E.O. 12958: DECL: 01/12/2017
TAGS: EPET, ENRG, EINV, ECON, VE
SUBJECT: OIL TRADING: SKELETONS IN PDVSA’S CLOSET
REF: A. 2006 CARACAS 3224
B. CARACAS 183 AND PREVIOUS
Classified By: Acting Economic Counselor Shawn E. Flatt for Reason 1.4
(D)
1. (C) SUMMARY: A senior PDVSA executive who was forced into
retirement in March 2007 indicated that PDVSA exports 38 million
barrels of oil each month, excluding crude from the former Faja
strategic partnerships. President Chavez had initially commanded PDVSA to
cease exports to the United States before the November
elections, though he was later discouraged from doing so, yet he still
plans to pursue this action. PDVSA is incurring losses of 7 billion USD
annually due to its reliance on imports for gasoline components. Additionally,
the company is losing 3 billion USD each year as a result of the Cuban
state oil company CUPET’s failure to settle payments for crude shipments,
and an undetermined amount related to fuel oil deliveries to
Argentina. Fuel oil shipments to China were halted due to the steep
discounts the Chinese sought. A PDVSA director warned that PDVSA would be
“dead” if WTI prices fell to 37 USD. END SUMMARY
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UNCERTAIN CONDITIONS
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2. (C) The Petroleum Attaché met on July 17 with a former senior
PDVSA executive who was compelled into retirement in March 2007
to explore PDVSA’s internal operations. The executive last held a position
in trading. He reported that PDVSA has continually exported 38 million
barrels of crude oil each month, excluding crude exports from the former
Faja strategic partnerships. Out of this total, 900 to 925,000 barrels per day are designated for Citgo. The supply contract with Citgo has an annual quota, and daily amounts can vary. For example, Citgo prefers not to receive any crude from PDVSA after the second week in December, owing to their intent to reduce stock for tax reasons.
3. (C) The executive noted that PDVSA is primarily selling most of
its production on the spot market “at distress.” This means the market is
aware that PDVSA needs to sell its crude and lacks the luxury of shopping
for better offers. The executive mentioned that PDVSA was selling its crude at a
“distress of six” (a discount of six USD per barrel). He suspected that
traders from major IOCs were working together to drive down prices for
PDVSA’s crude. He commented that traders could buy at a discount because
they were “assisting” PDVSA in placing its production. He asserted that PDVSA lacks a coherent trading strategy. When Petatt made a note concerning reports that PDVSA traders were inexperienced, the executive explained that senior PDVSA management intentionally wanted traders who were less knowledgeable. This decision was partly due to management’s desire to prevent traders from uncovering how they were misappropriating funds. Furthermore, they did not want traders capable of stealing from PDVSA. The executive revealed that an experienced trader had stolen 20 million USD from PDVSA and laundered the funds in Panama.
4. (C) The executive claimed that during his trading period, he worked directly under President Chavez. He was directed on several occasions to execute trades that originated from President Chavez. The executive mentioned that Chavez had ordered PDVSA to suspend crude exports to the United States leading up to the elections in November. This order was ultimately not executed because someone managed to convince Chavez that it was counterproductive for Venezuela. The executive hypothesized that now that Chavez has considered this, he will eventually attempt to implement it.
5. (C) When questioned about the existence of contingency plans for a
cutoff of Venezuelan crude supply to the States, the executive chuckled and stated that no plans were in place and that senior management at PDVSA was unsure of what it was doing. He reiterated that they were not clear on PDVSA’s actual production figures. He claimed they were oblivious to how much revenue PDVSA was truly generating. He later clarified that Eudomario Carruyo, a PDVSA director and the company’s unofficial CFO, knew precisely how much money PDVSA was making and where the funds were directed.
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GASOLINE COMPONENTS AND LUBRICANTS
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6. (C) The executive revealed that PDVSA is currently importing
125,000 barrels of gasoline components daily due to issues with its
refineries. At current market rates, he estimated that these imports are costing PDVSA about 4 billion USD annually. (COMMENT: The executive’s statements on the importation of gasoline components are consistent with reports in Reftel A. END COMMENT)
7. (C) He also mentioned that PDVSA has been sourcing base
lubricants from abroad because it cannot obtain the crudes necessary for
lubricant manufacturing at its own refineries. The executive stated that
PDVSA used to import Basra crude for this purpose. However, senior management declared Basra crude too expensive and instructed him to secure a combination of Maya and Isthmus crudes. The executive expressed frustration that this mix was commercially unviable but was overruled by his bosses. Unfortunately, due to a fallout between President Chavez and Mexican President Vicente Fox, PDVSA was ordered to stop buying oil from Mexico. Consequently, PDVSA had to import base lubricants rather than produce them. The executive did not specify the financial losses PDVSA is facing from these lubricant imports.
