Chavez Had Me Fooled

It seems I have been wrong about Hugo Chavez. I had thought the man didn’t have a clue about the oil business. While companies like ConocoPhillips were pulling in $15.5 billion profits*, they were investing $15.3 billion back into the business. Chavez, on the other hand, was siphoning off the profits of the national oil company of Venezuela, PDVSA, and spreading them among the public in support of his socialist platform. (Shame on those who complain about food shortages). Some, like me, probably thought “A few years of this, and he won’t have any oil profits to spread among the public.” How little I understood of his master plan.

You see, at first glance it does seem like his strategy is backfiring, as PDVSA is reportedly “facing growing operational problems” because of its failure to focus on its core business. It seemed like Chavez was running the business into the ground, as if Oil Watchdog had suddenly started to run the show. But that was before I read a story yesterday that revealed the man’s brilliant strategy:

Citgo cuts hundreds of Louisiana contractors-sources

HOUSTON, Jan 17 (Reuters) – Citgo Petroleum Corp cut more than 500 contract maintenance workers in late December at its Louisiana refinery as part of a program to increase returns to corporate parent Venezuelan state oil company PDVSA, according to sources familiar with the company’s refinery operations.

PDVSA is a key revenue generator financing Venezuelan President Hugo Chavez’s social development programs, but has drawn criticism for ignoring operational problems that have reduced oil and refined product output in Venezuela.

“Citgo wants to send 100 percent of what it makes to Venezuela,” said a source. “They’re only spending what’s needed to meet legal and regulatory obligations.”

It’s sheer genius. The profits from the oil company operations can be used to pay for social programs, and then the savings from job cuts in the refinery can be used to fund the oil company operations. Oh sure, there are naysayers, even internally:

Without the contractors, preventative maintenance at the refinery may fall off, the sources said.

“I don’t see how effective a maintenance program can be if you’re just chasing urgent jobs,” said a source.

PDVSA sources have told Reuters of similar problems at the company’s Venezuela-based refineries, lamenting the fact the company is carrying out “corrective maintenance” rather than “preventative maintenance.”

I say to these people “Don’t be so pessimistic!” After all, it is “preventative maintenance.” It’s like wearing your seat belt or motorcycle helmet: No accident, no problem. Besides, things don’t go wrong at refineries.

No, I was wrong about Chavez. He is clearly a misunderstood genius in the spirit of Vincent van Gogh. Stand back and let the man create a masterpiece.

Note: I do own ConocoPhillips stock, and I still don’t care for Hugo Chavez. It’s going to take more than a few maintenance cuts to impress me. After all, does he really need all of those operators and engineers scurrying about?

21 thoughts on “Chavez Had Me Fooled”

  1. He probably realizes that he may lose his refineries in arbitration with XOM and COP over the confiscation of their investments. So, why spend money on something that he may lose anyway? I bet this has the attention of OSHA though.

  2. Just wondering how much of the 15.3 billion ConocoPhillips reinvestment is included here?

    “The oil company ConocoPhillips announced yesterday it had approved a stock buyback of as much as $15 billion through the end of 2008…. ConocoPhillips’ program includes $2 billion remaining under a previously announced $4 billion stock buyback authorization.” – THE ASSOCIATED PRESS, July 10, 2007

    http://www.nytimes.com/2007/07/10/business/10buyback.html

  3. COP has actually borrowed money to fund some of those buybacks. It has also borrowed money to fund some of the capital budget.

  4. I agree that Chavez has been smart. (although I suspect RR was trying to be sarcastic)

    But please remember that oil prices have gone up close to 50% over the last year. I would argue that as long as oil prices rise at a faster rate than the cost of capital, then leaving as much oil as possible in the ground gives higher net-present-value than pumping it up as fast as possible.

    Chavez may have been ham-handed and blustery about it, but leaving oil in the ground to be extracted at higher prices is basically the net result he has achieved.

  5. “…leaving oil in the ground to be extracted at higher prices is basically the net result he has achieved.”

    Yet his stated goal is to increase production. His actions may end up having the result you stated, but it won’t be because that was his intent.

    On the stock buybacks, I can never understand why people criticize these sorts of moves. A CEO has a duty to maximize shareholder value. If I have some cash, and I feel like my share price is seriously undervalued, I have a duty to buy shares back UNLESS I can spend it all on projects that promise a higher return. So, maybe some of those criticizing the buybacks should start identifying the exact projects that should have been invested in instead.

    RR

  6. The company I work for had contracts to monitor natural gas compressors for PDVSA (in Venezuela), and they just got cancelled last week. Interesting. Chavez is going to have a revolution on his hands if he can’t keep the oil revenue flowing.

  7. Got a simple solution: COP seizes those assets in court. I gotta hand it to COP’s CEO, the only one with the stones to tell Chavez to piss off.

