Something's Going On

We’ll get started with our Down The Rabbit Hole segment in a few but first…Reuters reports that Venezuela President (dictator), Nicolas Maduro, accepted the resignation of Oil Minister, Tareck El Aissami, following the detention of at least 6 high level officials amid a corruption probe of PDVSA (Venezuela government-owned oil company) and the judiciary. El Aissami said he would resign to support the investigation.

 Since Maduro took power following the death of Hugo Chavez in 2013 El Aissami has been a powerful ally of Maduro holding the positions of Oil Minister, Vice President, and was named as the point man to renegotiate Venezuela’s debt when they defaulted on their bonds despite being under sanction by the US for drug trafficking and therefore unable to talk to the bond holders. Oh, did I forget to mention his suspected ties to the terrorist group, Hezbollah, who is backed by the Iranians? This is a very powerful man with his fingers in a lot of pies.

 The anti-graft police arrested a mayor, two judges, and three high-level government officials and at least 20 lower level officials at PDVSA have been arrested in recent days. An occurrence like this is very rare under Chavismo, one might say unheard of.

 It kinda’ makes me want to put on my tinfoil hat…Ever since Maduro took power Venezuela has ranked in the top three most corrupt countries in the world every year. They announce corruption probes all the time and after a while, usually long enough to make it seen like they actually investigated something, a low-level scapegoat or two are offered up and that’s about it. Anything bigger than that, more high profile, is directed at the Venezuela opposition.

 In my conspiracy-plagued mind I’m thinking maybe the very powerful El Aissami got a little too powerful or did something that Maduro viewed as a threat. If it’s not that it’s something else, something more than a routine corruption probe. Something’s going on.

 Now, whether we will ever know exactly what is, or isn’t, going on is another matter as groups like Transparency International have described the Venezuela government as “opaque”. Neither PDVSA nor the prosecutors office responded to requests for comment.

 Now, let’s go Down The Rabbit Hole…

 Chapter 3 continued…

 …So, let’s see…we have 100,000 bpd going to Petro Caribe 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 no cash to PDVSA. 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 before exporting. So, who actually pays PDVSA for their oil?

 I first became alerted to this situation years ago when Chavez went on his borrowing binge and then when Maduro took over and continued to rely on credit to run the country instead of revenue. They would periodically announce a great new trade deal or project with China or Russia and it was always guaranteed by future Venezuelan oil shipments. I kept seeing $5 billion here and $5 billion there and soon commitments of tens of thousands of bpd became hundreds of thousands . Eventually the total between the Chavez and Maduro years reached almost 700,000 bpd combined, guaranteed, for which PDVSA received no cash. Add in, let’s say, an average of 700,000 bpd for domestic needs, another 100,000 bpd for Petro Caribe, and another 100,000 bpd for Cuba and you have almost 1,600,000 bpd to be supplied for free! (Nobody ever seemed to want to do the math)

 Since everything Venezuela-related is good news/bad news let’s take a look at the upside. With all the oil they basically had to give away due to their totally irresponsible use of resources and finances there were still some paying customers out there. Year over year they were exporting about 300,000 bpd to India and another 800,000 bpd to North America (This was pre-sanctions), most of that to the US. Despite all the anti-capitalist and anti-imperialist bluster the USA was their number one trading partner. The downside regarding revenues from the US was that it wasn’t all cash. Remember, Venezuela needed dilutants to process the heavy, and extra-heavy, crude and their number one supplier of these was the USA. That said, the US still bought, and paid for, more oil from Venezuela than any other country.

 So now we have another 1,100,000 bpd to to add to the ledger to maintain the status quo for a total of 2,700,000 bpd among the major players. Other than the peak production of 3,500,000 bpd PDVSA produced about 2,500,000 bpd most of the time so, as you can see, they had to do some juggling. They were about 200,000 bpd short so one month they would short the free shipments and the next month they would short the paying customers and take the financial hit…but that only worked for just so long. From time to time they still needed to raid their gold reserves. You can see where we’re headed.

 Again, I apologize for the tedious nature of a lot of this but there are a lot of moving parts to this train wreck. I’ll try not to get too deep in the weeds but please bear with me, it’s worth it.

 As this scenario is unfolding let’s flip back to the personnel side of the story. Remember, even with the purge there were still some qualified people at PDVSA among the bloated payroll. That would begin to change when oil prices dropped and the Chavista credit dried up. First it was just people frustrated that Chavistas were promoted and the real oil professionals were expected to carry the load for the “dead weight”. The desertions accelerated when employees saw the handwriting on the wall. Things weren’t going to get better any time soon so if they could get out they did.

 Now, with Maduro in control, things got really crazy. In one demonstration of paranoia, or simply putting on a big “anti-corruption” show, he fired the entire accounting department. For a few weeks there was absolutely nobody qualified to bill customers or pay bills. Then he turned PDVSA over to the military since he couldn’t buy their loyalty through any other means. In light of the recent and prior purges distrust ruled the day and more employees left. Now that the head of the company was a military man with no oil business experience it seemed that nobody had any idea what was going on.

 More tomorrow….

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