EX-99.T3E 5 d171369dex99t3e.htm EX-99.T3E EX-99.T3E

Exhibit T3E

 

OFFERING CIRCULAR   CONFIDENTIAL

LOGO

Petróleos de Venezuela, S.A.

Offers to Exchange

 

 

 

Any and all outstanding U.S. dollar denominated Unsecured Notes due April 2017 (the “April 2017 Notes”) and November 2017 (the “November 2017 Notes” and, together with the April 2017 Notes, the “Existing Notes”),    For    U.S. dollar denominated 8.50% Senior Secured Notes due 2020 (the “New Notes”) unconditionally and irrevocably guaranteed (the “Guaranty”) by PDVSA Petróleo, S.A. (“PDVSA Petróleo” or the “Guarantor”).

Petróleos de Venezuela, S.A. (“PDVSA” or the “Issuer”), a corporation (sociedad anónima) organized under the laws of the Bolivarian Republic of Venezuela (“Venezuela”), is offering to exchange newly issued New Notes for all of its outstanding Existing Notes (the “Exchange Offers”) upon the terms and subject to the conditions set forth in this offering circular. The aggregate principal amount outstanding of the Existing Notes as of the date of this offering circular is U.S.$7,100 million.

 

Title of Existing Notes    CUSIP/ISIN   

Principal

Outstanding

Amount

    

Minimum Authorized

Denominations of

Existing Notes

5.250% Senior Notes due 2017 (“April 2017 Notes”)

  

N.A. (Rule 144A)/

XS0294364103 (Regulation S)

   U.S.$ 3,000 million       U.S.$400 and integral multiples of U.S.$100 in excess thereof

8.50% Senior Notes due 2017 (“November 2017 Notes”)

   716558AB7 (Rule 144A); P7807HAK1 (Regulation S)/ US716558AB79 (Rule 144A); USP7807HAK16 (Regulation S)    U.S.$ 4,100 million       U.S.$100 and integral multiples of U.S.$100 in excess thereof

The New Notes will be secured, subject to certain exceptions and permitted liens, by a first-priority lien on 50.1% of the capital stock of CITGO Holding, Inc. (the “Collateral”). The New Notes will rank effectively senior in right of payment to all of our existing and future unsecured indebtedness, including the Existing Notes, to the extent of the value of the Collateral securing the New Notes. The New Notes will be fully and unconditionally guaranteed on a senior secured basis by the Guarantor. The Guaranty by the Guarantor of the New Notes will rank effectively senior in right of payment to all other existing and future unsecured indebtedness, including the Existing Notes, to the extent of the value of the Collateral securing the New Notes. See “Description of the New Notes” for more information on ranking. As described more fully in this offering circular, the consummation of the Exchange Offers is conditioned upon, among other things, the valid tender, without subsequent withdrawal, of at least 50% aggregate principal amount of the Existing Notes. We may, at our option and in our sole and absolute discretion, waive such condition and other conditions that we may assert or waive. See “Terms of the Exchange Offers—Conditions to the Exchange Offers.” We expect to issue the New Notes on or about the third business day following the Expiration Date (the “Settlement Date”).

The New Notes will bear interest from the Settlement Date. We will pay on the Settlement Date all accrued and unpaid interest on the Existing Notes exchanged for New Notes for the period from the most recent interest payment date until, but not including, the Settlement Date.

You may exchange your Existing Notes for New Notes in the following amounts: (a) for each U.S.$1,000 principal amount currently outstanding of Existing Notes validly tendered and accepted on or prior to the Early Tender Deadline (as defined below), we will deliver to you U.S.$1,000 of New Notes, which includes an Early Tender Premium (the “Early Tender Premium”) of U.S.$50 of New Notes (“Total Exchange Consideration”), and (ii) for each U.S.$1,000 principal amount currently outstanding of Existing Notes validly tendered and accepted after the Early Tender Deadline but on or prior to the Expiration Date (as defined below), we will deliver to you U.S.$950 of New Notes (“Exchange Consideration”), as provided under “Terms of the Exchange Offers - Consideration.” The Exchange Consideration will not include an Early Tender Premium.

There is currently no public market for the New Notes. We intend to apply to list the New Notes on the Official List of the Luxembourg Stock Exchange and to trade them on the Euro MTF market of such exchange, although no assurance can be given as to the approval of said applications. The Euro MTF Market of the Luxembourg Stock Exchange is not a regulated market within the meaning of the provisions of Directive 2004/39/EC on markets in financial instruments.

The early tender deadline for the Exchange Offers is 5:00 P.M., New York City Time, on September 29, 2016, unless extended by us (the “Early Tender Deadline”). The Exchange Offers expire at 11:59 P.M., New York City Time, on October 14, 2016, unless extended or terminated earlier by us (the “Expiration Date”). You must tender your Existing Notes in the manner described in this offering circular on or prior to the Expiration Date in order to be eligible to participate in the Exchange Offers. You must tender and not validly withdraw your Existing Notes on or prior to the Early Tender Deadline in order to receive the Total Exchange Consideration. Existing Notes tendered for exchange may be withdrawn on or before 5:00 P.M., New York City Time, on September 29, 2016, unless extended by us (such date and time, as the same may be extended, the “Withdrawal Deadline”).


The New Notes will be issued in minimum denominations of U.S.$150,000 and integral multiples of U.S.$1,000 in excess thereof. The New Notes will not be issued in definitive form except under certain limited circumstances. The Issuer will not accept any tender that would result in the issuance of less than U.S.$150,000 principal amount of New Notes to a participating holder.

The principal amount of New Notes you will receive pursuant to the Exchange Offers will be rounded downwards to the nearest integral multiple of U.S. $1,000. No additional consideration will be paid in lieu of fractional New Notes not received as a result of such rounding down. The determination by PDVSA of any calculation or quotation made with respect to the Exchange Offers will be conclusive and binding on you, absent manifest error.

 

 

Investing in the New Notes involves risks. You should carefully consider the “Risk Factors” beginning on page 18 of this offering circular before you make a decision to tender your Existing Notes.

The New Notes have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the “Securities Act”), or with any securities regulatory authority of any state or other jurisdiction of the United States. The New Notes are subject to the same restrictions on transfer as the Existing Notes. For the description of certain restrictions on offers, sales or transfers of the New Notes, see “Transfer Restrictions.” Only holders of Existing Notes are authorized to receive and review this offering circular and to participate in the Exchange Offers.

We are relying on Section 3(a)(9) of the Securities Act to exempt the Exchange Offers from the registration requirements of the Securities Act. We have not filed and will not file a registration statement under the Securities Act or any other federal or state securities laws with respect to the New Notes. Section 3(a)(9) provides that the registration requirements of the Securities Act will not apply to “any security exchanged by the issuer with its existing security holders exclusively where no commission or other remuneration is paid or given directly or indirectly for soliciting such exchange.” We have no contract, arrangement or understanding relating to, and will not, directly or indirectly, pay any commission or other remuneration to any broker, dealer, salesperson, agent or any other person for soliciting tenders in the Exchange Offers.

If you do not validly tender your Existing Notes in the Exchange Offers, or if you tender your Existing Notes but validly withdraw the Exchange Offers at or before the Withdrawal Deadline, or if your Existing Notes are not accepted for exchange, you will continue to be entitled to receive interest on the Existing Notes. All announcements and amendments to the documents will be made available via the information agent website: https://sites.dfkingltd.com/pdvsa.

It is expected that delivery of the New Notes will be made in book-entry form through The Depository Trust Company (“DTC”), as depositary, for the accounts of its participants including Euroclear Bank S.A./N.V. (“Euroclear”) and Clearstream Banking, société anonyme, Luxembourg (“Clearstream”) on or about the Settlement Date (as defined herein). See “Description of the New Notes—Book-Entry; Delivery and Form.”

 

 

September 16, 2016


Table of Contents

 

     Page  

Important Dates

     1   

Summary of PDVSA

     3   

The Exchange Offers

     10   

Summary of the New Notes

     14   

Risk Factors

     18   

Capitalization

     47   

Selected Consolidated Financial and Operating Data

     49   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     54   

Business

     84   

Management and Employees

     123   

Principal Shareholders

     129   

Related Party Transactions

     130   

Tax Considerations

     133   

Description of the New Notes

     140   

Notice to Prospective Investors

     170   

Transfer Restrictions

     173   

Legal Matters

     176   

Independent Auditors

     176   

Available Information

     176   

Technical and Regulatory Terms

     177   

Index of Defined Terms

     181   

Index to the audited Consolidated Financial Statements

     F-1   

CITGO Holding, Inc. Report for the Fiscal Year Ended December 31, 2015

     A-1   

 

 

This offering circular is confidential. This offering circular has been prepared by us solely for use in connection with the consideration of the Exchange Offers. This offering circular is personal to each offeree and does not constitute an offer to any other person or to the public generally to subscribe for or otherwise acquire securities. You are authorized to use this offering circular solely for the purpose of considering the Exchange Offers. Distribution of this offering circular to any other person other than the offeree and any person retained to advise such offeree with respect to the Exchange Offers is unauthorized, and any disclosure of any of its contents, without our prior written consent, is prohibited. Each offeree, by accepting delivery of this offering circular, agrees to the foregoing and to make no photocopies of this offering circular or any documents referred to in this offering circular. Offerees should assume that the information contained in this offering circular is accurate only as of any date on the front of this offering circular. Our business, financial condition, results of operations and prospects may have changed since that date.

In making an investment decision regarding acceptance of the Exchange Offers, you must rely on your own examination of the Issuer and the Guarantor and the terms of the Exchange Offers and the New Notes to be delivered in the Exchange Offers, including the merits and risks involved. You should not construe anything in this offering circular as legal, business or tax advice. You should consult your own advisors, as needed, to make your investment decision and to determine whether you are legally permitted to accept the Exchange Offers under applicable legal investment or similar laws or regulations.

We have furnished the information in this offering circular. You acknowledge and agree that, none of the Trustee, the Information Agent and the Exchange Agent make any representation or warranty, express or implied, as to the accuracy or completeness of such information, and nothing contained in this offering circular is, or shall be relied upon as, a promise or representation by the Trustee, the Information Agent or the Exchange Agent. This offering circular contains summaries believed to be accurate with respect to certain documents, but reference is made to the actual documents for complete information. All such summaries are qualified in their entirety by such reference. Copies of documents referred to herein will be made available to prospective investors upon request to us.

 

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The distribution of this offering circular and the offering and sale of the New Notes in certain jurisdictions may be restricted by law. We require persons into whose possession this offering circular comes to inform themselves about and to observe any such restrictions. This offering circular does not constitute an offer of, or an invitation to exchange or purchase, any of the New Notes in any jurisdiction in which such offer or sale would be unlawful.

We intend to apply to list the New Notes on the Official List of the Luxembourg Stock Exchange and to trade them on the Euro MTF market of such exchange, although no assurance can be given as to the approval of said applications, if any. If, as a result of applicable rules and regulations relating to trading on the Euro MTF market, we are required to publish financial information either more regularly than we otherwise would be required to or according to accounting principles which are materially different from the accounting principles which we would otherwise use to prepare our published financial information, we may delist the New Notes from the Euro MTF market or seek an alternate admission to listing, trading and/or quotation for the New Notes on a different section of the Luxembourg Stock Exchange or by such other listing authority, stock exchange and/or quotation system inside or outside the European Union as we may decide.

We have prepared this offering circular solely for use in connection with the Exchange Offers and take responsibility for its contents. No other person is responsible for its contents. We and other sources we believe to be reliable have furnished the information contained in this offering circular. Nothing contained in this offering circular is or shall be relied upon as a promise or representation, whether as to the past or the future. The opinions and intentions expressed in this offering circular with regard to us are honestly held, have been reached after considering all known relevant circumstances and are based on reasonable assumptions, and all reasonable inquiries have been made by us to ascertain such facts and to verify the accuracy of all such information and statements. We accept responsibility accordingly.

You must comply with all laws and regulations in force in any jurisdiction in connection with the possession or distribution of this offering circular and the exchange of the Existing Notes for the New Notes or the sale of the New Notes, and you must obtain any required consent, approval or permission for the exchange of the Existing Notes for the New Notes or the sale of the New Notes under the laws and regulations applicable to you in force in any jurisdiction to which you are subject or in which you make purchases, offers or sales, and we have no responsibility for those transactions. See “Transfer Restrictions.”

You acknowledge that (1) you have been afforded an opportunity to request from us, and to review, all additional information considered by you to be necessary to verify the accuracy of, or to supplement, the information contained in this offering circular, (2) you have not relied on us or any person affiliated with us in connection with your investigation of the accuracy of the information or your investment decision, and (3) no person has been authorized to give any information or to make any representation concerning us or the New Notes other than as contained in this offering circular. If given or made, that other information or representation should not be relied upon as having been authorized by us.

In making an investment decision regarding the acceptance of the Exchange Offers, you must rely on your own examination of our business and the terms of the Exchange Offers and the New Notes to be delivered in the Exchange Offers, including the merits and risks involved. The New Notes have not been recommended by any federal or state securities commission or regulatory authority. Furthermore, these authorities have not confirmed the accuracy or determined the adequacy of this offering circular. Any representation to the contrary is a criminal offense.

The New Notes and the Guaranty have not been, and will not be, registered under the Securities Act or the securities of any state or other jurisdiction of the United States and may not be offered or sold in the United States except in transactions exempt from or not subject to the registration requirements of the Securities Act and any applicable state securities laws. The New Notes will be available initially only in book-entry form. We expect that the New Notes will be represented by beneficial interests in a permanent global note in fully registered form without interest coupons. The global notes will be deposited with The Depository Trust Company. New Notes shall be issued in minimum denominations of U.S.$150,000 and integral multiples of U.S.$1,000 in excess thereof. See “Description of the New Notes” for more information.

 

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The purchase and sale of the New Notes in the secondary market in Venezuela in transactions payable in Bolívares by individuals and legal entities domiciled in Venezuela can occur only through universal banks (under Venezuelan law, a universal bank is a bank that can carry out any financial operation permitted by Venezuelan laws), authorized stock brokers and the Bolsa de Valores Pública Bicentenaria (Bicentennial Public Stock Exchange) and shall be made at the floating exchange market rate (DICOM) pursuant to the Foreign Exchange Agreement No. 35 dated March 9, 2016 published in the Official Gazette No. 40,865 and the Foreign Exchange Agreement No. 33 dated February 10, 2015 published in the Extraordinary Official Gazette No. 6,171.

Jurisdictional Restrictions

The distribution of this offering circular and related materials is restricted by law in certain jurisdictions. Persons into whose possession this offering circular and related materials come are required by PDVSA to inform themselves of and to observe any of these restrictions.

This offering circular does not constitute, and may not be used in connection with, an offer or solicitation by anyone in any jurisdiction in which an offer or solicitation is not authorized or in which the person making an offer or solicitation is not qualified to do so or to any person to whom it is unlawful to make an offer or solicitation. PDVSA does not accept any responsibility for any violation by any person of the restrictions applicable in any jurisdiction.

European Economic Area

This offering circular has been prepared on the basis that any offer of securities in any Member State of the European Economic Area (“EEA”), which has implemented the Prospectus Directive (each, a “Relevant Member State”) will be made pursuant to an exemption under the Prospectus Directive, as implemented in that Relevant Member State, from the requirement to publish a prospectus for offers of securities. Accordingly, any person making or intending to make any offer in that Relevant Member State of securities which are the subject of the offering contemplated in this offering circular may only do so in circumstances in which no obligation arises for the Issuer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive, in each case, in relation to such offer. The Issuer has not authorized, nor does it authorize, the making of any offer of securities in circumstances in which an obligation arises for the Issuer to publish or supplement a prospectus for such offer.

The expression “Prospectus Directive” means Directive 2003/71/EC (as amended, including by Directive 2010/73/EU), and includes any relevant implementing measure in the Relevant Member State.

United Kingdom

This offering circular is for distribution only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Financial Promotion Order”), (ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations etc.”) of the Financial Promotion Order, (iii) are outside the United Kingdom, or (iv) are persons to whom an invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000) in connection with the issue or sale of securities may otherwise lawfully be communicated or caused to be communicated (all such persons together being referred to as “relevant persons”). This offering circular is directed only at relevant persons and must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this offering circular relates is available only to relevant persons and will be engaged in only with relevant persons.

France

The Exchange Offers are not being made, directly or indirectly, to the public in France.

 

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Neither this offering circular nor any other document or material relating to the Exchange Offers has been or shall be distributed to the public in France. Such Exchange Offers and distributions have been and shall only been made in France to (i) providers of investment services relating to portfolio management for the account of third parties (personnes fournissant le service d’investissement de gestion de portefeuille pour le compte de tiers) and/or (ii) qualified investors (investisseurs qualifiés), in each case acting on their own account and all as defined in, and in accordance with, Articles L. 341-2, L. 411-2, D. 411-1 to D. 411-3, D. 744-1, D. 754-1 and D. 764-1 of the French Code monétaire et financier.

Neither this offering circular nor any other document or material relating to the Exchange Offers has been or will be submitted for clearance or approved by the Autorité des Marchés Financiers.

Netherlands

In the Netherlands, the New Notes may only be offered to qualified investors (gekwalificeerde beleggers) within the meaning of section 1:1 of the Dutch Financial Supervision Act (Wet op het financieel toezicht).

Belgium

No action has been taken or will be taken in Belgium to permit a public offer of the New Notes in accordance with the Belgian Act of 16 June 2006 on the public offer of securities and admission of securities to trading on a regulated market (i.e. the Belgian Prospectus Act) or an takeover bid in accordance with the Belgian Act of 1 April 2007 on takeover bids (i.e. the Belgian Takeover Act) and no New Notes may be offered or sold to persons in Belgium which are not qualified investors within the meaning of Article 10 of the Belgian Prospectus Act or pursuant to another exemption available pursuant to Article 3 of the Belgian Prospectus Act or Article 6 (3) of the Belgian Takeover Act.

Switzerland

The New Notes may not be publicly offered, sold or advertised, directly or indirectly, in or from Switzerland. Neither this offering circular nor any other offering or marketing material relating to the New Notes constitutes a prospectus as such term is understood pursuant to article 652a or article 1156 of the Swiss Federal Code of Obligations or a listing prospectus within the meaning of the listing rules of the SIX Swiss Exchange Ltd., and neither this offering circular nor any other offering or marketing material relating to the New Notes may be publicly distributed or otherwise made publicly available in Switzerland.

Luxembourg

The Exchange Offers do not constitute a public offer or an offer requiring the drafting of a prospectus within the meaning of the law dated July 10, 2005 on prospectuses for securities (the “Luxembourg Prospectus Act”) and the New Notes may not be offered or sold within the territory of the Grand Duchy of Luxembourg unless: (a) a prospectus has been approved by the Commission de Surveillance du Secteur Financier in accordance with the Luxembourg Prospectus Act implementing Directive 2003/71/EC of the European Parliament and of the Council of November 4, 2003 on the prospectus to be published when securities are offered to the public or admitted to trading (the “Prospectus Directive”) if Luxembourg is the home member state (as defined in the Prospectus Law); or (b) if Luxembourg is not the home member state, the Commission de Surveillance du Secteur Financier has been notified by the competent authority in the relevant home member state that the prospectus has been duly approved in accordance with the Prospectus Directive; or (c) the offer benefits from an exemption to or constitutes a transaction not subject to the requirement to publish a prospectus.

