Ideas to recover the Venezuelan oil industry. Part 2. Juan Fernandez.

As a general premise, it is essential that all the efforts to rebuild the country must driven to have a diversified economic model to generate wealth so that all citizens, equally, have an acceptable welfare state and opportunities. The actions for recovery must not only be focus on the oil, but of being an energy-producing country, with a process of transformation that allows us to insert ourselves into global change and with a vision of the future of the country that we must be. 

However, as we have indicated in previous notes, in the short term we have to use the oil revenues and the structure of the battered Pdvsa as a lever to change. There are a number of very notable efforts, including those of Gente del Petroleo, who have been working on plans to address the emergency situation in which the company is right now, thus in the shortest possible time, at least restore and execute actions to recover a minimum acceptable operational capacity. Also, there are several proposals from a number of groups of professionals and knowledgeable people, there is a consensus among all, on the need for both domestic and international private investment to participate in the productive activities of the economy and it will be indispensable for the hydrocarbons business.

- New draft of the Hydrocarbons Law.

 A new draft of the Hydrocarbons Law is circulating. I would have preferred for this legal document to be broader and include the concept of energy integration having the hydrocarbons as part of a major change, also I would like to see the law to promote and encourage research and development manly for the purpose to extend the useful life of hydrocarbons. Another aspect to be considered is to develop the sectors related to the energy industry and their multiplier effect on demand for goods and services, including the developing of the capital market and the financial sector to ensure a broader ownership of investors. All of the above order to cease to be an economy dependent exclusively on oil revenues. Obviously, the legal instrument should consider the country's current circumstances, its short-term needs and the medium-term outlook for the hydrocarbons to be effective. We must change the paradigm of our traditional political thinking on oil, the world is immersed in a structural change for the oil industry, both from the supply side and consumption pattern, and OPEC’s own partners are rethinking their economies. Therefore the instruments of oil policy must therefore be agile, and to be adapted to the only constant we live on, change.

However, the draft has made improvements, clarifies private sector participation, and emphasizes oil production within the business value chain. It describes in detail the functions of the Venezuelan Hydrocarbons Agency, which will regulate, execute and evaluate the participation of the private sector. In turn, Pdvsa will be a competitive participant with the other companies.  Certain activities now delegated to the Ministry would become part of the AVH, especially related to the allocation of areas, issues on incentives for business economies via royalty rate changes. In other words, this entity will be essential and with a significant influence on the private investment process for the hydrocarbons sector.

The draft emphasizes exploration and production and established the  "Production Delegation Contracts", but also includes other phases of the oil business such as; refining, distribution, and domestic market. As regards the AVH structure governing bodies, the designation of members by the Ministry of Hydrocarbons and Finance is included, a total of five members would part of its board of directors. 

Again I must insist, to include a more integrated vision of the business to move towards the concept of horizontal integration such as generation, distribution of electricity. Also establish mechanisms to facilitate the debt swap of the republic and PDVSA for participation in private investment processes to be promoted by the AVH, need to be incorporated into the law.

Three considerations on the draft, agreeing on the need for an entity focused on the tasks to promote and assure the private sector participation. The first is to take into account the short-term crisis. As it was indicated in the previous reflections Pdvsa has a role while establishing the AVH. This would facilitate and advance in actions for the company and the oil industry to recover, such as to modify the shareholder participation of Pdvsa with foreign partners for the Orinoco Belt, known as the “Faja Projects” for the extra heavy crude oil,  Pdvsa will also must do and rank the opportunities for the ‘Round Zero” to be offered to the private sector.  Second, I would recommend a clear path self-financing for the AVH, arising from its core activities. Third, it has to do with the concept of the AVH a concept discretionary power, which must be taken to a minimum by making a clear decision-making process, where transparency will give confidence to the country and the potential investors. I have to mention this taking into account, the experience of similar agencies in the region, which began to be very efficient, but subsequently bureaucratized, and are not delivering the expected results. In fact, the entities became almost complete politicized and therefore losing the originally objective, this should not be the case with the AVH. 

- The debt issue.

Clearly one of the biggest problems and challenges for Venezuela   is to solve the treatment of the immense debt inherited from the supposed revolution, a heavy financial burden estimated above the $125 billion, and we must added all commercial debt, which is also are billions plus the compensation for expropriations, the needs to help and alleviate the humanitarian crisis, and finally the financing needs to recover the economy new resources.

