserves at 296.5 billion barrels, above Saudi Arabia's 265.4 billion barrels.

23. Reserves & Capacity • The BP Statistical Review of World Energy 2012 sees Venezuela's reserves at 296.5 billion barrels, above Saudi Arabia's 265.4 billion barrels. • PDVSA’S oil and gas reserves are located only in Venezuela • 235 billion barrels of extra heavy oil in the Orinoco Belt region • PDVSA is the 5th largest company in proven oil & gas reserves • World’s 5th largest oil exporter

24. Economy • Modest and undiversified • GDP: $382.4 billion • Oil has supplied 80-90% of exports • 50-60% of government revenues • 20-35% of GDP • Oil industry is seen as the key to economic and social development in Venezuela

25. Types of Oil

26. Orinoco heavy oil belt • The mean estimate of recoverable oil resources from the Orinoco Belt is 513 billion barrels of crude oil. • PDVSA began the 'Magna Reserva' project in 2005, which involved dividing the Orinoco region into four areas and further divided into 28 blocks and quantifying the reserves in place. This initiative resulted in the upgrading of Venezuelan reserve estimates by more than 100 billion barrels. • Venezuela plans to develop further the Orinoco Belt oil resources in the coming years. In 2009 Venezuela signed bilateral agreements for the development of four major blocks in the Junin area. Last year the country awarded two more major development licenses in the Carabobo region. Venezuela expects these projects to add more than 2 million barrels per day of heavy oil production capacity by the end of the decade

27. Refining Capacity

28. Investment Cycles – Recurring Pattern • Heavy oil requires large capital expenditures – solicit outside investment at favorable terms • Once external funding is committed, government modifies terms of agreement • Return to offering better terms once more development is required • PDVSA shifts from government policymaker to trusted agent

29. Natural Gas Reserves • Venezuela’s natural gas reserves – 195.1 trillion cubic ft • Oil industry absorbs 70% of natural gas production • Uses large share for reinjection into oil fields to produce heavy oil

30. Shift in PDVSA – Government Relationship

31. PDVSA – “State within a State” • Venezuela’s government institutions generally weak • Low accountability – largely ineffective in providing public goods • Widespread corruption • Consistently in bottom 50% for all six World Bank governance indicators • PDVSA stepped in to control energy policy • Weak Energy Ministry – top talent left to work for PDVSA • Loaned economists to other government agencies • Easy target for Chávez during his rise to power • PDVSA still manages most of Chávez’s social programs due to its competence and large cash flow

32. PDVSA under Chávez • Under the influence of President Chávez, the Venezuelan government has reduced PDVSA’s previous autonomy. • Nearly one-half of PDVSA’s employees walked off the job on December 2, 2002 in protest against the rule of President Chavez, practically bringing all the company’s operations to a halt. • Chávez fired 19,000 workers following the strike, draining the company of technical knowledge and expertise. • From 2005 on, PDVSA began converting Operating Service Agreements into new PDVSA joint ventures, meaning many expropriations of foreign investments.

33. Expropriation • Chavez forced foreign oil producers into joint ventures as minority partners in 2007 • Assets of ExxonMobil and ConocoPhillips were expropriated in 2007 after they declined to restructure their holdings in Venezuela to give PDVSA majority control • Total, Chevron, Statoil and BP agreed and retain minority interests in their Venezuelan projects. • PDVSA has paid compensation for assets it has nationalized including $255 million paid to ExxonMobil on February 2012

34. Government take from PDVSA

35. Breakeven oil price • About half of Venezuela's exports are committed to others, due to the need to service debts, particularly to China. • PDVSA debt rose to some 11% of GDP ($35 billion) last year, up from $8.5 billion at the beginning of the last decade when debt amounted to 7% of GDP • It is hard to pinpoint breakeven price for oil. That is, the oil price needed to generate the oil revenues sufficient to balance its fiscal budget , but it may run at over $120 per barrel. • PDVSA's profits are diverted to social contributions, having risen from 0% to 24% of its revenue over 2002-2011; • These financial burdens on PDVSA include domestic subsidies, foreign aid as well as oil-backed loans from other countries, particularly China.

36. Petrocaribe and the Bolivarian Revolution • 2005 agreement between Venezuela and 17 importing countries • 60% paid upfront and remaining 40% financed over 25 years at 1% interest rate • 180,000 b/d • Mounting debts levels are becoming too large to ignore • Dominican Republic - $3 billion • Jamaica - $1.9 billion • Discouraged private investment that could have helped diversify Caribbean countries' energy mix

37. Current State of Investment • Caracas has spent billions of dollars of PDVSA's earnings on projects ranging from the construction of low-income housing to subsidized food distribution • PDV is short of cash to fund critical investment projects -Orinoco Belt heavy-oil region • China last year ordered a freeze of new financing for Venezuela • PDVSA now required to meet benchmarks before receiving the next round of funding • Spain's Repsol agreed to invest an additional $1.2 billion in its Petroquiriquire partnership with PDVSA • Money will go into a trust overseen by the joint venture

38. PDVSA is In Good Hands “The bird stood on a wooden beam and began whistling, a nice hissing," he said imitating the sound. "Then I stared at him and whistled back... The bird looked strange at me, right? He whistled for a little while, flew around and left, and I felt the spirit of Chavez," said Maduro.