Wikileaks - Skeletons in PDVSA's closet

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    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 stated PDVSA exports 38 million
    barrels of oil per month excluding crude from the former Faja
    strategic associations.  President Chavez ordered PDVSA to
    stop exporting to the United States before the November
    elections but was later talked out of it but he remains
    intent on carrying this out.  PDVSA is losing 7 billion USD
    per year due to its need to import components for gasoline.
    PDVSA is also losing 3 billion USD per year due to Cuban
    state oil company CUPET\'s failure to pay for crude shipments
    and an undetermined amount from fuel oil shipments to
    Argentina.  Shipments of fuel oil to China were suspended due
    to the steep discount the Chinese demanded.  A PDVSA director
    told the executive PDVSA would be \"dead\" if the price of WTI
    dropped to 37 USD.  END SUMMARY

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    THEY DON\'T KNOW WHAT IS GOING ON
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    2.  (C) Petroleum Attache met on July 17 with a former senior
    PDVSA executive who was forced into retirement in March 2007
    to discuss the inner workings of PDVSA.  The executive\'s last
    position with the company was in trading.  According to the
    executive, PDVSA has consistently exported 38 million barrels
    of crude oil per month.  This figure does not include crude
    exports from the former Faja strategic associations.  Of this
    amount, 900 to 925,000 barrels per day goes to Citgo.  The
    supply contract with Citgo has a yearly quota and daily
    figures fluctuate.  For example, Citgo does not want to
    receive any crude from PDVSA after the second week in
    December due to the fact that it wants to run down its stocks
    for tax purposes.

    3.  (C) According to the executive, PDVSA is selling most of
    its production on the spot market \"at distress\".  In other
    words, the market knows that PDVSA has to sell its crude and
    does not have the luxury of shopping around for the best
    offer.  The executive stated PDVSA was selling its crude at a
    \"distress of six\" (a discount of six USD per barrel).  He
    believed traders from major IOCs were colluding to lower the
    price on PDVSA\'s crude.  He stated the traders were able to
    buy at a discount because they \"were helping\" PDVSA to place
    its production.  The executive stated PDVSA does not have any
    trading strategy.  When Petatt noted contacts have stated
    PDVSA traders are young and inexperienced, the executive
    stated PDVSA senior management consciously decided that it
    did not want traders who knew what they were doing.  One
    reason for the decision was that senior PDVSA management did
    not want traders who could figure out how  senior management
    was stealing from the company.  In addition, the managers did
    not want traders who had the financial acumen to steal from
    PDVSA.  The executive stated an experienced trader stole 20
    million USD from PDVSA and deposited the funds in Panama.

    4. (C) The executive also claimed during his tenure in
    trading that he worked directly for President Chavez.  He was
    told on a number of actions to carry out trades that
    originated with President Chavez.  According to the
    executive, President Chavez ordered PDVSA to stop exporting
    crude to the United States in the run-up to elections in
    November.  The order was never carried out because someone
    convinced Chavez that the idea was counterproductive for
    Venezuela.   The executive opined that now that Chavez has
    the idea in his head he will eventually try to carry it out.

    5. (C)  When asked if contingency plans were drafted for a
    cutoff of Venezuelan crude supplied to the States, the
    executive laughed derisively and replied no plans were in
    place and that the senior management of PDVSA had no idea
    what it was doing.  He repeatedly stated senior PDVSA
    management was not sure what PDVSA\'s actual production
    numbers were.  He also claimed that they were unaware of how
    much money PDVSA was actually earning.  He later amended his
    comments and said that Eudomario Carruyo, a PDVSA director
    and the company\'s de facto CFO, knew exactly how much money
    PDVSA was generating and where the funds were flowing.

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    GASOLINE COMPONENTS AND LUBRICANTS
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    6. (C) The executive stated PDVSA is currently importing
    125,000 barrels of gasoline components per day due to
    problems with its own refineries.  At current market prices,
    the executive estimated that the imports were costing PDVSA
    approximately 4 billion USD per year. (COMMENT: The
    executive\'s statements concerning the importation of gasoline
    components gibes with what we reported in Reftel A.  END
    COMMENT)

    7. (C) He also stated PDVSA has been importing base
    lubricants due to an inability to secure the crudes it needed
    to manufacture lubricants at its own refineries.  The
    executive stated PDVSA used to import Basra crude to
    manufacture lubricants.  When senior management decided Basra
    crude was too expensive, it ordered the executive to secure a
    mix of Maya and Isthmus crudes.  The executive complained
    that use of the mix did not make sense commercially but was
    over-ruled by his superiors.  Unfortunately for PDVSA,
    President Chavez then had a falling out with Mexican
    President Vicente Fox and ordered PDVSA to quit purchasing
    oil from the Mexicans.  As a result, PDVSA was forced to
    import base lubricants rather than manufacture them.  The
    executive did not give any figures on how much PDVSA is
    losing due to the importation of lubricants.

