US embassy cable - 05CARACAS1658

C O N F I D E N T I A L SECTION 01 OF 03 CARACAS 001658 
 
SIPDIS 
 
NSC FOR CBARTON 
TREASURY FOR OASIA-GIANLUCA SIGNORELLI 
HQ USSOUTHCOM ALSO FOR POLAD 
BUENOS AIRES FOR TREASURY-MHAARSAGER 
 
E.O. 12958: DECL: 05/10/2015 
TAGS: ECON, EPET, ENRG, EFIN, PGOV, VE 
SUBJECT: PDVSA OIL EARNINGS - WHAT THEY MEAN ABOUT 
PRODUCTION 
 
REF: A. CARACAS 1546 
 
     B. CARACAS 1359 
     C. CARACAS 1336 
     D. 04 CARACAS 3747 
 
Classified By: ECONOMIC COUNSELOR RICHARD M SANDERS FOR REASON 1.4 D 
 
------- 
SUMMARY 
------- 
 
1. (C) A controversy is raging in Venezuela over just how 
much money state-owned oil company PDVSA delivered to the 
Venezuelan Central Bank (BCV) in the first quarter of 2005, 
which in turn calls into question whether its claimed oil 
production is accurate.  (As we reported ref A, industry 
observers are confident that official numbers are grossly 
exaggerated and even suggest production is dwindling.) 
Statements from PDVSA and the BCV conflict, and statements 
made by Rafael Ramirez, Minister of Energy and President of 
PDVSA, contradict themselves.  Claiming that production is 
still at the OPEC quota, Ramirez_ and other government 
officials have also admitted to diverting funds for GOV 
social spending in a way the BCV says is not allowed. 
(Unadmitted and impossible to calculate is how much PDVSA 
money has been corruptly diverted into private hands.)  But 
even after accounting for those funds, and other 
theoretically legal diversions, the difference between what 
the BCV says oil earnings are and what it should receive is 
potentially in the billions of dollars.  PDVSA has made 
several press releases since the accusations began, and 
Ramirez_ made a lengthy speech before the National Assembly 
May 25 on the subject.  One of the leading figures in 
publicly questioning the figures tells post that these are 
clear signs the GOV is "on the defensive."  END SUMMARY. 
 
-------------------------- 
THE NUMBERS, PDVSA VERSION 
-------------------------- 
 
2. (U) On May 6, Energy Minister Rafael Ramirez_ announced in 
a press conference that PDVSA had received USD 7.513 billion 
for exports of crude and products in the first quarter of 
2005.  He also stated that USD 480 million had been diverted 
to the Special Development Fund (SDF, see ref D and previous) 
for large infrastructure projects, and USD 600 million into 
the "rotating fund" (a long-standing fund to facilitate 
imports of materials necessary for oil production), with the 
remainder - USD 6.433 billion - going to the BCV.  He 
reiterated the claim that Venezuela is "producing 3.3 million 
barrels per day."  BCV Director Domingo Maza Zavala responded 
the same day, saying, "PDVSA is delivering to the BCV USD 400 
million per week, which is USD 1.6 billion per month (i.e., 
5.2 billion for the quarter, some 1.2 billion less than 
Ramirez_ claimed), that is what is coming in."  On May 11, 
Maza testified to the Control Commission ("Controloria") of 
the National Assembly that the agreement which created the 
SDF had supposedly been a one-time agreement.  Any diversion 
of funds beyond the original USD 2 billion - reportedly 
transferred in its entirety in 2004 - had not been approved 
by the BCV, he said. 
 
3. (U) Ramirez_ then said May 18 that PDVSA was not, in fact, 
diverting funds from the BCV - at least nothing it wasn't 
allowed to.  Ramirez_ added, "We've already adjusted these 
statistics with the BCV and we have no deviations."  He then 
cited several statistics that were different from those he 
had announced May 6.  A subsequent May 20 press release by 
PDVSA clarified that Ramirez's new numbers were for the first 
four months of 2005.  New information in the press release 
included claims that USD 860 million had been paid to the 
"operating service agreement" (contracts with private 
companies to produce oil in more mature fields) companies 
(Ramirez_ was quoted as saying USD 890 million), USD 640 
million to the SDF, USD 194 million to the rotating fund 
(Ramirez_ on May 18 repeated the figure of USD 600 million), 
USD 1.418 billion for imports of "necessary products," and 
USD 39 million for interest on debt.  The press release cited 
total oil production as 3.24 million b/d, with 617,000 b/d 
from the so-called "strategic associations" that upgrade 
crude from the Orinoco heavy oil belt.  The release denied 
receiving any income from oil produced in the Orinoco Belt 
"strategic associations," noting that "the dollars 
corresponding to the associations of the Orinoco Petroleum 
Belt never enter the country." 
 
