Best Laid Plans

 Here’s our quick pre Venezuela : Down The Rabbit Hole daily dispatch. Venezuela Plans Production Of  Epivacorona Vaccine (Russian). This was announced by Venezuela’s Foreign Minister, in Moscow to meet with Russian Foreign Minister Lavrov. This type of announcement is common for the Chavistas. They constantly talk about all the great things they plan to do. Does anyone really believe that the Gang That Couldn’t Shoot Straight, these guys that can’t keep the lights on and the water running, are capable of producing anything… other than misery?

 In keeping with their “It’s Gonna’ Be Great” theme the Venezuelan oil minister, good friend to terrorists and criminals everywhere, announced that Venezuela plans to quadruple oil production by the end of the year. Uhh, aren’t these the guys we are talking about in our Down The Rabbit Hole segment right now? You know, the same ones that destroyed the oil production. Under their stewardship oil production has declined almost every year although it’s the perfect kind of thing for the Chavistas. Maduro has announced huge economic growth every year since he took (and I do mean took) office and as you might have guessed GDP in Venezuela has declined every year providing us with the largest economic contraction in Latin America since World War Two!

 Maduro stated the other day that Venezuela pioneered cryptocurrency use in South America and cited his creation of “el Petro” as the central reason for this. While he is correct in that Venezuelans are among the top users of cryptocurrencies in the world using everything except “el Petro he conveniently omits the fact that it’s because his own currency is worthless due to his three year stint of hyperinflation. Just so you know, for hyperinflation a year is a long time. He also says they “have plans” for the resurgence of the beleaguered currency The Bolivar.

 Oh, and if you still harbored any ideas about Maduro and his boys doing something out of the kindness of their hearts,with or without sanctions, here’s some news for you. After the Foreign Minister’s announcement regarding the regime’s grandiose vaccine production plans he went on to say that Venezuela and Russia are negotiating more arms supplies. What! No food…? Still think the Chavistas care about the downtrodden Venezuelan people (and who has been doing the ‘trodding’?) The largest private sector group in Venezuela,Fedecamaras, offered up a proposal to vaccinate private sector employees at their own cost due to the government’s slow response to the crisis although they didn’t mention the government’s slow response. The regime rejected the proposal preferring to continue on their current trajectory using the Carnet de le Patria (homeland card) system which benefits PSUV (Maduro’s party) members. Still a believer in the pipe dream of benevolent Chavistas?

 Enough of that! Let’s get back Down The Rabbit Hole…

 …..Now that’s the oil business in general.  For Venezuela,as you might guess, it’s a bit more complicated…and expensive. The existing oil fields are a combination of heavy and less heavy oil but not the light sweet crude found in some areas of the world. Most of the recently discovered reserves are of the heavier variety. They require mixing in dilutents  before it is usable which is very expensive and limits which refineries can receive the oil.If you have been receiving light sweet crude from the Middle East you can’t just switch to Venezuelan heavy crude. That limits the refinery base or requires upgrading, a very costly proposition in both time and money.

 As you might expect, PDVSA exploited the lighter and most easily extracted and processed oil first leading to thousands of existing wells and reaching a high of 95 drilling rigs in 2011.Now most of the existing wells have fallen into disrepair due to lack of maintenance and the rig count fell to below 20 and was recently down to 1, yes I said ONE! And that’s on a good day. Some days there are ZERO rigs in operation.

 While production dropped from it’s all time high of 3 and 1/2 million bpd (barrels per day ) to 2 and 1/2 bpd under Chavez it didn’t fall off a cliff until Maduro came to power and at last count was at about 400,000 bpd and has been under 200,000! Anyone who has ever owned a home,a car, or almost anything else for that matter, knows that without maintenance things break down. As we saw with the incubators in our segment on the healthcare sector,eventually you have babies in cardboard boxes. The Chavistas either failed to grasp this or simply didn’t care.They were too busy siphoning off all the profits to fund their ever expanding social programs referred to as “Missions” or simply lining their own pockets.Worse yet,again as we discussed in the hospital situation,they engaged on an unprecedented borrowing spree.

 Any rational person would see that the outlook wasn’t exactly rosy. Well, there are a couple of other factors that would have a negative impact in the Chavistas race to the bottom.Take,for example,Petrocaribe.

 The Chavez vision of “21st Century Bolivarian Socialism” wasn’t just about Venezuela being an economic power but a political one as well. He began engaging countries throughout Latin America and the Caribbean in multilateral organizations like ALBA,CARICOM,MERCOSUR,UNASUR,and so on. In order to ensure their support of Chavismo policies they set up Petrocaribe whereby Venezuela would use it’s ability to supply oil to the 17 member countries on unbelievably favorable terms in return for their solidarity with the “Bolivarian Revolution.”

 The members,of which Cuba is a de facto member, were able to buy oil, per their various quotas and terms tailored to each country’s needs and ability to pay, for anywhere from 5% to 50% upfront, then a one or two year grace period,then finance the balance for a term of between 17-25 years at 1% interest.PDVSA would also allocate funds for member country’s social programs (while also funding Chavismo’s Missions) and partnering in various refining and power generation projects among member countries.While the available quotas were somewhat higher, Petrocaribe supplied approximately 100,000 bpd to member countries and another 98,000 bpd to Cuba. It’s worth remembering that Cuba paid nothing upfront in return for supplying medical,military,and security personnel to “The Revolution.”

 So let’s see, we have 100,000 bpd to Petrocaribe countries for almost no cash and another almost 100,000 bpd to Cuba for no cash. The domestic market during the Chavez years consumed 650,000 to 790,000 bpd and due to the unbelievably low gasoline prices (basically free in dollar terms) provided PDVSA no cash. It’s also worth remembering, although the Chavistas won’t tell you this, that part of the agreement as a member of OPEC is domestic needs MUST BE GUARANTEED. So who actually pays PDVSA for their oil?

 To be continued…..

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