This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L  CARACAS 002118 
 
SIPDIS 
 
 
NSC FOR TSHANNON AND CBARTON 
ENERGY FOR DPUMPHREY AND ALOCKWOOD 
SOUTHCOM FOR POLAD 
 
E.O. 12958: DECL: 06/28/2014 
TAGS: EPET EFIN PGOV VE ECON VE
SUBJECT: PDVSA - OIL COMPANY OR SOCIAL DEVELOPMENT AGENCY? 
 
REF: CARACAS 2034 AND PREVIOUS 
 
Classified By: ECONOMIC COUNSELOR RICHARD SANDERS; FOR REASONS 1.4 (B) 
AND (D) 
 
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SUMMARY 
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¶1. (C)  Through budgetary and non-budgetary spending, 
Petroleos de Venezuela (PDVSA) is now the primary agent for 
implementation of Chavez Administration social programs. 
Over $1.7 billion has been designated to social development 
programs in PDVSA's 2004 budget while up to an additional $2 
billion in PDVSA oil receipts will reportedly be used to 
establish President Chavez's "Special Development Fund," 
supposedly for development of big ticket national 
infrastructure projects.  In recent months, PDVSA has also 
attempted to take over management of at least some part of 
the funds budgeted by international oil companies for their 
own corporate social responsibility programs in Venezuela. 
When money is channeled directly through PDVSA, however, the 
Chavez Administration is bypassing the accounting and 
budgetary control that should rest with the National 
Assembly.  A PDVSA debt buy-back program announced on June 28 
may also help PDVSA to evade the transparency required by 
U.S. financial sector regulations in the future.  The most 
troubling aspect of this emphasis on PDVSA's new role as a 
social welfare agency, however, is that it is deflecting the 
company's attention from its core mission, oil production. 
End summary. 
 
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PDVSA:  DEVELOPMENT PIGGY BANK 
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¶2. (C) Recent developments have underscored that PDVSA is not 
simply "connected to the national development program" as 
Energy Minister Rafael Ramirez_ has put it, but is now the 
primary agent for implementation of Chavez Administration 
social programs.  This trend began in 2003 when PDVSA 
affiliate CVP started funding a program to build affordable 
housing called "Oil for the People."  (NOTE:  In 2003, CVP, 
the Venezuelan Petroleum Corporation, was put in charge of 
the 33 existing operating agreements under which foreign oil 
companies do business in Venezuela as well as the four extra 
heavy crude projects.  END NOTE)  Under this program, CVP, 
working with the State-owned Venezuelan development bank 
BANDES, created a $300 million trust fund (since augmented to 
$500 million).  The fund was designed to provide mortgages 
for the purchase of homes developed by the CVP.  Supposedly, 
BANDES will repay the CVP trust fund when the homeowner pays 
off the loan. 
 
¶3. (C) Starting in 2003, the Ministry of Energy and Mines 
(MEM) has also been designated either as the Ministry in 
charge or as a participant in a number of Chavez,s pet 
social plans.  These include "Mision Ribas," the literacy 
plan; "Mision Barrio Adentro" (Inside the Neighborhood), the 
plan under which Cuban doctors provide medical services to 
the poor; "Mision Sucre," a plan to provide grants for higher 
education; and "Mision Vuelvan Caras" (About Face), a plan to 
provide job training to the poor.  The funding for these 
efforts has come out of PDVSA.  PDVSA has also made 
contributions in kind to President Chavez's programs.  A 
number of Caracas properties formerly occupied by PDVSA have 
been turned over for the use of the recently formed 
Bolivarian University of Venezuela. 
 
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PDVSA'S 2004 BUDGET 
------------------- 
 
¶4. (C) This trend has accelerated in 2004 with the 
announcement in January of PDVSA's 2004 budget in which 
$1.716 billion was budgeted for social development.  These 
monies include $600 million earmarked to the CVP for a trust 
fund for agricultural development (the "Zamora Fund") as well 
as an additional $500 million, at least some of which will be 
allocated to the &Oil for the People8 housing program. 
 
These funds were included in the investment portion of the 
PDVSA budget.  An additional "Social Development Plans" line 
item under the "Other Costs and Expenses" portion of the 
PDVSA budget is budgeted at $616 million (Note:  the MEM's 
participation in the various programs listed in Para. 3 may 
well be covered by this budget item but we cannot verify 
that.)  In early 2004, PDVSA Gas also announced a new 
project, "Gas Adentro," (Gas Inside, i.e., the neighborhood 
) a clear reference to the "Barrio Adentro" medical program) 
to provide bottled gas to poor sectors of Caracas and other 
major cities.  According to a local consultant, the proposed 
funding for "Gas Adentro" is about 15 percent of PDVSA Gas' 
2004 budget and the project appears to be a virtual give away 
of the gas. 
 
¶5. (C) But there are other indicators of the change in 
PDVSA's role.  At the Latin American Petroleum Show, held 
June 15-17 in Maracaibo, econoff attended a presentation by 
PDVSA detailing its plans for the development of the Tomoporo 
field, the most significant new oil prospect in Venezuela. 
The presentation included a slide listing the social 
development projects that will supposedly be included in the 
development of Tomoporo, including artesanal fishing and 
tourism development projects.  The final slide revealed that, 
as part of the Tomoporo project, PDVSA will fund the 
development of a railroad in western Venezuela.  This raises 
the possibility that additional "social development" or other 
project financing will now be included as a matter of course 
in the budgets for the development of oil and gas projects. 
 
