Friday, June 20, 2008

a socialist story, part 2

In this second part, there is another article for you to read - certainly more recent that in the first post. Two years on, and it seems that the prediction made in the first article came through. PDVSA continues to struggle while Hugo Chavez continues pouring more money into his 'rakyat'. It doesn't take a genius to realise that when PDVSA has declined so badly to the point that it cannot fund Chavez's charity, his standing amongst the people will decline and he will eventually be replaced, leaving his successor with pretty much nothing to work with.

This is what I am against.

I do not care who runs this country (never liked any of them in the first place), so as long as the guy in charge does not make decisions just to stay popular with the people. Anwar Ibrahim promises to increase the subsidy while Lim Guan Eng wants to give each household earning less than RM6000 a month and extra RM6000 a year. If people don't have enough money, then you create opportunities for them to make money, not give it to them for free.

I think my stand on this is quite clear. But go on and read this, then make your own stand.

Chavez Under Pressure
Stratfor Analysis, 9 June 2008

Venezuelan state-run oil company Petroleos de Venezuela (PDVSA) is up to four months behind in payments to a host of energy industry contractors, El Universal reported June 10. Although the delays officially have been blamed on technical malfunctions, there is some evidence that PDVSA may be at serious risk of financial ruin, spelling grave implications for Venezuelan President Hugo Chavez's regime.

PDVSA is the main source of income for the Venezuelan government and the principal financial foundation for Chavez's populist policies. Chavez's reliance on PDVSA to fund his policies is increasing even as inflationary pressures in the Venezuelan economy mount, local elections approach and the government struggles to compensate for system-wide food shortages. If PDVSA's late payments are an indication that the company is faltering, it could seriously shake the country and put the government at risk of losing control.

While PDVSA has been late in paying contractors before, the delays have never been quite this protracted. The official reason is that PDVSA's SAP computer systems program is experiencing unspecified technical difficulties. There is, however, speculation that corruption is exacerbating the situation. PDVSA is also reportedly experiencing very high employee turnover, which has slowed all of the company's processes.

The compromised employee situation began in 2002, when a significant portion of PDVSA's skilled staff was laid off after the company's participation in a coup attempt against Chavez. The move left the company without technically skilled personnel or an accounting department.

Oil production took an immediate hit after the coup attempt. With the company organizationally scrambled, daily production of crude oil fell from an all-time peak of 3.15 million barrels per day (bpd) in 2000 to 2.34 million bpd in 2003, according to estimates by the U.S. Energy Information Administration (EIA). Although PDVSA claims to have raised oil output to pre-coup levels, there is serious doubt as to whether this is true. The EIA, the Organization of Petroleum Exporting Countries and the International Energy Agency all estimate that Venezuela's actual output of crude oil hovers somewhere around 2.4 million bpd. PDVSA's crude upgrading output also dropped by about 200,000 bpd in 2007.

A spike in imports of refined products and inputs is also cause for concern, as the value of purchases spiked from $759 million in the second quarter of 2007 to $1.6 billion in the first quarter of 2008. Part of the increase is most likely due to the rise in global oil prices and is not necessarily an indication of dramatically increased imports of refined products. However, it is yet another sign of weakness and a burden on PDVSA. If PDVSA is rapidly losing the capacity to produce these refined products (necessitating increased imports), it is in trouble.

In the face of declining production, PDVSA is able to invest only a small amount of funds into new exploration and production. The EIA estimates that in order for the company to maintain its level of production, an investment of $3 billion per year is necessary to compensate for lowered production in mature fields. But in the first half of 2007, PDVSA invested only 4.8 percent of revenues, or $2.09 billion, into exploration and production - hardly enough to increase revenue.

Many of the company's capital expenditures have been focused on acquiring stakes in other companies and projects following Chavez's 2007 nationalization campaign, which required PDVSA to hold a majority stake in all Venezuelan energy operations. Such deals give PDVSA a higher percentage of revenues, but also a higher burden of responsibility.