Liechtenstein

The Exchange Offers are made solely to qualified investors as defined in Art 3 para 1 lit g) of the Liechtenstein Securities and Prospectus Act (WPPG), limited to: (a) legal entities, which are authorized or regulated to operate in the financial market supervised by the Liechtenstein Financial Market Authority including banks, asset management companies, insurance companies, pension funds, investment undertakings and their management corporations; (b) the Liechtenstein Government, international and supranational organizations similar

 

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to international and supranational institutions such as the International Monetary Fund, the European Central Bank, the European Investment Bank; (c) legal entities that do not meet more than one of the following conditions: (i) being an entity having less than 250 employees during the last financial year; (ii) being an entity having a total balance sheet not exceeding €43 million; (iii) being an entity having an annual net turn over not exceeding €50 million; and (d) Small and Medium Sized Enterprises as defined in Art 3 para 1 lit. h) WPPG, registered with and entered in as well as natural persons registered with and entered in the “list of qualified investors” with the Liechtenstein Financial Market Authority.

Italy

Neither the Exchange Offers nor any of the information contained in this offering circular constitutes an offer or an invitation to offer, exchange or sell or a promotional message of any form to any person (natural or legal) resident in the Republic of Italy to purchase, exchange or acquire the New Notes, within the meaning of articles 1, par.1, lett. (v), and 101-bis et seq., of Legislative Decree dated February 24, 1998, n.58. The Exchange Offers are not being made and will not be made, directly or indirectly, in or into the Republic of Italy, whether by mail or by any means or other instrument (including, without limitation, telephonically or electronically) or any facility of a national securities exchange publicly or privately available in Italy. Accordingly, copies of this offering circular and any related documents should not be mailed or otherwise forwarded, distributed or sent in, into or from the Republic of Italy and persons receiving such documents must not forward, distribute or send them in or into or from the Republic of Italy. Therefore, holders of Existing Notes are hereby notified that, to the extent such holders are Italian residents or are located in the Republic of Italy, the Exchange Offers are not available to them. Any person who may have a legal or contractual obligation to forward this offering circular and any related offer documents in the Republic of Italy should read this offering circular before doing so. No prospectus will be lodged in, or registered by, the Commissione Nazionale per le Società e la Borsa (CONSOB) in respect of the Exchange Offers. Accordingly, neither this offering circular nor any other material relating to the Exchange Offers may be distributed or made available in the Republic of Italy.

Japan

The New Notes have not been and will not be registered under the Financial Instruments and Ex-change Law of Japan (as amended, the “FIEL”). The New Notes may not be offered or sold, directly or indirectly, in Japan or to or for the benefit of any resident of Japan or Japanese corporation, except in accordance with the provisions of, or pursuant to an exemption available under, the applicable laws and regulations of Japan including the FIEL. For the purpose hereof, “resident of Japan” means an individual whose address is in Japan, and “Japanese corporation” means a legal entity organized under the laws of Japan.

Enforcement of Judgments

Under Venezuelan law, no company or its property, including PDVSA, has any immunity from the jurisdiction of any court or from set-off of any legal process (whether through service or notice, attachment prior to judgment, attachment in aid of execution of judgment, execution or otherwise), except that pursuant to Article 113 of the Law of the Office of the Attorney General of Venezuela (Ley Orgánica de la Procuraduría General de la República) an attachment prior to judgment, attachment in aid of execution, execution or otherwise, on our properties located in Venezuela that are related to the rendering of a public service, such as oil and gas distribution and transportation, must be stayed for a period of 45 days after notice is given to the Venezuelan Attorney General pursuant to which the Venezuelan government may take any action in order to avoid interruption of the services, including taking possession of such assets if such attachment endangers the continuity, quality or security of the services provided. If the Venezuelan Attorney General does not notify the court about the provisional measures taken by the relevant entity to avoid discontinuance of the service within such 45-days’ notice, the court may continue with such enforcement or foreclosure.

A foreign judgment arising in connection with the New Notes, the Guaranty or the Indenture rendered by any court referred to above would be enforceable against us and the Guarantor in the courts of Venezuela subject to obtaining a confirmatory judgment (exequatur) from the Supreme Court of Justice (Tribunal Supremo de Justicia) in Venezuela, in accordance with the provisions and conditions of the Venezuelan Private International Law (Ley de Derecho Internacional Privado), without a review of the merits of the judgment, provided that: (i) the foreign

 

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judgment concerns matters of private civil or commercial law only; (ii) the foreign judgment constitutes res judicata under the laws of the jurisdiction where it was rendered; (iii) the foreign judgment does not relate to real property interests over real property located in Venezuela and the exclusive jurisdiction of Venezuelan courts over the matter has not been violated; (iv) the foreign courts have jurisdiction over the matter pursuant to the general principles of jurisdiction set forth in Chapter IX of the International Private Law (Ley de Derecho Internacional Privado) in Venezuela; (v) we and the Guarantor (as the case may be) are duly served, with sufficient time to appear in the proceedings and are granted due process; (vi) the foreign judgment is not incompatible with a prior judgment that constitutes res judicata and no proceeding initiated prior to the rendering of the foreign judgment is pending before Venezuelan courts on the same subject matter among the same parties to litigation; and (vii) the foreign judgment does not contravene the essential principles of Venezuelan public policy.

Presentation of Financial Information

As used in this offering circular, unless the context requires otherwise, the terms “we,” “us” and “our” refer to Petróleos de Venezuela, S.A. on a consolidated basis with our subsidiaries. We prepare consolidated financial statements in U.S. dollars and in conformity with International Financial Reporting Standards, or IFRS. In this offering circular, references to “U.S. dollars,” “dollar,” “U.S.$” and “$” are to the legal currency of the United States of America and references to “Bolívar,” “Bolívares” and “Bs.” are to the Venezuelan Bolívar, the legal currency of Venezuela.

For the convenience of the reader, certain amounts originally reflected in Bolívares have been translated into U.S. dollars at the exchange rate in effect as of the date of the applicable transaction. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations Impact of Inflation and Devaluation” for information regarding the U.S. dollar to Bolívar exchange rate.

Certain figures included in this offering circular have been subject to rounding adjustments. Accordingly, figures shown for the same category presented in different tables may vary slightly, and figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.

Our fiscal year ends on December 31.

Our financial information included in this offering circular is for the year ended December 31, 2015. Interim financial information for the six months ended June 30, 2016 is not yet available.

Discontinued Operations

On December 22, 2015, the shareholder of PDVSA, the Bolivarian Republic of Venezuela, approved a plan to transfer ownership of a portion of PDVSA’s non-oil subsidiaries directly to it at their book value which was U.S.$2,314 million as of December 31, 2015. According to the shareholders resolution, transfer is required to occur within a period of no more than one year following the meeting. The ownership transfer will transfer the subsidiaries outside of the PDVSA corporate structure, and is intended to enable PDVSA to focus on petroleum-related activities. The following affiliates constitute the segregated subsidiaries: PDVSA América, S.A.; PDVSA Industrial, S.A.; PDVSA Naval, S.A.; PDVSA Salud, S.A.; PDVSA Agrícola, S.A.; PDVSA Gas Comunal, S.A.; PDVSA Desarrollos Urbanos, S.A. and Empresa Nacional de Transporte, S.A. See note 6 to our audited financial statements and “Selected Consolidated Financial and Operating Data” for more information on Discontinued Operations.

As a result of the foregoing, PDVSA restated its 2013 and 2014 financial statements and has presented the financial results of the segregated subsidiaries as discontinued operations (“Discontinued Operations”) for 2015, 2014 and 2013. See note 6 to our audited financial statements and “Selected Consolidated Financial and Operating Data” for more information on Discontinued Operations.

Since PDVSA’s audited financial statements include only two comparative years, the 2014 and 2013 audited consolidated financial statements have been restated to reflect results from Discontinued Operations. Results for 2012 and 2011 have not been restated to reflect results from Discontinued Operations as required by IFRS, and remain as originally presented in the respective year.

 

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For the years 2015, 2014 and 2013, the results from the discontinued operations are presented as line item “Discontinued Operations” and separately as a “Summary Consolidated Statement of Comprehensive Income Information from Discontinued Operations.”

Forward-Looking Statements

This offering circular contains forward-looking statements as described under the U.S. Private Securities Litigation Reform Act of 1995, as amended, specifically, certain statements relating to the expected results of exploration, drilling and production activities, refining processes, gas, and related capital expenditures and investments, the expected results of joint venture projects, the anticipated demand for new or improved products, environmental compliance and remediation and related capital expenditures, sales, taxes, dividends and contributions to Venezuela. Words such as “anticipate,” “estimate,” “project,” “expect,” “intend” and similar expressions are used to identify forward-looking statements. Forward-looking statements are subject to risks and uncertainties related to Venezuelan and international oil and gas markets, inflation, the availability of continued access to capital markets and financing on favorable terms, regulatory compliance requirements, changes in import controls or import duties, levies or taxes and changes in prices or demand for our products as a result of actions of our competitors or economic factors. Those statements are also subject to the risks of costs and anticipated performance capabilities of technology and performance by third parties of their contractual obligations. Exploration activities are subject to risks arising from the inherent difficulty of predicting the presence, yield and quality of hydrocarbon deposits, as well as unknown or unforeseen difficulties in extracting, transporting or processing any hydrocarbons found or doing the foregoing on an economic basis. Should one or more of these risks or uncertainties materialize, actual results may vary materially from those estimated, anticipated or projected. Specifically, but without limitation, capital costs could increase, projects could be delayed, and anticipated improvements in capacity or performance may not be fully realized. Although we believe that the expectations reflected by such forward-looking statements are reasonable based on information currently available, readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this offering circular. We undertake no obligation to publicly release any revision to these forward-looking statements to reflect events or circumstances after the date of this offering circular.

Such forward-looking statements are principally contained in the “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and “Selected Consolidated Financial and Operating Data” sections of this offering circular and include our expectations with respect to our business following the completion of the offering.

 

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IMPORTANT DATES

You should note the following dates and times relating to the Exchange Offers. We reserve the right to extend or modify any of these dates. All announcements and amendments to the documents will be made available via the information agent website: https://sites.dfkingltd.com/pdvsa.

 

Date

 

Calendar Date

 

Event

Launch Date   September 16, 2016   Commencement of Exchange Offers
Early Tender Deadline   5:00 P.M. New York City Time, on September 29, 2016, unless extended or terminated earlier by us at our sole discretion.   The last time for you to validly tender Existing Notes to qualify for the Total Exchange Consideration, which includes the Early Tender Premium.
Withdrawal Deadline   5:00 P.M., New York City Time, on September 29, 2016, unless extended or terminated earlier by us at our sole discretion.   The last time for you to validly withdraw tenders of Existing Notes. If your tenders are validly withdrawn, you will no longer receive the applicable consideration on the Settlement Date (unless you validly retender such Existing Notes on or before the Expiration Date).
Expiration Date   11:59 P.M., New York City Time, on October 14, 2016, unless extended or terminated earlier by us at our sole discretion.   The last time for you to validly tender Existing Notes to qualify for the payment of the Exchange Consideration payable in respect of Existing Notes tendered after the Early Tender Deadline.
Announcement Date   As soon as practicable after the Expiration Date, (expected to be on or about the first Business Day after the Expiration Date).  

The Issuer announces whether it will accept any Existing Notes in exchange of New Notes.

 

The Issuer will also announce the aggregate principal amount of Existing Notes accepted for purchase (which may be zero) and the aggregate principal amount of Existing Notes remaining outstanding following the completion of the Exchange Offers, which will all be subject to the satisfaction or waiver of the conditions set forth herein on or before the Settlement Date.

Settlement Date   As soon as practicable (upon satisfaction (or waiver by us at our sole discretion) of the conditions set forth herein) after the Expiration Date, but not, in any event, later than three business days after the Expiration Date (including any applicable Expiration Date following an extension of the Exchange Offers).   The date on which the New Notes will be issued to you in exchange for Existing Notes accepted in the Exchange Offers.

 

1


Holders of the Existing Notes who would like to tender Existing Notes in exchange for New Notes should be sure to allow enough time for the necessary documents to be timely received by the Exchange Agent. We are not required to notify you of defects or irregularities in tenders of the Existing Notes for exchange.

 

2


SUMMARY OF PDVSA

This summary highlights information contained elsewhere in this offering circular. It does not contain all the information that you may consider important in making your investment decision. Therefore, you should read the entire offering circular carefully, including in particular the “Risk Factors” section and the annual audited consolidated financial statements and the related notes thereto appearing elsewhere in this offering circular.

Overview

We are a corporation (sociedad anónima) organized under the laws of Venezuela, formed in 1975 by the Venezuelan government to coordinate, monitor and control all operations relating to hydrocarbons. We are wholly owned by Venezuela and are the holding company for a group of oil and gas companies. We are the fifth largest vertically integrated oil company in the world with daily crude oil production of 2,746 million barrels per day as of December 31, 2015, or mbpd, as measured by a combination of operational data, including volume of reserves, production, refining and sales, based on information published in Petroleum Intelligence Weekly on November 16, 2015, a trade publication. We carry out our exploration, development and production (“upstream”) operations in Venezuela and our sales, marketing, refining, transportation, infrastructure, storage and shipping (“downstream”) operations in Venezuela, the Caribbean, North America, South America, Europe and Asia. Through PDV Holding, a wholly-owned subsidiary, we indirectly own 100% of CITGO Holding and CITGO Petroleum Corporation (“CITGO”), the latter a refiner and marketer of transportation fuels, petrochemicals and other industrial oil-based products in the United States. We plan to invest in upstream and downstream projects in Venezuela and abroad in order to satisfy the current and expected global increase in energy demands.

All hydrocarbon reserves in Venezuela are owned by Venezuela and not by us. Under the Ley Orgánica de Hidrocarburos de 2001 (Organic Hydrocarbons Law), as amended, every activity relating to the exploration and exploitation of hydrocarbons and their derivatives is reserved to the government of Venezuela, which may undertake such activities directly or through entities controlled by Venezuela through an equity participation of more than 50%. At the current production rate of crude oil and gas, Venezuela has proved hydrocarbon reserves of crude oil for the next 301 years for oil and 73 years for gas.

We mainly sell crude oil to the United States, Canada, the Caribbean, Africa, Europe, South America and Asia. In addition, we refine crude oil, with a refining capacity of approximately 2,730 mbpd and other feedstock in Venezuela and abroad into a number of products, including gasoline, diesel, fuel oil and jet fuel, petrochemicals and industrial products, lubricants and waxes, and asphalt. We are also engaged in the exploration and production of gas from offshore sources with a production of 913 barrel-of-oil equivalent, or boe, per day as of December 31, 2015.

Our Plan Estratégico Socialista (Strategic Socialist Plan) (the “Business Plan”) outlines the development of production and refining projects totaling U.S.$132 billion in Venezuela, the Caribbean, Latin America and Asia during its initial stage between 2016 and 2025. Such expenditures are subject to the availability of cash from our operations, obtaining financing on reasonable terms and the favorable pricing of crude oil and gas. During the three-year period ended December 31, 2015, we invested U.S.$66,687 million in development projects in such regions through cash on-hand and issuance of debt. During the year ended December 31, 2015, we invested U.S.$18,106 million in such projects.

Our registered office is located at Avenida Libertador, La Campiña, Apartado 169, Caracas 1050-A, Venezuela, and our telephone number is 011-58-212-708-4111. Our website is: www.pdvsa.com. Information contained on our website is not part of this offering circular.

Business Strategy

Our Business Plan takes into account the impact of the global economic conditions on the demand for oil and the expectations for global economic growth, as well as the projected supply of oil worldwide, the capabilities and challenges related to oil and gas production in Venezuela, and the consolidation of PDVSA’s non-oil businesses. Our Business Plan is based on the following key initiatives approved by the government of Venezuela:

 

  Exploration of Condensate and Light and Medium Crude Oil. We intend to focus primarily on areas that have been already explored and that are currently producing crude oil. All other exploration areas, both onshore and offshore, are open to third-party participation in partnership with us, under the framework of the Organic Hydrocarbons Law and the Venezuelan Constitution.

 



 

3


  Development of the Hugo Chávez Orinoco Oil Belt Magna Reserves. The Hugo Chávez Orinoco Oil Belt (“Orinoco Oil Belt”) area (55,314 km2) has been divided into 36 blocks for reserves quantification and certification of original oil on site purposes. There are approximately 1,469,011 million barrels of Original Oil in Place (“OOIP”) in the Orinoco Oil Belt. Of such amount, approximately 287,096 million barrels have been certified as recoverable reserves, based on a total recovery factor of 20%. See “Risk Factors – Venezuelan proved crude oil and gas reserve estimates involve some degree of uncertainty and may prove to be incorrect over time, which could adversely affect our ability to generate income.” We intend to participate actively in the development of these reserves.

 

  Production Growth in Mature Areas. We are investing in mature areas with a view to achieve a crude oil production capacity in these areas of 1,221 mbpd by 2025. The projected production in mature areas for the period leading up to 2025 includes the following: 767 mbpd from areas where we are the sole operator and 454 mbpd from joint ventures producing light, medium and heavy oil.

 

  Expansion of Orinoco Oil Belt Production. We intend to obtain 1,949 mbpd from the expansion of our existing and future operations in the Orinoco Oil Belt. This growth represents an increase of 629 mbpd from 1,320 mbpd in 2015 to 1,949 mbpd in 2025 (including 112 mbpd in mature areas of the Orinoco Oil Belt), which we plan to implement by developing our extra-heavy crude oil reserves, including a new upgrading facility and pipelines. The expected investment for the years 2016 through 2025 is U.S.$71,567 million. The expected total oil production capacity for 2025, including existing production and the expansion of the Orinoco Oil Belt, offshore crudes, NGL and the mature areas, is 3,180 mbpd. The growth of oil production capacity is expected to occur through joint ventures in which we typically have a 60% stake and international oil companies have the remaining 40% stake.

 

  Development of Major Projects in Refineries. We intend to expand our refinery capacity from approximately 2.5 mmbpd in 2015 (1.3/1.2 mmbpd Venezuela/overseas capacity) to 2.7 mmbpd by 2025 (1.3/1.4 mmbpd Venezuela/overseas capacity). We expect that the implementation of this initiative will allow us to increase our production of refined petroleum products and upgrade our product slate towards higher-margin products, as well as to improve the efficiency of our existing refining capacity. The focus of our refining capacity expansion will be the incorporation of heavier crude oil from the Orinoco Oil Belt expansion into the national refinery system. We currently have in process a major upgrade project to increase the refining capacity of the Puerto La Cruz Refinery. Certain major projects which were part of prior business plans, such as Paraguaná and El Palito, have been postponed due to the decline in oil revenues. In addition, we intend to expand our refining capacity and develop a new refinery in Asia.