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CUBA AND ARGENTINA
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8. (C) Besides losses from gasoline component imports, the executive estimated that PDVSA is losing about 3 billion USD owing to Cuba’s failure to pay for crude imported from Venezuela. He noted that Venezuela had recently signed a new contract with Cuba for crude sales to CUPET, the Cuban state oil company. He was uncertain about the terms of the new contract, stating that knowledge of the specifics seemed to be restricted to very high-level BRV officials.
9. (C) The executive explained that PDVSA commenced fuel oil shipments to Argentina in 2004. At that time, he was informed that PDVSA was obligated to send oil to Argentina due to humanitarian concerns for the “freezing Argentines.” He argued to his superiors that PDVSA could not supply Venezuelan fuel oil because its sulfur levels were too high for Argentine plants. To meet the commitment, PDVSA had to purchase fuel oil from Mexico. He noted that PDVSA incurred losses on all Argentine fuel oil shipments between 2004 and 2006, and he was unclear if PDVSA had shipped or would ship fuel oil this year.
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PACIFIC RIM AND CHINA
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10. (C) The executive stated that PDVSA was ordered to implement a Pacific Rim strategy in 2004. He expressed that PDVSA could never profit in the Pacific Rim due to market conditions. The executive stated that the market consists of two segments: California/the U.S. West Coast and the Pacific Rim in Asia. He observed that Middle Eastern producers, particularly Saudi Arabia, dominate the Asian market with long-term supply contracts. He asserted that Saudi Arabia would never permit PDVSA to break into the Asian markets and has used PDVSA’s attempts as opportunities to seize market share in the Eastern U.S. market.
11. (C) The executive also contended that PDVSA had ceased shipping oil to China despite public assertions to the contrary. He claimed the Chinese were buying fuel oil at “a distress of
20.” Consequently, PDVSA could not provide oil to the Chinese at
that rate without incurring severe losses. PDVSA sought to negotiate a new arrangement with the Chinese but only managed to lower the distress to 18. As a result, it halted shipments
to China. (COMMENT: A senior CNPC executive informed Petatt that
her company was indeed receiving a discount on oil purchases from
PDVSA but did not disclose the discount amount. Our understanding is that PDVSA is still shipping crude to China, although this conclusion is based on implications from CNPC officials’ remarks rather than confirmed evidence. END COMMENT).
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IRAN
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12. (C) The executive revealed that PDVSA has made two
gasoline shipments to Iran, with the last occurring in
February 2007. On one occasion, PDVSA had to utilize one of its own coastal tankers to transport gasoline to Iran. The executive noted that the tanker was old and in very poor condition. Since it was not supposed to operate outside Venezuelan coastal waters, insurance would not have covered any accidents that might happen at sea. The executive estimated that a Panamax-class tanker would take approximately 80 days for a round trip to Iran, but a PDVSA vessel would likely take much longer due to its state. He stated the vessel was expected to bring back additives on its return journey.
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WHERE IS PDVSA’S MONEY?
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13. (C) The executive recounted that Carruyo mentioned to him during a luncheon in November that PDVSA would be “dead” if WTI prices reached 37 USD per barrel. He believes the true danger point for PDVSA is even higher WTI prices owing to declining production and management issues. However, he declined to specify a particular price.
14. (C) The executive also noted that PDVSA was instructed several years ago to withdraw its funds from U.S. banks. He claimed Carruyo consulted him for recommendations on which European banks to utilize, which surprised him. He recommended Dresdner Bank AG and Deutsche Bank, but when Carruyo asked about Barclays Bank, he dismissed it.
15. (C) The executive expressed gratitude towards Carruyo, especially as a PDVSA pensioner. He stated that Carruyo transferred the
9 billion USD PDVSA pension fund to various European banks years prior to “hide the money from Chavez.”
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COMMENT
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16. (C) While we have limited means to validate the executive’s claims, we recognize that they align with much of what we have heard from other sources and documented previously (Reftel B). We consider his assertion regarding Chavez contemplating the suspension of crude exports to the United States significant.