Things they don’t teach you about in Stanford

The guy over your shoulder - that's your problem right there, Eulogio

The guy over your shoulder – that’s your problem right there, Eulogio

There is an interesting piece in the Business Section of the [increasingly indispensable] Wall Street Journal focused on PDVSA President Eulogio del Pino.

I wouldn’t call it a profile per se – Del Pino did not make himself available to friend-of-the-blog Kejal Vyas, so he hovers over the story like a ghost. But the story claims del Pino is trying to veer the company into doing what it is supposed to be doing – producing oil, producing more of it, and doing so efficiently.

The sirloin:

[del Pino’s] top task is to seek the $247 billion in investment that PDVSA says it needs between 2016 and 2019, a difficult proposition as the highest borrowing costs in the developing world all but close off access to debt markets.

Under Mr. del Pino, PDVSA is trying to woo investors by offering them more operational and financial control of oil projects. Some partners can invest in projects directly rather than going through a PDVSA intermediary and are being promised joint access to proceeds from oil sales using off-shore accounts. And a preferential exchange rate for oil firms helps keep production costs under $10 a barrel, making projects attractive despite oil’s slump, people close to PDVSA say.

But undoing years of shaky relations with foreign oil partners won’t be easy… India’s ONGC Videsh Ltd., for example, hasn’t been able to send about $500 million in backlogged dividends to its headquarters since 2009. Talks between the two companies are so fragile that one person familiar with the negotiations said ONGC is crossed between making multi-billion dollar investments or pulling out of the country entirely, much like Vietnam’s national oil company, which says it wants to leave [sic] and their Malaysian counterpart which already has.

My sense form reading the story is that del Pino is caught.

He may want to apply all that hardcore Stanford knowledge and make the company grow, but he is hampered by a reality – economic, but mostly political – that sees PDVSA as the country’s cash cow, in charge of winning elections and keeping the shelves in supermarkets somewhat stocked. Producing oil? That comes later.

PDVSA simply will not be able to get off the ground unless currency restrictions are lifted, and unless the government understands that the company needs breathing room to be able to focus on what it needs to do. It needs to do more than tinker with rules about investing that can be changed at will.

Investment can only come once the entire political structure the revolution is built on changes. del Pino simply does not have the political capital to do this, and it’s clear his bosses don’t either. His low-key public persona suggests he doesn’t have the intuition to develop it by going on the airwaves and making his appeal to the public, by picking a fight with the forces inside chavismo that are hampering his agenda.

Trying to be a technocrat in the times of chavismo is an almost impossible problem to solve. That’s something no amount of Stanford education can prepare you for.

35 thoughts on “Things they don’t teach you about in Stanford

  1. From the article
    </blockquote.Under Mr. del Pino, PDVSA is trying to woo investors by offering them more operational and financial control of oil projects. Some partners can invest in projects directly rather than going through a PDVSA intermediary and are being promised joint access to proceeds from oil sales using off-shore accounts. And a preferential exchange rate for oil firms helps keep production costs under $10 a barrel, making projects attractive despite oil’s slump, people close to PDVSA say.Given the history of Chavismo’s conduct with regard to honoring contracts with foreign oil companies, he is going to have a more difficult time than he anticipates in getting a foreign oil company to sign on the dotted line. But there’s a sucker born every minute, as PT Barnum said.

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  2. Last time I was in New York I talked to Juan’s good friend/oil sector obsessive – I don’t think she’d like me to name her, but Juan, you know whom I mean – about Mr. Del Pino.

    She scoffed and went on a little rant on the theme of:

    “Don’t they get it?! They missed the bus! That ship has sailed! A year ago, two years ago, with oil prices in triple digits, who-runs-PDVSA was a major limiting factor for investment in Venezuela. But the sector crashed! Companies worldwide aren’t looking for new places to invest, they’re looking for places to cut investment. High cost producers – and make no mistake, the need to mix the gunk you get out of the Orinoco Belt with light crude makes Venezuela a very high cost producer – can’t attract big new investment in this climate. It doesn’t matter who runs PDVSA anymore. That was last year’s problem!”

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    • What struck me was that the piece clearly wanted to paint a picture of a company hitting reset, of a CEO wanting to change course … But del Pino did not make himself available!

