Venezuela's Devaluation a Boon for PDVSA in Short Term

CARACAS (Dow Jones), Jan. 13, 2010

Venezuela's currency devaluation should give state oil company PdVSA an immediate and much-needed boost to its budget. But President Hugo Chavez is likely to procure a large part of that windfall for social spending ahead of this year's congressional elections.

Chavez devalued the bolivar currency's official fixed exchange rate by half over the weekend, to VEF4.3 per dollar from the VEF2.15 per dollar rate it was at since 2005. That means each barrel of oil, which is priced in dollars, will provide double the income for the company once the funds are repatriated into local currency.

"You could argue that PdVSA will be the one to benefit the most from the devaluation, because it was the one most harmed from an overvalued currency," said Patrick Esteruelas, an analyst with Eurasia Group, a political-risk consultancy.

But rather than the extra cash going toward new technology and new projects to increase flagging oil production, analysts say Chavez may well use the funds to add more workers to an already-bloated PdVSA payroll. That could lead to budget problems down the road, especially if global oil prices decline again.

Chavez also may use the cash for spending unrelated to the oil sector altogether, such as increased spending on subsidized state-run supermarkets and other welfare projects.

"The question is whether the extra revenue will favor the government or PdVSA," said a former top PdVSA official, who asked not to be identified. "The distributional rules are not clear, but my impression is that the government would take the bulk of the extra revenue."

Officials at PdVSA and Chavez' press office were not available for comment.

PdVSA, or Petroleos de Venezuela, had been selling most of its dollars for 2.15 bolivars for years, even while a greenback fetched three times that amount in Venezuela's black currency market. While oil prices were sky-high, nobody worried to much about the currency mismatch, but after global crude prices dropped in late 2008 and into 2009, the government could no longer overlook the raw deal PdVSA was getting.

"We've been selling dollars cheaply for too long," Chavez said on Saturday. "This (devaluation) will have a huge impact on the national fiscal situation, and will strengthen our oil industry."

The extra revenue could clearly help PdVSA, which saw its net profits for the first six months of last year fall to $3.15 billion from $9.5 billion in that period of 2008. First, it would let the company pay down pending bills to suppliers and make final payments to oil services firms that were nationalized last year. PdVSA debts with contractors and suppliers were as high as $8 billion last year.

Receiving more bolivars for each barrel of oil will also allow the company to give workers the hefty salary increases they've been demanding in contract negotiations.

Furthermore, PdVSA may not have to issue more bonds for a while to meet its obligations.

That's important, because PdVSA sold a hefty $6.2 billion in dollar-denominated "petrobonds" last year. The bond prices fell sharply as the year progressed as supply outstripped demand.

But those benefits for PdVSA could come at a cost down the road. "The company's fiscal pressures are going to grow," Esteruelas said.

Critics say that while Chavez may understand the longer-term risks for PdVSA, all he's mostly concerned about is keeping the spending high at least through congressional elections in September.

PdVSA was for decades managed as an independent company even though it was owned by the state, a freedom that allowed it to flourish into the fourth-largest energy company in the world, according to Energy Intelligence.

But since Chavez took power 11 years ago, the company has suffered. He turned company revenue into the engine for his social spending. PdVSA's payroll is near 100,000 employees, double its 2002 workforce.

Venezuela's oil production has receded during that time. Venezuela currently turns out about 2.2 million barrels a day, according to independent analysis - far less than the 3.4 million barrels a day it produced a decade ago.

"If PdVSA cannot invest the extra revenue, production could continue to fall," the former PdVSA official said.

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