In spite of its reduced production capacity and increased financial burden, PDVSA is largely responsible for the fiscal solvency of the Venezuelan government. PDVSA's financial statements from the first half of 2007 indicate that the company contributed 37.8 percent of total revenues to the state. After taxes and expenses, PDVSA had only 2.1 percent of its revenue left. With such a small surplus, PDVSA has very little wiggle room for adapting to new demands.

Furthermore, PDVSA will not be able to take advantage of spiking global oil prices. A recent change in tax law will increase the tax PDVSA pays per barrel of oil sold. Oil prices had been estimated at $35 a barrel, but actual oil prices averaged $95.84 a barrel; hence, there is an excess of $60.84 a barrel. These additional earnings were used to calculate higher income tax. Some analysts have predicted that unless the global price of oil is at or above $150 per barrel, PDVSA will be in the red.

This is not to say that Venezuela is not taking action to counteract PDVSA's financial difficulties and declining production. A series of deals with foreign governments and companies has brought further investment into Venezuela's energy industry, and several blocks are currently up for auction. However, the flow of investment is gradual , and the demands on PDVSA are increasing.

In addition to covering its own costs and debts, PDVSA is also responsible for a host of social and economic programs that are the basis for many of Chavez's policies, and upon which he relies for public support. These include farming, food production, food distribution and oil industry equipment production. (PDVSA is also in the process of acquiring control of Venezuelan electric utility Corporacion Electrica Nacional.) These policies extend abroad to include foreign oil and general assistance programs in Latin America that have been key to Chavez's foreign diplomatic strategy.

With so many demands on PDVSA, it is perhaps no wonder that the company might be having difficulties making its payments to contractors.

And the political and economic strain Chavez is feeling is ratcheting up the pressure on PDVSA even further. Chavez's recent reversal on two key policies - an authoritarian intelligence law and support for the Revolutionary Armed Forces of Colombia - shows that the president is feeling threatened. With skyrocketing inflation, periodic food shortages and the approach of November local and state elections that will test the United Socialist Party of Venezuela's mandate, Chavez is leaning ever more on PDVSA for financial support for his populist policies.

Chavez's populism is intended to maintain public support and the survival of his regime. But the more he leans on PDVSA to fund his policies, the more Chavez risks shattering the very foundation upon which his kingdom rests


Wednesday, June 18, 2008

a socialist story, part 1

It is not often I copy and paste entire articles here.

In fact, this is the first time I am going to copy and paste an entire article here because (1) it is an old article and I lost the link and (2) even if I had the link, you would have to pay to read it.

The following article offers a glimpse of a socialist Venezuela. Whether or not you think the actions of Hugo Chavez below is right is different matter. This article offers a very balanced view, both for the people's point of view as well as their National Oil Company. When I first read this article two years ago, I thought it brilliant and an eye opener that I decided to save it up. And so here I am, sharing it with you at a time where I deem this article extremely revelant.

If you haven't read my previous article, please do so first before proceeding with this. Please do not be the typical Malaysian who says, "Nah, this is happening in Venezuela. It won't affect me". The truth is, this is exactly what certain politicians are proposing we do with our own National Oil Company.

As global demand tightens, oil producer has agenda
Stratfor Analysis, 2 August 2006

Ricardo Coronado, the head of western operations for Venezuela's state-run oil giant, found out the hard way that his job wasn't just overseeing development of one of the world's richest oil regions.

On a recent Saturday, Venezuela's flamboyant leader Hugo Chavez scolded him on national television for failing to appear at a ribbon-cutting ceremony for a school in western Venezuela paid for by Petroleos de Venezuela SA.

"The time is past when the president turned up and PDVSA was off somewhere minding its own business," said Mr. Chavez, who ordered an aide to summon Mr. Coronado. When the hapless executive arrived a half-hour later, Mr. Chavez was still raging, and cut him off before he could defend himself. "There's nothing you can say," the Venezuelan president lectured.

Since Mr. Chavez took power in 1999, he has become PDVSA's de facto CEO, steering the oil company into political, economic and philanthropic ventures that have distracted it from its core business of finding and producing more oil. The consequences for PDVSA are stark: Output has fallen to an estimated 1.6 million barrels a day from nearly 3 million barrels in 1998.