 

  Development of the Gas Sector. We have plans to continue developing our onshore and offshore gas reserves with third-party participation under the framework of the Venezuelan Organic Law of Gaseous Hydrocarbons. We intend to maintain our natural gas production from 7,756 mmcfd in 2015 to 7,699 mmcfd by 2025 (equivalent to 1.33 mbpd). In particular, we intend to focus on the development of the Delta Caribe, an initiative consisting of the Northeast Delta Caribbean Project and the Rafael Urdaneta Project in western offshore Venezuela. These projects involve the development of gas reserves located north of Paria (the Mariscal Sucre Project) and Gulf of Venezuela (Cardón IV/Rafael Urdaneta Project). With respect to northeast developments, we intend to link all blocks by a gas pipeline network to the future Güiria Hub, where an industrial complex, Gran Mariscal de Ayacucho, or CIGMA, is expected to be developed. For Gulf of Venezuela natural gas developments, we plan to connect the gas production blocks in the Península de Paraguaná with the domestic gas transportation system.

 

 

Development of Infrastructure. We plan to implement an infrastructure program focused on multiple projects with the aim of securing the development of crude oil and gas reserves, particularly in the Orinoco Oil Belt. This program includes the building of about 8.0 million barrels of oil storage capacity, one liquid

 



 

4


 

terminal in Punta Cuchillo (Orinoco River), the expansion of the existing liquid terminal in Jose, approximately 640 km in oil pipelines, the expansion of existing gas pipelines, and 1,924 km in new gas pipelines.

 

  Marketing of Crude and Products. We intend to continue supplying the local market and exporting crude oil, refined products and natural gas, including refineries and wholesalers in order to improve our margins, and maintaining our markets in Asia, Europe and North America related to the transport logistics. We expect to renew and expand our tanker fleet and increase our maritime transporting capacity from its current controlled fleet of 2,642 tdwt to 9,122 twdt by 2025, as well as increase the number of vessels we own from 26 vessels to 75. In addition, we are expanding and diversifying our marketing efforts in Latin America, the Caribbean and Asia, including China, India and Russia, with the goal of reaching total crude oil exports of 2.6 mbpd by 2025.

 

  Auto Gas Project. Since 2006, we have been developing a project aimed at reducing the domestic gasoline demand by creating natural gas dispatch facilities for vehicles and converting vehicles to dual fuel engines on a national scale. The project’s goals include the construction of 473 new compressed natural gas (“CNG”) stations, as well as the construction and outsourcing of more than 200 vehicle conversion centers and the reactivation of 141 existing CNG stations. As of December 31, 2015, we had 342 CNG stations and 39 vehicle conversion centers. Our total estimated investment in this project for the period beginning 2016 through 2025 is expected to be U.S.$2,189 million.

 

  Production Strategy with Naphtha Stripper for the Orinoco Oil Belt. We have implemented a production strategy in the Orinoco Oil Belt in order to start production before upgraders are built and operational. This strategy consists of the construction of one naphtha stripper that will allow transportation of extra-heavy crude oil diluted with naphtha from the production fields to the port terminals and/or storage tanks where the stripper is to be located. The stripper will remove naphtha diluted with extra-heavy crude oil to send it back to the production field for re-use as a transport diluting agent and to allow the extra-heavy crude oil to be blended with other light crudes in order to obtain a commercially viable crude product. The naphtha stripper will have a total capacity of 260 mbpd and will require an investment of U.S.$725 million. The basic engineering for the naphtha stripper is being completed and its construction is expected to be finalized by 2022.

 

  Exploration Projects. Our prior exploration strategy, known as Integral Exploration Projects (PIEX), included eight exploration projects covering the entire national territorial area with the aim of adding an estimated 8,045 million barrels of crude oil and 40.0 trillion cubic feet of gas. Currently, we are focused on an exploration strategy focused on: (i) concentrating the exploration efforts in new and traditional areas that lead to the incorporation of new light and medium crude oil and non-associated gas; (ii) executing an exploration plan for the incorporation of reserves associated to the Cretaceous in the Orinoco Oil Belt and the Lake Maracaibo; (iii) increasing the proved reserves of light and medium crude oil and non-associated gas from the conversion of the probable reserves with the execution of re-exploration and outline projects; (iv) accelerating the integrated characterization of fields with the purpose of establishing the exploitation plans and strategies that enhance the volumetric growth in Venezuela; and (v) executing a Specific Exploration Plan in border areas in Venezuela to strengthen Venezuela. The Exploration Plan includes the acquisition of 7,258 km2 of seismic 2D and 4,065 km2 of seismic 3D in the period 2016 – 2025, 131 exploratory wells, and includes the addition of 1,047 mbpd of oil and 2.3 bcf of new natural gas reserves. The total estimated investment in these projects through from 2016 through 2025 is U.S.$2,386 million. As of December 31, 2015, total disbursements in the projects since 2011 have amounted to U.S.$1,454 million.

Social Development

Pursuant to the Venezuelan Constitution, the Organic Hydrocarbons Law and social policy, we are required to foster Venezuela’s socio-economic development and the welfare of its citizens. To that effect, we make and are expected to continue to make significant financial contributions to social programs, including transfers to FONDEN (Fondo de Desarrollo Nacional) and other programs, which are included in our annual budget together with other expenses aimed to fund specific social projects, as determined by our Board of Directors, certain of which are recorded as part of our capital expenditures in accordance with applicable accounting rules.

 



 

5


We contributed a total of U.S.$7,829 million in 2013, a total of U.S.$2,015 million in 2014, and a total of U.S.$8,215 million in 2015 to social development, which are reflected as social development expenses in our consolidated statements of income included elsewhere in this offering circular. These contributions are in addition to taxes and dividends we pay annually to Venezuela, as well as the social projects we have funded, which are recorded as part of our capital expenditures because they relate to one of our oil and gas production projects.

Recent Developments

Exchange Agreement 35

On March 9, 2016, the Ministry of Finance and the Central Bank enacted Foreign Exchange Agreement No. 35 (Convenio Cambiario No. 35), effective as of March 10, 2016, published in Official Gazette No. 40,865 dated March 9, 2016, which established two exchange rates: (i) a protected exchange rate (known as “DIPRO”) fixed at Bs. 9.975 to buy and Bs. 10.00 to sell for products related to the food and pharmaceuticals sectors as well as other sectors specified in the Foreign Exchange Agreement and; (ii) the complementary floating exchange market rate (known as “DICOM”), which varies in accordance with market needs, for the remaining sectors.

The exchange transactions derived from the export and/or sale of hydrocarbons by PDVSA and its affiliates and joint ventures, as well as those derived from financing operations, financial instruments, capital contributions, asset sales, dividends, collection of debts, and provision of services can be made using any of the exchange rates described above, or any other rate; provided, that if any rate other than the exchange rates described above is to be used, such rate shall be reduced in one-quarter of a percent (0.25%) and must be authorized by the Vice-presidency of the Economic Sector, the Ministry for Bank and Finance and the Central Bank.

The Foreign Exchange Agreement No. 35 provides that the mechanisms for the exchange transactions provided in the partially abrogated Foreign Exchange Agreement No. 33 of February 10, 2015, published in the Extraordinary Official Gazette No. 6,171 dated February 10, 2015, shall continue to remain in force until such mechanisms are replaced pursuant to a subsequent Foreign Exchange Agreement. Therefore, the acquisition of foreign currency at the DICOM exchange rate shall continue to be executed through the SIMADI system, which consists of auctions that are held on a daily basis by the Central Bank and are open to the general public in Venezuela for the exchange of currency between U.S. dollars and Bolívares.

Increase of Domestic Gasoline Prices

On February 18, 2016, the Ministry of Petroleum issued Resolution No. 015, effective as of February 18, 2016, which established the increase of fuel prices to: (i) Bs. 6 per liter for the 95 octanes gasoline and; (ii) Bs. 1 per liter for the 91 octanes gasoline. This modification represented a price increase of more than 6,000% with respect to the 95 octanes gasoline and of 1,282% with respect to the 91 octanes gasoline from the prices established by Resolution No. 301 of August 15, 2005 and published in the Official Gazette No. 38,251 dated August 16, 2005.

Creation of CAMIMPEG

On February 10, 2016, the creation of the Compañía Anónima Militar de Industrials Mineras, Petrolíferas, y de Gas (CAMIMPEG), a state entity affiliated with the Ministry of Popular Power for the Defense, was authorized by Presidential Decree N° 2,231 and published in the Official Gazette N° 40,845. CAMIMPEG will be domiciled in Caracas and will have the purpose of undertaking all lawful activities concerning oil services, gas and mining. In accordance with the decree, CAMIMPEG may provide services to PDVSA, including but not limited to, in connection with the maintenance of oil wells and the repair, maintenance and management of drilling rigs.

 



 

6


Investigation Case

In December 2015, a case was brought against certain third-party (unaffiliated to PDVSA) contractors and suppliers to PDVSA affiliates in the United States District Court for the Southern District of Texas for the violation of anti-corruption and anti-money laundering laws, among other charges, in connection with international supply contracts and service contracts with a PDVSA affiliate during the period between 2009 and 2014. Certain former employees of a PDVSA affiliate were also charged in connection with these violations, and have since pled guilty along with the suppliers.

Following the commencement of the foregoing action, PDVSA commenced an internal investigation to, among other things, identify the internal controls that were violated and the manner in which such violations occurred; evaluate whether such internal control violations were isolated incidents; and determine the effects of such violations on the PDVSA audited consolidated financial statements for 2015. While the investigation is currently ongoing, PDVSA has implemented a number of remedial measures, including, reinforcing the design and implementation of certain internal controls related to the compliance with Venezuelan and international law applicable to PDVSA’s activities; establishing new procedures and controls in the internal process of supplier payments; and creating a method for the verification and analysis of all suppliers of goods and related services.

See note 32 to the audited consolidated financial statements for more information on the investigation case.

Conversion of Commercial Debt with Strategic Suppliers

PDVSA has implemented different transactions that allow to partially convert the outstanding commercial debt maintained with certain commercial suppliers into financial debt. This conversion is achieved by the execution of several note agreements which provide for (i) the assumption by PDVSA of a portion of its affiliates’ debt (evidenced in outstanding commercial invoices and contracts) with certain strategic suppliers; (ii) the novation of said commercial debt into a financial debt that cancels the former one; and (iii) the issuance of a three-year note (or several notes) regulated by a Note Agreement, with quarterly amortizations and an annual interest rate of 6.5%, to each of the participating strategic suppliers.

From May 2016 to the date of this offering circular, the aforementioned transactions have been successfully executed with GE Capital Financing, Inc., Cementaciones Petroleras Venezolanas, S.A., Petroalianza, C.A., Maritime Contractors de Venezuela, S.A., Weatherford Latin America, S.C.A., Servicios Halliburton de Venezuela, S.A., Environmental Solutions de Venezuela, C.A., Proambiente, S.A., Elecnor, S.A. and Servicios Picardi, C.A. for a total amount of U.S.$1,151 million. 

The Exchange Offers and the Collateral

Reasons for the Exchange Offers

The purpose of the Exchange Offers is to extend the maturities of and refinance the Existing Notes, by repurchasing the Existing Notes in consideration for the issuance of New Notes.

External factors such as the recent decline in oil prices, exchange rate fluctuations and recent global economic conditions resulting from the recent recession affecting the United States and the European Union, among other factors, have affected the price at which we can sell our products. As a result, we believe that it would be prudent to rearrange our debt profile, which was structured (when incurred) during different political and economic conditions. In any event, we believe that we will continue to service our existing debt (and the New Notes, should we decide to complete the exchange) in accordance with their terms.

The Collateral

The New Notes will be secured by a first-priority lien on 50.1% of the capital stock of CITGO Holding. The security interest in the Collateral will be perfected on or before the Settlement Date.

CITGO Holding is a wholly-owned subsidiary of PDV Holding, a Delaware corporation, and is an indirect wholly-owned subsidiary of PDVSA. CITGO Holding is the direct parent of CITGO. CITGO is engaged in the refining, marketing and transportation of petroleum products, including gasoline, diesel fuel, jet fuel, petrochemicals and lubricants, mainly within the continental United States east of the Rocky Mountains.

 



 

7


For a more complete description of CITGO Holding, please refer to the information contained in the “Report for the Fiscal Year Ended December 31, 2015” attached hereto. You should consider the information contained under the section “Risk Factors” set forth therein before making a decision to tender your Existing Notes.

Recently, PDVSA conducted a valuation of the market value of the equity of CITGO and CITGO Holding. CITGO is the owner and operator of important midstream assets, refineries, inventories and receivables, among others, all of which were taken into consideration during such valuation. This valuation exercise was conducted on the basis of an analysis of CITGO and CITGO Holding’s projected future free cash flows, based on certain assumptions regarding growth and taxes. Such valuation also took into consideration the amount of debt at the CITGO level (approximately U.S.$2.0 billion as of December 31, 2015) and CITGO Holding consolidated level (approximately U.S.$4.2 billion as December 31, 2015), among other factors. Such valuation concluded that the market value of the equity (before taxes) as of December 31, 2015 of CITGO was approximately U.S.$9.3 billion and of CITGO Holding was approximately U.S.$8.3 billion, in each case net of debt. In addition, the enterprise valuation of CITGO was U.S.$11.3 billion with an implied EBITDA multiple of 4.7x (based on an EBITDA of U.S.$2.4 billion for the year ended December 31, 2015 (see “Selected Consolidated Financial and Operating Data” for a reconciliation of net income to EBITDA)), and of CITGO Holding was U.S.$12.5 billion with an implied EBITDA multiple of 5.1x (based on an EBITDA of U.S.$2.4 billion for the year ended December 31, 2015 (see “Selected Consolidated Financial and Operating Data” for a reconciliation of net income to EBITDA)). There can be no assurance that such values with respect to a sale of shares of CITGO Holding or CITGO would be achieved.

 



 

8


Corporate Structure

The following chart summarizes our corporate structure:

 

LOGO

 

(1) Issuer
(2) Guarantor
(3) PDV Holding will grant a lien on 50.1% of its stock in CITGO Holding on or before the Settlement Date.
(4) For a detailed description of the interests CVP holds in the different joint ventures, please see “Business – Conversion of Operating Service Agreements to Empresas Mixtas,” “Business – Overview of Main Projects with Private Sector Participation” and “Business – Other Joint Ventures for Exploration and Production of Light-Medium Crude – Expansion Projects in the Orinoco Oil Belt.”
(5) Mainly responsible for the realization and monitoring of regional energy cooperation activities by PDVSA, together with the National Government.

 



 

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THE EXCHANGE OFFERS

The following summary is qualified in its entirety by reference to detailed information appearing elsewhere in this offering circular. For a more detailed description of the Exchange Offers, see “Terms of the Exchange.

 

Offeror and Issuer   PDVSA
The Exchange Offers  

PDVSA is inviting any and all holders of the Existing Notes to tender their Existing Notes in Exchange for newly issued New Notes on the terms and subject to the conditions set forth in this offering circular.

 

The Exchange Offers are subject to certain conditions (as described below under “—Conditions to the Exchange Offers”) and we expressly reserve the right, in our sole and absolute discretion, subject to applicable law, to terminate the Exchange Offers at any time prior to the Expiration Date, or to waive any condition of the Exchange Offers.

 

The “Early Tender Deadline” for the Exchange Offers is 5:00 P.M., New York City Time, on September 29, 2016, unless extended or terminated earlier by us at our sole discretion.

 

The Exchange Offers expire at 11:59 P.M., New York City Time, on October 14, 2016, unless extended or terminated by us at our sole discretion. We refer to the date on which the Exchange Offers expire as the “Expiration Date.”

 

The following table sets forth, for each series of Existing Notes, the security description of the Existing Notes, the identifier, the aggregate principal amount outstanding and the minimum denominations for tenders of each series of Existing Notes:

 

Title of

Security

   CUSIP/ISIN    Principal
Outstanding
Amount
  

Minimum Authorized
Denominations

of Existing

Notes

5.250% Senior Notes due 2017 (“April 2017 Notes”)    N.A. (Rule 144A)/ XS0294364103 (Regulation S)    U.S.$3,000
million
   U.S.$400 and integral multiples of U.S.$100 in excess thereof
8.50% Senior Notes due 2017 (“November 2017 Notes”)    716558 AB7 (Rule 144A); P7807H AK1 (Regulation S)/ US716558AB79 (Rule 144A); USP7807HAK16 (Regulation S)    U.S.$4,100
million
   U.S.$100 and integral multiples of U.S.$100 in excess thereof
  Subject to the satisfaction or waiver by PDVSA of the conditions to the Exchange Offers, we will accept for Exchange any and all of the outstanding Existing Notes validly tendered by holders in the Exchange Offers on or prior to the Expiration Date (and not validly withdrawn on or prior to the Withdrawal Deadline).

 



 

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Total Exchange Consideration and Exchange Consideration  

You may exchange your Existing Notes for New Notes in the amounts described below:

 

(i) Total Exchange Consideration for each U.S.$1,000 principal amount currently outstanding of Existing Notes validly tendered and accepted on or prior to the Early Tender Deadline (as defined below), we will deliver to you U.S.$1,000 of New Notes, which includes the Early Tender Premium, and

 

(ii) Exchange Consideration for each U.S.$1,000 principal amount currently outstanding of Existing Notes validly tendered and accepted after the Early Tender Deadline but on or prior to the Expiration Date (as defined below), we will deliver to you U.S.$950 of New Notes.

 

The principal amount of New Notes you will receive pursuant to the Exchange Offers will be rounded downwards to the nearest integral multiple of U.S.$1,000. No additional consideration will be paid in lieu of fractional New Notes not received as a result of such rounding down. The determination by PDVSA of any calculation or quotation made with respect to the Exchange Offers will be conclusive and binding on you, absent manifest error.

Purpose of the Exchange Offers   The purpose of the Exchange Offers is to extend the maturities of and refinance the Existing Notes, by repurchasing the Existing Notes in consideration for the issuance of New Notes.
Accrued Interest on Existing Notes   We will pay on the Settlement Date all accrued and unpaid interest on the Existing Notes exchanged for New Notes for the period from the most recent interest payment date until, but not including, the Settlement Date.
Holders   Only holders of Existing Notes are authorized to receive and review this offering circular and to participate in the Exchange Offers.
Existing Notes; Principal Amount Currently Outstanding   Any and all Existing Notes are eligible to participate in the Exchange Offers. The principal amount of the Existing Notes currently outstanding is U.S.$7,100 million.
Procedures for Tendering Existing Notes   If you wish to participate in the Exchange Offers and your Existing Notes are held in the name of a custodian or other securities intermediary, such as a broker, dealer, bank, trust company or trustee, you must contact such custodian or other securities intermediary and instruct it to tender your Existing Notes on your behalf. You should contact your custodian or other securities intermediary well in advance of the Early Tender Deadline or Expiration Date, since your custodian may have earlier deadlines by which it must receive your instructions in order to have adequate time to submit your tender on time.

 



 

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Custodial entities that are participants of DTC should tender Existing Notes through DTC’s Automated Tender Offer Program (“ATOP”), by which the custodial entity and the beneficial owner on whose behalf the custodial entity is acting to agree to be bound to the terms and conditions set forth herein. If you are a beneficial owner that holds Existing Notes through the Euroclear Bank S.A./N.V. (“Euroclear”) or Clearstream Banking, société anonyme (“Clearstream, Luxembourg”) and wish to tender your Existing Notes, you must contact Euroclear or Clearstream, Luxembourg, as the case may be, directly to ascertain their procedure for tendering Existing Notes and comply with those procedures.

 

For more information on tendering your Existing Notes, please see “Procedures for Participating in the Exchange Offers.”

