Chavez’ plan to sale CITGO and the Oxford Institute for Energy Studies

London 03.02.05 | My involvement in this business of writing

and reporting the crisis of Venezuela started in October 2002 when I

learned that Hugo Chavez had been invited by Oxford’s Center for Socio

Legal Studies to give a conference, as a guest speaker, in a human

rights seminar. At a latter date I found out that the convener of the

seminar and visiting fellow of the said center, William F. Pepper,

received a handsome payment of $137.527, 42 from the Venezuelan

government via the Venezuelan Information Office in Washington DC. I

was astounded by the discovery that a visiting scholar to one of Oxford

University’s colleges could be so easily, and cheaply I must add,

bribed by Hugo Chavez.

My attention has turned now to the Oxford Institute for Energy

Studies (OIES). With the precedent aforementioned ever daunting me, I

have started investigating a couple of individuals that have done/are

doing research in that Institute and currently sit in the board of

directors of PDVSA, namely Bernard Mommer and Juan Carlos Boué.

Bernard Mommer

Platt’s Oilgram News reported on December 22, 1994 “fallout about PDVSA’s foreign investment plan”. The brief read:

“The first signs of internal conflict in PDVSA over its much

heralded profit-sharing agreements have emerged with the surprise

resignation of senior strategic planning advisor, Bernard Mommer. PDVSA

vice president Claus Graf admitted Dec. 15 that Mommer’s resignation

resulted from his disagreement with the way the oil industry is being

opened up to foreign participation. But he said he didn’t believe

Mommer’s views were widespread or that they would affect the scheme.

Mommer, who will remain at PDVSA until Jan. 15, declined to comment in

detail on the issue, but indicated that his views had been made clear

in a paper delivered to the Fifth Petroleum Conference in November.

Hence Mommer was, already in 1994, a senior strategic planning

advisor of PDVSA. It is puzzling to imagine how such a leftist radical

made it to the senior echelons of the company. Nonetheless, sources

report that he was asked to leave and he headed for greener pastures.

Mommer is quoted as an Andres Bello fellow of St. Anthony’s College by

The Times on October 20, 1993; then again on October 4, 1996. His name

appears associated with the OIES for the first time in 1994 in a paper

published by the OIES entitled “The Political Role of National Oil

Companies in Exporting Countries: The Venezuelan Case”. In 1998 he

published another paper under the OIES umbrella called “The New

Governance of Venezuelan Oil”. Both papers reflect Mommer’s own

understanding of how commercial relationships between the State,

through its vehicle PDVSA, and foreign companies should be modeled. He

argues that Venezuela, in regards to the public administration,

possesses an appalling record of economic performance and even goes on

to admit that PDVSA was “…the only profitable, stable and dynamic

institution” [sic] of the country. Alarmingly Mommer condemns the

management of the oil giant for having, effectively, taken control away

from the Venezuela’s Minister of Mines vis-à-vis energy policy and

related activities. The State has a role of administrator of a system,

coined by Mommer, as rent-capitalism (little he seems to know about

mercantilism…).

The FT Energy Newsletters – Energy Economist of June 1, 1998,

carries an article whereby it is argued that the policy of opening up

Venezuela (Apertura Petrolera) to foreign firms to recuperate marginal

oil fields, augment production and in some cases initiate exploration

activities had been a resounding success:

“PDVSA began in 1991 to put various of its marginal or low-yield

fields out to tender to domestic and foreign firms to reactive under

operating contracts. Proven reserves in the marginal fields, mainly

situated in western Venezuela, are estimated at close to 2 billion

barrels of light and medium crude oil. Together with a second round in

1993, a total of 15 contracts were awarded to companies, although one

was subsequently cancelled.

