Pension scandal shakes up Venezuelan oil giant

CARACAS, (Reuters) – Venezuela received an enviable  honor last month: OPEC said it is sitting on the biggest  reserves of crude oil in the world — even more than Saudi  Arabia.

But the Venezuelan oil industry is also sitting atop a well  of trouble.
The South American nation has struggled to take advantage of  its bonanza of expanding reserves. And a scandal over embezzled  pension funds at state oil company PDVSA has renewed concerns  about corruption and mismanagement.

Retired workers from the oil behemoth have taken to the  streets in protest. Their beef: nearly half a billion dollars of  pension fund money was lost after it was invested in what turned  out to be a Madoff-style Ponzi scheme run by a U.S. financial  advisor who was closely linked to President Hugo Chavez’s  government.

The fraud case centers on Francisco Illarramendi, a  Connecticut hedge fund manager with joint U.S.-Venezuelan  citizenship who used to work as a U.S.-based advisor to PDVSA  and the Finance Ministry.

Several top executives at PDVSA have been axed since the  scandal, which one former director of the company said proved  Venezuela under Chavez had become “a moral cesspool.”

Pensioners are not the only ones still wondering how such a  large chunk of the firm’s $2.5 billion pension fund was invested  with Illarramendi in the first place.

The question cuts to the heart of the challenges facing  PDVSA, one of Latin America’s big three oil companies alongside  Pemex of Mexico and Brazil’s Petrobras .

The Organization of the Petroleum Exporting Countries issued  a report last month showing Venezuela surpassed Saudi Arabia as  the largest holder of crude oil reserves in 2010.

PDVSA is ranked by Petroleum Intelligence Weekly as the  world’s fourth largest oil company thanks to its reserves,  production, refining and sales capacity, and it has been  transformed in recent years into the piggy-bank of Chavez’s  “21st Century Socialism.”

The timing of the scandal is not good for Chavez: the  charismatic, 57-year-old former coup leader underwent cancer  surgery in Cuba in June and is fighting to recover his health to  run for re-election next year. He needs every cent possible from  PDVSA for the social projects that fuel his popularity.

MULTI-TASKING

The company does a lot more than pump Venezuela’s vast oil  reserves. Tapped constantly to replenish government coffers,  PDVSA funds projects ranging from health and education to arts  and Formula One motor racing. From painting homes to funding  medical clinics staffed by Cuban doctors, the restoration of a  Caracas shopping boulevard and even a victorious team at the Rio  carnival, there’s little that PDVSA doesn’t do.

Jeffrey Davidow, a former U.S. ambassador to Venezuela who  now heads the Institute of the Americas at the University of  California, San Diego, points to the occasion when PDVSA senior  executives turned down invitations to a regional energy  conference at the last minute back in May, saying they were too  busy because of PDVSA’s leading role in the government’s “Gran  Mission Vivienda” project. It aims to build two million homes  over the next seven years.

“In poorly-managed societies, national oil companies tend to  be the most efficient organizations, so the government gives  them more work to do, instead of letting them focus on being  better oil companies,” Davidow told industry executives in the  ballroom at a luxurious La Jolla hotel.

That’s the kind of criticism that Chavez, who has  nationalized most of his country’s oil sector since he was  elected in 1999, says is rooted in a bankrupt “imperial Yankee”  mind-set.

He purged perceived opponents from PDVSA’s ranks in response  to a crippling strike in 2002-2003 that slashed output, firing  thousands of staff and replacing them with loyalists. Since  then, the company has endured one controversy after another.

There was the “maleta-gate” affair in 2007, so-called after  the Spanish word for suitcase, when a Venezuelan-American  businessman was stopped at Buenos Aires airport carrying luggage  stuffed with $800,000 in cash that U.S. prosecutors said came  from PDVSA and was intended for Cristina Fernandez’s  presidential campaign in Argentina. Both Fernandez and Chavez  denied the charge.

There have also been persistent allegations by industry  experts and international energy organizations that Venezuela  inflates its production statistics — which PDVSA denies — and  a string of accidents, including the sinking of a gas  exploration rig in the Caribbean last year and a huge fire at a  giant oil storage terminal on an island not far away.

In a big blow to its domestic popularity, tens of thousands  of tonnes of meat and milk bought by PDVSA’s importer  subsidiary, PDVAL, were left festering in shipping containers at  the nation’s main port last year, exacerbating shortages of  staples on shop shelves. Opposition media quickly nicknamed the  subsidiary “pudreval” in a play on the Spanish verb “to rot” –  “pudrir”.
In an apparent damage-limitation exercise after the pension  scandal, five members of the PDVSA board were relieved of their  duties in May, including the official who ran the pension fund.  They were replaced by Chavez loyalists including the country’s  finance minister and foreign minister.

Gustavo Coronel, a former PDVSA director in the 1970s and  later Venezuela’s representative to anti-graft watchdog  Transparency International, said the fraud had been going on  right under the noses of the PDVSA board.
“What this scandal shows is that Venezuela has become a  moral cesspool, not only restricted to the public sector but to  the private sector as well,” he wrote on his blog.

“Money is dancing like a devil in Venezuela, without  control, without accountability. Those who are well connected  with the regime have thrown the moral compass by the side  Venezuelan justice will not move a finger. Fortunately, U.S.  justice will.”

 SHOW ME THE MONEY 

U.S. investigators say Illarramendi, the majority owner of  the Michael Kenwood Group LLC hedge fund, ran the Ponzi scheme  from 2006 until February of this year, using deposits from new  investors to repay old ones. He pleaded guilty in March to  multiple counts of wire fraud, securities and investment advisor  fraud, as well as conspiracy to obstruct justice and defraud the  U.S. Securities and Exchange Commission. He could face up to 70  years in prison.

