PDVSA - OIL COMPANY OR SOCIAL DEVELOPMENT AGENCY?

C O N F I D E N T I A L CARACAS 002118

SIPDIS


NSC FOR TSHANNON AND CBARTON
ENERGY FOR DPUMPHREY AND ALOCKWOOD
SOUTHCOM FOR POLAD

E.O. 12958: DECL: 06/28/2014
TAGS: EPET EFIN PGOV VE ECON VE
SUBJECT: PDVSA - OIL COMPANY OR SOCIAL DEVELOPMENT AGENCY?

REF: CARACAS 2034 AND PREVIOUS

Classified By: ECONOMIC COUNSELOR RICHARD SANDERS; FOR REASONS 1.4 (B)
AND (D)

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SUMMARY
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1. (C) Through budgetary and non-budgetary spending,
Petroleos de Venezuela (PDVSA) is now the primary agent for
implementation of Chavez Administration social programs.
Over $1.7 billion has been designated to social development
programs in PDVSA's 2004 budget while up to an additional $2
billion in PDVSA oil receipts will reportedly be used to
establish President Chavez's "Special Development Fund,"
supposedly for development of big ticket national
infrastructure projects. In recent months, PDVSA has also
attempted to take over management of at least some part of
the funds budgeted by international oil companies for their
own corporate social responsibility programs in Venezuela.
When money is channeled directly through PDVSA, however, the
Chavez Administration is bypassing the accounting and
budgetary control that should rest with the National
Assembly. A PDVSA debt buy-back program announced on June 28
may also help PDVSA to evade the transparency required by
U.S. financial sector regulations in the future. The most
troubling aspect of this emphasis on PDVSA's new role as a
social welfare agency, however, is that it is deflecting the
company's attention from its core mission, oil production.
End summary.

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PDVSA: DEVELOPMENT PIGGY BANK
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2. (C) Recent developments have underscored that PDVSA is not
simply "connected to the national development program" as
Energy Minister Rafael Ramirez_ has put it, but is now the
primary agent for implementation of Chavez Administration
social programs. This trend began in 2003 when PDVSA
affiliate CVP started funding a program to build affordable
housing called "Oil for the People." (NOTE: In 2003, CVP,
the Venezuelan Petroleum Corporation, was put in charge of
the 33 existing operating agreements under which foreign oil
companies do business in Venezuela as well as the four extra
heavy crude projects. END NOTE) Under this program, CVP,
working with the State-owned Venezuelan development bank
BANDES, created a $300 million trust fund (since augmented to
$500 million). The fund was designed to provide mortgages
for the purchase of homes developed by the CVP. Supposedly,
BANDES will repay the CVP trust fund when the homeowner pays
off the loan.


3. (C) Starting in 2003, the Ministry of Energy and Mines
(MEM) has also been designated either as the Ministry in
charge or as a participant in a number of Chavez,s pet
social plans. These include "Mision Ribas," the literacy
plan; "Mision Barrio Adentro" (Inside the Neighborhood),the
plan under which Cuban doctors provide medical services to
the poor; "Mision Sucre," a plan to provide grants for higher
education; and "Mision Vuelvan Caras" (About Face),a plan to
provide job training to the poor. The funding for these
efforts has come out of PDVSA. PDVSA has also made
contributions in kind to President Chavez's programs. A
number of Caracas properties formerly occupied by PDVSA have
been turned over for the use of the recently formed
Bolivarian University of Venezuela.

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PDVSA'S 2004 BUDGET
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4. (C) This trend has accelerated in 2004 with the
announcement in January of PDVSA's 2004 budget in which
$1.716 billion was budgeted for social development. These
monies include $600 million earmarked to the CVP for a trust
fund for agricultural development (the "Zamora Fund") as well
as an additional $500 million, at least some of which will be
allocated to the &Oil for the People8 housing program.

These funds were included in the investment portion of the
PDVSA budget. An additional "Social Development Plans" line
item under the "Other Costs and Expenses" portion of the
PDVSA budget is budgeted at $616 million (Note: the MEM's
participation in the various programs listed in Para. 3 may
well be covered by this budget item but we cannot verify
that.) In early 2004, PDVSA Gas also announced a new
project, "Gas Adentro," (Gas Inside, i.e., the neighborhood
) a clear reference to the "Barrio Adentro" medical program)
to provide bottled gas to poor sectors of Caracas and other
major cities. According to a local consultant, the proposed
funding for "Gas Adentro" is about 15 percent of PDVSA Gas'
2004 budget and the project appears to be a virtual give away
of the gas.


5. (C) But there are other indicators of the change in
PDVSA's role. At the Latin American Petroleum Show, held
June 15-17 in Maracaibo, econoff attended a presentation by
PDVSA detailing its plans for the development of the Tomoporo
field, the most significant new oil prospect in Venezuela.
The presentation included a slide listing the social
development projects that will supposedly be included in the
development of Tomoporo, including artesanal fishing and
tourism development projects. The final slide revealed that,
as part of the Tomoporo project, PDVSA will fund the
development of a railroad in western Venezuela. This raises
the possibility that additional "social development" or other
project financing will now be included as a matter of course
in the budgets for the development of oil and gas projects.