Withdrawal Rights  

Any tender of Existing Notes in the Exchange Offers may be withdrawn for any reason, at any time prior to 5:00 P.M., New York City Time, on September 29, 2016, unless extended or terminated earlier by us at our sole discretion. We refer to such date and time as the “Withdrawal Deadline.” We may, among other things, extend the Early Tender Deadline without extending the Withdrawal Deadline, unless required by applicable law.

 

For more information about the conditions for withdrawal, see “Terms of the Exchange Offers – Withdrawal of Exchange Instructions.”

Settlement Date   As soon as practicable (upon satisfaction (or waiver by us at our sole discretion) of the conditions set forth herein) after the Expiration Date, but not, in any event, later than three business days after the Expiration Date (including any applicable Expiration Date following an extension of the Exchange Offers). On this date, PDVSA will deliver the New Notes in exchange for the Existing Notes validly tendered and accepted for exchange pursuant to the Exchange Offers.
Tax Considerations   Please see the section entitled “Tax Considerations” for important information regarding the possible tax consequences to noteholders that tender Existing Notes pursuant to the Exchange Offers.
Information Agent and Exchange Agent   D.F. King & Co., Inc. (see the back cover page of this offering circular for contact details).
Further Information  

Any questions concerning the terms of the Exchange Offers should be directed to the Issuer at the telephone numbers listed on the back cover page of this offering circular.

 

Questions concerning tender procedures and requests for additional copies of this offering circular should be directed

 



 

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  to the Information Agent at its address or telephone numbers listed on the back cover page of this offering circular.
Consequences of Failure to Exchange   For a description of certain consequences of failing to exchange your Existing Notes, see “Risk Factors” and “Terms of the Exchange Offers—Certain Consequences to Holders of Existing Notes Not Tendering in the Exchange Offers.”
Use of Proceeds   We will not receive any cash proceeds from the Exchange Offers.
Conditions to the Exchange Offers   The consummation of the Exchange Offers are conditioned upon, among other things, the valid tender, without subsequent withdrawal, of at least 50% aggregate principal amount of the Existing Notes that are the target of the Exchange Offers. The Exchange Offers are also subject to certain conditions that we may assert or waive. These conditions include the condition that nothing has occurred or may occur that, in our reasonable judgment, (a) makes or seeks to make illegal the exchange of Existing Notes for New Notes pursuant to the Exchange Offers; (b) would or might be expected to result in a delay in, or restrict, our ability to issue the New Notes in exchange for Existing Notes, (c) imposes or seeks to impose limitations on our ability to issue the New Notes in exchange for Existing Notes; or (d) impairs or might impair us from realizing the anticipated benefits of the Exchange Offers. See “Terms of the Exchange Offers – Conditions to the Exchange Offers.”
Governing Law   New York.

 



 

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SUMMARY OF THE NEW NOTES

The following summary is qualified in its entirety by reference to detailed information appearing elsewhere in this offering circular.

 

Issuer   Petróleos de Venezuela, S.A.
Guarantor   PDVSA Petróleo, S.A.
New Notes   Up to U.S.$7,100 million aggregate principal amount of 8.50% senior secured notes due 2020, which will be unconditionally and irrevocably guaranteed by PDVSA Petróleo, S.A.
Maturity Date of the New Notes   The fourth anniversary of the Settlement Date.
Interest   Interest will accrue on the New Notes at the rate of 8.50% per annum. Interest will be payable semi-annually in arrears on each six month anniversary of the Settlement Date, until the maturity date. Interest on the New Notes will be calculated on the basis of a 360-day year of twelve 30-day months.
Scheduled Amortization   Principal payments on the New Notes will be payable in four equal installments on the first, second, third and fourth anniversary, respectively, of the Settlement Date.
Collateral   The New Notes will be secured by a first-priority lien on 50.1% of the capital stock of CITGO Holding. See “Description of the New Notes—Collateral.”
Ranking of the New Notes  

The New Notes will:

 

•       be senior secured Obligations of the Issuer;

 

•       rank effectively senior in right of payment to all existing and future senior unsecured Obligations of the Issuer to the extent of the value of the Collateral, and any outstanding amounts due after the foreclosure of the Collateral will rank equally in right of payment with all existing and future senior unsecured Obligations of the Issuer (other than Obligations preferred by statute or operation of law);

 

•       rank senior in right of payment to all existing and future Obligations of the Issuer that by their terms are subordinated to the New Notes;

 

•       be effectively subordinated to all existing and future secured Indebtedness of the Issuer that is secured by liens on assets that do not constitute the Collateral to the extent of the value of the assets securing such Indebtedness; and

 

•       be structurally subordinated to all existing and future Indebtedness of the Issuer’s subsidiaries (other than the Guarantor).

 



 

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As of June 30, 2016, the Issuer and the Guarantor had total indebtedness of U.S.$37,345 million (of which U.S.$2,583 million was secured indebtedness).

 

As of June 30, 2016, CITGO Holding and CITGO had total indebtedness of U.S.$4,082 million and U.S.$1,927 million, respectively. As of the same date, on a consolidated basis, CITGO had U.S.$817 million of available capacity under its senior secured revolving credit facility and U.S.$67 million of available capacity under its accounts receivable securitization facility.

 

As of June 30, 2016, the non-Guarantor subsidiaries (excluding CITGO Holding) had total indebtedness of U.S.$3,863 million (of which U.S.$760 million was secured indebtedness).

Ranking of the Guaranty  

The Guaranty will:

 

•       be a senior secured Obligation of the Guarantor;

 

•       rank effectively senior in right of payment to all existing and future senior unsecured Obligations of the Guarantor to the extent of the value of the Collateral, and any outstanding amounts due after the foreclosure of the Collateral will rank equally in right of payment with all existing and future senior unsecured Obligations of the Guarantor (other than Obligations preferred by statute or by operation of law); and

 

•       be effectively subordinated to all existing and future secured indebtedness of the Guarantor that is secured by liens on assets that do not constitute the Collateral to the extent of the value of the assets securing such indebtedness.

Book-Entry; Form and Denomination   The New Notes will be issued in the form of one or more global notes without coupons, registered in the name of a nominee of DTC, as depositary, for the accounts of its participants including Euroclear and Clearstream. The New Notes will be issued in minimum denominations of U.S.$150,000 and integral multiples of U.S.$1,000 in excess thereof. The New Notes will not be issued in definitive form except under certain limited circumstances. The Issuer will not accept any tender that would result in the issuance of less than U.S.$150,000 principal amount of New Notes to a participating holder. The principal amount of New Notes you will receive pursuant to the Exchange Offers will be rounded downwards to the nearest integral multiple of U.S.$1,000. No additional consideration will be paid in lieu of fractional New Notes not received as a result of such rounding down. See “Description of the New Notes—Book-Entry; Delivery and Form—Certificated Notes.”

 



 

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Original Issue Discount   The New Notes are expected to be issued with “original issue discount” for U.S. federal income tax purposes. In such case, regardless of a U.S. Holder’s (as defined under “Tax Considerations”) regular method of tax accounting, the U.S. Holder will be required to accrue the original issue discount on a note on a constant yield basis and include the accruals in gross income, whether or not the U.S. Holder receives a corresponding cash payment on the note during the taxable year. For a summary of the material U.S. federal income tax consequences of the purchase, ownership and disposition of the New Notes, see “Tax Considerations – Material U.S. Federal Income Tax Consequences.
Payment of Additional Amounts   All payments made in respect of the New Notes will be made free and clear of, and without withholding or deduction for or on account of, any present or future Venezuelan taxes, unless such withholding or deduction is required by law. Subject to certain exceptions, in the event of any such withholding or deduction the Issuer or the Guarantor, as the case may be, will pay such additional amounts (“Additional Amounts”) as may be necessary so that the net amount received by each holder after such withholding or deduction would not be less than the amount such holder would have received absent the withholding or deduction. See “Description of the New Notes—Additional Amounts.”
Optional Redemption  

We may redeem the New Notes in whole, or in part, at our option, at any time and from time to time prior to the maturity thereof at 100% of the then outstanding principal amount, plus a “make-whole” amount, plus accrued and unpaid interest, if any, and Additional Amounts, if any, to the redemption date upon the satisfaction of certain conditions. See “Description of the New Notes —Redemption.”

 

We may also redeem the New Notes in whole but not in part, at our option, at 100% of the outstanding principal amount, plus accrued and unpaid interest, if any and Additional Amounts, in the event of specific changes affecting taxation on the New Notes. See “Description of the New Notes —Redemption.”

Transfer Restrictions   The New Notes are subject to the same restrictions on transfer as the Existing Notes. The New Notes have not been, and will not be, registered under the Securities Act or under any state securities laws and are subject to certain restrictions on transfer and resale. We are offering the New Notes pursuant to the exemption from the registration requirements of the Securities Act provided by Section 3(a)(9) thereof. We will not be required to, nor do we intend to, register the New Notes for resale under the Securities Act or to offer to exchange the New Notes for

 



 

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  notes registered under the Securities Act or the securities laws of any jurisdiction. The New Notes are subject to the same restrictions on transfer as the Existing Notes. See “Transfer Restrictions.”
No Established Trading Market   There is currently no market for the New Notes and there can be no assurance as to the development or liquidity of a market for the New Notes.
Governing Law   New York.
Listing   We intend to apply to list the New Notes on the Official List of the Luxembourg Stock Exchange and to trade them on the Euro MTF market of such exchange, although no assurance can be given as to the approval of said applications.
Trustee   MUFG Union Bank, N.A.
Collateral Agent   GLAS Americas LLC.
Paying Agent, Transfer Agent and Registrar   Law Debenture Trust Company of New York.
Luxembourg Listing and Paying Agent   Banque Internationale À Luxembourg, Société Anonyme
Risk Factors   For a discussion of certain considerations relevant to an investment in the New Notes, see “Risk Factors.”

 



 

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RISK FACTORS

Before deciding to tender your Existing Notes in exchange for the New Notes, you should carefully read this offering circular and should consider carefully, in light of their own financial circumstances and investment objectives, all of the information set forth in this offering circular and, in particular, certain matters relating to the Issuer and other matters associated with investments in securities of issuers in countries that do not have highly developed capital markets, including, without limitation, the risk factors set forth below.

Our respective businesses, financial condition, results of operations and ability to satisfy our obligations under the New Notes could be materially adversely affected by any of these risks. The trading price of the New Notes could decline due to these risks.

Risks of Not Participating in the Exchange Offers

If the Exchange Offers are completed, the trading market for Existing Notes may become illiquid, which may adversely affect their market value and the ability of holders to sell Existing Notes.

The principal amount of Existing Notes that will remain outstanding after the exchange is consummated may be significantly reduced, depending on the overall level of participation in the Exchange Offers. Consequently, the trading market, if any, for Existing Notes outstanding after the Exchange Offers could become limited or nonexistent. As a result, if you elect not to participate in the Exchange Offers it may be difficult for you to trade your Existing Notes and the market value of your Existing Notes may be adversely affected.

The Existing Notes will not get the benefit of the Collateral securing the New Notes and will be effectively subordinated to the New Notes to the extent of the value of the Collateral.

The Existing Notes will not get the benefit of the Collateral securing the New Notes. The indebtedness evidenced by the Existing Notes and related guaranty will be our (and the guarantor of the Existing Notes) unsecured obligations and therefore will be effectively subordinated, to the extent of the value of the Collateral, to any of our existing or future secured obligations and of the guarantor of the Existing Notes, including the New Notes.

Risks of Participating in the Exchange Offers

Your decision to tender your Existing Notes for New Notes exposes you to the risk of nonpayment for a longer period of time.

The outstanding Existing Notes mature in 2017 and the New Notes will mature on the fourth anniversary of the Settlement Date. If following the maturity date of your Existing Notes, but prior to the maturity date of the New Notes received in exchange for those Existing Notes, we were to become subject to a bankruptcy or similar proceeding, the holders of the Existing Notes who did not exchange their Existing Notes for New Notes could have been paid in full and there would exist a risk that holders who exchanged their Existing Notes for New Notes would not be paid in full, if at all. The market price of New Notes may also decline during this period if our creditworthiness declines. Your decision to tender your Existing Notes should be made with the understanding that the lengthened maturity of the New Notes exposes you to the risk of nonpayment or a decline in our creditworthiness for a longer period of time.

We have broad discretion to complete, limit, cancel, extend or amend the terms of the Exchange Offers, which may affect the timing for completion of the Exchange Offers and the ability of holders of the Existing Notes to transfer or sell their notes.

The terms of the Exchange Offers allow us to terminate or extend the Exchange Offers past the originally scheduled expiration date, to withdraw or amend the Exchange Offers in one or more jurisdictions, and to reject valid tenders of Existing Notes, in each case pursuant to the terms of the Exchange Offers. Accordingly, we cannot provide any assurance that the exchange of Existing Notes for New Notes pursuant to the Exchange Offers will be completed in any particular jurisdiction, or at all. Even if the Exchange Offers are consummated, we cannot assure

 

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holders of Existing Notes that the Exchange Offers will be completed in accordance with the time schedule and terms set forth in this offering circular due to potential legal proceedings or other reasons. Accordingly, holders participating in the Exchange Offers may have to wait longer than expected to receive their New Notes, during which time those holders will not be able to effect transfers of their Existing Notes tendered pursuant to the Exchange Offers.

We may in the future purchase Existing Notes at different prices

Subject to existing contractual and regulatory restrictions, we may from time to time purchase any Existing Notes that remain outstanding after consummation of the Exchange Offers through open market or privately negotiated transactions, one or more tender or exchange offers or otherwise, on terms that may be more advantageous to holders than the terms of the Exchange Offers.

The consideration to be received in the Exchange Offers does not reflect any valuation of the Existing Notes or the New Notes and is subject to market volatility, and none of PDVSA, the trustee or the Information Agent and the Exchange Agent makes any recommendation that any holder participate in the Exchange Offers.

We have made no determination that the consideration to be received in the Exchange Offers represents a fair valuation of either the Existing Notes or the New Notes. PDVSA has not obtained a fairness opinion from any financial advisor about the fairness to PDVSA or to you of the consideration to be received by the holders who exchange their Existing Notes. The trading price and the availability of a liquid market of the New Notes following the Exchange Offers cannot be assured. If a market does develop, the trading price of the New Notes will be impacted by other factors such as credit ratings and the trading prices of the Existing Notes. The New Notes may trade at discounts to par.

None of PDVSA, the trustee, the Information Agent, the Exchange Agent or any of their respective affiliates, makes any recommendation as to whether holders of the Existing Notes should exchange their Existing Notes for New Notes in response to the Exchange Offers.

You should not tender any Existing Notes that you do not wish to have accepted for exchange by us.

Existing Notes tendered in any Exchange Offer may be validly withdrawn at any time at or before the Withdrawal Deadline (5:00 p.m. New York City time on September 29, 2016, unless extended or terminated earlier by us at our sole discretion) (but not thereafter). Existing Notes tendered in any Exchange Offer after the Withdrawal Deadline will be irrevocable, except when additional withdrawal rights are provided by law.

Accordingly, you should not tender any Existing Notes that you do not wish to have accepted for exchange by us.

Risk Factors Relating to the New Notes, the Guaranty and the Collateral

The value of the Collateral securing the New Notes may not be sufficient to satisfy all our obligations under the New Notes.

The proceeds from the sale of the Collateral may not be sufficient to satisfy all our obligations under the New Notes. The value of the CITGO Holding shares will depend on numerous factors affecting the price of such shares, including, but not limited to, the market value of the shares at such time and the timing and manner of the sale or liquidation, as well as changing economic conditions, competition or other future trends. In addition, some or all of the pledged shares may be illiquid, and may have to be sold at a substantial discount in an insolvency situation or otherwise. See “Risk Factors—Risks Relating to the New Notes —It may be difficult to realize the value of the Collateral pledged to secure the New Notes in a timely manner or at all.” We cannot assure noteholders that the pledged shares will be saleable or, if saleable, that there will not be substantial delays in its liquidation, especially in the event of default under the New Notes. During any such delays, the value of Collateral could decline. Accordingly, we cannot assure noteholders that the proceeds of any sale or liquidation of the Collateral will be sufficient to satisfy, or will not be substantially less than, our obligations under the New Notes.

 

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In addition, if the Collateral Agent were to enforce its lien on the Collateral, such enforcement could result in a change of control under instruments governing outstanding indebtedness of CITGO Holding and CITGO. Holders of certain of such outstanding debt could then require CITGO Holding and CITGO to make an offer to repurchase such indebtedness. There can be no assurance that the cash on hand or other assets of CITGO Holding or CITGO would be sufficient to effect such a repurchase in whole or in part, and any such repurchase, or failure to make any such repurchase, could negatively impact the value of the pledged shares. In addition, a change of control would constitute an event of default under certain of CITGO’s outstanding debt if not consented to thereunder. As a result, if the Collateral Agent were to enforce the lien on the Collateral, there is a substantial risk that the value of the pledged shares would not be sufficient to satisfy all our obligations under the New Notes in the event that a change of control occurs under CITGO Holding’s and CITGO’s outstanding debt.

Any claim for the difference between the amount, if any, realized by holders of the New Notes from the sale of the pledged shares securing the New Notes and the obligations under the New Notes rank equally in right of payment with all of our other unsecured unsubordinated indebtedness and other obligations. As a result, if the value of the Collateral for the New Notes is less than the amount outstanding under the New Notes at the time the Collateral is liquidated, it is possible that any claims by holders of the New Notes for the difference between the amount realized from the sale of Collateral and the obligations under the New Notes may not be satisfied in full before the claims of such creditors are paid.

It may be difficult to realize the value of the Collateral pledged to secure the New Notes in a timely manner or at all.

Our obligations under the New Notes will be secured by a pledge by PDV Holding of 50.1% of the outstanding common stock of CITGO Holding. The security agreements governing the Collateral provide the Collateral Agent with significant remedies, including foreclosures and sale of all or parts of the Collateral, but the rights of the Collateral Agent to exercise such remedies are, subject to certain exceptions, generally limited to any Event of Default under the New Notes. Further, the Collateral Agent will only take such action as instructed by the holders of a majority of the outstanding principal amount of the New Notes. The realization of value from the Collateral Agent’s security interest, however, may be limited by other factors that may impede selling the Collateral in a timely manner and at a suitable price. Any delay in the realization of value of Collateral could result in a significant decline in the amount realized.

We cannot assure you that, in the event of any attempt to liquidate the pledged shares, such sales will occur on a timely basis or at all, which may have a potentially significant adverse effect on the sale price of the Collateral when compared with amounts due under the New Notes. Therefore, the practical value of realizing on the Collateral may be limited.

Under the terms of the New Notes, PDV Holding is not subject to any restrictions to dispose or grant liens on its shares in CITGO Holding that are not part of the Collateral.

PDV Holding may dispose or grant a pledge in the remaining 49.9% of the shares it owns in CITGO Holding. Subject to other restrictions affecting the Issuer (including any negative pledge covenants affecting the Issuer and its Subsidiaries), PDV Holding may use such remaining shares to secure other obligations or sell them to a third party. The value of the Collateral may be adversely affected if PDV Holding (and ultimately, PDVSA) ceases to be the owner of such remaining shares.

CITGO Holding and its subsidiary, CITGO, are parties to several financing transactions.