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      • When I saw the headline, two days ago, I wondered: What’s this? Is the journo trying hard, or been commissioned, to make Vzla/PDVSA look appealing to investors?

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    • The heavy gunk does not need to be mixed with light crude. It has to be treated into a light crude, that is were the money is. That is why the mejoradoras were built. Ameriven sold an oil that sold at a premium to Brent. They do the mixing because they f.. up Petrozuata, Ameriven, Cerro Negro and the one I can’t remember.

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  3. I sent Mr. Vyas a note on this article that reads:
    Dear Mr. Vyas:

    Re: http://www.wsj.com/articles/eulogio-del-pino-battles-to-turn-around-venezuelas-energy-giant-1435794777

    In reference to your excellent article on Mr. Eulogio Del Pino I would like to offer the following comments:

    1. Legally and technically speaking PDVSA has no oil reserves, which belong to the Nation. PDVSA is authorized to develop and produce them but they cannot appear as Assets in the financial statements of the company. Furthermore, these reserves are not the largest in the world. The certification ordered by Chavez some time ago failed to comply with the international rules to define oil reserves. What Venezuela has should be more correctly termed the world’s largest oil resources (proven reserves + probable reserves + possible reserves). The graph in the article does not convey the exact situation.

    2. Mr. Del Pino was for several years Vice-president of Exploration and Production of the company and, under his watch, Exploration practically died and Production has either declined significantly , if we believe the IEA and OPEC or remained stagnant , if we trust PDVSA’s official figures that few believe in, at considerable loss to the Nation.

    3. Today PDVSA is a company that cannot be recovered. It has 150,000 employees, owes some $150 billion internally and externally and engages in a multitude of non-oil related activities, from food imports to pig raising and cassava planting. Its “social” nature, defined by the “revolution” cannot be discarded because it is essential to the political philosophy of the regime.

    4. Rafael Ramirez was probably the most damaging member of the Chavez/Maduro government but Del Pino was his very close collaborator and his dismal record cannot be whitewashed.

    5. No one can be so gullible as to think that Mr. Del Pino is going to hit a reset button, after being one of the strongest members of the Ramirez gang. He is a political survivor who will navigate the waters in order to keep in power

    6. The Orinoco project keeps being mismanaged by the association with mediocre foreign companies from Russia, China and other countries ideologically friendly. Little or nothing has been accomplished during the last 16 years of rule by this regime. And raising $274 billion from foreign investors or from the open financial market is science fiction. The logistical requirements to increase production significantly from the Orinoco are beyond PDVSA’s capability. In parallel, their desire for total control is such a core ideological value of the regime that could not be dispensed with, without the government’s political narrative being destroyed.
    Sincerely,
    Gustavo Coronel

    © 2015 Microsoft Términos Privacidad y cookies Desarrolladores Español

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    • The various plans described by the intrepid Kejal that you cite, Juan, have been the PDVSA buzz for at least a three or four years now. Indeed, Del Pino has pushed on these lately, particularly allowing partners in the Faja to directly purchase equipment from abroad and more operational control, although there are still caveats at every twist and turn, as usual.

      Francisco’s comment plus especially Gustavo Coronel’s point #6 are right on, in my opinion.

      For some perspective: Consider that Iraq (yes, I R A Q — that OPEC state with its second largest city and much more territory under ISIL occupation — has nonetheless increased it’s production [at least up till this past April, see for example: http://www.reuters.com/article/2015/05/01/us-markets-oil-idUSKBN0NM3GU20150501 ]. Now, why is it Venezuela’s PDVSA cannot do the same? There is no good reason. Can the sabotage of the esqualidos and the “economic war” of the Venez. bourgeoisie be more effective at undermining oil production than a civil war ISIL?!

      It is difficult fathom, by comparison, how incredibly incompetent is PDVSA (and it does start with politics and with chavismo’s incorrect political/ideological understandings of the world of oil and of economics)

      ;

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      • Exactly Tom/Gustavo, total incompetence, bureaucratic and inefficient. Its an upside down world in PdVSA. They work really hard to make bad decisions, including not accepting their partners help when it is the best and easiest solution.

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    • 7. Mr. Del Pino is nothing but another Chavismo MegaThief, vastly more concerned with his overflowing personal bank accounts, than with managing Vzla’s oil resources.