By those outside the circles of power in Venezuela,  Illarramendi was seen as one of the “Boli-Bourgeoisie” —  someone who was already wealthy but grew much richer thanks to  the “Bolivarian Revolution,” named by Chavez after the dashing  19th century South American independence hero Simon Bolivar. In  one widely-circulated image, Illarramendi is seen overweight and  balding, wearing a dark blue overcoat and clutching a blue  briefcase as he left federal court in Bridgeport, Connecticut  after pleading guilty.

An ex-Credit Suisse employee and Opus Dei member in his  early 40s who lived in the United States for at least the last  10 years but traveled frequently to Venezuela, Illarramendi is  on bail with a bond secured on four U.S. properties he owns.

He was close to PDVSA board members and Ministry of Finance  officials, but is not thought to have known Chavez personally.  The son of a minister in a previous Venezuelan government,  Illarramendi did enjoy some perks — including using a terminal  at the capital’s Maiquetia International Airport normally  reserved for the president and his ministers, according to one  source close to his business associates.

His sentencing date has not been set yet, but a receiver’s  report by the attorney designated to track down the cash is due  in September. In June, SEC regulators said they found almost  $230 million of the looted money in an offshore fund.

That was just part of the approximately $500 million  Illarramendi received, about 90 percent of which was from the  PDVSA pension fund, according to the SEC.

PDVSA has assured its former workers they have nothing to  worry about, and that the money will be replaced. But what  concerns some retirees are allegations the company may have  broken its own rules for managing its pension fund, which should  have provided for more oversight by pensioners.
A representative of the retirees should attend meetings  where the use of the fund is discussed, but no pensioners have  been called to attend such a meeting since 2002.

PDVSA’s investment in capitalist U.S. markets may seem to be  incongruous given the president’s anti-West rhetoric, but the  scale of such transfers is not known, and the investment options  for such funds at home in Venezuela are sharply limited, not  least by restrictive currency controls.

Energy Minister Rafael Ramirez told Reuters that  Illarramendi only had an advisory role with PDVSA, and that it  ended six years ago. So quite how he came to be managing such a  big chunk of the pension fund is a hotly debated topic. Ramirez  said the pension fund had been administered properly, and that  the losses were of great concern to the company.

In July, PDVSA boosted pension payments to ex-employees by  800 bolivars a month, or about $188. The government also  allocated nearly half the income from a new 2031 bond issue of  $4.2 billion to the company’s pension fund — probably to  replenish deposits lost in the scandal.
Still, ex-PDVSA worker Luis Villasmil says his monthly  stipend barely meets the essentials for him, his wife, a  diabetic son and a niece. One morning in April, he rose early  and met several dozen other PDVSA retirees to march in protest  to the company’s local headquarters in Zulia, the decades-old  heartland of Venezuela’s oil production.

“I never thought we would be in this situation,” the  65-year-old told Reuters with a sigh. “I think PDVSA should show  solidarity with the retirees and pay their pensions whatever  happens because it is responsible. But that’s not the heart of  the issue, which is to recover the money if possible.”

Ramirez, who once proclaimed that PDVSA was “rojo rojito”  (red) from top to bottom, says the firm’s 90,000 staff have  nothing to worry about. “Of course we are going to support the  workers,” he told Reuters in March. “We will not let them suffer  because of this fraud. We have decided to replace it (the lost  money) and to make ourselves part of the lawsuit (against  Illarramendi).”

 ORINOCO FLOW      

The latest scandal comes at a time when observers are  focused on the future of PDVSA, given Chavez’s uncertain health,  next year’s election and OPEC’s announcement on reserves.

The producer group said in July that Venezuela leapfrogged  Saudi Arabia last year to become the world’s no.1 reserves  holder with 296.5 billion barrels, up from 211.2 billion barrels  the year before.

“It has been confirmed. We have 20 percent of the world’s  oil reserves … we are a regional power, a world power,” Chavez  said during one typical recent TV appearance, scribbling lines  all over a map to show where planned refineries and pipelines to  the coast would be built.

The new reserves were mostly booked in the country’s  enormous Orinoco extra heavy belt, a remote region of dense  forests, extraordinary plant life and rivers teeming with  crocodiles and piranhas.

And there lies the rub. Not only is the Orinoco crude thick  and tar-like, unlike Saudi oil which is predominantly light and  sweet, it is also mostly found in rural areas that have little  in the way of even basic infrastructure. It costs much more to  produce and upgrade into lighter, more valuable crude.
So hopes now rest on a string of ambitious projects that  Venezuela says will revitalize a declining oil sector,  eventually adding maybe 2 million barrels per day (bpd) or more  of new production to the country’s current output of about 3  million bpd, while bringing in some $80 billion in investment.
The projects are mostly joint ventures with foreign partners  including U.S. major Chevron , Spain’s Repsol ,  Italy’s  Eni , Russian state giant Rosneft and  China’s CNPC, as well as a handful of smaller companies from  countries such as Japan, Vietnam and Belarus. Even after the  nationalizations of the past, investors clearly want a seat at  the Orinoco oil table.

In June, Ramirez announced new funding for Orinoco projects  this year of $5.5 billion through agreements with Chinese and  Italian banks.

The question remains: will PDVSA have the operational  capacity required as the lead company in each project, and will  it be able to pay its share?
“Processing that extra heavy crude requires a lot of capital  and equipment, and the climate is not good for that at the  moment,” said one regional energy consultant who has worked with  PDVSA and asked not to be named.
There may be billions of barrels in the ground, but the  pension scandal will only underline the risks going forward for  foreign companies with billions of dollars at stake.

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