--------------------------------- 
THE NUMBERS, CENTRAL BANK VERSION 
--------------------------------- 
 
4. (C) The BCV released its first quarter balance of payments 
numbers on May 24.  They showed total public (PDVSA) oil 
export income as USD 7.925 billion (presumably an estimate 
based on PDVSA's reported production), net oil income of USD 
5.116 billion, and public imports of products for oil 
production as an outflow worth USD 306 million.  The last two 
combined indicate that PDVSA turned over no more than USD 
5.422 billion to the BCV in the first quarter of 2005.  This 
is very much in line with what Maza said, but both numbers 
contradict what Ramirez_ and PDVSA claimed.  Considering both 
the under-declaration of income, and overstatement of 
currency given to the BCV, the gap between the Ramirez/PDVSA 
numbers and those of the BCV is about USD 1.4 billion, or 
17.6% of the alleged total value of oil exports during the 
first quarter of 2005. 
 
------------------------ 
JUST HOW BIG IS THE GAP? 
------------------------ 
 
5. (C) Efrain Velazquez, President of the National Economic 
Council (an entity roughly equivalent to the USG's Council of 
Economic Advisors, but which is largely ignored by the Chavez 
government) told econoff May 19 that the gap between actual 
income and funds given to the BCV has been "between (USD) 3.5 
and 5 billion" since 2004.  This includes the USD 2.1 billion 
which Ramirez_ cited May 18, but Velazquez also called some of 
that into question, noting that only about USD 700 million 
has been diverted to the rotating fund in each of the last 
three years, and suggested that to approach the annual total 
in only three months is suspicious.  Jose Barcia, Vice 
President of economic consultancy Metroeconomica, noted that 
the total should be reduced due to oil shipments to Cuba (ref 
B), which could account for USD 360 million more in reduced 
revenue, as that oil is not paid for in cash.  He also cited 
some statistics about the strategic associations which 
indicate that PDVSA should have received about USD 750 
million for their share of production.  This is contrary to 
Ramirez's May 18 comments, i.e., "There is a quantity (of 
money) that stays out of Venezuela, the money from the 
strategic associations never enters."  Velazquez noted that 
the claimed numbers for exports also seem excessively large, 
as USD 1.418 billion is more than was spent each year since 
1997 (when BCV on-line records begin).  If that number and 
the BCV first quarter number were both true, April 
expenditures were more than the average of the proceeding 8 
full calendar years. 
 
6. (C) Jose Guerra, head of economic research at the BCV 
until January 2005, has been the most outspoken questioner of 
the GOV's numbers.  At a public forum May 25, he noted that 
fully 25% of the oil income PDVSA reported to the BCV in the 
first quarter of 2005 was unaccounted for, even according to 
the GOV's public explanations of money kept in special 
accounts and allegedly used for legitimate purposes.  If the 
discrepancy corresponds to nothing but lack of actual income 
due to reduced exports, then total Venezuelan oil production 
in the first quarter was actually only 2.45 million b/d, he 
asserted.  Guerra noted to econoff on May 26 that those 
numbers do not even take into consideration what PDVSA should 
have received from CITGO and from the strategic associations, 
calling claims that PDVSA receives no income from the latter 
"the biggest absurdity of all."  He also said that the 
unprecedented number of press releases and the fact that 
Ramirez_ had testified before the National Assembly May 25 for 
the first time in two years (after missing some scheduled 
appointments) were not "a show of strength, (but) a show of 
weakness" and that "PDVSA is in a vise."  He noted, "This is 
ceasing to be an economic matter."  (Note:  In addition to 
the at best semi-legal placement of funds into various 
special funds, and the likely over-statement of production, 
and attendant earnings, the question also arises of how much 
PDVSA money has simply been diverted into private hands as a 
result of corruption.  While we suspect that most PDVSA 
corruption takes place inside Venezuela, through sweetheart 
deals for contracting services, etc., that possibility of 
skimming before the money reaches Venezuela cannot be ruled 
out.  End note.) 
 
------- 
COMMENT 
------- 
 
7. (C) PDVSA has not accounted fully for the income it has 
reported to the Central Bank, nor explained why it claims to 
have given more than the BCV says it has received.  Ramirez's 
contradictory statements, as well as the fact that he 
acknowledges diverting funds in a way the Central Bank says 
is not permitted, have only heightened suspicions.  The utter 
lack of reliable information - both in terms of actual oil 
production and PDVSA income, as well as in and out of the two 
special funds - mean that GOV officials can claim virtually 
anything and not be conclusively proven wrong.  Nonetheless, 
the controversy is highly embarrassing for the GOV, and makes 
it harder to sustain its boast that it successfully brought 
PDVSA fully back after the Dec 2002-Feb 2003 general strike, 
and that the new "revolutionary" enterprise can continue to 
produce great benefit for the poor.  As Guerra put it, 
although "they can lie, they have to explain." 
Brownfield