Rafael Ramirez's initial comments to the press since becoming head of PDVSA appear to support the view that his appointment will increase political control over the state oil company.

Although the details of the proposed review of PDVSA are still vague, it appears that the two main objectives will be to bring about a greater alignment between the company and the government's social policies, and to accelerate the implementation of a long-awaited divestment programme for some of the company's less-profitable overseas assets.

Concerns about the increasing politicisation of the state oil company and the state's use of PDVSA's cash flow for non-commercial purposes, as well as its ability to maintain investments under a lower oil-price scenario, will continue.

PDVSA Reviews Operations

While President Hugo Chavez has been out of the country drumming up foreign investment for the hydrocarbons sector and, as well as signing a number of oil co-operation agreements with fellow OPEC members in the Middle East, energy officials in Venezuela have made a number of statements indicating that further changes are planned at the state oil company PDVSA.

PDVSA's new president, Rafael Ramirez, has announced plans to restructure the company and align it with the government's social policies. Ramirez has also announced a review of the company's operations, which may entail the sale of part of the company's US subsidiary, Citgo, or some of its assets in Europe. Ramirez also declared his intention to introduce tighter controls in order to reduce corruption. The company will also have to amend its internal regulations in order to permit Ramirez to serve on its board of directors, while retaining his position as energy and mines minister. Meanwhile, Deputy Energy Minister Luis Vierma said in a presentation to the steel sector that Venezuela required at least two more refineries.

Post-Strike PDVSA

In March 2004, as energy and mines minister, Rafael Ramirez announced the expansion of PDVSA's board of directors and the adoption of a new organisational structure for the company that saw the reintegration of PDVSA's eastern and western divisions. It appeared at the time that this represented the completion of a restructuring process that had begun in early 2003, when the company was divided into east and west divisions, and a third of its workforce dismissed in an attempt to break the strike and facilitate the rapid resumption of oil production. Although it is not clear whether the review of the company's operations will entail any further changes to the company's organisational structure, it looks likely that some decision will finally be made on the possible disposal of some of PDVSA's less-profitable foreign assets.

Reviewing PDVSA's International Portfolio

The Chavez administration has long made known its desire to revise the 'internationalisation' policy that was initiated by PDVSA in the early 1980s, allowing PDVSA, through its foreign subsidiaries, to acquire total ownership or equity interests in 17 refineries in the US and Europe. Although PDVSA has been in discussions over the sale of its stake in Germany's Ruhr Oel Gmbh refiner, and there has been speculation about the possible sale Citgo, to date the company has not disposed of any of its foreign assets .

Outlook and Implications

Although precise details of the review and the company's new objectives following the merger of the positions of head of PDVSA and energy minister in the person of Rafael Ramirez are still unclear, his initial comments appear to affirm the perception that his appointment will increase political control over the state oil company and lead to an even greater involvement of the company in social projects that are not directly related to oil production. The approval of the 2005 budget this week, which sets aside over 40% of the total budget for social spending, and reports that PDVSA's contributions to the government-sponsored misiones projects are set to increase in 2005, will exacerbate these concerns, as will the report in today's El Universal that the submission of PDVSA's 2003 annual results to the SEC is not expected until January 2005, six months behind schedule.

PDVSA expects net revenues from domestic and international crude oil and refined product sales to total over US$26bn by end-2004, compared to net income from sales for 2003, as a whole, of US$20bn, making 2004 'an exceptional year' for PDVSA. Nevertheless, there are ongoing concerns that not enough of the oil windfall is being reinvested in the oil sector and that this is impairing the company's ability to restore its pre-strike production capacity. With some of the company's older fields declining at a rate of around 22% per year, Venezuelan oil is more expensive to produce than that of most other countries and it is estimated that around US$2.5bn per year needs to be invested just in maintaining oil production. PDVSA had so far spent 75% of its total US$5bn budget for 2004, but the level of investment is thought to be lower in the west of the country, where many of the older fields are located. 

Insufficient transparency with regard to the company's accounts, combined with what the international rating agency Fitch has described as the use of PDVSA's cash flow for 'quasi-sovereign and fiscal uses, rather than for commercial investment purposes', could have serious implications for the company's ability to fund its US$37bn capital expenditure programme in a lower oil-price scenario, and ultimately, for its ability to maintain production levels.