Pursuant to the terms of the New Notes and the other documents constituting the Transaction Documents, CITGO Holding and CITGO are subject to covenants or other obligations not to dispose their assets. Likewise, CITGO Holding and CITGO are parties to several financial transactions, and are also subject to certain financial covenants, restrictions on their ability to declare or pay dividends, dispose assets, and further, some of their assets are subject to security interests granted for the benefit of their creditors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Loan Agreements—CITGO Loan Agreements.” In the future, CITGO Holding and CITGO may incur more secured or unsecured debt or enter into other financial arrangements with similar or more restrictive covenants. In addition, CITGO Holding and CITGO may make financing or investing decisions in their own interests that may conflict with the interests of the Holders of the New Notes. Finally, the value of the Collateral may be affected by CITGO Holding’s and CITGO’s ability to service its respective debt.

 

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Payments on the New Notes and the Guaranty will be effectively subordinated to any debt obligations of PDVSA and the Guarantor that are secured by assets other than the Collateral and to the liabilities of the non-guarantor subsidiaries, affiliates or joint ventures.

The New Notes and the Guaranty will be effectively subordinated to our current indebtedness that is secured by our assets other than the Collateral to the extent of the value of the assets securing such indebtedness. Secured creditors will have a senior right to the collateral securing their indebtedness that is not securing the New Notes and the Guaranty in case of an event of default under their secured indebtedness. This right would be to the exclusion of the noteholders, even if we were in default under the New Notes as well. In that event, such collateral would first be used to repay in full all indebtedness and other obligations of such secured creditors, resulting in all or a portion of such assets being unavailable to satisfy the claims of the noteholders (to the extent that the Collateral that will secure the New Notes is insufficient to repay the New Notes in full in the event of its foreclosure) and other of our creditors of their unsecured debt. If any of the foregoing events were to occur, recovery by noteholders may be adversely affected.

In addition, we conduct part of our business through subsidiaries and joint ventures, none of which (except for the Guarantor) are obligated under the New Notes or the Guaranty. Our non-guarantor subsidiaries are separate distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due under the New Notes or the Guaranty or to make any funds available therefor, whether in the form of loans, dividends or otherwise. The claims of any creditor of a subsidiary or joint venture would rank ahead of our ability to receive dividends or other cash flows from these companies. As a result, claims of these creditors would rank ahead of our ability to access cash or other assets from these companies in order to satisfy our obligations under the New Notes. In addition, our unrestricted subsidiaries may be restricted by their own loan agreements, governing instruments and other contracts from distributing cash to us to enable us to perform under the New Notes.

The Exchange Offers described herein constitute separate and distinct Exchange Offers and any modifications to the terms of one Exchange Offer will not impact the terms of the other Exchange Offer. This may impact the level of participation in each Exchange Offer and your rights with respect to the Collateral securing the New Notes.

The Exchange Offers described herein constitute separate and distinct Exchange Offers and certain modifications made to one Exchange Offer are not required to be made in the other Exchange Offer. This may increase the level of participation in one Exchange Offer. Holders of the New Notes will share on a pro rata basis with the other holders of the New Notes with respect to rights to the Collateral. An increase in the aggregate principal amount of the New Notes as a result of an increase in the participation level in an Exchange Offer or otherwise will increase the amount of obligations secured by the Collateral. This would have the effect of diluting the ability of the holders that tender their Existing Notes to benefit from the Collateral.

The Collateral may not be enforceable in the event PDVSA is subject to bankruptcy or reorganization proceedings.

If PDVSA were to commence a bankruptcy or reorganization proceeding, or one were to be commenced against PDVSA, the competent bankruptcy court may prevent the Trustee under the indenture and the Collateral Agent from foreclosing on the Collateral. Secured creditors such as the Trustee, the Collateral Agent and the holders of the New Notes may be prohibited from foreclosing upon or disposing of a debtor’s property by the competent bankruptcy court.

The market value of the New Notes may depend on economic conditions in Latin America and other developing countries over which we have no control.

The market value of securities of Venezuelan companies, including us, is affected to varying degrees by economic and market conditions in other Latin American and developing countries. Although economic conditions in such countries may differ significantly from economic conditions in Venezuela, investors’ reactions to

 

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developments in any of these other countries may affect the market value of securities of Venezuelan issuers. We cannot assure you that any economic, social or political deterioration in other Latin American or developing countries or other events in Latin American or developing countries will not affect the market value of the New Notes.

The transferability of the New Notes may be limited under applicable securities law.

The New Notes have not been registered under the Securities Act or any securities laws of any state of the United States or any other jurisdiction and, unless so registered, may not be offered or sold in the United States or for the account or benefit of a U.S. Person, except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and the applicable securities laws of any state or any other jurisdiction.

Additionally, the purchase and sale of the New Notes in the secondary market in Venezuela in transactions payable in Bolívares by individuals and legal entities domiciled in Venezuela can occur only through universal banks authorized stock brokers and the Bolsa de Valores Pública Bicentenaria (Bicentennial Public Stock Exchange), and it must be made at the complementary floating exchange market rate (DICOM) pursuant to the Foreign Exchange Agreement No. 35 dated March 9, 2016 published in the Official Gazette No. 40,865 and the Foreign Exchange Agreement No. 33 dated February 10, 2015 published in the Extraordinary Official Gazette No. 6,171.

According to the Decreto con Rango, Valor y Fuerza de Ley de Instituciones del Sector Bancario (Law Decree of the Institutions of the Banking Sector), published in the Official Gazette No. 40,557, dated December 8, 2014, all Venezuelan banks, either public or private, must hold their securities, as well as the securities they hold on behalf of their clients denominated in local or foreign currency, issued or endorsed by the Republic or state-owned companies such as us, through the Central Bank. Also, according to the partially abrogated Foreign Exchange Agreement No. 33 of February 10, 2015, published in the Extraordinary Official Gazette No. 6,171 dated February 10, 2015, the institutions authorized to sell the New Notes in the secondary market through must assure the existence of the securities offered, and thus must hold such securities on behalf of their clients.

While in the future, the New Notes might be sold in Venezuela in the Public Securities Exchange (Bolsa Pública de Valores Bicentenaria), created pursuant to the Public Securities Exchange Law (Ley de la Bolsa Pública de Valores Bicentenaria) published in the Special Official Gazette No. 5,999 dated November 13, 2010 and its General Rules (Reglamento General de la Bolsa Pública de Valores Bicentenaria) published in the Official Gazette No. 39,659 dated April 25, 2011, in accordance with the procedures and subject to the terms and conditions established in the Rules relating to the Registration, Negotiation and Settlement of Securities in the Public Securities Exchange (Reglamento de Inscripción, Negociación y Liquidación de Valores en la Bolsa Pública de Valores Bicentenaria) issued by the Venezuelan Superintendency of Securities (Superintendencia Nacional de Valores) and published in the Official Gazette No. 39,600 dated January 24, 2011, we cannot assure you that any such active trading market will develop and provide an additional market for the New Notes. Prospective investors should be aware that investors may be required to bear the financial risks of this investment for an indefinite period of time.

The New Notes are a new issue of securities for which there is currently no public market, and you may be unable to sell your New Notes if a trading market for the New Notes does not develop.

We intend to apply to list the New Notes on the Official List of the Luxembourg Stock Exchange and to trade them on the Euro MTF market of such exchange, although no assurance can be given as to the approval of said applications, if any.

There is currently no market for the New Notes. We cannot assure you that any active trading market will develop for the New Notes, nor can we assure you regarding the liquidity of any such market, your ability to sell the New Notes or the prices at which the New Notes could be sold. We plan to place a portion of the New Notes with Banco de Venezuela, which could also affect the liquidity of the New Notes. If a market for the New Notes develops, the New Notes could trade at prices that may be higher or lower than their initial offering prices depending on many factors, including prevailing interest rates, our results of operations, the markets for similar securities, and other factors beyond our control, including general economic and market conditions.

 

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Our liquidity and ability to generate cash depends on many factors beyond our control, and any failure to meet our debt obligations could harm our business, financial condition, and results of operations.

Our ability to make payments on and to refinance indebtedness we may incur and to fund planned capital expenditures will depend on our ability to generate sufficient cash flow from operations, accessing the capital markets and making assets sales in the future. For example, decreases in oil and gas prices in the recent past, and any further decreases in oil and gas prices, will adversely affect our ability to generate cash flow from operations. Although we intend to finance a portion of our working capital and capital expenditure requirements with cash we expect to generate from operations, we will nonetheless need to raise substantial additional funds to fully fund our operations. The availability of these sources of capital when the need arises will depend upon a number of factors, some of which are beyond our control. These factors include general economic and financial market conditions, oil and natural gas prices, our credit ratings, interest rates, market perceptions of us or the oil and gas industry, our market value, and our operating performance.

As of December 31, 2015, we had current assets of $53,935 million, of which $5,821 were cash and cash equivalents, while we had $52,692 million of current liabilities, resulting in a working capital position of $1,243 million. We historically have addressed our liquidity needs through cash flow from operations and short- and long-term borrowings in U.S. dollars and Bolívares. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources.”

We must continue to invest capital to maintain or increase the number of hydrocarbon reserves that we operate and the amount of crude oil that we produce and process. Additionally, we are required by Venezuelan law to make significant financial contributions to social programs. Between 2011 and 2015, our average social contributions represented 14% of our revenues. We cannot assure you whether these contributions will increase in the future and that they will not have a material impact on our business, results of operations or our liquidity position and/or ability to make our scheduled debt or other payments. These contribution requirements, which are completely out of our control, have been unpredictable and have varied greatly in the past and are likely to do so in the future. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Operating Results—Contributions for Social Development.”

We may not be able to find additional financing on commercially reasonable terms, or at all. Furthermore, we cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in the market in an amount sufficient to enable us to pay principal and interest on our indebtedness or to fund our other liquidity needs. If our cash flow and existing capital resources are insufficient to fund our debt obligations, we may be forced to reduce our planned capital expenditures, sell assets, seek additional equity or debt capital, or restructure our debt, and any of these actions, if completed, could adversely affect our business. In addition, any failure to make scheduled payments of interest and principal on our outstanding indebtedness could harm our ability to incur additional indebtedness on commercially reasonable terms and lenders would have the right to accelerate our debt, which could result in a cross-acceleration of a material portion of our indebtedness, including the Existing Notes. Our cash flow and capital resources may be insufficient for payment of interest on and principal of our debt in the future, and any such alternative measures may be unsuccessful or may not permit us to meet scheduled debt service obligations, which could cause us to default on our obligations and could impair our liquidity.

The New Notes are expected to be issued with original issue discount for U.S. federal income tax purposes.

The New Notes are expected to be issued with original issue discount for U.S. federal income tax purposes. In such case, regardless of a U.S. Holder’s (as defined under “Tax Considerations”) regular method of tax accounting, the U.S. Holder will be required to accrue the original issue discount on a New Note on a constant yield basis and include the accruals in gross income, whether or not the U.S. Holder receives a corresponding cash payment on the New Note during the taxable year. For a summary of the material U.S. federal income tax consequences of the purchase, ownership and disposition of the New Notes, see “Tax Considerations – Material U.S. Federal Income Tax Consequences.”

 

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Investment in emerging markets poses a greater degree of risk.

Investing in emerging-market securities generally pose a greater degree of risk than investing in securities from more mature market economies as emerging market economies are more volatile.

There can be no assurance that a continuation or acceleration of these economic and financial crises or similar events will not negatively affect investor confidence in emerging markets or the economies of the principal countries in Latin America, including Venezuela. In addition, there can be no assurance that these events will not adversely affect Venezuela’s economy and its ability to raise capital in the external debt markets in the future.

The New Notes are not guaranteed by PDVSA’s subsidiaries, other than the guarantor, and are not secured by any other liens, other than the Collateral.

Our subsidiaries are separate and distinct legal entities and, other than the guarantor, will have no obligation, contingent or otherwise, to pay any amounts due on our debt or to provide PDVSA with funds for its payment obligations, whether by dividends, distributions, loans or other payments. PDVSA’s right to receive any assets of any of our subsidiaries upon their liquidation or reorganization, and therefore the right to receive any assets of any of our subsidiaries upon their liquidation or reorganization, and therefore the right of the noteholders of PDVSA’s debt (including the New Notes) to participate in those assets, would be effectively subordinated to the claims of those subsidiaries’ creditors, including trade creditors. In addition, even if PDVSA were a creditor of any of our subsidiaries, its rights as a creditor would be effectively subordinated to any security interest in our subsidiaries’ assets and any indebtedness of our subsidiaries senior to that held by PDVSA.

If we are subjected to Venezuelan bankruptcy or insolvency law, the ability of the holders of New Notes to recover their investment in the New Notes will be substantially impaired and will be subordinated to several classes of creditors such as secured creditors, our employees and the Venezuelan treasury, among others.

If a Venezuelan court were to hold us subject to Venezuelan bankruptcy or insolvency laws, your ability to recover your investment in the New Notes will be impaired and will be subordinated to several creditors such as the bankruptcy trustee, secured creditors, our employees for any unpaid wages and labor benefits set forth in applicable collective bargaining agreements and Venezuelan labor law (including profit-sharing payments, accrued but unpaid vacation and severance) and the Venezuelan treasury for unpaid taxes, among others.

Venezuela recognizes the execution of foreign judgments and arbitration awards, subject to certain conditions provided for in Venezuelan laws.

Foreign judgments and arbitration awards rendered against PDVSA can be enforced against its assets located in Venezuela only upon compliance with the effectiveness requirements set forth in the Venezuelan Law of Private International Law, the Commercial Arbitration Law and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Notwithstanding these requirements, given that we are a state-owned company which owns assets that serve the public interest, in accordance with the provisions of the Organic Law of the National Attorney’s Office, the execution of a foreign judgment or arbitration award must be stayed for a period of 45 business days during which Venezuela may take actions in order to prevent the interruption of the public services that we provide in Venezuela.

We may incur a material U.S. tax liability if the CITGO Holding shares held as part of the Collateral are sold in the future.

A sale in the future of the CITGO Holding shares held as part of the Collateral may result in a material U.S. tax liability to us. No assurance can be made that, under the applicable insolvency, bankruptcy and other laws existing at such time, the proceeds from such sale would not be subject to our tax liabilities.

 

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Risk Factors Relating to Venezuela

Events in Venezuela have produced significant social and political tensions, which have had in the past a material adverse effect on us and could again do so in the future.

A substantial part of our operations, properties, employees and activities are located in Venezuela. A deterioration in Venezuela’s economic condition, social instability, political unrest or other adverse social developments in Venezuela could adversely affect our business and financial condition. Those events could also lead to increased volatility in the foreign exchange and financial markets, thereby affecting our ability to obtain and service foreign debt. Furthermore, between December 2001 and August 2004, February 2014 and including more recently in 2016, there were and have been periods of intense political and social turmoil involving groups that opposed the Venezuelan government. Between December 2002 and February 2003 a massive strike, also known as the oil strike or oil lockout, took place, in an unsuccessful attempt by the Venezuelan political opposition to President Chávez to force a new presidential election. Among the effects of the oil strike on the Venezuelan economy, was a decrease in the GDP of 15.8% and 24.9% during the fourth quarter of 2002 and the first quarter of 2003, respectively, a substantial reduction in the country’s fiscal revenue and an 8% decline in bank deposits.

On December 3, 2006, President Hugo Chávez was re-elected President for a six-year term and from December 2005 to January 2016 the Partido Socialista Unido de Venezuela, or PSUV, the political party formerly headed by President Chávez, controlled a majority of the seats in the Asamblea Nacional, or National Assembly (formerly the Venezuelan Congress), as well as most state governments, and enjoyed broad support among the poorer segments of Venezuelan society.

On September 26, 2010, at the election for representatives to the National Assembly, 98 representatives of the PSUV and 67 representatives of opposing parties were elected. The new members of the National Assembly took office in January 2011.

On October 7, 2012, President Chávez was re-elected for another six-year term. However, on March 5, 2013, President Chávez passed away, leaving Vice-president Nicolás Maduro as the incumbent president until the next election. On April 14, 2013, Nicolás Maduro was elected as president of Venezuela for a six-year term.

On December 6, 2015, at the election for representatives to the National Assembly, 112 representatives of the opposition coalition known as Mesa de la Unidad Democrática, or MUD, and 55 representatives of the PSUV were elected. Since this date, MUD representatives represent a majority of the National Assembly. The new members of the National Assembly took office in January 2016, except for 3 MUD representatives, whose election was challenged before the Supreme Court of Venezuela.

There can be no assurance that the significant domestic political, social and economic instability that has existed in Venezuela will not re-emerge. Such instability could have a material adverse effect on Venezuela’s economic growth, our operations and as a result our ability to service our obligations under the New Notes.

The significant decline in the price of oil has had an impact on the economy of Venezuela.

The economy of Venezuela is highly dependent on petroleum revenues. The average sale export price of crude oil was U.S.$88.92/bl in 2014 and U.S.$44.65/bl in 2015. While as of July 31, 2016, the sale export price of crude oil was U.S.$32.75/bl, in the event the price of oil was to decrease from its current levels, Venezuela’s revenues from oil could significantly decline further. There can be no assurance that government revenues from petroleum exports will not experience significant fluctuations as a result of changes in the international petroleum market. Concerns with respect to the current global recession, weakness of the world economy, terrorism, market volatility and certain geopolitical developments, such as political instability in the Middle East, may have a potentially adverse effect on the petroleum market as a whole.

PDVSA’s production levels were 2,991 mbpd, 2,910 mbpd, 2,899 mbpd, 2,785 mbpd, and 2,746 mbpd, for the years 2011, 2012, 2013, 2014 and 2015, respectively. While Venezuela expects to increase production through the development of new fields, future political uncertainty, budget adjustments that affect investments in oil exploration or outages (which have occurred recently in Venezuela from time to time) could result in a decline of overall production. Accordingly, any sustained period of decline in capacity, if exacerbated by a decline in oil production, could adversely affect Venezuela’s fiscal accounts and international reserves.

 

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Changes to Venezuela’s credit ratings may adversely affect the value of the New Notes.

Since February 2015, Standard & Poor’s credit rating for Venezuela has been CCC with a negative outlook. In December 2014, Fitch lowered Venezuela’s credit rating from B- to CCC, and reaffirmed this rating in July 2016. In March 2016, Moody’s affirmed Venezuela’s Caa3 credit rating, and changed the outlook, which was previously stable, to negative, citing “increased uncertainty surrounding economic and political events in Venezuela which could increase the loss severity bondholders could face in the event of a default, a development to which [Moody’s] assign[s] a high probability of occurrence.” Any actual or anticipated changes or downgrades in Venezuela’s credit ratings could affect the market value of the New Notes.

Inflation, along with governmental measures to combat inflation, has had significant negative effects on the Venezuelan economy and, as a result, on our operations.

Venezuela has experienced relatively high levels of inflation during much of the past two decades, despite the presence of price controls on many core goods during certain periods. The general rate of inflation as measured by the consumer price index was approximately 26.1% in 2011, 21.1% in 2012, 56.20% in 2013, 68.54% in 2014 and 180.90% in 2015. In 2008, the Central Bank changed the calculation base used to determine the consumer’s price index that was used until December 31, 2007, in order to consider, among other factors, a larger geographical area of Venezuela. We cannot assure you that inflation will not continue at or increase from its current level. Future governmental actions, including government spending, and actions to adjust the value of the Bolívar, may trigger increases in inflation. Because some of our costs, such as labor, are Bolívar-based, while the sales prices of substantially all of our products are U.S. dollar-based or U.S. dollar-related, periods of inflation that are not accompanied by commensurate devaluations of the Bolívar can adversely affect our costs, financial condition and ability to meet our obligations under the New Notes.