The oil company, the world's third-biggest by most measures, is run along social and political guidelines as much as business tenets. As a result, much of the decision-making involves figuring out new ways to fund Mr. Chavez's pet projects. One of the latest ventures was paying to televise soccer's World Cup for free in Bolivia, a Chavez ally.

Mr. Chavez's geopolitical considerations, and his anti-American bent, also influence the way the company does business. PDVSA has turned away from traditional partners like U.S. major Exxon Mobil Corp. and is doing much more business with state companies from Iran, China and India. This weekend, during a visit to Tehran by Mr. Chavez, Iran pledged to invest $4 billion in two Venezuelan oil fields. The two nations also unveiled a raft of joint ventures, including a refinery in Indonesia.

PDVSA, however, has announced deals and projects in the past that have so far failed to get off the ground, including a proposed South American pipeline.

The company's diminished production has cut world output by more than 1%. That may not sound like a lot, but in a global oil market stretched tight by growing demand, political volatility and hard-to-expand supply, the company's production shortfall has contributed to the run-up in oil prices during the past few years, and is likely to continue to do so.

A recent report by the U.S. Government Accountability Office says that PDVSA's long-term decline in output is a growing energy-security problem for the U.S., which relies on the Andean country as its fourth-biggest oil supplier. Venezuela boasts the biggest oil reserves outside the Middle East, and is much closer to the U.S. market.

Venezuela's production could slide further. Under recent changes by Mr. Chavez, PDVSA will now be in charge of managing the privately run fields in Venezuela, where growing production accounts for roughly a third of the country's total oil output. Mr. Chavez is imposing new rules on the ventures that could hamper their continued growth, such as requiring them to spend part of their budget on social projects.

Nothing is more central to Mr. Chavez's political fortunes than PDVSA, pronounced peh-deh-VEH-za. The oil giant is the source of the money his government lavishes on the poor and, in many ways, his 60% approval ratings. Before the former paratrooper took power, many in Venezuela viewed the company as a fiefdom where oil engineers and technocrats lived comfortably and little was done for the poor.

Under Mr. Chavez, the priorities of PDVSA, which has funded half of government spending for decades, have changed dramatically. The company still hands over a portion of its profits to the government, but it also gets directly involved in poverty alleviation and economic development.

The company must spend at least 10% of its annual investment budget on social programs worth about $1 billion a year. But that figure doesn't include other spending by the oil giant on projects such as building roads and the government's subsidized food program. That kind of economic aid totaled $8 billion last year alone, the company says. Palmaven, the PDVSA unit that oversees social spending, is the company's fastest-growing division.

PDVSA's social focus sets it apart from most oil companies, which try to maximize output and profits. Even most state-run oil companies, which tend to have bloated payrolls, try to mimic private-sector efficiency and focus entirely on the oil business. PDVSA's shift recalls the role that Mexico's state firm Pemex played for decades in trying to spur economic development by providing jobs and building roads.

Such attention to economic development, however, gives the company less time and money to devote to its oil business. It spent just $60 million on exploration in 2004, compared with $174 million in 2001, according to the company's recently published 2004 financial results. That's bad news for Venezuela, where current wells are so old that their output falls at an average rate of 23% a year, forcing the company to drill new wells just to keep production steady.

"The oil industry needs investments in maintenance and expansions," says Domingo Maza Zavala, a central bank director who applauds the company's social mission but also says it should be more efficient.

In a recent report, Gersan Zurita, an oil analyst at Fitch credit-ratings agency, said that PDVSA's "forced disinvestment" for social programs has hamstrung the company's ability to produce oil.

Some of PDVSA's problems can be traced to a devastating strike in late 2002 and early 2003, during which Mr. Chavez sacked about 19,000 employees who opposed his policies. Even though employment is now back to pre-strike levels, output -- which began to recover in the months after the strike -- has since fallen again, suggesting a long-term decline at the company.

PDVSA counters that the company is performing well, and says its daily output is 2.2 million barrels, though most independent analysts and the U.S. government put it at about 1.6 million. The company says it plans to boost production to 4 million barrels a day by 2012. Venezuelan officials also point out that the country's oil exports to the U.S. have remained steady since 2004 at 1.5 million barrels a day.