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    CUBA AND ARGENTINA
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    8. (C) In addition to what PDVSA is losing on the importation
    of gasoline components, the executive estimated it is losing
    approximately 3 billion USD due to the failure of Cuba to pay
    for the crude it is importing from Venezuela.  The executive
    stated Venezuela recently signed a new contract with Cuba for
    the sale of crude to CUPET, the Cuban state oil company.  He
    stated he is not sure about the terms of the new contract and
    added knowledge of the specific terms of the contract
    appeared to be limited to very senior BRV officials.

    9.  (C) The executive stated 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 to death\".  The executive told his superiors
    that PDVSA could not send Venezuelan fuel oil to Argentina
    because its sulfur content was too high for Argentine plants.
     In order to meet the commitment to supply Argentina with
    fuel oil, PDVSA was forced to buy fuel oil from Mexico.  The
    executive stated PDVSA lost money on all of the Argentine
    fuel oil shipments between 2004 and 2006.  He was not clear
    if PDVSA has shipped or will ship fuel oil this year.

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    PACIFIC RIM AND CHINA
    ---------------------
    10. (C) The executive also stated that PDVSA was ordered to
    adopt a Pacific Rim strategy in 2004.  He complained that
    PDVSA could never make money in the Pacific Rim due to the
    nature of the market.  According to the executive, the market
    is composed of two parts: California/the West Coast of the
    United States and the Pacific Rim in Asia.  The executive
    stated the Middle Eastern producers, particularly Saudi
    Arabia had a lock on the Asian market and had long term
    supply contracts.  He said Saudi Arabia would never allow
    PDVSA to break its hold on the Asian markets and has used
    PDVSA\'s attempts to break into the market as opportunities to
    steal market share on the Eastern Coast market of the United
    States.

    11.  (C) The executive also claimed PDVSA was no longer
    shipping oil to China despite public claims to the contrary.
    He stated the Chinese were buying fuel oil at \"a distress of
    20\".  As a result, PDVSA could not supply the Chinese at
    those terms without a significant loss.  PDVSA attempted to
    negotiate a new deal with the Chinese but was only able to
    reduce the distress to 18.  As a result, it halted shipments
    to China.  (COMMENT: A senior CNPC executive told Petatt that
    her company was receiving a discount on oil purchases from
    PDVSA.  She did not specify the amount of the discount.  It
    was our understanding that PDVSA is still shipping crude to
    China but we base this on implications from CNPC officials\'
    comments rather than on hard evidence.  END COMMENT).

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    IRAN
    ----
    12.  (C) According to the executive, PDVSA has made two
    gasoline shipments to Iran.  The last shipment occurred in
    February 2007.  In one case, PDVSA was forced to use one of
    its own coastal tankers to carry the gasoline to Iran.  The
    executive stated the tanker was old and in very poor shape.
    Since the tanker was not supposed to leave Venezuelan coastal
    waters, insurance would not have covered it if an accident
    had occurred on the high seas.  The executive estimated that
    it would take a Panamax class tanker approximately 80 days to
    make a round trip to Iran.  He estimated that it would have
    taken the PDVSA vessel considerably longer due to its
    condition.  He stated the vessel was supposed to carry
    additives on its return trip.

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    WHERE IS PDVSA\'S MONEY?
    -----------------------
    13.  (C) The executive claimed Carruyo told him in November
    at a luncheon that PDVSA would be \"dead\" if the price of WTI
    reached 37 USD per barrel.  He said he personally believes
    the danger point for PDVSA is a higher WTI price due to
    PDVSA\'s declining production and management problems.
    However, he declined to give a specific price.

    14.  (C) The executive also said PDVSA was instructed to
    remove its funds from U.S. banks several years ago.  He
    claimed Carruyo approached him and asked him 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 stated he was grateful to Carruyo
    because he is a PDVSA pensioner.  He stated Carruyo moved the
    9 billion USD PDVSA pension fund to a series of European
    banks several years ago in order to \"hide the money from
    Chavez\".

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    COMMENT
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    16.  (C) Although we have little or no way of confirming the
    executive\'s claims, we note that they are in line with many
    of the things that we have heard from other contacts and
    reported in the past (Reftel B).  We believe that his claim
    that Chavez is contemplating the suspension of crude exports
    to the United States should be taken seriously.

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