EO 12958: DECL: 12/01/2017
TAGS: EPET, ENRG, EINV, ECON, VE
SUBJECT: OIL TRADE: PDVSA’S DIRTY LITTLE SECRETS
REF: A. 2006 CARACAS 3224
B. CARACAS 183 AND PREVIOUS ONES
Classified by: Acting Economic Counselor Shawn E. Flatt for Reason 1.4
(D)
1. (C) SUMMARY: A senior PDVSA executive forced to retire in March 2007 indicated that PDVSA exports 38 million barrels of oil per month, excluding crude from former strategic partnerships in the Faja. President Chávez ordered PDVSA to stop exporting to the United States before the November elections but was later dissuaded; nonetheless, there remains an intention to follow through. PDVSA loses $7 billion annually due to its need to import gasoline components. Additionally, PDVSA is losing $3 billion a year due to Cuba’s default on crude shipments from the state-owned oil company CUPET, and an unspecified amount of fuel oil shipments to Argentina have been affected. Shipments of fuel oil to China were halted due to the steep discounts demanded by the Chinese. A PDVSA director told the executive that PDVSA would be “dead” if WTI prices fell to $37. END SUMMARY
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THEY DON’T KNOW WHAT’S GOING ON
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2. (C) The Oil Attache met on July 17 with a former senior PDVSA executive who was forced to retire in March 2007 to discuss the internal workings of PDVSA. The executive’s last position with the company was in trading. According to him, PDVSA has consistently exported 38 million barrels of crude per month. This figure does not include crude exports from former Faja strategic partnerships. Of this amount, 900,000 to 925,000 daily barrels go to Citgo. The supply agreement with Citgo has an annual quota, fluctuating figures. For example, Citgo does not wish to receive crude from PDVSA after the second week of December as they want to deplete their own stocks for tax purposes.
3. (C) According to the executive, PDVSA is selling most of its production on the “distress” spot market. In other words, the market knows that PDVSA has to sell its crude and cannot afford to seek the best offers. The executive said PDVSA was selling its crude at a “distress of six” (a $6 discount per barrel). He believed that traders from leading IOCs were colluding to drive down PDVSA’s crude prices. He said the traders could buy at a discount because they were “helping” PDVSA place its output. The executive insisted that PDVSA lacks any trading strategy. When Petatt noted that the traders have declared that PDVSA traders are young and inexperienced, he stated that PDVSA’s top management consciously decided not to hire traders who knew what they were doing. One reason for this decision was that the upper management did not want traders capable of uncovering how they were robbing the company. Furthermore, the managers did not want traders who had the financial insight to embezzle from PDVSA. The executive claimed that an experienced trader stole $20 million from PDVSA and deposited the funds in Panama.
4. (C) The executive also claimed that during his tenure in trading he worked directly for President Chávez. He recounted a series of orders originating from Chávez. According to the executive, President Chávez ordered PDVSA to stop exporting crude to the United States in the run-up to the November elections. The order was never fulfilled because someone convinced Chávez that the idea was counterproductive for Venezuela. The executive opined that now that Chávez has the idea in his head, he would eventually try to implement it.
5. (C) When asked if contingency plans were drafted for a cut in Venezuelan crude supplies to the States, the executive laughed derisively and replied that there were no plans in place and that PDVSA’s upper management had no idea what they were doing. He repeatedly stated that PDVSA’s top management was unsure of what the actual production numbers were. He also claimed they had no idea how much money PDVSA was earning. Later, he modified his comment, saying that Eudomario Carruyo, PDVSA’s director and de facto CFO of the company, knew exactly how much money PDVSA was generating and where the funds flowed.
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GASOLINE AND LUBRICANT COMPONENTS
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6. (C) The executive asserted that PDVSA is currently importing 125,000 barrels of gasoline components daily due to issues with its own refineries. At current market prices, he estimated these imports cost PDVSA about $4 billion a year. (COMMENT: The executive’s statements about importing gasoline components contradict what we reported in Reftel A. END COMMENT)
7. (C) He also claimed that PDVSA has been importing base lubricants due to an inability to secure the crudes necessary to manufacture lubricants in its own refineries. The executive said that PDVSA used to import Basra crude to produce lubricants. When upper management decided Basra crude was too expensive, he was ordered to secure a mix of Maya and Istmo crudes. The executive complained that using this mixture made no commercial sense but was enforced by his superiors. Unfortunately for PDVSA, Chávez then had a falling out with Mexican President Vicente Fox and ordered PDVSA to stop buying oil from Mexico. As a result, PDVSA was forced to import base lubricants rather than produce them. The executive did not provide figures on how much PDVSA is losing from importing lubricants.