In some cases, Mr. Chavez has literally taken PDVSA assets and handed them to the poor. The elegant five-story headquarters for PDVSA Servicios, a subsidiary that oversaw communications and technology services for the oil giant, has been turned into the Bolivarian University of Venezuela. The university's 5,000 students get a free ride: tuition, materials, health care and food are paid for by the oil company.

Students and teachers view the campus's marble-lined elevators, expensive artwork and baseball field as evidence that PDVSA's executives lived too cushy a life for a poor nation before Mr. Chavez came to power. As a group of students and teachers play baseball, 36-year-old English teacher Claire Bendahan looks on in approval. "This is socialism in action," she says. "Now our country's oil money is being used for the poor."

At this new PDVSA, job creation -- outside the oil business -- is also in. The company is kicking off a new program to create about 73,000 jobs, including at a paper plant and in ecotourism.

The firm's own hiring is based on social and political goals as much as on talent. Under a new job-placement system, candidates with larger families are given priority because they are viewed as needing jobs more. Those who have been unemployed for longer are pushed to the front of the line, too. This goes for technical and engineering jobs as well as secretarial ones.

Quality and safety have suffered since the strike. Industry executives say PDVSA has botched a number of wells over the past year due to human error. Contractors complain they have to repeatedly send staffing requests before getting properly trained oil hands. Even the National Assembly, where every legislator is from a pro-Chavez party, is alarmed enough that it is investigating whether the new hiring system has excluded more-experienced workers.

Company officials say accidents are in decline compared with 2003, just after the strike. "At first we had some bad stumbles, but the safety side has been improving a lot," says Jorge Luis Sanchez, the head of Venezuela's Enegas natural gas regulatory agency.

Nowhere has the company's decay turned up faster than at PDVSA's massive 1.3 million-barrel-a-day domestic refining network, which suffered more than a dozen plant outages in 2005. In March, two workers died in a blast at the Amuay refinery, the nation's largest. Last month, another explosion and subsequent fire caused extensive damage at a 190,000-barrel-a-day unit at Amuay, sending spot gasoline prices higher in the U.S. Gulf Coast where Amuay ships much of its production.

"Workers are scared," says Oswaldo Caibett, the president of the Fedepetrol oil union. The union filed a complaint with the attorney general's office last year after a deadly refinery fire, accusing management of negligence.

PDVSA refining chief Alejandro Granado recently acknowledged to the local press that accidents at the refining complex are above international standards, and that the company had contracted U.S. chemicals firm DuPont Co. to help it improve safety.

PDVSA's ambivalence about boosting oil production is seen in the shallow waters of the remote Gulf of Paria, where Christopher Columbus first set foot on the South American continent in 1498. U.S. oil giant ConocoPhillips discovered the Corocoro oil field in the area in 1999, and spent the next few years drilling exploratory wells and drawing up a production plan.

But when Conoco was ready to transport a U.S.-made drilling platform to Corocoro in late 2004 to get commercial production started, PDVSA, which has a 35% stake in the project, refused and insisted the company use a locally made platform. That decision set back commercial production by more than a year to early 2007.

"Nowhere else in the world do you have a field with 500 million barrels that just sits there," said an oil executive involved in the project.

PDVSA says that it doesn't want to rely on imported technology and wants to spawn a domestic oil-services industry to compete with the likes of France's Schlumberger Ltd. and U.S.-based Baker Hughes Inc. PDVSA recently announced that any private oil company doing business with the state firm must source a majority of supplies and services in Venezuela.

In the past two years, Mr. Chavez has rewritten the rules of Venezuela's oil industry. In 2004, his government claimed a majority stake in some 32 operating agreements between private companies and PDVSA, which gave the state firm at least a 60% stake in most ventures. This year, he announced similar rules for four heavy-oil projects in the Orinoco region, and is expected to eventually seize operations from two other private ventures not included in the original 32 deals -- among them the Corocoro field.