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  4. The day when everyone wanted a piece of the Faja are gone. PDVSA has destroyed any credibility once held. The goons operating are ever more abusive to employees, who are continuing to leave the country or preferring to be bachaquerias rather than be slaves to the revolution. The remaining talent cannot meet the technical challenges, and do not have the resources if they could. Talk of giving partners more operational control is like selling unicorns and rainbows. The management at all levels is incompetent and corrupt, similar as the military, and have no intention of giving up their positions and power.

    No new upgrader projects have come online since 2004, they cost $5 billion and were profitable at $20 per barrel. Cost estimates to build another mega-project is in the 25 to 45 $ billion range. No major will make that type of investment without much more control, as in the combined junior partners having at least 51% to 49% of PDVSA share, and that will not change without a change in government. Another significant obstacle is the lack of a local skilled workforce to build an upgrader, including welders, crane operators, electrical and technicians. Imagine having to import that workforce.

    http://www.worldoil.com/news/2015/6/29/big-oil-needs-new-model-to-endure-60-crude-morgan-stanley-says

    And even if that did happen, the landscape has changed. As the link above shows the appetite for any mega project is gone for at least 5 to 8 years, likely longer. Fracking is too cost effective and the efficiency (when was the last time you heard that word spoken in Venezuela?) is improving.

    The inflexibility of the current situation will doom PDVSA to poking some holes in the ground and having a few barrels ooze out. Certainly not enough to reach the grandiose plan of 5 million barrels a day, or to feed the country. The outlook is scary and dangerous for anyone remaining.

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    • Not only that, they haven’t even PAID for the friggen upgraders they stole, which barely function today due to lack of spare parts. By the way, that was an excellent post!

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      • I understand price tag for a 200 kbd upgrader nowadays varies between 12 to 18 bln USD , increased costs probably are due to 3 factors, reduced labout and operational productivity from conditions now prevaling , location of new upgraders ( they are designed to be located inland near the production fields where no infrastructure exist to support their execution thus making it ncessary for new infrastructure to be build in order to erect the upgraders from scratch) and three corruption among contractors and incompetent management make everything more expensive ,, You would need at least some 4 new upgraders to accomodate the increased heavy crude production which would require some 48 to 72 billion USD in investment capital and some 4 years of uninterrupted effort.

        That conventional crude production has fallen doestn mean that it has dissapeared and cannot be increased thru better maintennace and development of existing reservoirs .!!

        The notion that efficiency of operations depends mostly on an enlightened managerial leadership is false , the mid level expertise and efficiency of mid leve technical cadres working together is extremely important for any succesful turn arround in current operations .

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  5. I suspect that there may be an effort on the part of the top guys to improve management and make it less ideological more buisness like , but their control of the operations is subject to interference by people close to the Governing Circle that have been posted inside Pdvsa , and whose view is more political than anything else (e.g Cilias relative as head of corporate finance) , also dont think its a question of a changed leadership perspectives , competence belongs to the organization as a whole , to the combined expertise of hundreds of people working together and creating a work culture that makes things happen , this last quality is totally lacking . Ramirez made Pdvsa do things which prejudiced its operations and future to sattisfy the narcistic whims of Chavez , they are paying for that . Still its encouraging that there is even a timid mmovement towards making Pdvsa a better functioning company, even if its too late for that.

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  6. “And a preferential exchange rate for oil firms helps keep production costs under $10 a barrel, making projects attractive despite oil’s slump, people close to PDVSA say.”

    What is this, some magic free lunch? It sounds like these firms are being subsidized with increasingly scarce dollar reserves, just so they won’t pack up and leave.

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  7. I actually guffawed at the ludicrous thought of a Chavista having the country’s development and growth interests placed before his own.

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    • I agree. There might be some dumb-ass true believers left. But anyone with half-a-brain must know the wheels are coming off the wagon and it is time to get your share while the gettin’ is still good.