Our products in the Venezuelan domestic market are sold at subsidized prices, thereby reducing our Venezuelan source revenues.

The Venezuelan government, rather than the international market, determines the price of products such as gasoline, diesel, natural gas and natural gas liquids, or NGL, sold by us through our affiliates in the domestic market and, as a result, we earn substantially lower revenues on our products sold in Venezuela than on our exports and products sold internationally. The continued existence of such price controls will continue to reduce our Venezuelan source revenues.

The Venezuelan economy could be adversely affected by economic developments in regional or global markets.

Financial and securities markets in Venezuela are influenced, to varying degrees, by economic and market conditions in regional or global markets. Although economic conditions vary from country to country, investors’ perceptions of the events occurring in one country may substantially affect capital flows into and securities from issuers in other countries, including Venezuela. International investors consider Venezuela to be an emerging market. Economic and market conditions in other emerging market countries, especially those in Latin America, influence the market for securities issued by Venezuelan companies. Volatility in the securities markets in Latin America and in other emerging market countries may have a negative impact on the trading value of our securities and on our ability and the terms on which we are able to access international capital markets.

The crisis in the Asian markets, beginning in 1997 negatively affected markets throughout Latin America. Similar adverse consequences resulted from the economic crisis in Russia in 1998, the Brazilian devaluation in 1999 and the Argentine crisis in 2001. Furthermore, the Venezuelan economy may be affected by events in developed economies that are trading partners or that affect the global economy, including the sovereign debt crisis affecting Greece, Spain and Italy. During the most recent global economic and financial crisis, global market conditions had adverse effects on the Venezuelan economy. Negative economic developments in the international markets in the future, including a decline in the demand for the commodities that Venezuela exports, would likely adversely affect the Venezuelan economy and financial system.

 

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A significant increase in interest rates in the international financial markets could have a material adverse effect on the economies of Venezuela’s trading partners.

If interest rates outside Venezuela increase significantly, our trading partners in Asia, the United States and the European Union could find it more difficult and expensive to borrow capital and refinance their existing debt. These increased costs could in turn adversely affect economic growth in those countries. Decreased growth on the part of these trading partners could have a material adverse effect on the markets for our exports.

Risk Factors Relating to our Business

The significant decline in the price of oil has had an impact on our revenues. A further decrease in such prices could materially and adversely affect our business.

The average sale export price of the Venezuelan crude oil basket was U.S.$88.42/bl in 2014 and U.S.$44.65/bl in 2015. Exports of Venezuelan crude oil represent a substantial portion of our revenues. In the event the price of oil was to decrease from its current levels, PDVSA’s revenues could significantly decline further. There can be no assurance that PDVSA’s revenues from petroleum exports will not experience significant fluctuations as a result of changes in the international petroleum market. Concerns with respect to the current global recession, weakness of the world economy, terrorism, market volatility and certain geopolitical developments, such as political instability in the Middle East, may have a potentially adverse effect on the stability of the petroleum market as a whole.

PDVSA’s production levels were 2,991 mbpd, 2,910 mbpd, 2,899 mbpd, 2,785 mbpd, and 2,746 mbpd, for the years 2011, 2012, 2013, 2014 and 2015, respectively. While Venezuela expects to increase production through the development of new fields, future political uncertainty, budget adjustments that affect investments in oil exploration, or outages (which have occurred recently in Venezuela from time to time) could result in a decline of overall production. Accordingly, any sustained period of decline in capacity, if exacerbated by a decline in oil production, could adversely affect PDVSA’s revenues.

Our business depends substantially on international prices for oil and refined petroleum products and such prices are volatile.

Our business, financial condition, results of operations and prospects depend largely on international prices for crude oil and refined petroleum products. Prices of oil and refined petroleum products are cyclical and highly volatile and have, historically, fluctuated widely due to various factors that are beyond our control, including:

 

  changes in global supply and demand for crude oil and refined petroleum products;

 

  political events in major oil producing and consuming nations;

 

  agreements among the members of the Organization of Petroleum Exporting Countries (“OPEC”);

 

  availability and price of competing products;

 

  actions of commodity markets, participants, and competitors;

 

  international economic trends;

 

  technological advancements and developments in the industry;

 

  domestic and foreign government regulations that directly impact the supply of crude oil and refined petroleum products;

 

  inflation; and

 

  variations of the rate of exchange of the U.S. dollar vis-à-vis other currencies, such as the Euro.

 

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OPEC members have historically entered into agreements to reduce their production of crude oil. Such agreements have sometimes increased global crude oil prices by decreasing the global supply of crude oil. Venezuela is a party to and has complied with such production agreement quotas, and we expect that Venezuela will continue to comply with such agreements in the future. Since 1998, OPEC’s production quotas have contributed to substantial increases in international crude oil prices. Beginning with the 160th Meeting of the Conference of OPEC, convened on December 14, 2011 in Vienna, Austria, to the present, OPEC decided to maintain a production level of 30.0 mbpd, including production from Libya, and also agreed that OPEC member countries would, if necessary, take steps (including voluntary downward adjustments of output) to ensure market balance and reasonable price levels. In the 168th Meeting of the Conference of the Organization of the Petroleum Exporting Countries (OPEC), held in Vienna, Austria, on December 4, 2015, the Conference, emphasizing its commitment to ensuring a long-term stable and balanced oil market for both producers and consumers, agreed that member countries should continue to closely monitor developments in the coming months, leaving its production ceiling at 30.0 mbpd.

Any reduction in our crude oil production or export activities that could occur as a result of changes in OPEC’s production quotas or a decline in the prices of crude oil and refined petroleum products for a substantial period of time may materially and adversely affect our results of operations, cash flows and financial results.

We do not own any of the hydrocarbon reserves that we develop and operate.

Under Venezuelan law, the hydrocarbon reserves that we develop and operate belong to Venezuela. The rights to exploration of these hydrocarbon reserves are reserved for Venezuela. We were formed to coordinate, monitor and control operations related to Venezuela’s hydrocarbon reserves.

While the Venezuelan Constitution requires that Venezuela retain exclusive ownership of us, it does not require the country to continue to conduct its hydrocarbon exploration and exploitation activities through us. If the Venezuelan government elects to conduct its hydrocarbon activities other than through us, our operations will be materially and adversely affected. We can offer no assurance that changes in Venezuelan law or the implementation of policies by the Venezuelan government will not affect our operations, cash flow and financial results.

We are controlled by the Venezuelan government, which ultimately determines our capital investment and other spending programs.

The Bolivarian Republic of Venezuela is our sole owner. Article 303 of the National Constitution provides that for “reasons of economic and political sovereignty and national strategy,” Venezuela shall retain all of our stock or any other entity to be incorporated to handle the petroleum industry. Furthermore, Article 29 of the Organic Hydrocarbons Law provides that state-owned oil companies, such as PDVSA, will be governed by the Organic Hydrocarbons Law and its regulations and, in particular, by the provisions issued by the National Executive through the Ministry of Petroleum (Ministerio del Poder Popular de Petróleo). The National Executive, through the Ministry of Petroleum, establishes national petroleum policies and also regulates and supervises our operations. The President of Venezuela appoints our president and the members of our Board of Directors by executive decree. Since November 2004, the Minister of Petroleum has also served as our president. However, the Bolivarian Republic of Venezuela is not legally liable for our obligations.

We have operated as an independent commercial entity since our formation; however, since hydrocarbons are vital to the economy and future development of Venezuela due to the fact that they are the primary revenue-generating resource of Venezuela, the revenues received from hydrocarbons activities, according to Article 5 of the Organic Hydrocarbons Law, are required to be used to finance health and education, to create funds for macroeconomic stabilization and to make productive investments, all in favor of the welfare of the Venezuelan people. Those social commitments may affect our ability to place additional funds in reserve for future uses and, indirectly, our commercial affairs. Given that we are controlled by the Venezuelan government, we cannot assure you that the Venezuelan government will not, in the future, impose further material commitments upon us or intervene in our commercial affairs in a manner that will adversely affect our operations, cash flow and financial results.

 

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The Bolivarian Republic of Venezuela, our sole owner, may have interests that conflict with ours.

The Bolivarian Republic of Venezuela is our sole owner and, through the Ministry of Petroleum, establishes national petroleum policies and also regulates and supervises our operations. Article 8 of the Organic Hydrocarbons Law, along with Articles 29 and 30, grants to the National Executive, acting through the Ministry of Petroleum, direct responsibility for the formulation, regulation, and follow-up of policies in the area of hydrocarbons. Additionally, the Organic Law on Public Administration and the Decree on Organization and Operation of the National Public Administration grant the Ministry of Petroleum the highest administration, direction, inspection and protection of the services, properties and income from revenue related to the energy sector, including PDVSA’s, in order to ensure compliance with the guidelines and policies adopted by the National Executive to serve the public and social interest. In circumstances involving a conflict of interest between Venezuela, as our sole owner, and the holders of the New Notes, Venezuela may exercise the rights arising from its ownership interest in a manner that would benefit Venezuela’s interests above our own interests, which may, in turn, have a negative effect on our financial condition and results of operations.

The Bolivarian Republic of Venezuela, as our sole owner, may cause us to pursue certain macroeconomic and social objectives that may adversely affect our results of operations and financial condition.

The Bolivarian Republic of Venezuela, as our sole owner, has pursued, and may pursue in the future, certain of its macroeconomic and social objectives through us. As a result, we may engage in activities that give preference to the objectives of the Venezuelan government rather than our economic and business objectives. We may make investments, incur costs and engage in sales on terms that affect our results of operations and financial condition. For instance, pursuant to the Venezuelan Constitution and the Organic Hydrocarbons Law, we are required to foster Venezuela’s socio-economic development and the welfare of its citizens. To that effect, the government requires us to make significant financial contributions to social programs, including transfers to FONDEN, as well as requiring us to fund specific projects. In 2014 and 2015, we made total contributions to FONDEN in the amounts of U.S.$974 million and U.S.$3,306 million, respectively. In addition, in the past the Venezuelan government required us to acquire several electricity generation and distribution companies, as well as certain food companies, all of which have been divested as of the date of this offering circular. The Venezuelan government has also nationalized and continues to nationalize other companies in Venezuela. We cannot assure you that the government of Venezuela will not require us to increase our financial contributions to social programs or to purchase other businesses. Any such actions could expose us to increased costs, litigation and contingent liabilities, which would have a material adverse effect on our financial condition and results of operations.

Our investment in capital expenditures has decreased in recent years and our business requires substantial capital expenditures, and if we do not maintain our production levels, our ability to service our debt may be impaired.

The exploration and development of hydrocarbon reserves, production, processing and refining and the maintenance of machinery and equipment require substantial capital investments. We must continue to invest capital to maintain or to increase the number of hydrocarbon reserves that we operate and the amount of crude oil that we produce and process. The capital levels required to increase hydrocarbon reserves and the amount of crude oil that we produce and process are described in our Business Plan. Our capital expenditures decreased to U.S.$18,106 million in 2015 from U.S.$25,051 million in 2014 and U.S.$23,530 million in 2013. We cannot assure you that we will maintain our production levels or generate sufficient cash flows or that we will have access to sufficient investments, loans or other financing alternatives to maintain and service our existing infrastructure in order to continue with our current production levels. Achieving our desired production levels, sufficient cash flows and sufficient investments will also depend on the successful completion of our Business Plan, which cannot be guaranteed.

We have embarked on an ambitious capital expenditure plan to expand and upgrade our existing production and refining capacity. If we are not able to adequately raise, deploy and invest the necessary capital to expand our existing refining and exploration infrastructure, our business may be materially and adversely affected.

 

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The expansion and development of our production and refining infrastructure requires substantial capital investment. Our Business Plan outlines the development of projects totaling U.S.$302 billion in Venezuela, the Caribbean, Latin America and Asia during their initial stages from 2014 through 2019. Such expenditures are subject to the availability of cash from our operations, obtaining financing on reasonable terms and the favorable pricing of crude oil and gas. The failure to raise sufficient funds on reasonable terms, if necessary, may require us to modify or significantly curtail our Business Plan. If we are unable to raise the necessary funds or adequately and efficiently deploy these resources in order to expand our refining, exploration, and development activities, our business, results of operations and cash flows may be adversely affected.

We are subject to production, equipment, transportation and other risks that are common to oil and gas companies.

As an integrated oil and gas company, we are exposed to production, equipment transportation risks and other risks that are common to oil and gas companies, including fluctuations in production volume due to changes in reserve levels, weather conditions, production accidents, mechanical difficulties, business interruptions, adverse natural conditions or events such as a severe hurricane, tsunami or earthquake, unforeseen production costs, the condition of pipelines and vulnerability of other modes of transportation, the adequacy of our equipment and production facilities and employee and/or political conflicts.

Due to the increased level of activity in the oil and gas industry, we may experience a shortage of oil rigs and manpower, as well as increasing costs in material and services. If we are unable to contract the necessary equipment and services to develop our exploration and production projects or if the prices for such equipment and services continues to increase, our exploration and production costs will increase. Any such increase in exploration and production costs may affect our results of operations and financial condition.

These risks may lower our production levels, increase our production costs and expenses, or cause damage to our property or injury to our employees or others. We maintain insurance to cover certain losses and exposure to liability in order to protect our assets, operations and liability to third parties. Nonetheless, we cannot assure you that such coverage will be sufficient to cover all our losses given the potential increases in the value of assets or modifications in the maximum probable losses. These risks may adversely affect our operations and financial results.

Venezuelan proved crude oil and gas reserve estimates involve some degree of uncertainty and may prove to be incorrect over time, which could adversely affect our ability to generate income.

The proved crude oil and gas reserves set forth in this offering circular are our estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions (i.e., prices and costs as of the date the estimate is made). All reserves of oil and natural gas located within Venezuelan territory belong to the Bolivarian Republic of Venezuela and the amounts thereof are estimated by PDVSA and approved by the Ministry of Petroleum. The standards applied by the Ministry of Petroleum are recognized and used worldwide, making the declared results comparable to the ones of other countries. The oil located in the Orinoco Oil Belt has been certified by Ryder Scott Co. LP. Our proved oil and gas reserves have not been verified by any independent third party. Venezuelan proved developed crude oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. In the past, we revised our expected recovery factor for the Orinoco Oil Belt from 8% to 20%, based on existing economic and operating conditions, as well as on the availability of improved recovery technologies and broader information regarding reservoir performance parameters such as cumulative production, production rate, reservoir pressure and gas oil ratio behavior. The foregoing led the addition of 131,421 million barrels to our previously existing internally certified proved reserves over the past five years.

There are uncertainties in estimating quantities of proved reserves related to prevailing crude oil and natural gas prices applicable to our production, which may lead us to make revisions to our reserve estimates. Moreover, many of the factors, assumptions and variables involved in estimating proved reserves are beyond our control and are subject to change over time. Consequently, measures of reserves are not precise and are subject to revision. Downward revisions in our reserve estimates could lead to lower future production, which could affect our results of operations and financial condition.

 

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We are subject to numerous environmental and health regulations in the locations where we conduct operations, particularly in the United States and Venezuela, that may become more stringent and result in increased liabilities and increased capital expenditures.

Our activities are subject to a wide variety of national and local laws, regulations, and permit requirements relating to the protection of human health and the environment. Certain environmental laws require us to incur significant costs to cover damage that a project may cause to the environment. These costs may have a negative impact on the profitability of the projects we intend to implement or may make such projects economically unfeasible. In addition, some of our activities are in areas under special protection regimes with very restricted land uses. If the legal and regulatory framework is revised to become more rigorous, we will likely be required to substantially increase the capital expenditures for compliance with our revised legal and regulatory framework to effectively undertake the necessary improvements to comply with the health, safety, and sustainable environmental practices in the future. Any such increased expenditure may affect our results of operations and financial condition.

We are subject to numerous laws, regulations and government mandates in Venezuela that may change in the future and adversely affect our operating results and financial condition.

In addition to laws, regulations and permit requirements relating to the protection of human health and the environment, our business and activities are subject to numerous other federal, state and local laws, regulations and government mandates relating to various matters such as taxes, production tax payments, social contributions, foreign exchange and capital controls, price controls on the sales of our products, and development and operation of fields and hydrocarbon reserves owned by Venezuela. For example, in the past few years, the Venezuelan government has made numerous amendments to foreign exchange rates for the sale and purchase of foreign currency, which have had significant impact on our results of operations. Similarly, the government has established laws regulating required production tax contributions, dividends and tax revenues that have been modified several times. We have no control over and cannot predict what measures the government will take in the future or which policies it will implement, and these laws and regulations could change at any time depending on the government’s needs or policies. Any substantial change in the regulations applicable to us may have a material adverse effect on our results of operations and financial condition. Likewise, uncertainty over whether the Venezuelan government will implement changes in policy or regulation in the future may contribute to economic uncertainty and heightened volatility in the financial markets, which may have a material and adverse effect on our business, results of operations and financial condition. In addition, the government may require that we increase our social contribution payments, or it may require us to divert a portion of our crude oil production to electricity companies in Venezuela, which would, in both cases, materially adversely affect our results of operations, cash flows and financial condition.

We could become subject to laws and regulations affecting our ability to conduct business in certain jurisdictions, such as the United States.

On May 24, 2011, the U.S. Department of State announced the imposition of sanctions on seven companies, including PDVSA, under the Iran Sanctions Act of 1996, as amended by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010. The sanctions imposed on PDVSA prohibited the company from competing for U.S. government procurement contracts, securing financing from the Export-Import Bank of the United States, and obtaining U.S. export licenses for goods and technology requiring a specific license or any other formal written authorization from the U.S. government for exportation or re-exportation to Venezuela. The U.S. State Department’s May 24, 2011 press release stated that “these sanctions do not apply to PDVSA’s subsidiaries and do not prohibit the export of crude oil to the United States,” and this was further confirmed by the formal notice by the State Department published in the Federal Register on September 14, 2011 (76 Fed. Reg. 178 at 56866). The sanctions imposed on PDVSA under the Iran Sanctions Act, as amended by the Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010, were lifted on January 16, 2016, as a result of the Joint Comprehensive Plan of Action (JCPOA) with Iran.

In December 2015, a case was brought against certain third-party (unaffiliated to PDVSA) contractors and suppliers to PDVSA affiliates in the United States District Court for the Southern District of Texas for the violation

 

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of anti-corruption and anti-money laundering laws, among other charges, in connection with international supply contracts and service contracts with a PDVSA affiliate during the period between 2009 and 2014. Certain former employees of a PDVSA affiliate were also charged in connection with these violations, and have since pled guilty along with the suppliers.

We may incur losses arising from our pending arbitrations and litigation.

We are currently a party to certain arbitrations and numerous legal proceedings relating to civil, administrative, environmental, labor and tax claims filed against us. These claims involve substantial amounts of money and other remedies. Several individual disputes account for a significant part of the total amount of claims against us. While we believe that we have provisioned such risks appropriately based on the opinions and advice of our external legal advisors and in accordance with applicable accounting rules, in the event that claims involving a material amount and for which we have no provisions were to be decided against us, or in the event that the losses estimated turn out to be significantly higher than the provisions made, the aggregate cost of unfavorable decisions could have a material adverse effect on our financial condition and results of operations.

