In its notes to the consolidated accounts for 2007, PDVSA reports the following: “The consolidated financial statements are prepared in accordance with International Financial Reporting Standards (IFRS), adopted by the International Accounting Standards Board (IASB) and its interpretations issued by the International Financial Reporting Interpretations Committee (IFRIC) of the IAS. The consolidated financial statements of PDVSA for the years ended December 31, 2007 and 2006, include the Company, its affiliates and jointly-controlled entities.”
Comment
It is quite clear PDVSA adheres to the IASB standards, but use of the term “affiliates” is ambiguous since it could cover both subsidiary and associated companies. Its common use is to describe associates, i.e. companies that are not subsidiaries but, if that is what PDVSA means, then a reference to subsidiaries is missing. Most oil companies use the term “associated companies” but PDVSA calls them “non-consolidated investees.” Both terms are correct, since associated companies are not consolidated, but for most people “associated companies” is more readily understood. PDVSA'S explanation below of their consolidation procedure is extensive and clearer, in some respects, than other oil companies'.
Basis of Consolidation -- Investment in Subsidiaries
Subsidiary companies are those controlled by PDVSA. Control exists when PDVSA has the power, directly or indirectly, to control the financial and operating policies of an entity in order to obtain benefits from its activities. In assessing control, potential voting rights that may be exercised or transferred are taken into account. From October 2007, the consolidated financial statements of PDVSA include the financial statements of Petrolera Zuata, Petrozuata , C.A. (Petrozuata), resulting from control over its activities from that date. Until September 30, 2007, the investment in Petrozuata was recorded under the equity method.”
Jointly-Controlled Entities
Jointly-controlled entities are those where PDVSA has common control, established through a contractual agreement. PDVSA Petróleo participates through its consolidated subsidiaries PDVSA Cerro Negro, S.A. (PDVSA Cerro Negro), PDVSA Sincor, S.A. (PDVSA Sincor) and Corpoguanipa , S.A. (Corpoguanipa), in associations for the development of extra-heavy crude oil reserves in the Orinoco Belt. These subsidiaries of PDVSA Petróleo account for these investments using the proportional consolidation method , recognizing their percentage share in the assets, liabilities, income and costs, in accordance with their percentage participation in the joint businesses from the date that joint control commences until the date that joint control ceases. In accordance with guidelines established by the National Government, the activities of these entities are undertaken by mixed companies incorporated with a majority interest of PDVSA, from the time when the asset transfer decrees are published, which is expected to be during the first semester of 2008. After publication, the financial information of the mixed companies will be included in the consolidated financial statements of PDVSA on a consolidated basis.
Non-Consolidated Investees
Non-consolidated investees are those entities where PDVSA has a significant influence, but not control, over the financial and operating policies. Significant influence is presumed when the Company owns directly or indirectly between 20 and 50 percent of the voting rights in the other company. The consolidated financial statements include the interest in the income or losses in the non-consolidated investees recorded on an equity basis, from the date when influence commences until the date when control ceases. The equity method consists of increasing the cost of the investment by the corresponding interest in the results of operations of the issuer for periods subsequent to the acquisition date. Dividends received are reduced from the carrying value of the investment.”
Comment
Using the equity method for associated companies, where control does not exist but significant influence does, is common practice and proportional consolidation is not an option. Jointly controlled entities are a special category--neither subsidiaries nor associated companies. The IASB defines them quite clearly as follows: “A joint venture is a contractual arrangement whereby two or more parties undertake an economic activity that is subject to joint control. Joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions relating to the activity require the unanimous consent of the parties sharing control (the venturers). Control is the power to govern the financial and operating policies of an economic activity so as to obtain benefits from it.”
The IASB further states
“A venturer shall recognise its interest in a jointly controlled entity using proportionate consolidation or the equity method.” Many oil companies use the equity method but others, mainly those incorporated in the USA , use proportionate consolidation. But this is a matter of presentation and does not affect my discussion on whether the associations in the Orinoco Oil Belt are, or are not, joint ventures. The following table shows how the shareholdings have changed since PDVSA, through government legislation, acquired a majority interest.
Whereas previously PDVSA held under 50% of the shares, and only Conoco had an absolute majority, they now have 100% of the shares in Petrozuata, and 60%, 70% and 83% in the others. This occurrence, which forms the basis for my discussion, has been highlighted in PDVSA'S notes and is summarized as follows:
a) Until 30 September 2007, the investment in Petrozuata was recorded under the equity method, b) from 1 October 2007, when PDVSA took control, PDVSA has consolidated the results of Petrozuata, c) the subsidiaries of PDVSA Petróleo accounted for the other three joint ventures using the proportional consolidation method, and d) from publication of the asset transfer date in 2008, these three mixed companies will be fully consolidated as subsidiaries of PDVSA.
It is strange, and I fail to see the reason, that previously PDVSA accounted for Petrozuata under the equity method, but used proportionate consolidation for the other three joint ventures. Proportionate consolidation is the same as 100% consolidation, except that only the proportion corresponding to the shares held is consolidated. However, as Petrozuata became a 100% subsidiary of PDVSA when Conoco decided not to accept a reduced shareholding, the association is no longer a joint venture and it is right PDVSA should consolidated 100% of its results as from 1 October 2007.
The statement above that the “mixed companies” will be consolidated can only mean that, from the date they acquired a majority of the shares, PDVSA no longer consider the associations in the Orinoco Oil Belt to be joint ventures. I find this decision debatable as joint control does not depend on shareholding but, as stated above, on a “common control established through a contractual agreement.”
My query is why PDVSA no longer consider the three other associations to be joint ventures. Have the contractual conditions been changed so as to eliminate joint control? Was the reason for it that PDVSA no longer wanted unanimity to be a requirement? Does it mean the associations with other partners in the Orinoco Oil Belt, including several state companies, will not be joint ventures? If so, this could deter potential partners who may believe contributing a large part of the investment entitles them to be treated as joint venture partners. Furthermore, will not investments abroad, like the Pernambuco refinery in which PDVSA has a 40% stake, be considered joint ventures? Or is it only in Venezuela that PDVSA has abandoned the concept of joint venture? I sought enlightenment from Alcaraz Cabrera Vásquez, PDVSA'S external auditors and associates of KPMG, but they did not reply.
The term “mixed companies” is ambiguous. Does it exclude joint ventures and apply only to companies where PDVSA and other companies have a common shareholding? Or does it cover both joint ventures and non joint ventures? The term is not common in the English language and it, as well as “empresas mixtas,” needs to be defined.
In brief, accounting by proportionate consolidation indicates a joint venture exists, but a change to full consolidation means the companies are considered subsidiaries. It seems PDVSA base this change on the fact they now have majority shareholdings in the associations. However, a majority shareholding per se does not mean that joint control cannot exist and the decision to end it has, apparently, been PDVSA'S.
It remains to be seen whether joint ventures in the oil industry will again be formed in Venezuela.
Oliver L Campbell , MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002.
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