Monday, August 07, 2006

The Wrong Man

“Cuban dictator Fidel Castro is still in the hospital with a serious medical condition. Castro said that a half century of Communist rule seemed like a good idea right up until the point he was rushed to the hospital in a '55 Oldsmobile.”
—Conan O'Brien

“A message delivered on Cuban Television today said that Fidel Castro's condition is listed as stable, which in Communist countries means he'll be dead by Friday.”
—Jay Leno

The headlines (and the jokes) these days are all about Fidel Castro, the appears-to-be-dying Cuban strongman who also ranks as the favorite dictator of Connecticut’s own version of “Senator Forehead,” Chris Dodd.

Back in 2002, Dodd went on a “fact-finding” mission to that country, which is such a land of opportunity, equality and social progression that thousands of Cubans every year risk sharks, starvation, and other ways of dying in order to sail to freedom across the Straits of Florida. Dodd’s “fact-finding” mission apparently gleaned some very interesting “facts” courtesy of the thugs in control, because Dodd later gave a speech on the Senate floor criticizing not the Castro regime; but the “bullying tactics” of the United States government.

(In the interest of full disclosure, I should note that one of those who did escape from Cuba across those shark-infested waters on a raft is now a friend of mine, who found freedom, raised a family and built a successful small business in return. He does not, to put it mildly, like Castro. Nor is he a fan of our Senator Forehead—er, Dodd.)

Nevertheless, while the intense speculation regarding Castro’s fate is interesting and even exhilarating, considering the potential for the freeing of 11 million people from dictatorship, there is, south of our border, a far more ominous development in a far more important country—and that is the destruction of Venezuela's oil producing capacity under its strongman, Hugo Chavez.

Venezuela, as I have mentioned before, has the biggest oil reserves outside the Middle East. Also, as I have mentioned before, it is the fourth largest oil supplier to the United States.

And it is run by Mr. Chavez, who has publicly declared that in order to counteract an impending U.S. invasion of his country, he is buying Soviet fighter jets:

“Do you all know from what distance the Sukhoi (Su-30MK2) can launch?” Chavez asked at a news conference last month. "Two hundred kilometers -- that's to say, an aircraft carrier that stops in the Caribbean. They (the United States) like to stop aircraft carriers in the Caribbean to invade."

—from the San Francisco Chronicle.

In other words, he’s a mad-man.

And he’s a mad-man who controls a very large and important oil-producing nation—which Cuba is not.

Consequently, the health of an aging dictator in Havana is of far less import to the United States that the ongoing collapse of the Venezuelan oil company (known as PDVSA), upon which rests the entire social policy of the Chavez government. According to a recent and excellent Wall Street Journal article on the issue:

Since Mr. Chávez 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.

That’s a 50% drop in less than 10 years, which works out to almost 8% a year. At that rate, Venezuela will be producing less than a million barrels a day in five years—not enough to export anything to the United States, and certainly not enough to feed Chavez’s hungry entitlements programs.

According to the Journal:

The company [PDVSA] 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.

How much does that leave the Venezuelan oil company for, oh, finding oil? Not very much:

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.

$60 million worth of oil exploration is, almost quite literally, nothing.

Consider this: Venezuela is producing about 1.6 million barrels a day, and it is spending $60 million on exploration. Meanwhile, Apache Corporation, your basic independent oil and gas company, produced 450,000 barrels a day last year—one-third of Venezuela’s output.

Yet Apache spent $3.4 billion—with a “b”—on exploration and development, or 55-times what Mr. Chavez deems necessary.

As the Journal says:

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.

Yes, that's bad news for Venezuela, but it’s even worse news for the United States, which relies on Venezuela—think about that for a second—for a healthy chunk of its daily needs.

And with this morning’s news about "British So-Called Petroleum" shutting down the North Slope oil field for repairs to the aging pipeline, Mr. Chavez is the guy we want to see being rushed to the hospital “in a ’55 Oldsmobile.”

Not Fidel Castro.