Risk Factors Relating to CITGO Holding

Please refer to “Appendix A—CITGO Holding, Inc. Report for the Fiscal Year Ended December 31, 2015,” page A-15 for certain risk factors in connection with CITGO Holding. You should consider the information contained under the section “Risk Factors” set forth therein before making a decision to tender your Existing Notes.

 

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TERMS OF THE EXCHANGE OFFERS

We are inviting owners of Existing Notes, also referred to as “holders,” to tender, on the terms and subject to the conditions of this offering circular, Existing Notes in exchange for New Notes. Each such tender for exchange is referred to as a “tender.” The terms of the New Notes are described under the heading “Description of the New Notes.

Purpose of the Exchange Offers

The purpose of the Exchange Offers is to extend the maturities of and refinance the Existing Notes, by repurchasing the Existing Notes in consideration for the issuance of New Notes.

For a description of certain restrictions on resale or transfer of the New Notes, see “Transfer Restrictions” in this offering circular.

Consideration

You may exchange your Existing Notes for New Notes in the amounts described below:

(i) for each U.S.$1,000 principal amount currently outstanding of Existing Notes validly tendered and accepted on or prior to the Early Tender Deadline (as defined below), we will deliver to you U.S.$1,000 of New Notes, and

(ii) for each U.S.$1,000 principal amount currently outstanding of Existing Notes validly tendered and accepted after the Early Tender Deadline but on or prior to the Expiration Date (as defined below), we will deliver to you U.S.$950 of New Notes.

The Issuer will not accept any tender that would result in the issuance of less than U.S.$150,000 principal amount of New Notes to a participating holder.

The principal amount of New Notes you will receive pursuant to the Exchange Offers will be rounded downwards to the nearest integral multiple of U.S.$1,000. No additional consideration will be paid in lieu of fractional New Notes not received as a result of such rounding down.

The determination by PDVSA of any calculation or quotation made with respect to the Exchange Offers will be conclusive and binding on you, absent manifest error.

Early Tender Deadline; Expiration Date

For purposes of the Exchange Offers, the term “Early Tender Deadline” means 5:00 P.M., New York City Time, on September 29, 2016, unless extended or terminated earlier by us at our sole discretion, in which case the Early Tender Deadline means the latest date and time to which the Early Tender Deadline is extended.

For purposes of the Exchange Offers, the term “Expiration Date” means 11:59 P.M., New York City Time, on October 14, 2016, unless extended or terminated earlier by us at our sole discretion, in which case the Expiration Date means the latest date and time to which the Exchange Offers are extended.

Representations, Warranties and Undertakings Relating to Tenders of Existing Notes

By validly tendering Existing Notes in the Exchange Offers, the holder and beneficial owner (as defined below) of those Existing Notes, and (if applicable) the relevant direct participant on such holder’s behalf, will acknowledge, represent and warrant to PDVSA, the Information Agent and the Exchange Agent, among other things, that:

 

    it has received and reviewed this offering circular in its entirety;

 

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    it has tendered the Existing Notes pursuant to the Exchange Offers for the purpose of their cancellation and accepts the Exchange Offers in respect of such Existing Notes, subject to the terms and conditions of the Exchange Offers as set forth in this offering circular;

 

    subject to and effective upon exchange by PDVSA of the Existing Notes tendered pursuant to the Exchange Offers, it irrevocably (subject to the withdrawal rights granted hereunder) and unconditionally sells, assigns and transfers to or upon the order of PDVSA or its nominee all right, title, interest in and to the Existing Notes tendered by it pursuant to the Exchange Offers, and such exchange will be deemed to constitute full performance by PDVSA of all of its obligations under such Existing Notes, such that thereafter it shall have, now or in the future, no contractual or other rights or claims in law or in equity with respect to its tendered Existing Notes against PDVSA or any of its affiliates, or any of their agents, officials, officers, employees or advisors;

 

    it irrevocably waives any and all rights with respect to its tendered Existing Notes against PDVSA and its affiliates, and any of their agents, officials, officers, employees or advisors, and discharges and releases any of the foregoing from any and all claims such holder may have, now or in the future, arising out of or related to the Existing Notes tendered, including, without limitation, any claims arising from any existing, past or continuing defaults and their consequences in respect of such Existing Notes (such as any claim that such holder is entitled to receive accrued interest or any other payment with respect to Existing Notes tendered, other than as expressly provided for in this offering circular);

 

    it irrevocably waives any and all rights with respect to the Exchange Offers against PDVSA (and its affiliates), the trustee for the New Notes, the trustee for the Exchanged Notes, the Principal Paying Agent, the Exchange Agent, the Information Agent, and any of their agents, officials, officers, employees or advisors, and discharges and releases any of the foregoing from any and all claims such holder may have, now or in the future, arising out of or related to the Exchange Offers, other than as expressly provided for in this offering circular;

 

    all authority conferred or agreed to be conferred pursuant to its representations, warranties and undertakings and all of its obligations shall be binding upon its successors, assigns, heirs, executors, trustees in bankruptcy and legal representatives and shall not be affected by, and shall survive, its death or incapacity;

 

    it is solely liable for any taxes and similar or related payments imposed on it under the laws of any applicable jurisdiction as a result of its participation in the Exchange Offers and agrees that it will not and does not have any right of recourse (whether by way of reimbursement, indemnity or otherwise) against PDVSA (or any of its affiliates), the Information Agent, the Exchange Agent, or any other person in respect of such taxes and payments;

 

    the submission of the Exchange Instructions to the applicable Designated Clearing System shall, subject to a holder’s ability to withdraw its tender prior to the Withdrawal Deadline, and subject to the terms and conditions of the Exchange Offers, constitute the irrevocable appointment of the Exchange Agent as its true and lawful agent and attorney-in-fact (with full knowledge that the Exchange Agent also acts as our agent) with respect to all Existing Notes tendered, with full power of substitution, to (a) present such Existing Notes and all evidences of transfer and authenticity to us, or upon our order, (b) present such Existing Notes for transfer or cancellation, as necessary, (c) receive all benefits and otherwise exercise all rights of beneficial ownership of such Existing Notes and (d) receive on behalf of such holder and beneficial owner the New Notes issued upon and in exchange for the cancellation of the Existing Notes;

 

    the submission of the Exchange Instructions to the applicable Designated Clearing System shall, subject to a holder’s ability to withdraw its tender prior to the Withdrawal Deadline, and subject to the terms and conditions of the Exchange Offers, constitute the irrevocable appointment of the Exchange Agent as its true and lawful agent and attorney-in-fact, with full power of substitution, and provides an irrevocable instruction to such attorney and agent to complete and execute all or any form(s) of transfer and other document(s) deemed necessary in the opinion of such attorney and agent in relation to Existing Notes tendered thereby in favor of PDVSA or such other person or persons as PDVSA may direct and to deliver such form(s) of transfer and other document(s) in the attorney’s and agent’s opinion and/or the certificate(s) and other document(s) of title relating to such Existing Notes’ registration and to execute all such other documents and to do all such other acts and things as may be in the opinion of such attorney or agent necessary or expedient for the purpose of, or in connection with, the acceptance and settlement of the Exchange Offers;

 

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    it is the beneficial owner (as defined below) of, or a duly authorized representative of one or more beneficial owners of, the Existing Notes tendered and has full power and authority to tender, sell, assign and transfer Existing Notes tendered by it;

 

    it is a person for whom it is lawful to participate in the Exchange Offers under applicable securities laws;

 

    it has good and marketable title to all Existing Notes being tendered by it, free and clear of all liens, charges, claims, encumbrances, interests, rights of third parties and restrictions of any kind;

 

    it will not sell, pledge, hypothecate or otherwise encumber or transfer any Existing Notes tendered from the date of tender and agrees that any purported sale, pledge, hypothecation or other encumbrance or transfer will be void and of no effect;

 

    it holds, and will hold, until the time of cancellation for the purpose of settlement, the Existing Notes it has tendered blocked in the Designated Clearing System through which such securities are held and, in accordance with the requirements of such Designated Clearing System and by the deadline established by such Designated Clearing System, has taken all steps necessary to authorize the blocking of its tendered Existing Notes with effect on and from the date its Exchange Instruction (as defined below under “Procedures for Participating in the Exchange Offers – Procedures for Tendering Existing Notes held through the Designated Clearing System”) is received, has authorized any transfers of the Existing Notes by the Designated Clearing System in furtherance of cancellation and settlement and, pending any such transfers relating to cancellation and settlement of such Existing Notes, it will not instruct or effect any transfers of such Existing Notes;

 

    its Existing Notes are not the subject of any proceedings against PDVSA (or any of its affiliates), or any of their agents, officials, officers, employees or advisors before any court or arbitral tribunal (including claims for payment of past due interest, principal or any other amount sought in connection with its tendered Existing Notes or for compensation of lawyers’ costs and court fees);

 

    in evaluating the Exchange Offers and in making its decision whether to participate therein by tendering its Existing Notes, it has made its own independent appraisal of the matters referred to herein and in any related communications and is not relying on any statement, representation or warranty, express or implied, made to such holder by PDVSA, the Exchange Agent, the Information Agent or any other person, other than those contained in this offering circular (as supplemented prior to the Expiration Date);

 

    the tendering of its Existing Notes pursuant to the Exchange Offers shall constitute an undertaking to execute any further documents, authorize any transfers of the Existing Notes relating to the cancellation and settlement of the Exchange Offers and give any further assurances that may be required in connection with any of the foregoing, in each case on and subject to the terms and conditions set out or referred to in this offering circular; and

 

    PDVSA, the Exchange Agent and other persons will rely upon the truth and accuracy of the foregoing acknowledgments, representations, warranties and agreements, and agrees that if any of the acknowledgements, representations, warranties and agreements deemed to have been made by it by its acquisition of the New Notes is no longer accurate, it will promptly notify PDVSA and withdraw its tender of Existing Notes.

The representations, warranties and agreements of a person tendering Existing Notes shall be deemed to be repeated and reconfirmed on and as of the Expiration Date and on and as of the Settlement Date.

For purposes of this offering circular, the “beneficial owner” of any Existing Notes shall mean any person or entity that exercises sole investment discretion with respect to such Existing Notes.

 

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Procedures for Participating in the Exchange Offers

Holders who need assistance with respect to the procedures for participating in the Exchange Offers should contact the Information Agent, the contact details for which are on the last page of this offering circular.

Summary of Action to be Taken

Holders may only participate in the Exchange Offers by way of submitting valid Exchange Instructions in accordance with the procedures set out in this section.

To participate in the Exchange Offers, a holder should deliver, or arrange to have delivered on its behalf, via the applicable Designated Clearing System, and in accordance with the requirements of such Designated Clearing System, a valid Exchange Instruction which must be received in each case by the Exchange Agent on or prior to the Expiration Date.

Holders who hold Existing Notes through the Depository Trust Company (“DTC”) should exchange notes through its Automated Tender Offer Program (“ATOP”). A holder with Existing Notes held through a custodian must contact that custodian if such holder desires to exchange those Existing Notes and promptly instruct such custodian to exchange such notes on its exchange deadline.

By tendering Existing Notes pursuant to the Exchange Offers, Holders will be deemed to have agreed that the delivery and surrender of the Existing Notes is not effective, and the risk of loss of the Existing Notes does not pass to the Exchange Agent, until receipt by the Exchange Agent of a properly transmitted Exchange Instruction, together with all accompanying evidences of authority and any other required documents in form satisfactory to PDVSA. All questions as to the form of all documents and the validity (including time of receipt) and acceptance of tenders and withdrawals of Existing Notes will be determined by PDVSA, in its sole discretion, which determination shall be final and binding.

Holders are advised to check with any bank, securities broker, custodian or other intermediary through which they hold Existing Notes, whether such intermediary would require to receive instructions to participate in, or withdraw their instruction to participate in the Exchange Offers, before the deadlines specified in this offering circular. The deadlines set by each Designated Clearing System for the submission or withdrawal of Exchange Instructions will be earlier than the relevant deadlines specified in this offering circular.

Procedures for Tendering Existing Notes

General

If your Existing Notes are held in the name of a custodian or other securities intermediary, such as a broker, dealer, bank, trust company or trustee, to participate in the Exchange Offers, you must contact such custodian or other securities intermediary and instruct it to tender your Existing Notes on your behalf. You should contact your custodian or other securities intermediary well in advance of the Early Tender Deadline or Expiration Date, as applicable, since your custodian may have earlier deadlines by which it must receive your instructions in order to have adequate time to submit your tender on time.

By submitting a valid Exchange Instruction in the Exchange Offers, the direct participant in the Designated Clearing System and the tendering holder on whose behalf it is acting, will be deemed to have made the representations and warranties set forth above under “–Representations, Warranties and Undertakings Relating to Tenders of Existing Notes” to PDVSA, the Information Agent and the Exchange Agent, and they will be deemed to have read and agreed to be bound by the terms and conditions of the Exchange Offers contained in this offering circular.

It is the responsibility of holders wishing to participate in the Exchange Offers to validly submit Exchange Instructions in respect of their Existing Notes. Only PDVSA has the right to waive any defects of such instructions submitted by holders. However, PDVSA is not required to waive such defects and is not required to notify a holder of defects in its Exchange Instructions.

 

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We believe all Existing Notes are held in book-entry form. If you hold Existing Notes in physical form, please contact the Exchange Agent specified on the back cover of this offering circular for assistance in tendering your Existing Notes.

There are no guaranteed delivery provisions provided for in conjunction with the Exchange Offers under the terms of this offering circular. Tendering holders must exchange their Existing Notes in accordance with the procedures set forth in this section.

The Designated Clearing Systems

We have designated DTC, Euroclear and Clearstream, Luxembourg as “Designated Clearing Systems” for purposes of the Exchange Offers.

Procedures for Tendering Existing Notes held through the Designated Clearing Systems

Any holder who holds Existing Notes through the Designated Clearing Systems must arrange for a person who is shown in the records of the any of the Designated Clearing Systems as a holder of the Existing Notes (each, a “Direct Participant”) to deliver the holder’s Exchange Instructions (as described below) to such Designated Clearing System prior to the Early Tender Deadline or the Expiration Date, as applicable. Only a Direct Participant in a Designated Clearing System may submit Exchange Instructions in respect of Existing Notes to such Designated Clearing System.

“Exchange Instructions” in relation to Existing Notes held through a Designated Clearing System and tendered by a holder or its agent pursuant to the Exchange Offers, comprise:

(a) irrevocable instructions to:

(i) block any attempt to transfer the holder’s Existing Notes on or prior to the Settlement Date;

(ii) debit the holder’s account on the Settlement Date in respect of all of the Existing Notes that such holder has tendered, or in respect of such lesser portion of such Existing Notes as are accepted for exchange by PDVSA, upon receipt of an instruction from the Exchange Agent; and

(iii) receive, in return for Existing Notes tendered and accepted for exchange pursuant to the Exchange Offers, New Notes as so specified in the relevant Exchange Instructions, which, in the case of holders that are QIBs, must be instructions to credit the New Notes to such holders’ account in the form of global notes, as such term is defined under “Description of the New Notes;”

subject in each case to the automatic withdrawal of the irrevocable instructions in the event that the Exchange Offers are terminated by PDVSA prior to the Expiration Date or the holder validly withdraws its election to participate in the Exchange Offers, as notified to the applicable Designated Clearing System by the Exchange Agent; and

(b) authorization to disclose the name of the Direct Participant and information about the foregoing instructions.

Exchange Instructions must result in an aggregate principal amount currently outstanding of Existing Notes of at least U.S.$150,000 and integral multiples of U.S.$1,000 in excess thereof, which are the minimum authorized denominations of the Existing Notes.

By participating in the Exchange Offers in this manner, holders will be deemed to have acknowledged that they have received this offering circular and agree to be bound by the terms of the Exchange Offers and that PDVSA may enforce the terms of the Exchange Offers against such holders.

 

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Exchange Instructions must be delivered and received by the applicable Designated Clearing System in accordance with the procedures, and on or prior to the deadlines, established by them. Holders are responsible for informing themselves of those deadlines and for arranging the due and timely delivery of Exchange Instructions to the applicable Designated Clearing System.

Book-Entry Delivery of the New Notes; Exchange though ATOP.

Promptly after the date of this offering circular, the Exchange Agent will establish one or more accounts with respect to the Existing Notes at DTC for purposes of the Exchange Offers. Any financial institution that is a participant in DTC may make book-entry exchanges of Existing Notes by causing DTC to transfer such Existing Notes into the appropriate account of the Exchange Agent in accordance with DTC’s procedure for such transfer. Although delivery of the Existing Notes may be effected through book-entry at DTC, an Exchange Instruction and any other required documents, must be transmitted to and received by the Exchange Agent at its address set forth on the back cover of this offering circular prior to the applicable Expiration Date in order for the holder of such Existing Notes to be eligible to receive the applicable Consideration. Delivery of such documents to DTC does not constitute delivery to the Exchange Agent.

Holders who are tendering Existing Notes by book-entry transfer to the Exchange Agent’s account(s) at DTC may execute their exchange through DTC’s ATOP system by transmitting their acceptance to DTC in accordance with DTC’s ATOP procedures: DTC will then verify the acceptance, execute a book-entry delivery to the Exchange Agent’s account(s) at DTC and send an Exchange Instruction to the Exchange Agent. Any acceptance of an Exchange Instruction transmitted through ATOP is at the election and risk of the person transmitting such Exchange Instruction and delivery will be deemed made only when actually received. No documents should be sent to PDVSA.

Determination of Validity

All questions as to the validity, form, eligibility (including time of receipt) and acceptance for exchange of any Exchange Instructions pursuant to any of the procedures described above, and the form and validity (including time of receipt of notices of withdrawal) of all documents in relation to the Exchange Offers, will be determined by PDVSA at its sole discretion, which determination will be final and binding.

PDVSA reserves the absolute right to:

 

(a) reject any and all Exchange Instructions or withdrawal instructions not in proper form, or not made in accordance with the terms of the Exchange Offers, or in respect of which, in the opinion of its legal advisers, the acceptance may be unlawful or in breach of applicable regulations;

 

(b) waive any defects, irregularities or delay in the submission of any and all Exchange Instructions or withdrawal instructions; and/or

 

(c) waive any such defects, irregularity or delay in respect of particular Existing Notes whether or not PDVSA elects to waive similar defects, irregularities or delay in respect of other Existing Notes.

Any defect, irregularity or delay must be cured within such time as PDVSA may determine, unless waived by it. Exchange Instructions will be deemed not to have been made until such defects, irregularities or delays have been cured or waived. None of PDVSA or the Exchange Agent shall be under any duty to give notice to any holder of any defects, irregularities or delays in any Exchange Instructions or withdrawal instructions nor shall any of them incur any liability for failure to give such notice. Holders must send all materials relating to their tenders through the Designated Clearing Systems to the Exchange Agent and not to PDVSA.