  8. Chavez in ruining his nation’s primary asset (along with good-looking women).
    Still, there is shame enough for right-wingers too in this whole mess..after years and then deacdes of preaching IMF reforms and free markets, the right still was not delivering medical care and other basics to ordinary working people…
    if you are an ordinary worker with children, and one guy says “yes I will find medical care for them,” and another guy says “It’s up to the markets,” guess who you will vote for?
    The right wing has to learn there such a thing as a fair social contract, and it goes like this: people who work for a living are entitled to certain basics, and if they do not get them, they are right to vote for another way….

  9. Chavez is looking out for the little guy, so long as he doesn’t happen to be an American contract maintenance worker.

  10. Chavez is probably a lunatic opportunist. But his message appealed to people who were not being offered anything better by a corrupt, right-wing eleite in Venezuela…..

  11. On the stock buybacks, I can never understand why people criticize these sorts of moves.

    Depends on what the criticism was.

    Stock buy-backs are asserted to be a more “tax efficient” way of returning profits to the shareholders than raising dividends.

    The valid criticism of stock buy-backs is that many executive compensation packages are tied to increasing the share price. Cutting the supply of shares (through buy-backs) is a good way to increase the price.

    It is worth remembering that growing businesses can re-invest all the profits they earn (& more). A growing business wants to do a rights issue to raise more capital, not buy back its own stock.

    The way it seems to me, the prevalence of stock buy-backs among International Oil Companies is a public admission that they are opportunity-starved. They simply don’t have access to enough exploration prospects to keep growing.

    Stock buy-backs are probably unavoidable for todays IOCs, but they are really a public notice that the IOCs are (quite profitably) going out of business in the long term. Many stock analysts seem to miss this rather obvious point — or maybe their time frames are very short.

  12. The purpose of stock buybacks is to raise the value of the CEO’s stock options.

    Remember the good old 70s when the oil companies bought department stores and semiconductor companies they didn’t know how to run? Instead of returning the money to the investors, oil companies can always mismanage it until the problem goes away.

  13. Stock buy-backs are probably unavoidable for todays IOCs, but they are really a public notice that the IOCs are (quite profitably) going out of business in the long term.
    MMMMMMM. You’re onto something. But I don’t see IOCs going out of business, just yet.

    As crude prices rise there is an incentive for IOCs to start looking for alternative feedstocks. The obvious feedstock would be coal. One can only hope biomass gets to the point where it can compete.

    I see us buying the same fuels (diesel and gasoline, although perhaps more diesel and less gasoline) 50 years from now, from the same IOCs. Even if global crude production drops to 75% of what it is today, which is also quite unlikely.

  14. A stock buyback is a perfectly reasonable option for a cash cow company. You can build cash hoards, pay dividends, make unwise acquisitions, waste it, or do a stock buyback.
    RR is right on: The business roadsides are littered with the wrecks of companies who thought they could manage well, in a whole new industry after a business combine. Business combos are losers.
    That being said, the large oil companies might want to ponder their fates, and move into some other fuels which can be produced in the sane world, (and the sane world excudes almost all of the oil-producing nations). I don’t know what those fuels would be, but jatropha comes to mind.

  15. “On the stock buybacks, I can never understand why people criticize these sorts of moves.” – RR

    Introduced the topic in the context of your statement, “While companies like ConocoPhillips were pulling in $15.5 billion profits*, they were investing $15.3 billion back into the business” not to speak to the Venezulian situation, but to chalange the implicit assumption that CoP is investing in its core business. The context, as I understand the post is investment in petrolium production. Extarnalities opperate in both cases. I don’t see that pointing this out is cricizim.

    I’ve some recent and rather direct experience, being a resource owner dealing with CoP (amoung others), over distribution of cash flow resulting from production, and the impacts of redistribution on production investment.

  16. Optimist wrote:
    As crude prices rise there is an incentive for IOCs to start looking for alternative feedstocks.

    Why? This may be tough for the hang-overs from the 1960s (Hi there, Hillary!) to accept, but what was Big Oil only half a lifetime ago is now Fairly Small Oil.

    Shareholder-owned International Oil Companies are now collectvely responsible for something like 20% of current production and a piddling amount of reserves. They don’t even own much of the refining capacity these days (as RR’s comment on Chavez & Citgo shows).

    Yes, in theory, IOCs could re-invent themselves as energy companies and pursue alternate energy sources. But the reality is that even though the IOCs are now Fairly Small Oil, the remaining companies are still giant bureaucracies — not the place to look for unconventional thinking, risk taking, and swift action.

  17. Chavez is a better man than ANYONE in the US govt or CEO, theif, fatcat of your greedy corporations.
    None of this really matters though because the US is finished as a nation.

  18. I have locked this thread from further comments. My favorite internet stalker, who shows up any time I mention Chavez, has decided to pollute the comments with his lies and hatred.

    As I have told him before, and I will tell him again, NOTHING he ever posts will be allowed to stand here. I get an e-mail notification every time he posts anything, so he won’t ever slip anything in here.

    RR

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