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Chavez' plan to sale CITGO and the Oxford Institute for Energy Studies

By Aleksander Boyd

London 03.02.05 | My involvement in this business of writing and reporting the crisis of Venezuela started in October 2002 when I learned that Hugo Chavez had been invited by Oxford's Center for Socio Legal Studies to give a conference, as a guest speaker, in a human rights seminar. At a latter date I found out that the convener of the seminar and visiting fellow of the said center, William F. Pepper, received a handsome payment of $137.527, 42 from the Venezuelan government via the Venezuelan Information Office in Washington DC. I was astounded by the discovery that a visiting scholar to one of Oxford University's colleges could be so easily, and cheaply I must add, bribed by Hugo Chavez.

My attention has turned now to the Oxford Institute for Energy Studies (OIES). With the precedent aforementioned ever daunting me, I have started investigating a couple of individuals that have done/are doing research in that Institute and currently sit in the board of directors of PDVSA, namely Bernard Mommer and Juan Carlos Boué.

Bernard Mommer

Platt's Oilgram News reported on December 22, 1994 "fallout about PDVSA's foreign investment plan". The brief read:

"The first signs of internal conflict in PDVSA over its much heralded profit-sharing agreements have emerged with the surprise resignation of senior strategic planning advisor, Bernard Mommer. PDVSA vice president Claus Graf admitted Dec. 15 that Mommer's resignation resulted from his disagreement with the way the oil industry is being opened up to foreign participation. But he said he didn't believe Mommer's views were widespread or that they would affect the scheme. Mommer, who will remain at PDVSA until Jan. 15, declined to comment in detail on the issue, but indicated that his views had been made clear in a paper delivered to the Fifth Petroleum Conference in November.

Hence Mommer was, already in 1994, a senior strategic planning advisor of PDVSA. It is puzzling to imagine how such a leftist radical made it to the senior echelons of the company. Nonetheless, sources report that he was asked to leave and he headed for greener pastures. Mommer is quoted as an Andres Bello fellow of St. Anthony's College by The Times on October 20, 1993; then again on October 4, 1996. His name appears associated with the OIES for the first time in 1994 in a paper published by the OIES entitled "The Political Role of National Oil Companies in Exporting Countries: The Venezuelan Case". In 1998 he published another paper under the OIES umbrella called "The New Governance of Venezuelan Oil". Both papers reflect Mommer's own understanding of how commercial relationships between the State, through its vehicle PDVSA, and foreign companies should be modeled. He argues that Venezuela, in regards to the public administration, possesses an appalling record of economic performance and even goes on to admit that PDVSA was "…the only profitable, stable and dynamic institution" [sic] of the country. Alarmingly Mommer condemns the management of the oil giant for having, effectively, taken control away from the Venezuela's Minister of Mines vis-à-vis energy policy and related activities. The State has a role of administrator of a system, coined by Mommer, as rent-capitalism (little he seems to know about mercantilism…).

The FT Energy Newsletters - Energy Economist of June 1, 1998, carries an article whereby it is argued that the policy of opening up Venezuela (Apertura Petrolera) to foreign firms to recuperate marginal oil fields, augment production and in some cases initiate exploration activities had been a resounding success:

"PDVSA began in 1991 to put various of its marginal or low-yield fields out to tender to domestic and foreign firms to reactive under operating contracts. Proven reserves in the marginal fields, mainly situated in western Venezuela, are estimated at close to 2 billion barrels of light and medium crude oil. Together with a second round in 1993, a total of 15 contracts were awarded to companies, although one was subsequently cancelled.

A third round of 18 marginal fields offered last year was massively oversubscribed, with a record 240 investors queuing up to participate. PDVSA eventually received GBP 2.1bn, more than twice what the company had anticipated (see FTEE 188/10). The total investment for these third round fields alone is now estimated at between GBP 8bn and GBP 10bn. Venezuela will also benefit from foreign technology and expertise; foreign operators now expect to boost production from the 18 fields from 150,000 bpd to 500,000 bpd, far greater than PDVSA's original forecasts of 350,000 bpd.