Jeff Matthews
I Am Not Making This Up

© 2006 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author.


fgruben said...

and all i thought about was getting some good cigars finally. thanks jeff

Canucklebrain said...

Actually, the second, and possibly largest reserves are in Canada in the oil sands.
And while Cuba has its problems, no doubt partly incurred due to American trade restrictions, compare its' level of health care and education to good old America.
Regarding Chavez the madman with his jets, compare him to Bush the madman with his aircraft carriers.
I don't know why falling output is stark, unless it fails to provide enough income to support Venezuelas' social programs. Remember, he's not running a typical oil company with shareholder return being paramount as in the American model. And this oil ain't going anywhere. Produce today @ $70/bbl, or later at ???$$$, probably higher. Quite obviously, his mandate is not to worry if he has enough to export to America, he's not Ameri-centric, if such a word exists. To compare to Apache is apples and oranges, see above, re: shareholder return etc.
I think you've captured the difference between socialism and capitalism quite nicely.

quints said...

Excellent writeup. I quite agree.

The only plus for Venezuela is that the oil they leave in the ground out of incompetence or indifference is increasing in value.. How much will it be worth when we start running out?

Kevin H. Stecyk said...

I completely agree with your assessment of Hugo Chávez. Sooner or later, it will all end badly.

However, I am not so confident of your exploration argument. Given that much of Venezuela's oil is concentrated in a few locations, there likely is not much need for exploration. This is similar to oil sands companies in Alberta not spending much, if any, on oil exploration. They know where it is. The challenge is producing it.

That slight quibble aside, PdVSA's falling production is a real concern for the U.S. and even more so for Venezuela. The Venezuelans are counting on continued prosperity, if you can call it that, from PdVSA's oil revenues. As production continues to fall, revenue will fall, and problems will increase.

whydibuy said...

This unnamed friend from Cuba wouldn't be Manuel Ascesio would it? I'd love to read a second edition of his short seller adventures. Good stuff.

econjohn said...

on saturday, WSJ ran a great chart of world trade w/ cuba over the past 10 years or so. nothing from the US until...BOOM...freedom loving *republicans* take control of white houses and congress. suddenly it was okay to sell a few hundred million dollars worth of agricultural products to cuba. sure helps a company like ADM, who happens to really get along with the speaker of the house.

makes you wonder what would happen if fidel had some oil himself...

hrmm...maybe another industry exception to the embargo would be in order...

Jeff Matthews said...

"whydibuy": my Cuban friend's name is in fact Manny, but he is no relation to the famous short-seller.

And Kevin raises an excellent point--Venezuela's reserves are there, so the "E" in E&P is not as costly as for, say an Apache Corp. But $60 million doesn't buy you much "P" either.

RichL said...

Do your exploration figures incorporate the CapEx made by their concession holders? There are foreign oil companies working in Lake Maricaibo, which is a repository of heavy oil.
Chavez is awful, but what passed for a govt. before him did very little for its people, thus opening the door to Mr. Chavez.
It's all part of the wheel turning in world affairs. Look for a renegotiation of terms of oil exploration concessions with the intl. oil companies here and in all 3rd world countries, which might keep Mr. Chavez popular, and in the chips, longer.

QuestionMark and the Mysterians said...

Let's not leave out Mr. Chaviz's close ties (and growing) with our other good friends, Iran.

And I believe I read a news item a few days ago that had Whacko Chavez castigating the head of PDVSA for missing the opening of some grammar school. Probably had the guy's wife killed.

Its_strange said...

Today its oil from Venezuela . Yesterday it was slaves from Cuba. We are a rich and powerful county but we can also be very arrogent..Chavez , Castro ..well Kevin Stecyk might be right, it might end badly. ..It might end with Cuba and Venezuela getting worse tyrants...And then some US President might decide to remove those tyants and nation build. And than both US parties can stick thier heads in the sand along with the US press and people..