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DEEP POCKETS OF THE PRIVATE SECTOR
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6. (C) In the past few months, PDVSA, and particularly CVP,
have also attempted to take over some portion of the social
development budgets of at least some of the private sector
oil companies present in Venezuela. The international oil
companies (IOC's) have traditionally managed their own
sustainable development programs to reflect their own vision
of corporate social responsibility. In fact, ChevronTexaco
recently won an OAS award for its program in Maracaibo. In
early April, however, ChevronTexaco and the other companies
that are expected to be involved in the development of
off-shore oil and gas projects were summoned to a meeting in
Sucre state. According to a participant, the CVP
representatives demanded that some percentage of company
social development budgets be turned over to the CVP for
project development. Sucre state representatives at the
meeting said the money would be used to foster the various
Chavez Administration social programs in the state. While
IOC representatives have informed econoff that they are
unwilling to simply give money to CVP, PDVSA and the MEM are
pushing the companies to work on projects that will be
defined by the GOV. These discussions continue.

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THE &SPECIAL DEVELOPMENT FUND8
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7. (C) Reftels reported on the diversion of an additional $2
billion of PDVSA funds into a "Special Development Fund"
announced by President Chavez on May 23. At that time,
Chavez stated that $2 billion in PDVSA funds would be
transferred to BANDES to be used to finance national
development projects such as a sugar mill, a new state
airline, electricity projects, a subway line in a Caracas
suburb, and an irrigation system in western Venezuela. Since
then, observers have noted that most of these projects were
already covered in other parts of the GOV budget. Most
observers also commented that the proposed fund would be
illegal under Venezuelan law that requires that PDVSA's
dollar receipts be turned over to the Central Bank. The GOV
has responded that it sought and received authorization from
the Central Bank Board for the establishment of the fund.


8. (C) In a June 25 meeting with econcouns, Alejandro Dopazo,
Finance Ministry Director General for Public Credit,
underlined that, in his view, the most important issue is not
that the money would not be run through the Central Bank but
that there is not a coherent, on-budget system for accounting
for it and spending it. Dopazo reported that a small, high
level committee is now working to get this back onto a more
legal track. He speculated that the means will be revision
of the legislation governing the Macroeconomic Stabilization
Fund (FIEM, a fund previously maintained by the GOV at the
Central Bank, in theory to be built up during periods of high
oil prices and drawn down when prices drop) so that some of
the money placed in it can be spent on social projects. In
any event, Dopazo claimed that nothing has been done with the
money and that it has not been given to state bank BANDES as
has been reported in the media.

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DEBT BUY BACK
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9. (C) In another development that could have a negative
impact on PDVSA, taken as it is with its "social development"
mandate, on June 28 PDVSA announced an offer to buy back up
to $2.6 billion of its external debt. The offer is in the
form of a "tender and consent" requiring all noteholders who
accept the purchase price to agree to certain amendments to
the current PDVSA Finance Ltd. transaction terms. If the
tender is completed successfully, all holders of outstanding
notes after completion of the tender will be bound by the
amendments. The amendments include the removal of certain
designated buyers for Venezuelan crude as well as a reduction
in the volume of oil that must be sold through PDVSA Finance
as collateral.


10. (C) According to a knowledgeable local energy analyst, on
its face it appears that PDVSA is simply doing what a normal
company would do, i.e., paying down its debt in a time of
high revenues. However, this analyst believes that the goal
of the buy back is an attempt to reduce the legal
requirements on PDVSA to tell all about its operations.
Depending on the type of bonds that PDVSA is successful in
buying back, i.e., those that carry a requirement that PDVSA
file an SEC report, the buy back could result in a reduction
in the amount of financial information the company is
required to give to U.S. regulators. Another Wall Street
analyst questions whether the proposed amendments would also
further open the door to the possibility of diversion of
Venezuelan exports away from the U.S. market.

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COMMENT
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11. (C) In a time of high oil prices, it is reasonable to
expect PDVSA to buy back debt and to contribute to GOV social
programs (although in an earlier day it would have been to
the FIEM, or Macroeconomic Stabilization Fund.) However,
when money is channeled directly through PDVSA, the Chavez
Administration is bypassing the accounting and budgetary
responsibility that should rest with the National Assembly.
BANDES, so far the preferred conduit for the PDVSA
development funds, is also free of any significant oversight,
even by the Superintendent of Banks. As noted above, it is
also possible that PDVSA may in the future be able to evade
the transparency required by U.S. financial sector
regulations.


12. (C) The most troubling aspect of this emphasis on PDVSA's
new role as a social welfare agency, however, is that it is
deflecting the company's attention from its core mission, oil
production. PDVSA Vice President Felix Rodriguez recently
admitted publicly that PDVSA had invested only 30 percent of
its 2004 investment budget in the first five months of the
year. A local energy analyst commented to econoff that, if
this is true, PDVSA's capital investment in 2004 may well be
less than in 2002. This investment is urgently needed to
off-set Venezuela's natural production decline rate to
maintain production once oil prices drop. With increasing
resources given over to social development planning, PDVSA's
management, already shorthanded, is being deflected away from
managing Venezuela's oil industry to becoming a one-stop
solve-all social welfare program funder/executor, a task for
which none of the current managers has the training let alone
the experience.
SHAPIRO