Mommer, begged to differ though, he advocated from the get go that the internationalization plan of PDVSA was flawed, unprofitable and prejudicial for Venezuela's interests. Mommer went on to become adviser to OPEC Secretary-general Ali Rodriguez, then back to managerial positions in PDVSA. In 2002 Mery Mogollon published an article entitled "VENEZUELA: 'PARALLEL' PDVSA LEADERSHIP SEEKS ALI RODRIGUEZ'S REMOVAL" in which one can read the tactics devised by Mommer, by this time already in company of Boué, to have the management of PDVSA removed and replaced by a group of revolutionary supporters of Hugo Chavez. Said group, structure created by Mommer, was formed by Adina Bastidas, Gustavo Perez Issa, Vladimir Lazo, Carmen Romero, Yolanda Vetencourt, Victor Poleo, Gaston Parra, Carlos Mendoza Potella, Alfreda Riera, Argenis Rodriguez, and Felix Rodríguez.

Juan Carlos Boué

In the current version of the OIES' website one can see the profile of Juan Carlos Boué. Dr Boué is meant to be an expert in "Microeconomic and logistical aspects of oil markets and oil trading. Oil geopolitics. Oil and gas taxation. Oil and development. OPEC. Political economy of oil in Latin and North America". His professional career appears to be linked solely to PEMEX, the national oil company of Mexico, his own country. Boué has also written about the petroleum industry of Venezuela; a book published in 1993 entitled "Venezuela: The Political Economy of Oil" and more recently a paper entitled "the Internationalization Programme of PDVSA". Boué's opinions are almost a repetition of Mommer arguments and strikingly similar to those of Mark Weisbrot; i.e. the whole purpose of PDVSA in its internationalization campaign was to divert revenues that should have ended up in Venezuela's treasury coffers, in the form of fiscal contribution and taxation, to the USA. That is the reason why Chavez, a complete ignorant of the oil business, keeps hammering upon the argument that CITGO is 'financing' Bush. The chemical composition and characteristics of the Venezuelan crude lacks relevance in the view of these experts, the issue revolves around the unpatriotic conduct of former PDVSA management and the evident ideological collision of market oriented method of management with obsolete socialist utopias.

Last month I received a copy of the recent appointments of the new PDVSA board of directors produced in a meeting held on January 19 2005. Surprisingly enough the name of Juan Carlos Boué pops up as Vice President of Commerchamp (subsidiary of Petróleos de Venezuela S.A. that sells aviation fuel, lubricants and services related to PDVSA). It is a given that said appointment came to fruition thanks to the good auspices of old pal and now multitasked-PDVSA's-executive-director Bernard Mommer. Sensing a potential conflict of interests between Boué's role as a senior research fellow of the non-partisan OIES and his executive position at Commerchamp, I decided to send him an email to his electronic address at the OIES. He kindly replied, although his arguments are, in my view, not only flawed but extremely ignorant.

From: A. Boyd
Date: 03/02/05 13.13 GMT
To: Juan Carlos Boué [juancarlos.boue@oxfordenergy.org]
Subject: Information request

Dear Dr Boué,

It is with great interest that I have read your recent paper entitled "The Internationalisation programme of PDVSA". My attention was drawn particularly to this argument:

"...covenants have probably become the best protection for the internationalisation programme against the interference of the Venezuelan government. For instance, in the hypothetical case that the Venezuelan government had tried to force through the sale of PDVSA’s refining assets in the United States, the fiscal agent for the special purpose vehicle could have declared PDVSA in breach of covenant and then proceeded to retain the whole of the accounts receivable generated by designated clients in the United States until enough funds were available to pay off the creditors of the vehicle (the balance of PDVSA Finance bond issues to the end of 2001 was 3,300 MMUSD)".

Ergo according to that predicament, Hugo Chavez would be seeking to sell CITGO in order to hedge himself against possible actions of the fiscal agent.

Could you please confirm that indeed that is the reason behind the recent move to get rid of CITGO's assets?

