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PDVSA's Net Profits Fall as Social Spending Rises

Published: 3/29/2007 by Kenneth Yeasting
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The Venezuelan state oil company saw its profits decline last year as social spending almost doubled.

Global Insight Perspective

 

Significance

PDVSA saw a 26% decline in its net profits in 2006 at the same time as its spending on social projects almost doubled.

Implications

The results will be seen by President Chavez's critics as further evidence that his increased reliance on PDVSA's revenue to fund social programmes and extend the country's influence in the region have weakened the company both financially and operationally.

Outlook

Venezuela's ability to significantly raise production levels will continue to be impaired unless investment levels are increased.

PDVSA's Profit Falls

The Venezuelan state oil company PDVSA has disclosed its preliminary unaudited results for 2006 in a report on its financial and operational performance released to accompany the launch of a US$5-billion bond issue this week (see Venezuela: 26 March 2006:PDVSA Launches US$5-bil. Bond Issue)

The report shows that the company recorded a net profit of US$4.774 billion in 2006 down from US$6.483 billion in 2005. However, its earnings before spending on social development and income tax were US$22.931 billion, up from US$19.209 billion in 2005. Spending on social development rose in 2006 to US$13.261 billion from US$6.909 billion in 2005. Other tax payments to the government in the form of royalties and other taxes totalled US$18.248 billion in 2006, up from US$13.318 billion in 2005 and US$3.760 billion in 2001.

Gross sales revenue from domestic and international operations in 2006 was US$101.838 billion.

PDVSA Earnings (US$ mil.)

 

2006*

2005

2004

2003

2002

2001

Earnings before Spending on Social Development and Income Tax

22,931

19,209

12,067

4,850

4,648

8,001

Spending on Social Development

13,261

6,909

1,242

249

-

-

Income Tax Paid

4,896

5,817

5,419

1,318

1,102

3,669

Net Earnings

4,774

6,483

5,406

3,283

3,546

4,332

Source: PDVSA
*preliminary, unaudited figures

Production Expected to Increase in 2007

The report did not include production figures for 2006, but it stated that Venezuela produced an average 3.274 million b/d of crude oil in 2005 of which 2.906 million barrels per day (b/d) was produced by PDVSA and 368,000 b/d from third parties in the Orinoco heavy oil belt. Venezuela's proven crude reserves at end-2005 were 80 billion barrels (including an estimated 38 billion barrels of extra heavy oil reserves in the Orinoco Belt). Venezuela's total proven gas reserves at end-2005 were put at over 152 Tcf.

In separate news, El Universal reported that PDVSA's budget published in the Official Gazette yesterday included an average oil production projection for the company of 2.96 million b/d of crude in 2007, of which 2.08 million b/d will be destined for export.

Outlook and Implications

The decline in profits, despite the impressive sales-revenue figures, show that President Hugo Chavez's increasing reliance on PDVSA's revenue to help fund increased government spending have affected its bottom line. The results will exacerbate concerns that as a result of increased social spending not enough of the oil windfall from higher oil prices is being reinvested in the oil sector, with the consequence that the company's ability to increase production is impaired.

PDVSA's recent moves to raise capital to finance its business plan through the bond issue and loan agreements with Japanese and French investors come as the government's increasing reliance on PDVSA's revenue to fund non-commercial projects reduces the cash flow available for reinvestment in the company's oil operations. However, the experience of the Mexican state oil company Pemex shows that increasing debt to finance an ambitious exploration and production programme, while the government budget absorbs a significant portion of its revenue, is not a sustainable strategy over the long term.

With some of the company's older fields declining at a rate of around 25% per year, Venezuelan oil is more expensive to produce than that of most other countries and it is estimated that over US$2.5 billion per year needs to be invested just in maintaining oil production. Insufficient investment in the sector means that PDVSA's own goal of raising production to 5.8 million b/d by 2012 is likely to be missed.

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