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  8. Luckily for our brothers and sisters in Venezuela, we have plenty of oil in Guyana too:

    ..U.S. Geological Survey (USGS) announcement that they’d identified the Guyana-Suriname basin as having the second highest resource potential among unexplored oil basins in the world. With recoverable oil reserves over 13.6 billion barrels and gas reserves of 32 trillion cubic feet. That’s more than the proven reserves in the North Sea, which gave such a stimulus to Norway and Britain back in the 1980s.”

    http://www.stabroeknews.com/2015/media/photos/07/01/exxonmobil-to-pump-more-resources-in-oil-exploration-in-guyana/

    Soon, we will have more money than we know how to spend. Since we will not steal every penny as your Chavista dictators do, and Exxon will run things effectively, we might even send some food, chicken or toilet paper as social relief to the oppressed people of Venezuela. Hang tight, better times will come.

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    • “Soon, we will have more money than we know how to spend.”

      And soon, you will have more corruption than you can possibly combat.

      Please study the problems faced by other petroleum exporting nations. Who knows? Maybe Guyana can avoid the pitfalls. I wish you luck.

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      • Oh, I am extremely familiar with the infamous Resource Curse, Mr. Roy. We have been studying many cases feverishly, Petrozuela, of course, Libya, Nigeria and many others. We have also studied the exception that confirms the rule, Norway, but we realize they are far more educated and far less susceptible to massive corruption than we are.

        We are even studying this recent “Oil-to-Cash” program, used in Alaska, etc, and it could work well in New countries like Guyana, that are not entirely corrupt as Venezuela or Iraq already.

        http://www.cgdev.org/initiative/oil-cash-fighting-resource-curse-through-cash-transfers

        As President, I can tell you that of course we will steal, and a lot, regardless. But it’s impossible to steal every single Oil Barrel as you guys do.. We shall try to do a little better, and thus, we shall have plenty of food and basic hygiene items left over to contribute for our dear brothers&sisters in Venezuela, Nigeria,Haiti and all!!

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          • Guyana’s GDP per capita (nominal): 3,500
            HDI ranking: 121st
            Democracy index: 78th (hybrid regime)
            Economic freedom index: 123rd
            Natural resources rents: 16% of GDP already

            Man, it doesn’t look good. I’m with you on that one. The hardware is just not fit for the software that they are trying to run. They will just exacerbate all the problems that they already have.

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        • We have also studied the exception that confirms the rule, Norway, but we realize they are far more educated and far less susceptible to massive corruption than we are.

          If your *studies* don’t include scoping the rule of commercial law in Norway and its social infrastructure, then your words are an empty shell, more so if Guyana can’t apply what it has “learned” from others.

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  9. It aint easy to define with precision how much recoverable oil there is in a reservoir , offshore exploitation is extremely costly and building the infrastructure to produce it and bring it to where it can be loaded onto a tanker is difficult and takes a long time. In todays low price climate the incentives may not be there to start a virgin exploitation in those conditions . its easier when there is some nearby installations the new exploitation can connect to ( apparently the case with the new discoveries in the Gulf of Mexico) . time will tell,!!

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  10. The comments above are mostly right on…thanks to all for the great input. The upshot is that PDVSA has long ago ceased to be a competent oil producer, with or without foreign investment. Sad that a once well respected oil company has been turned into a political tool for the government. What a disaster.

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  11. “…… but he is hampered by a reality – economic, but mostly political – that sees PDVSA as the country’s cash cow, in charge of winning elections and keeping the shelves in supermarkets somewhat stocked.”
    ——
    “Mr. del Pino, the CEO of Conoco-Phillips on line 2”.

    “Tell him I will have to call him back. We are in the middle of negotiating for a ship-load of Tampax here”.

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  12. From what Ive read and heard he is trying to get away from that to concentrate on the business management side of Pdvsa , He cant prevent the Chavismo hard wired fanatics from broadcasting their messages but doenst directly partcipate in them . He had a well publicized tiff with Cilias relative appointed as head of Pdvsa corporate finance about whether to use the few resources left to Pdvsa to shore up a really broken up busines or use it to help the govt with its popularity problems. He was targetted for dismissal , understand they offered his job to another Cilia favourite who declined, also to Rodriguez Torres. He is no saint , but he understood as probably Ramirez understood in the end ( once Chavez died) that to avoid total economic disaster they had to start breaking from their hare brained past and start doing things half right . He is far from being the type of manager who would have reached the Presidential position in the past but there are much worse candidates in the Chavista roster for the post .

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