PETROPAR AND PDVSA: A NECESSARY EVIL FOR PARAGUAY

C O N F I D E N T I A L ASUNCION 000288 SIPDIS STATE FOR WHA/BSC MDASCHBACH, WHA/EPSC FCORNEILE E.O. 12958: DECL: 07/26/2027 TAGS: ECON EFIN PGOV PA VZ SUBJECT: PETROPAR AND PDVSA: A NECESSARY EVIL FOR PARAGUAY REF: A. ASUNCION 00228 (2008) ¶B. ASUNCION 00378 (2008) ¶C. ASUNCION 00473 (2008) ¶D. ASUNCION 00721 (2008) Classified By: DCM Michael J. Fitzpatrick; reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: Paraguay's state-owned oil company PETROPAR racked up short-term debts of 317 million USD with Venezuela's state-owned oil company PDVSA for diesel supplied since 2007 and about 270 million USD of that is past due. PETROPAR's total debt more than doubled since 2006 because Paraguay maintained subsidies just as diesel prices peaked in ¶2007. PETROPAR's President Pedro Sugastti traveled in April to Venezuela to propose refinancing Paraguay's debt. Paraguay tried to pay part of its debt with in-kind payments in a food-for-oil scheme, but Paraguayan private agriculture producers refused to participate, resisting the Ministry of Foreign Affairs' overtures. The possibility of PDVSA making a push into Paraguay seems unlikely, as PETROPAR is a weak financial partner for PDVSA, and the market is saturated with private retailers. The immediate issue for Lugo is what to do with PETROPAR's debt. The only real option is limited to long-term refinancing by PDVSA or anyone else willing to take risk. END SUMMARY. ¶2. (SBU) Paraguay's state-owned oil company PETROPAR has accumulated short-term account payables of over 374 million USD with suppliers. Of this total, 85 percent, or 317 million, is owed to Venezuela's state-owned oil company PDVSA, and about 270 million USD of PETROPAR's debt to PDVSA is past-due. PETROPAR's debt with PDVSA reflects its limitations in finding suppliers. With the exception of PDVSA, few suppliers want to trade with PETROPAR, as the company is highly leveraged and in a very weak financial position with only 50 million USD in assets (reftels b and c). ¶3. (SBU) PETROPAR incurred most of its debt because it maintained diesel subsidies when oil prices peaked in 2007. The pressure to immediately solve acute shortages also contributed to Paraguay,s increasing reliance on PDVSA. During one of the most severe diesel shortages in July and August 2008 (the month President Lugo assumed the presidency),PETROPAR got from PDVSA about 3 month's stock of diesel on consignment. Since 2006, PETROPAR's debt more than doubled, coinciding with the severe diesel shortages �0A;experienced in 2007 and the second half of 2008 (reftel a). High costs associated with bad management and corruption, particularly in the selection of freight companies to transport the fuel, also contributed to PETROPAR's growing debt. (NOTE: PETROPAR ceased to subsidize diesel in November 2008, following the decline in market diesel prices. END NOTE.) ¶4. (SBU) In a visit widely criticized by the press, PETROPAR's President Pedro Sugastti went to Venezuela in April to propose refinancing Paraguay's debt per the terms set in the 2004 energy cooperation agreement between Paraguay and Venezuela. According to Sugastti, his PDVSA counterpart accepted Paraguay's proposal. (NOTE: Under the terms of an energy cooperation agreement signed in late 2004 between Paraguay and Venezuela and ratified by Paraguay,s Congress in mid-2005 (reftel a),PDVSA could supply PETROPAR with up to 70 percent of Paraguay,s diesel needs. Under the same agreement, PETROPAR could refinance up to 25 percent of the total supplied by PDVSA to a 15-year loan at a flat-rate of 2 percent per annum with a 2-year grace period. END NOTE). PDVSA supply contracts with PETROPAR are renewed every six months, and, per the contractual terms agreed by PETROPAR, PDVSA can apply a late penalty-fee of about 18 percent per annum (12 percent flat-rate plus 6 percent for administrative and collection charges) over past due amounts. The late-penalty fee for PETROPAR's past due debt has not been yet applied by PDVSA. ¶5. (C) Paraguay tried to pay part of its debt with in-kind payments (food-for-oil),but Paraguayan private agriculture producers refused to participate, resisting the overtures of Paraguay's Ministry of Foreign Affairs (MFA). Several large agriculture producers told Econoff in April that officials leading a food-for-oil agenda in the MFA, including Vice Minister Rodriguez Campusano, have repeatedly asked for a joint public-private sector commission to explore how to export food products in exchange for diesel imports. The Paraguayan private agriculture producers refused, claiming that it will be impossible to expect any payments for the goods exported to Venezuela. Producers cited PETROPAR's weak position with PDVSA. According to them, PDVSA will ask PETROPAR to pay for the goods exported to Venezuela by deducting the payment from the outstanding account payables PETROPAR has with PDVSA. In this scheme, PETROPAR will owe producers, and they argued that the state-owned company is in no condition to make and honor its financial obligations. (NOTE: A memorandum of understanding signed in 2007 modified the 2004 energy cooperation agreement to allow for food-for-oil transactions where PETROPAR can pay in-kind for PDVSA's fuel (reftel a). END NOTE.) ¶6. (C) Private distributor Exxon General Manager Alejandro Conti told Econoff in April that private distributors are increasingly responsible for supplying a larger share of Paraguay's diesel. Conti said PETROPAR maintains an advantage in its storage capacity, but private distributors are actively managing stock to further undermine PETROPAR's usefulness. Since PETROPAR no longer subsidizes diesel, Conti argued that PETROPAR is irrelevant in Paraguay's fuel retail market, and the project to upgrade Paraguay,s only refinery (the small-volume but highly staffed state-owned Villa Elisa refinery, reftels a and d) is inconsequential and likely a "smoke-screen" to avoid the real problems -- corruption and inefficiency. (NOTE: Under the Colorado's, PETROPAR was a huge source of funds for party patronage, pork, and corruption. There are allegations of fuel "disappearing" before it reaches Asuncion and exceedingly high markups for transport services benefiting a "selected" group of contractors. These issues and the lack of results in improving PETROPAR's performance contributed to Lugo's decision to replace Minister of Commerce and Industry Martin Heisecke. END NOTE.) ¶7. (C) COMMENT: Lugo's administration appears to be looking for a solution to PETROPAR's debt and its increasing reliance on PDVSA as a supplier. However, PETROPAR's financial problems will continue, even if PETROPAR refinances its debt with PDVSA, because the company is poorly managed and operates mainly to support corrupt patronage structures. Fortunately, with the decline of diesel prices, PETROPAR's role as a market-maker is diminished. As long as diesel prices maintain at current levels, the possibility of PDVSA using PETROPAR's compromised position to make inroads in Paraguay is unlikely. PETROPAR is a weak financial partner for PDVSA, and the retail market is saturated with private distribution retailers such as PETROBRAS and Exxon. The immediate issue for Lugo is what to do with PETROPAR's debt. The only real option is limited to long-term refinancing by PDVSA or anyone else willing to take risk. END COMMENT. Please visit us at http://www.state.sgov.gov/p/wha/asuncion AYALDE