In order to begin with the economic recovery, it will be necessary to have agreed and negotiated the refinancing of the debt with creditors, and the solution will include various financial options and schemes. It will be essential to agree to obtain the support of multilateral agencies and the financial markets at the same time Venezuela has to show steps toward the essential economic reforms required and to obtain fresh money.

Mainly the multilateral agencies, namely the IMF, the World Bank and the Inter-American Development Bank, all of agencies are sources to support financially development programs and projects, such as quality infrastructure improvement, which at the same improve quality of life of the people and solve balance of payments problems. The agencies have schemes for soft-loan programs and will be needed to alleviate the humanitarian crisis, as it was mentioned before. This negotiation will lead to an implicit reform and restructuring of the size of the government and will be subject to monitoring its evolution and results, we may say subject to accountability.

To obtain financing through multilaterals (IMF, BM, IDB), for the oil industry will not be an option, in most of the cases is a matter of policy. However, having agreements with multilaterals will be a strong endorsement for the private sector's decision to invest in the hydrocarbons sector.

As you may know a condition to be evaluated and considered by the private sector to invest has to do with the so-called "country risk". As we all know, the higher risk, the higher the financial cost, and of course this affects Venezuela's competitiveness. To this end, risk coverage through export banks in particular in countries with oil and service companies will be key. Country risk coverage will facilitate private investment, make the cost of seeking resources in the financial system to invest in Venezuela competitive. In order to make this mechanism effective, it is a very important task to reach agreement with the governments that have these facilities, to include Venezuela. If we take into account aspects such as technology, investor portfolio, oil and services companies, financial sector. We have to consider as priorities, agencies such as USA Eximbank and OPIC, which belong to the structure of the American government and are attached to the Department of Commerce and the Treasury. Cases should also be included for example (JBIC) and Japan, France the COFACE, and even China with its Exim Bank.

A topic of high concern within the current environment for the recovery process are the Pdvsa 2020 bonds, by next October $914 million must be cancelled to its holders, which include as a collateral 51% of the Citgo shares. It is clear and expected that Pdvsa will not make such payment and on the other hand it is difficult for Citgo to have that amount of money available to protect from the shares. Therefore, default for non-compliance is most likely. For some of President Juan Guaidó's spokesmen, Citgo would be protected by President Donald Trump's executive order, and no creditor will be able to take Citgo's shares. However, in my opinion, the separation of powers works in the US and creditors have an obligation to exercise their rights, the chances of Citgo being affected are quite high. Most likely, the court decision will granted creditors in their claim, then the moment for the sentence to be executed will depend on the decision the judge makes in this regard. This legal action will put other creditors of the Venezuela, Pdvsa and Citgo on alert to take actions to protect their debts. As all understands this is a critical matter,  product of Pdvsa's lousy and corrupt management of the so-called revolution, as far as Citgo is concerned, motivated by an ideological bias since the arrival of Chávez, the regime always sought to get rid of those strategic assets for Pdvsa, by the way located in the market that best pays the Venezuelan crude oil.

Final consideration.

All this effort that we must make as a country to change, modify, reform the model of life that Venezuelans deserve and insert ourselves properly in the 21st century, needs to maintain the principles and values. Think how important is to be recognized by knowledge, to lead with the example, reward honest work, maintaining meritocracy, and giving the confidence by  vote to public servants who demonstrate that the general interest is above the particular one and fulfill their role creating well-being for all citizens. 

A shared responsibility is evident in achieving the goal of the expected Venezuela. The country requires political responsibility for the process of change and the capacity to manage with excellence the  hydrocarbons business, through a human capital focused on its tasks, with a professional management, which must be required results and management to add value, without being subject to the swings the misunderstood political loyalty, as has been happened so far. 

I firmly believe that the whole country wants to get out of the vices, a wrong understanding of the political power, such as; "Quitate tu para ponerme yo", that could be translate as; Now is my turn, you are out, or from a misunderstood loyalty by assuming you are in that position subject to may requests, a common practice for the last 20 years. We all understand and know the importance of having the contest of the best, which, by the way, is not an age issue. We know that there are many things to be fixed, including transparent financing for the  political parties to not be subject to a particular interests.

I feel that the country will be very aware and remain vigilant to the actions and results of policy makers and managers. The space to make mistakes at this critical time for our Venezuela is not acceptable. 

@Jfernandeznupa