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DEEP POCKETS OF THE PRIVATE SECTOR 
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¶6. (C) In the past few months, PDVSA, and particularly CVP, 
have also attempted to take over some portion of the social 
development budgets of at least some of the private sector 
oil companies present in Venezuela.  The international oil 
companies (IOC's) have traditionally managed their own 
sustainable development programs to reflect their own vision 
of corporate social responsibility.  In fact, ChevronTexaco 
recently won an OAS award for its program in Maracaibo.  In 
early April, however, ChevronTexaco and the other companies 
that are expected to be involved in the development of 
off-shore oil and gas projects were summoned to a meeting in 
Sucre state.   According to a participant, the CVP 
representatives demanded that some percentage of company 
social development budgets be turned over to the CVP for 
project development.  Sucre state representatives at the 
meeting said the money would be used to foster the various 
Chavez Administration social programs in the state.  While 
IOC representatives have informed econoff that they are 
unwilling to simply give money to CVP, PDVSA and the MEM are 
pushing the companies to work on projects that will be 
defined by the GOV.  These discussions continue. 
 
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THE &SPECIAL DEVELOPMENT FUND8 
------------------------------ 
 
¶7. (C) Reftels reported on the diversion of an additional $2 
billion of PDVSA funds into a "Special Development Fund" 
announced by President Chavez on May 23.  At that time, 
Chavez stated that $2 billion in PDVSA funds would be 
transferred to BANDES to be used to finance national 
development projects such as a sugar mill, a new state 
airline, electricity projects, a subway line in a Caracas 
suburb, and an irrigation system in western Venezuela.  Since 
then, observers have noted that most of these projects were 
already covered in other parts of the GOV budget.  Most 
observers also commented that the proposed fund would be 
illegal under Venezuelan law that requires that PDVSA's 
dollar receipts be turned over to the Central Bank.  The GOV 
has responded that it sought and received authorization from 
the Central Bank Board for the establishment of the fund. 
 
¶8. (C) In a June 25 meeting with econcouns, Alejandro Dopazo, 
Finance Ministry Director General for Public Credit, 
underlined that, in his view, the most important issue is not 
that the money would not be run through the Central Bank but 
that there is not a coherent, on-budget system for accounting 
for it and spending it.  Dopazo reported that a small, high 
level committee is now working to get this back onto a more 
legal track.  He speculated that the means will be revision 
of the legislation governing the Macroeconomic Stabilization 
Fund (FIEM, a fund previously maintained by the GOV at the 
Central Bank, in theory to be built up during periods of high 
oil prices and drawn down when prices drop) so that some of 
the money placed in it can be spent on social projects.  In 
any event, Dopazo claimed that nothing has been done with the 
money and that it has not been given to state bank BANDES as 
has been reported in the media. 
 
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DEBT BUY BACK 
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¶9. (C) In another development that could have a negative 
impact on PDVSA, taken as it is with its "social development" 
mandate, on June 28 PDVSA announced an offer to buy back up 
to $2.6 billion of its external debt.  The offer is in the 
form of a "tender and consent" requiring all noteholders who 
accept the purchase price to agree to certain amendments to 
the current PDVSA Finance Ltd. transaction terms.  If the 
tender is completed successfully, all holders of outstanding 
notes after completion of the tender will be bound by the 
amendments.  The amendments include the removal of certain 
designated buyers for Venezuelan crude as well as a reduction 
in the volume of oil that must be sold through PDVSA Finance 
as collateral. 
 
¶10. (C) According to a knowledgeable local energy analyst, on 
its face it appears that PDVSA is simply doing what a normal 
company would do, i.e., paying down its debt in a time of 
high revenues.  However, this analyst believes that the goal 
of the buy back is an attempt to reduce the legal 
requirements on PDVSA to tell all about its operations. 
Depending on the type of bonds that PDVSA is successful in 
buying back, i.e., those that carry a requirement that PDVSA 
file an SEC report, the buy back could result in a reduction 
in the amount of financial information the company is 
required to give to U.S. regulators.  Another  Wall Street 
analyst questions whether the proposed amendments would also 
further open the door to the possibility of diversion of 
Venezuelan exports away from the U.S. market. 
 
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COMMENT 
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¶11. (C) In a time of high oil prices, it is reasonable to 
expect PDVSA to buy back debt and to contribute to GOV social 
programs (although in an earlier day it would have been to 
the FIEM, or Macroeconomic Stabilization Fund.)  However, 
when money is channeled directly through PDVSA, the Chavez 
Administration is bypassing the accounting and budgetary 
responsibility that should rest with the National Assembly. 
BANDES, so far the preferred conduit for the PDVSA 
development funds, is also free of any significant oversight, 
even by the Superintendent of Banks.  As noted above, it is 
also possible that PDVSA may in the future be able to evade 
the transparency required by U.S. financial sector 
regulations. 
 
¶12. (C) The most troubling aspect of this emphasis on PDVSA's 
new role as a social welfare agency, however, is that it is 
deflecting the company's attention from its core mission, oil 
production.  PDVSA Vice President Felix Rodriguez recently 
admitted publicly that PDVSA had invested only 30 percent of 
its 2004 investment budget in the first five months of the 
year.  A local energy analyst commented to econoff that, if 
this is true, PDVSA's capital investment in 2004 may well be 
less than in 2002.  This investment is urgently needed to 
off-set Venezuela's natural production decline rate to 
maintain production once oil prices drop.  With increasing 
resources given over to social development planning, PDVSA's 
management, already shorthanded, is being deflected away from 
managing Venezuela's oil industry to becoming a one-stop 
solve-all social welfare program funder/executor, a task for 
which none of the current managers has the training let alone 
the experience. 
SHAPIRO