Soon, any private oil company working in a joint venture with the state firm will be required to spend 3.3% of its local investment budget on social programs. "It's not easy. . . . But there will be no more projects with their backs turned to our reality," Rafael Ramirez, president of PDVSA, told an audience of industry executives in announcing the move in June.

Oil-service companies, which provide platforms, rigs and drilling supplies, must also include a community project, such as low-income housing, as part of their bids for contracts from PDVSA. In addition, the companies must spend up to 5% of the value of each contract hiring local worker-owned service companies to do some of the work.

Some in the oil service industry are pushing back. Todco, a U.S.-based rig supplier, has already sent two of its eight Venezuela rigs back to Houston.

Nevertheless, PDVSA's priorities are focused on bettering the lives of people in the nation's teeming slums. In the seaside town of Catia la Mar, about a half hour drive from the capital, the firm has just built one of 1,000 new community centers it plans to construct across the country. The centers offer living quarters for two doctors, often Cubans, who give locals free medical care. The waiting rooms all have new TVs and DVD players.

A local PDVSA employee organizes residents into a dozen committees, including health, sports and political ideology, which identify local needs and draw up proposals for PDVSA to fund.

The spending goes down well with Yoselin Escobar, a 33-year-old teacher and member of the local education committee, who is trying to convince the oil company to pay a monthly stipend to stay-at-home mothers who look after the children of other working moms. "Thanks to our president, the oil company helps us," she says. "I'm voting for [Chavez] until I die."

I do hope that you appreciated the article, and please feel free to draw your own conclusions from it.

I really want to know what you think here.


Wednesday, June 11, 2008

fuel hike facts

Most people have asked me about the fuel hikes and I have explained this scenario to many people, including supporters of the hike, simply because their reasons were wrong. In the past week, I have talked to friends who work for Petronas and Exxon Mobil who don't seem to know how the oil pricing works. Personally, I think those people need to be shot, but that is a story for another day.

People (namely the lying opposition leaders) have been questioning why Malaysia, as a net exporter of oil cannot afford subsidies, since the inflated price of oil should inflate the profits of this country. Being a net exporter of oil is irrelevant in our case for many reasons:

While Wan Azizah may be right about countries like Venezuela selling petrol for RM0.16 per litre, she does not consider many things. Heck, she probably did, but conveniently forgot to tell you guys about it. Theoretically, if the oil from the ground belongs to the people, so you could charge them the cost price for you to extract the oil from the ground, process it, and deliver it to the petrol stations. Personally, I am against this type of socialism (we will come to that later), but THEORETICALLY, it is possible.

However, we have different oil companies operating in this country. You can look at the pump stations and we are spoilt for choice. Shell is the market leader with about 35% of the market share. Petronas holds about 30% of the market share, while the rest are made up of Esso, Mobil, Caltex and BHP. This essentially means that 70% of the money is going to foreign oil companies - which does not make any sense. If Petronas held 100% of the market share, then at least the profits would be pumped back into the government and to the people. In my opinion, what needs to be done is to completely remove all the subsidies and allow all the oil companies to compete in a free market.

Going back to the issue of socialism in Venezuela's case, it would totally depend on which angle you are looking from. From the point of view of the Average Joe on the street, it would be absolutely fantastic to have to pay next to nothing for petrol. Hugo Chavez's populist policies scores him brownie points with his people, but are bad for his national oil company, PDVSA.

What he is doing is essentially what Anwar Ibrahim is proposing we do to Petronas.

When he first came into power, PDVSA was a growing giant with enormous potential. At that time they were producing some 4.5 million barrels per day (bpd) with a growth potential of 6 million bpd (numbers vary depending on which source you believe). When he took power, he channeled a huge chunk of PDVSA's funds into the country, halting a lot of their major projects. Some 20,000 PDVSA staff went on strike to demand Chavez's removal and call for early elections. Chavez responded by sacking each and everyone of them.

No company, no matter how well run can afford to replace 20,000 staff in a blink of an eye, so PDVSA struggled and today, even though they are still churning in billions of dollars of profits, they claim they are producing 3.5 million bpd. OPEC puts their figure closer to 3 million bpd (again, the numbers vary depending on the source, but the point is still the same). And as long as Chavez continues pouring in the money to his social project to gain popularity with his people, the oil company will continue declining until it can no longer contribute toward the nation.