A third round of 18 marginal fields offered last year was

massively oversubscribed, with a record 240 investors queuing up to

participate. PDVSA eventually received GBP 2.1bn, more than twice what

the company had anticipated (see FTEE 188/10). The total investment for

these third round fields alone is now estimated at between GBP 8bn and

GBP 10bn. Venezuela will also benefit from foreign technology and

expertise; foreign operators now expect to boost production from the 18

fields from 150,000 bpd to 500,000 bpd, far greater than PDVSA’s

original forecasts of 350,000 bpd.

Mommer, begged to differ though, he advocated from the get go that

the internationalization plan of PDVSA was flawed, unprofitable and

prejudicial for Venezuela’s interests. Mommer went on to become adviser

to OPEC Secretary-general Ali Rodriguez, then back to managerial

positions in PDVSA. In 2002 Mery Mogollon published an article entitled

“VENEZUELA: ‘PARALLEL’ PDVSA LEADERSHIP SEEKS ALI RODRIGUEZ’S REMOVAL”

in which one can read the tactics devised by Mommer, by this time

already in company of Boué, to have the management of PDVSA removed and

replaced by a group of revolutionary supporters of Hugo Chavez. Said

group, structure created by Mommer, was formed by Adina Bastidas,

Gustavo Perez Issa, Vladimir Lazo, Carmen Romero, Yolanda Vetencourt,

Victor Poleo, Gaston Parra, Carlos Mendoza Potella, Alfreda Riera,

Argenis Rodriguez, and Felix Rodríguez.

Juan Carlos Boué

In the current version of the OIES’ website one can see the profile of Juan Carlos Boué.

Dr Boué is meant to be an expert in “Microeconomic and logistical

aspects of oil markets and oil trading. Oil geopolitics. Oil and gas

taxation. Oil and development. OPEC. Political economy of oil in Latin

and North America”. His professional career appears to be linked solely

to PEMEX, the national oil company of Mexico, his own country. Boué has

also written about the petroleum industry of Venezuela; a book

published in 1993 entitled “Venezuela: The Political Economy of Oil”

and more recently a paper entitled “the Internationalization Programme

of PDVSA”. Boué’s opinions are almost a repetition of Mommer arguments

and strikingly similar to those of Mark Weisbrot;

i.e. the whole purpose of PDVSA in its internationalization campaign

was to divert revenues that should have ended up in Venezuela’s

treasury coffers, in the form of fiscal contribution and taxation, to

the USA. That is the reason why Chavez, a complete ignorant of the oil

business, keeps hammering upon the argument that CITGO is ‘financing’

Bush. The chemical composition and characteristics of the Venezuelan

crude lacks relevance in the view of these experts, the issue revolves

around the unpatriotic conduct of former PDVSA management and the

evident ideological collision of market oriented method of management

with obsolete socialist utopias.

Last month I received a copy of the recent appointments of the new PDVSA board of directors

produced in a meeting held on January 19 2005. Surprisingly enough the

name of Juan Carlos Boué pops up as Vice President of Commerchamp

(subsidiary of Petróleos de Venezuela S.A. that sells aviation fuel,

lubricants and services related to PDVSA). It is a given that said

appointment came to fruition thanks to the good auspices of old pal and

now multitasked-PDVSA’s-executive-director Bernard Mommer. Sensing a

potential conflict of interests between Boué’s role as a senior

research fellow of the non-partisan OIES and his executive position at

Commerchamp, I decided to send him an email to his electronic address

at the OIES. He kindly replied, although his arguments are, in my view,

not only flawed but extremely ignorant.

From: A. Boyd

Date: 03/02/05 13.13 GMT

To: Juan Carlos Boué [juancarlos.boue@oxfordenergy.org]

Subject: Information request

Dear Dr Boué,

It is with great interest that I have read your recent paper

entitled “The Internationalisation programme of PDVSA”. My attention

was drawn particularly to this argument:

“…covenants have probably become the best protection for the

internationalisation programme against the interference of the

Venezuelan government. For instance, in the hypothetical case that the

Venezuelan government had tried to force through the sale of PDVSA’s

refining assets in the United States, the fiscal agent for the special

purpose vehicle could have declared PDVSA in breach of covenant and

then proceeded to retain the whole of the accounts receivable generated

by designated clients in the United States until enough funds were

available to pay off the creditors of the vehicle (the balance of PDVSA

Finance bond issues to the end of 2001 was 3,300 MMUSD)”.