I lived in Gitmo for a year when i was in the Navy. The base costs a ton to operate. Everything is shipped in. Water has to be made. All because some US pol wants to win election in Fl and / or NJ

Johnny Debacle said...


"Actually, the second, and possibly largest reserves are in Canada in the oil sands. "

And they require huge amount of two other valuable natural resources (Water and natural gas) to make them viable.

"And while Cuba has its problems, no doubt partly incurred due to American trade restrictions, compare its' level of health care and education to good old America."

There are simple measures to tell if a country is a good place to live or not. European papers will cite things like happiness indices. Or social justice iniatives. Or healthcare. Etc. But the best empirical way to tell a country's quality is whether people are moving there or moving away. People risk their lives in makeshift boats to go from Cuba to Miami. People do not risk their lives to go from Miami to Cuba.

"Regarding Chavez the madman with his jets, compare him to Bush the madman with his aircraft carriers."

Most of the US's aircraft carriers were built in a time when they were needed, as the rest of the first world was ambivalent about their own defense (Canada and Western Europe for one) or legally bound from it (Japan, Germany). Bush is not a good president, but I don't think he has bought or had made a single aircraft carrier.

Who is VZ threatened by from abroad? What is the % possibility that the US would invade VZ as things are? At what % would that possibility have to be justify blowing millions on fighter jets? Even if it was 100% likely the US was to invade VZ, what point would there be to fighting an air war against the US? It doesn't make sense on any level, except as a show of machismo to his people.

"And this oil ain't going anywhere."

Oil wells run improperly or under-invested in lead to declining recovery rates. This can happen from overpumping, injecting too much water, using old equipment/techniques, or just doing it wrong. The recoverable oil IS being lost.

And a quick look at where Chavez has been spending money shows that he is mainly interested in establishing a Cronyarchy. How are 100's of thousands of AK47's and fighter jets socialist expenditures.

Alex Khenkin said...

Canucklebrain described the "differences" between "capitalism" and "socialism" quite nicely for a person who obviously had never actually lived in a socialist country trying to eke out a living. I was born and grew up in one, and will chose "capitalism" (the word invented by one Karl Marx because "free enterprise" is hard to make sound bad) over "socialism" any time. I always find it funny how people who enjoyed the fruits of Western economies all their lives sit back and pontificate on supposed "advantages" of socialism. Where were they when I was spending hours in the line to buy toothpaste, "back in USSR"? As the Beatles said, "You don't know how lucky you are, boys!", or something.
Small Investor Chronicles

Canucklebrain said...

Canucklebrain here.

Just pointing out that there are different wys of looking at the same thing.
Sure the oil sands require lots of water, but the water isn't consumed, just used, and reused etc., and I'm sure the return in oil offsets the natural gas used, or the oil sands wouldn't be economically viable. CBM will require far more water down the road as producers ramp up production of this resource. But Jeff wasn't talking about these details.

As far as happiness indexes go, aren't some of the highest indexes in Scandinavian socialist countries? Let's not confuse socialism with communism.

Bush may not have built any carriers, but as CIC he controls them, no?

Improperly run oil wells are a production, not exploration issue as Jeff was talking about. Do you think there have ever been any improperly run wells in North America as CEOs try to meet the street, I see it all the time, sometimes it's called "bringing in the ocean.
And I realize Communist socialism sucks. I the oil patch... with Cuban nationals making more in a day then they did in a year in Cuba. Better off in Haiti or the DR or Jamaica maybe, all of Cubas' problems without any benefits.

And I'm a total capitalist, I've been in the oil exploration business for 27 years, working for small producers, with my own company for 22 years. Oil companies need to spend big bucks on exploration, to obtain production cash flow so they can borrow more money to explore more, so they can increase production, so they can service more debt, so they can explore more... you get the picture, sort of a legitimate Ponzi scheme!
Like I said, just saying there are a lot of different ways of looking at the same thing.
I don't have any opinion on Chavez, alright, he seems to be a bit of a whack job, I'm sure time will prove you right.