We have seen that very same thing happen with Pertamina, Indonesia's National Oil Company. In the 70's they were huge, contributing to some one fifth of Indonesia's GDP. Years of mismanagement (granted there was a lot of corruption) and populist policies have literally destroyed the company. Up until recently Indonesia was a member of OPEC who wasn't actually an oil exporting country.

We have gas processing plants and oil refineries that are getting older and older and cost more to maintain. Inflation in the industry is bordering on ridiculous. 6 months ago, I purchased a particular item for work for a certain fee. Two weeks ago, I needed the same item for another equipment and I found the price had jumped 60%. The largest oil company in the world, Exxon Mobil posted a $39 billion profit in 2006. Despite the 80% jump in global oil prices, their profits for 2007 increased by a mere 2.5% to $40 billion.

10 years ago in school, we were told that Malaysia only has about 19-20 years of oil left. Today we still have 19 years of oil left in our lands. This is because you keep exploring new areas to look for oil. It is a simple rule of any business that you need to keep reinvesting your profits to sustain your business.

If Anwar Ibrahim does as he proposes, he will be extremely popular in the short term but will destroy this country in the long run.


I also followed this up with a couple of related articles:

A Socialist Story, Part 1
A Socialist Story, Part 2

Do read them for a better understanding of our dilemma.

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Thursday, June 05, 2008

fuel hike, part 104215

I can't decide which is worse:

The Government lying to the people and the uneducated people lapping up their lies


The Opposition lying to the people and the educated people lapping up their lies

Before today, I spent about RM400 a month on petrol. And I believe that that was quite a lot because I frequently commute between Hicksville and KL. I believe the Average Joe with a smaller car than mine (1.6L Waja) who mostly drives to and from work would spend less than myself.

But let's take my expenditure for example:

40% of RM400 = RM160 extra per month

RM160 - RM50 rebate = RM110 extra

If you have problems forking out an extra RM110 (or less) per month, you really have no business driving a car. Whatever happened to living within your means? Funnily enough, the 'friends' of mine who are complaining the most at the ones who must have their weekly dose of RM15 Starbucks coffee, and are more than willing to pay RM2 for a freaking doughnut that doesn't really taste all that great in the first place. That is what is meant by 'changing your lifestyle'.

You read the news and see that there are protests in KL, Ipoh, Penang and Kuching. Why do you urbanites talk as if the world owes you a living? If you people are to be believed and it is the 'poor' who are really suffering, where are they?

Busy earning money to survive I guess.

I find it extremely ironic that Pak Lah's bravest decision and what I feel is the most telling contribution to date would probably be one of the last few things he does. I always think that leaders must make difficult decisions because it is the right thing to do, and not because they are worried they become unpopular.

I can do without a new government full of hypocrites, thank you very much.

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Sunday, June 01, 2008

ego trip

Because everything in life can be explained by a quote from House:

GABE: Why did you become a doctor?

HOUSE: That's the big question? I give you complete license to humiliate me and that's the best you can do. Well, okay. Let's discuss the wonder of the human body.

GABE: No, no, no. You're a curious guy. You like to figure things out. Why not go into research? Why work with people when you obviously hate people?

HOUSE: When I was fourteen, my father was stationed in Japan. I went rock-climbing with this kid from school. He fell, got injured and I had to bring him to the hospital. We came in through the wrong entrance, passed this guy in the hall. It was a janitor. Friend came down with an infection and doctors didn't know what to do. So they brought in the janitor. He was a doctor and a buraku; one of Japan's untouchables. His ancestors had been slaughterers, gravediggers. And this guy knew that he wasn't accepted by the staff, didn't even try, didn't dress well, he didn't pretend to be one of them. The people around that place, they didn't think that he had anything they wanted, except when they needed him. Because he was right; which meant that nothing else mattered, they had to listen to him.

House MD - Season 3, Episode 7 : Son of a Coma Guy

Because there is no bigger ego trip than to be proven right over a diagnostic that nobody came even remotely close to guessing.