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CUBA AND ARGENTINA
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8. (C) Besides what PDVSA is losing from importing gasoline components, the executive estimated that it is losing about $3 billion due to Cuba’s failure to pay for crude it imports from Venezuela. The executive stated that Venezuela recently signed a new contract with Cuba for the sale of crude to CUPET, the Cuban state-owned oil company. He declared he wasn’t sure of the terms of the new contract, and additional knowledge of the specific terms seemed limited to high-level officials of the BRV.
9. (C) The executive claimed that PDVSA began shipping fuel oil to Argentina in 2004. He was told at that time that PDVSA had to send oil to Argentina because the “Argentines were freezing.” The executive informed his superiors that PDVSA couldn’t send Venezuelan fuel oil to Argentina due to its sulfur content being too high for Argentine plants. To meet the commitment of supplying Argentina with fuel oil, PDVSA had to purchase fuel oil from Mexico. The executive asserted that PDVSA lost money on all Argentine fuel oil shipments between 2004 and 2006. It was unclear whether PDVSA has shipped or will ship fuel oil this year.
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PACIFIC RIM AND CHINA
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10. (C) The executive also asserted that PDVSA was ordered to adopt a Pacific Rim strategy in 2004. He complained that PDVSA could never make money in the Pacific Basin due to the market’s nature. According to the executive, the market is composed of two parts: California/the West Coast of the United States and the Pacific Basin in Asia. The executive stated Middle Eastern producers, particularly from Saudi Arabia, had a lock on the Asian market and long-term supply contracts. He said that Saudi Arabia would never allow PDVSA to break its grip on Asian markets and used PDVSA’s attempts to enter the market as opportunities to steal market share in the U.S. East Coast market.
11. (C) The executive also claimed that PDVSA is no longer sending oil to China despite public claims to the contrary. He said the Chinese were buying fuel oil at a “distress of 20.” As a result, PDVSA could not supply the Chinese on those terms without significant loss. PDVSA tried to negotiate a new deal with the Chinese but could only reduce the distress to 18. Consequently, they halted shipments to China. (COMMENT: A high executive from CNPC told Petatt that his company was receiving a discount on oil purchases from PDVSA. He did not specify the amount of the discount. We understood that PDVSA is still sending crude to China, but we rely on the implications of CNPC officials’ comments rather than concrete evidence. END COMMENT).
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IRAN
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12. (C) According to the executive, PDVSA has made two shipments of gasoline to Iran. The last shipment occurred in February 2007. In one instance, PDVSA had to use one of its own coastal tankers to deliver the gasoline to Iran. The executive said the tanker was old and in very poor condition. Since the tanker was not supposed to leave Venezuelan coastal waters, insurance would not have covered it if an accident occurred at sea. The executive estimated that a Panamax-class tanker would take approximately 80 days for a round trip to Iran. He estimated that it would take the PDVSA vessel considerably longer due to its condition. He said the vessel was supposed to carry additives on its return journey.
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WHERE IS PDVSA’S MONEY?
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13. (C) The executive stated that Carruyo told him in November over lunch that PDVSA would be “dead” if WTI prices reached $37 per barrel. He said he personally believed that the danger point for PDVSA is a higher WTI price due to declining production and management issues at PDVSA. However, he refused to give a specific price.
14. (C) The executive also stated that PDVSA was instructed to withdraw its funds from U.S. banks several years ago. He claimed that Carruyo approached him and asked for suggestions on which European banks to use. The executive was surprised by the request but recommended Dresdner Bank AG and Deutsche Bank. Carruyo then asked if he thought Barclays Bank was another candidate, and the executive replied no.
15. (C) The executive also expressed gratitude to Carruyo because he is a retired PDVSA employee. He said that Carruyo moved $9 billion from PDVSA’s pension fund to a number of banks several years ago to “hide the money from Chávez.”
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COMMENT
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16. (C) Although we have little or no way to confirm the executive’s claims, we note that they align with many of the things we have heard from other contacts and have previously reported (Reftel B). We believe that his assertion that Chávez is considering suspending crude exports to the United States should be taken seriously.