Ergo according to that predicament, Hugo Chavez would be seeking to

sell CITGO in order to hedge himself against possible actions of the

fiscal agent.

Could you please confirm that indeed that is the reason behind the recent move to get rid of CITGO’s assets?

Cordially, A. Boyd

————————————————————-

From: Juan Carlos Boué [juancarlos.boue@oxfordenergy.org]

Date: 03/02/05 14.13 GMT

To: A. Boyd

Subject: Re: Information request

Dear Aleksandr:

Actually this argument is now rather passé, because

most of the debt issuance for which these considerations applied

(specifically PDVSA Finance) was retired by PDVSA in the latter part of

last year. In any case, the sale of Citgo would not have been a hedge

against the actions of the fiscal agent. To the contrary, such a sale

would have been taken by the fiscal agent as a breach of covenant, with

appropriate actions following. Bear in mind that the fiscal agent is

merely a large bank working on behalf of the investors in a special

purpose vehicle (in this case, the vehicle was called PDVSA Finance).

The reason why the President wants to sell Citgo has to do with

discounts: owning Citgo is bad business because crude oil sold under

the supply contracts that Citgo has realises, on average, 1.10 dollars

per barrel less than the same crude sold in the open market. Hope that

this is of use. JCBoué

—————————————————————–

From: A. Boyd

Date: 03/02/05 14.18 GMT

To: Juan Carlos Boué [juancarlos.boue@oxfordenergy.org]

Subject: Re: Information request

Dear Dr Boué,

Many thanks for your rapid response. Thinking aloud, wouldn’t it be

better, from a strategic point of view and taking into account the

network of outlets for refined products that CITGO possesses, to revise

and adjust, instead, the supply contracts between PDV and CITGO?

Cordially, A. Boyd

————————————————————–

From: Juan Carlos Boué [juancarlos.boue@oxfordenergy.org]

Date: 03/02/05 14.31 GMT

To: A. Boyd

Subject: Re: Information request

The idea that one needs outlets for refined products in order to

sell crude oil is a fallacy. Product marketing is a low return business

as was, until very recently, refining. A company like PDVSA, with a

limited capital budget, will always be better off dedicating all of its

investment capital to exploration and production activities. Notice

how, until very recently, all the large oil companies in the world were

very keen to get out of refining and marketing and concentrate on

E&P. Why should it be that what is good for them is not good for

us? Furthermore, the internationalisation programme has cost the

Venezuelan people around 20 billion dollars in foregone revenues since

1982. Today, it would be possible to recoup a far larger proportion of

this loss than would have been the case in the past.

End of messages

There have been mixed reactions to the above exchange. On the one

hand some experts believe that the new policies of PDVSA are been

modeled on those implemented by PEMEX, which need be stressed, are not

to be heralded as a showcase of profitability or excellence. Others

feel that the selection process of investment banks that surely shall

broker the sale of CITGO will represent fantastic opportunities for

some to make a killing, for corruption and obscure decisions will

dictate Venezuela’s course of action. To Boué’s claim that “the

internationalization programme has cost the Venezuelan people around 20

billion dollars in foregone revenues since 1982″ an expert replied “it

can easily be demonstrated that the six year presidency of Hugo Chavez

has cost PDVSA shareholders, i.e. the people of Venezuela, at least 60

billion dollars in nominal capital value losses”.

Sources also report that there is a somewhat valid apprehension that

Boué is one of the key elements in instilling the sudden motivation of

Chavez to sale CITGO. Furthermore it has been suggested that this

detrimental action to the network of international holdings of PDVSA

may be the result of Boué’s acting in cohorts with old employer PEMEX.