Cordially, A. Boyd

From: Juan Carlos Boué [juancarlos.boue@oxfordenergy.org]
Date: 03/02/05 14.13 GMT
To: A. Boyd
Subject: Re: Information request

Dear Aleksandr: Actually this argument is now rather passé, because most of the debt issuance for which these considerations applied (specifically PDVSA Finance) was retired by PDVSA in the latter part of last year. In any case, the sale of Citgo would not have been a hedge against the actions of the fiscal agent. To the contrary, such a sale would have been taken by the fiscal agent as a breach of covenant, with appropriate actions following. Bear in mind that the fiscal agent is merely a large bank working on behalf of the investors in a special purpose vehicle (in this case, the vehicle was called PDVSA Finance). The reason why the President wants to sell Citgo has to do with discounts: owning Citgo is bad business because crude oil sold under the supply contracts that Citgo has realises, on average, 1.10 dollars per barrel less than the same crude sold in the open market. Hope that this is of use. JCBoué

From: A. Boyd
Date: 03/02/05 14.18 GMT
To: Juan Carlos Boué [juancarlos.boue@oxfordenergy.org]
Subject: Re: Information request

Dear Dr Boué,

Many thanks for your rapid response. Thinking aloud, wouldn't it be better, from a strategic point of view and taking into account the network of outlets for refined products that CITGO possesses, to revise and adjust, instead, the supply contracts between PDV and CITGO?

Cordially, A. Boyd

From: Juan Carlos Boué [juancarlos.boue@oxfordenergy.org]
Date: 03/02/05 14.31 GMT
To: A. Boyd
Subject: Re: Information request

The idea that one needs outlets for refined products in order to sell crude oil is a fallacy. Product marketing is a low return business as was, until very recently, refining. A company like PDVSA, with a limited capital budget, will always be better off dedicating all of its investment capital to exploration and production activities. Notice how, until very recently, all the large oil companies in the world were very keen to get out of refining and marketing and concentrate on E&P. Why should it be that what is good for them is not good for us? Furthermore, the internationalisation programme has cost the Venezuelan people around 20 billion dollars in foregone revenues since 1982. Today, it would be possible to recoup a far larger proportion of this loss than would have been the case in the past.

End of messages

There have been mixed reactions to the above exchange. On the one hand some experts believe that the new policies of PDVSA are been modeled on those implemented by PEMEX, which need be stressed, are not to be heralded as a showcase of profitability or excellence. Others feel that the selection process of investment banks that surely shall broker the sale of CITGO will represent fantastic opportunities for some to make a killing, for corruption and obscure decisions will dictate Venezuela's course of action. To Boué's claim that "the internationalization programme has cost the Venezuelan people around 20 billion dollars in foregone revenues since 1982" an expert replied "it can easily be demonstrated that the six year presidency of Hugo Chavez has cost PDVSA shareholders, i.e. the people of Venezuela, at least 60 billion dollars in nominal capital value losses".

Sources also report that there is a somewhat valid apprehension that Boué is one of the key elements in instilling the sudden motivation of Chavez to sale CITGO. Furthermore it has been suggested that this detrimental action to the network of international holdings of PDVSA may be the result of Boué's acting in cohorts with old employer PEMEX.

My own take is pragmatic. I do not see the purpose of selling strategic assets due to unworkable supply contracts between a subsidiary and a parent company. Neither do I understand how refineries, which according to Boué have turned of late into a lucrative business, need be disposed of. I firmly believe, this may be interpreted by experts as an idiocy, that there is a fundamental difference between "large oil companies in the world" (making their money out of refining and marketing) and PDVSA like enterprises for the vertical integration that the latter have can only be envied and desired by the former. Imagine Shell or BP actually owning, without contractual time constraints, the reserves that PDVSA has got, without having to pay royalties of any sort to "rent-capitalist" governments. It's like comparing a supermarket (with the accompanying overheads) that buys its products from middlemen, to a farmer who actually grows his produce, transports it in his already paid of van and sells directly to the end buyer in the farmer's market at full price.

The fundamental questions that arise are; how come Mommer, a German citizen, and Boué, a Mexican citizen, have got so much leverage with Venezuela's current administration? Does the chavista concept of sovereignty apply only to US citizens? How come Boué admits quite candidly "Why should it be that what is good for them is not good for us?" Boué is not part of us, he's Mexican, and his actions are defined in my Venezuelan sovereignty taxonomic dictionary as treason.

What would be the OIES' stance, in light of the partisan profile of one of its senior fellows? Have PEMEX, Statoil, Saudi Aramco, Total, Shell, Exxon, etc., got 'autonomous researchers' at the OIES?



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