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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
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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
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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?
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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.