My own take is pragmatic. I do not see the purpose of selling

strategic assets due to unworkable supply contracts between a

subsidiary and a parent company. Neither do I understand how

refineries, which according to Boué have turned of late into a

lucrative business, need be disposed of. I firmly believe, this may be

interpreted by experts as an idiocy, that there is a fundamental

difference between “large oil companies in the world” (making their

money out of refining and marketing) and PDVSA like enterprises for the

vertical integration that the latter have can only be envied and

desired by the former. Imagine Shell or BP actually owning, without

contractual time constraints, the reserves that PDVSA has got, without

having to pay royalties of any sort to “rent-capitalist” governments.

It’s like comparing a supermarket (with the accompanying overheads)

that buys its products from middlemen, to a farmer who actually grows

his produce, transports it in his already paid of van and sells

directly to the end buyer in the farmer’s market at full price.

The fundamental questions that arise are; how come Mommer, a German

citizen, and Boué, a Mexican citizen, have got so much leverage with

Venezuela’s current administration? Does the chavista concept of

sovereignty apply only to US citizens? How come Boué admits quite

candidly “Why should it be that what is good for them is not good for

us?” Boué is not part of us, he’s Mexican, and his actions are defined

in my Venezuelan sovereignty taxonomic dictionary as treason.

What would be the OIES’ stance, in light of the partisan profile of

one of its senior fellows? Have PEMEX, Statoil, Saudi Aramco, Total,

Shell, Exxon, etc., got ‘autonomous researchers’ at the OIES?

5 thoughts on “Chavez’ plan to sale CITGO and the Oxford Institute for Energy Studies”

  1. Dear Mr. Boyd,The heart of Mr. J.C. Boué’s critique of PdVSA was that CITGO’s pre-tax profits have been more or less equal to the discounts at which the parent provides the crude. On a consolidated basis, the net effect is simply to transfer the taxable profit from Venezuela to the USA, benefiting the US Treasury over Venezuela’s. Meanwhile, the costs of debt, shipping, and other “services” get charged at the parent company level, further lowering the surplus taxable in Venezuela. He also points out that the compliated offshore structures obfuscate any tax audit. He suggests that, except for this elaborate transfer pricing to reduce taxes paid in Venezuela, CITGO and the rest of the overseas network is unprofitable. See: http://www.pdvsa.com/pdf/publicaciones/public_02.pdfThe fact that Boué’s consulting firm got paid for the analysis does not in itself refute his analysis. Nor does it invalidate his report to point out coincidences between Boué’s views and people sympathetic to Chávez. The only valid complaint would have to be a point-by-point set of counter-proofs, best offered by someone with extensive financial control experience. If you are aware of any, please share.Boué’s arguments do not appear ideological. They could also be employed by a free-market libertarian to point out why state-control and efficiency are an oxymoron, that PDVSA’s expansion was riddled with inefficiencies, and that the best solution would be divestiture from CITGO and leveling of taxes to reduce fiscal artbitrage.Boué was certainly not asked, and did not address, whether PDVSA’s home operations are run well or not. I do not see him recommending PEMEX as a model, either. Few people at PEMEX are happy with its tax and overhead situation.Regards.

  2. Dear Mr Koch,Please read my exchange with Mr Boue and pay extra attention to my comments regarding the so called unprofitability due to the supply contracts between CITGO and PDVSA. The truth of the matter is that Boue, currently sitting in the board of PDVSA and CITGO, aren’t water tight for it’s a know fact that refining has indeed turned into a highly profitable business.The argument that the internationalization of PDVSA has produced $20 billion in losses, otherwise known as diverted taxes and income, over a period of 20 years pales when compared to the $60 billion losses of PDVSA under Chavez control, which started effectively in 2002.Mr Boue is not fit for the job he’s assigned to do for the academic flair of his papers doesn’t hide his outstanding ignorance on the particular subject matter of PDVSA or his political colours. His but a pupil of Bernard Mommer, that other pundit who thinks that PDVSA reached world class status by mere chance.

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