 

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Withdrawal of Exchange Instructions

Withdrawal Rights

The submission of a valid Exchange Instruction in accordance with the procedures set out in this offering circular may be withdrawn from any reason at any time prior to 5:00 P.M., New York City Time, September 29, 2016, unless extended or terminated earlier by us at our sole discretion (the “Withdrawal Deadline”). Such Exchange Instructions, however, will be irrevocable from the Withdrawal Deadline except in the limited circumstances described in this section and only in accordance with the withdrawal procedures set out below. We may, among other things, extend the Early Tender Deadline without extending the Withdrawal Deadline, unless required by applicable law.

If PDVSA amends the Exchange Offers in any way (including by way of publication of any supplement to the offering circular relating to the Exchange Offers), after the Withdrawal Deadline which, in PDVSA’s opinion, is materially prejudicial to the holders of Existing Notes (the “Affected Notes”) who have already submitted Exchange Instructions in respect of their Existing Notes in respect of the Exchange Offers before the announcement of such amendment (which announcement shall include a statement whether in PDVSA’s opinion such amendment is materially prejudicial to such holders), then, subject to applicable law, such Exchange Instructions in respect of the Affected Notes may be withdrawn at any time from the date and time of such announcement until 5.00 p.m., New York City Time, on the third Business Day (as defined below) following such announcement (subject to the earlier deadlines required by the Designated Clearing Systems and any Direct Participant or other intermediary through which the Existing Notes are held). An Exchange Instruction validly submitted in accordance with the procedures set forth in the section “– Procedures for Tendering Existing Notes” above is otherwise irrevocable after the Withdrawal Deadline.

For the avoidance of doubt, and without prejudice to the generality of the foregoing, any decision by PDVSA to extend the Exchange Offers, to defer the announcements of the results of the Exchange Offers, to defer the Settlement Date by up to five Business Days from the original date defined herein, to modify the exchange ratio for the calculation of the consideration payable to holders in respect of Existing Notes validly tendered under the Exchange Offers, or not to accept any or all Exchange Instructions in respect of the Existing Notes received by the Exchange Agent prior to the Expiration Date, shall not require us to extend the Withdrawal Deadline or entitle holders to withdraw any Exchange Instructions. See “Risk Factors—Risk Factors Relating to the New Notes, the Guaranty and the Collateral—The Exchange Offers described herein constitute separate and distinct Exchange Offers and any modifications to the terms of one Exchange Offer will not impact the terms of the other Exchange Offer. This may impact the level of participation in each Exchange Offer and your rights with respect to the Collateral securing the New Notes.”

Holders wishing to exercise any withdrawal right should do so in accordance with the procedures set out below. Beneficial owners of Existing Notes that are held through an intermediary are advised to check with such entity when it would require to receive instructions to withdraw an Exchange Instruction submitted in respect of the Exchange Offers in order to meet the Withdrawal Deadline. For the avoidance of doubt, any holder who does not exercise any such withdrawal right in the circumstances and in the manner specified above and as set out in “–Withdrawal Procedures” below, shall be deemed to have waived such withdrawal right and its original Exchange Instruction will remain effective.

Withdrawal Procedures

Holders wishing to exercise any such withdrawal right should do so by submitting an electronic withdrawal notice in accordance with the procedures of the relevant Designated Clearing System. Beneficial owners of Existing Notes that are held through an intermediary are advised to check with such entity when it would require to receive instructions to withdraw an Exchange Instruction in order to meet the Withdrawal Deadline. For the avoidance of doubt, any holder who does not exercise any such withdrawal right in the circumstances and in the manner specified above, shall be deemed to have waived such withdrawal right and its original Exchange Instruction will remain effective.

If a holder has validly withdrawn an Exchange Instruction submitted to a Designated Clearing System in accordance with the procedures set out in this section, it will have the right to submit another Exchange Instruction in respect of the Existing Notes to which such original Exchange Instruction relates prior to the Expiration Date in accordance with the procedures described in this offering circular.

As used in this section “Terms of the Exchange Offers,” the term “Business Day” means a day other than a Saturday, Sunday or any day on which banking institutions are authorized or required by law to close in the City of New York, New York, United States, the city of London, United Kingdom, or in Venezuela.

 

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Termination, Amendments and Extensions

At any time before PDVSA announces on the Announcement Date the acceptance of any tenders (in the manner specified below under “—Acceptance of Tenders”), PDVSA may, in its sole discretion and to the extent permitted by the applicable laws, rules and regulations of each jurisdiction in which the Exchange Offers are being made:

 

    terminate the Exchange Offers, including with respect to tenders submitted prior to the time of the termination;

 

    extend the Exchange Offers past the originally scheduled Expiration Date;

 

    withdraw the Exchange Offers from any one or more jurisdictions; or

 

    amend the Exchange Offers from time to time in any manner, including amendments in any one or more jurisdictions.

If the Exchange Offers are amended in a manner that we determine constitutes a material change, we will extend the Exchange Offers for a period of two to ten Business Days, depending upon the significance of the amendment and the manner of disclosure to the holders, if the Exchange Offers would otherwise have expired during that two- to ten-Business-Day period.

We will promptly announce any extension, amendment or termination of the Exchange Offers by issuing a press release. We will announce any extension of the expiration date no later than 9:00 A.M., New York City Time, on the first Business Day after the previously scheduled expiration date. We have no other obligation to publish, advertise or otherwise communicate any information about any extension, amendment or termination.

Any change in the consideration offered to holders of Existing Notes pursuant to the Exchange Offers will be paid to all holders whose Existing Notes have previously been tendered and not withdrawn pursuant to the Exchange Offers. There can be no assurance that PDVSA will exercise its right to extend, terminate or amend the Offer.

Conditions to the Exchange Offers

The consummation of the Exchange Offers are conditioned upon, among other things, the valid tender, without subsequent withdrawal, of at least 50% aggregate principal amount of the Existing Notes that are the target of the Exchange Offers. The Exchange Offers are also subject to certain conditions that we may assert or waive. These conditions include the condition that no event, act or circumstance (including, without limitation, any threatened, instituted or pending action or proceeding before any court or governmental, regulatory or administrative body) has occurred or may occur that, in PDVSA’s reasonable judgment, (a) makes or seeks to make illegal the exchange of Existing Notes for New Notes pursuant to the Exchange Offers; (b) would or might be expected to result in a delay in, or restrict, the ability of PDVSA to issue the New Notes in exchange for Existing Notes; (c) imposes or seeks to impose limitations on the ability of PDVSA to issue the New Notes in exchange for Existing Notes; or (d) impairs or might impair PDVSA from realizing the anticipated benefits of the Exchange Offers.

Each of the foregoing conditions is for the sole benefit of PDVSA and may be waived by PDVSA, in whole or in part, at any time and from time to time, in its discretion. Any determination by PDVSA concerning the conditions set forth above (including whether or not any such condition has been satisfied or waived) will be final and binding upon all parties. PDVSA does not intend to grant withdrawal rights in the event that it waives any condition.

 

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Acceptance of Tenders

PDVSA reserves the right not to accept tenders in its sole discretion, subject to applicable law.

If PDVSA elects to accept tenders of Existing Notes submitted pursuant to the Exchange Offers, it will, at or around 6:00 P.M., New York City Time, on the Business Day immediately after the Expiration Date (including any extensions thereunder), as soon as practicable thereafter (the “Announcement Date”), announce by press release, by delivery of notices to the Designated Clearing Systems for communication to Direct Participants, and through publication in the form and manner required in Venezuela and certain other jurisdictions outside the United States:

 

    the approximate aggregate principal amount of Existing Notes duly tendered and accepted by PDVSA for exchange and cancellation,

 

    the approximate aggregate principal amount of New Notes to be issued in the Exchange Offers upon cancellation of tendered Existing Notes,

 

    the Settlement Date (as defined below), and

 

    the dates correspond to the principal payment dates of the New Notes.

You may obtain such information by contacting the Information Agent. In addition, subject to applicable law, PDVSA will publish the results of the Exchange Offers as described below under “—Announcements.”

PDVSA may also publish information concerning tenders in certain jurisdictions prior to the Announcement Date, in the manner and to the extent required in those jurisdictions.

The Announcement Date may be postponed by PDVSA for any reason. Once PDVSA has announced the acceptance of exchanges on the Announcement Date as provided above, PDVSA’s acceptance will be irrevocable. Tenders, as so accepted, shall constitute binding obligations of the submitting holders and PDVSA to settle the exchange in the manner described under “—Settlement” below.

If PDVSA terminates the Exchange Offers without accepting any exchanges, all exchanges shall automatically be deemed rejected. If PDVSA terminates the Exchange Offers without accepting any exchanges, or does not accept your exchanges, it will instruct the Exchange Agent to instruct the Designated Clearing System through which such tenders were submitted to unblock such Existing Notes held in the direct participant’s account at such Designated Clearing System.

Announcements

All announcements relating to the Exchange Offers will be made by PDVSA (i) by the issue of a press release; (ii) by the delivery of notices to the Designated Clearing Systems for communication to Direct Participants; and (iii) and through publication in the form and manner required in Venezuela and certain other jurisdictions outside the United States. All announcements and amendments to the documents will also be made available via the information agent website: https://sites.dfkingltd.com/pdvsa. Significant delays may be experienced in respect of notices delivered to the Designated Clearing Systems and holders are urged to contact PDVSA or the Information Agent for the relevant announcements during the course of the Exchange Offers, the contact details for which are on the last page of this offering circular.

Settlement

The settlement of the Exchange Offers will take place on the date when PDVSA delivers the New Notes in exchange for the Existing Notes validly tendered and accepted for exchange pursuant to the Exchange Offers. It is expected that the Settlement Date will be as soon as practicable (upon satisfaction (or waiver by us at our sole discretion) of the conditions set forth herein) after the Expiration Date, but not, in any event, later than three business days after the Expiration Date (including any applicable Expiration Date following an extension of the

 

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Exchange Offers) (the “Settlement Date”). On the Settlement Date PDVSA will deposit the New Notes with the depositary that will hold the New Notes on behalf of DTC. It is expected that the New Notes will be credited to the accounts of tendering holders on or promptly after the Settlement Date.

In connection with the settlement, if PDVSA has accepted your tender, you, as the beneficial owner, must have delivered to PDVSA good and marketable title to your Existing Notes, free and clear of all liens, charges, claims, encumbrances, interests, rights of third parties and restrictions of any kind for purposes of cancellation of the Existing Note.

If PDVSA accepts your tender, the Exchange Agent will take any and all actions necessary or desirable to complete the transfer and cancellation of Existing Notes in consideration of the issuance of New Notes, including transferring your Existing Notes from your account to the account of the Exchange Agent.

The calculation or quotation made with respect to the Exchange Offers by PDVSA will be conclusive and binding on you, absent manifest error.

If any tendered Existing Notes are not accepted for any reason described in the terms and conditions of the Exchange Offers, such unaccepted Existing Notes will be returned without expense to the tendering holders as promptly as practicable after the expiration or termination of the Exchange Offers.

We will not be obligated to deliver New Notes unless the Exchange Offers are consummated.

Certain Consequences to Holders of Existing Notes Not Tendering in the Exchange Offers

The following considerations, in addition to the other information described elsewhere in this offering circular, should be carefully considered by each holder of Existing Notes before deciding whether to tender Existing Notes pursuant to the Exchange Offers.

Limited Trading Market

All Existing Notes tendered and accepted pursuant to the Exchange Offers will be cancelled. Accordingly, the aggregate principal amount of Existing Notes may be reduced substantially if the Exchange Offers are consummated. This is likely to adversely affect the liquidity, market price and price volatility of any Existing Notes not tendered pursuant to the Exchange Offers. Existing Notes not exchanged pursuant to the Exchange Offers will remain outstanding.

Treatment of Existing Notes Not Tendered in the Exchange Offers

Existing Notes not tendered and exchanged in the Exchange Offers will remain outstanding. The terms and conditions governing the Existing Notes will remain unchanged. No amendment to the terms and conditions of the Existing Notes is being sought. From time to time in the future, we or our subsidiaries may acquire Existing Notes that are not tendered in the Exchange Offers through privately negotiated transactions, tender offers or otherwise, upon such terms and at such prices as we or they may determine, which may be more or less than the price to be paid pursuant to the Exchange Offers and could be for cash or other consideration. There can be no assurance as to which, if any, of these alternatives (or combination thereof) we or our subsidiaries will choose to pursue in the future.

Governing Law and Jurisdiction

Each Exchange Instruction submitted in a jurisdiction in which the Exchange Offers are being extended on the basis of this offering circular will be governed by and construed in accordance with the laws of the State of New York. By submitting an Exchange Instruction, you (and the Direct Participant on your behalf) irrevocably and unconditionally agree for the benefit of PDVSA, the Information Agent and the Exchange Agent that the New York

 

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state or U.S. federal courts sitting in the Borough of Manhattan, City of New York, are to have jurisdiction to settle any disputes which may arise out of or in connection with the Exchange Offers or any of the documents referred to in this offering circular and that, accordingly, any suit, action or proceedings arising out of or in connection with the foregoing may be brought in such courts.

No Recommendation

None of PDVSA, the Trustee the Information Agent, the Exchange Agent or any Designated Clearing System expresses any opinion regarding:

 

    the fairness of the terms of the Exchange Offers;

 

    the accuracy or fairness of the values that result from the methodology for calculations and the setting of other parameters of the Exchange Offers; or

 

    whether you should participate in the Exchange Offers by tendering your Existing Notes or refrain from doing so.

In addition, no one has been authorized by PDVSA to make any recommendation of any kind regarding your participation in the Exchange Offers or regarding any term, or the fairness or value of any aspect of the Exchange Offers.

Repurchases of Existing Notes that Remain Outstanding; Subsequent Exchange Offers

PDVSA reserves the right, in its absolute discretion, to purchase, exchange, offer to purchase or exchange, or enter into a settlement in respect of any Existing Notes that are not exchanged pursuant to the Exchange Offers (in accordance with their respective terms) and, to the extent permitted by applicable law, purchase or offer to purchase Existing Notes in privately negotiated transactions, tender offers or otherwise. Any such purchase, exchange, offer to purchase or exchange or settlement will be made in accordance with applicable law. The terms of any such purchases, exchanges, offers or settlements could differ from the terms of the Exchange Offers.

Effect of Tender

Any tender by a holder, and our subsequent acceptance of that tender, of Existing Notes will constitute a binding agreement between that holder and us upon the terms and subject to the conditions of the Exchange Offers described in this offering circular. The participation in the Exchange Offers by a tendering holder of Existing Notes will constitute an express acknowledgement of the representations and warranties set forth under “Representations, Warranties and Undertakings Relating to Tenders of Existing Notes” above.

Absence of Dissenters’ Rights

Holders of the Existing Notes do not have any appraisal or dissenters’ rights in connection with the Exchange Offers.

Financial Advisor

Credit Suisse Securities (USA) LLC is acting as the financial advisor for the Exchange Offers. We will pay the financial advisor a fixed fee for its services and will reimburse its reasonable expenses. The financial advisor may hold Existing Notes for its own account and, in addition to its role and compensation as financial advisor, will be permitted to participate in the Exchange Offers on the same terms as are offered to other holders of Existing Notes by this offering circular.

 

43


Credit Suisse Securities (USA) LLC and its affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with PDVSA and its affiliates. They have received, or may in the future receive customary fees and commissions for these transactions. In addition, in the ordinary course of the business activities of Credit Suisse Securities (USA) or its affiliates, they may make or hold investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities may involve securities and/or instruments of PDVSA or its affiliates. Credit Suisse Securities (USA) or its affiliates may have a lending relationship with us and may hedge their credit exposure to us consistent with customary risk management policies. Typically, such arrangers and their affiliates would hedge such exposure by entering into transactions which consist of either the purchase of credit default swaps or the creation of short positions in securities of PDVSA and its affiliates. Any such credit default swaps or short positions could adversely affect future trading prices of the New Notes. Credit Suisse Securities (USA) LLC and its affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.

The financial advisor is not being engaged to and will not solicit any holders of Existing Notes in connection with the Exchange Offers. The financial advisor does not make any recommendation to holders of Existing Notes as to whether to exchange or refrain from exchanging their Existing Notes. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Loan Agreements.”

Other Fees and Expenses

We will bear the expenses of soliciting tenders of the Existing Notes. Tendering holders of Existing Notes will not be required to pay any brokerage fee or commission to us, the Exchange Agent or the Information Agent. If, however, a tendering holder handles the transaction through its broker, dealer, commercial bank, trust company or other institution, that holder may be required to pay brokerage fees or commissions. No commission or other remuneration will be paid or given, directly or indirectly, to any party in consideration for soliciting this exchange.

 

44


EXCHANGE AGENT AND INFORMATION AGENT

Exchange Agent

D.F. King & Co., Inc. has been appointed the exchange agent for the Exchange Offers (the “Exchange Agent”). All correspondence in connection with the Exchange Offers should be sent or delivered by each holder, or a holder’s nominee, to the Exchange Agent at the address and telephone numbers set forth on the back cover of this offering circular. PDVSA or its affiliates will pay the Exchange Agent reasonable compensation for its services and will reimburse it for certain reasonable expenses in connection therewith.

Information Agent

D.F. King & Co., Inc. has also been appointed as the information agent for the Offer (the “Information Agent”), and will receive reasonable compensation for its services. Questions concerning tender procedures and requests for additional copies of this offering circular should be directed to the information agent at the address, telephone numbers and website set forth on the back cover of this offering circular. Holders of Existing Notes may also contact their nominee for assistance concerning the Exchange Offers.

 

45


USE OF PROCEEDS

We will not receive any cash proceeds in connection with the Exchange Offers. The Existing Notes exchanged in the Exchange Offers will be retired or cancelled and will not be reissued.

 

46


CAPITALIZATION

The following table sets forth our capitalization, on a consolidated basis, as of December 31, 2015, (A) on an actual basis and (B) as adjusted to give effect to (i) the issuance of U.S.$3,550 million aggregate principal amount of the New Notes, and the cancellation of U.S.$3,550 million Existing Notes exchanged for New Notes (which assumes holders representing at least 50% of the aggregate principal amount of the Existing Notes participated in the exchange and would receive the Total Exchange Consideration and an exchange ratio of 1:1) and (ii) the incurrence of the following principal indebtedness since December 31, 2015:

 

  In February 2016, PDVSA entered into a revolving credit facility with Banco de Venezuela for a total amount of Bs. 20,000 million (equivalent to U.S.$126 million). The facility has an annual interest rate of 14% and matures in February 2017. In the same month, PDVSA issued in favor of Banco de Desarrollo Económico y Social de Venezuela (BANDES) a renewable investment certificate for a total of U.S.$100 million, with a maturity date of 30 days and a 6.00% interest rate to be paid at maturity. The investment certificate was subsequently renewed under the same conditions in July 2016.

 

  On March 23, 2016, PDVSA entered into a U.S.$300 million credit facility with Banco San Juan Internacional, Inc., comprised of a U.S.$70 million revolving loan facility with a 6.25% per annum interest rate, and a U.S.$230 million term loan facility with a 7.50% per annum interest rate. The maturity date for (i) each revolving loan is 18 months after the date of the relevant disbursement, and (ii) each term loan is 24 months after the date of the relevant disbursement.

 

  In May, June, July and September 2016, PDVSA entered into transactions to partially convert the outstanding commercial debt maintained by various PDVSA affiliates with certain commercial suppliers into financial debt. This conversion has been achieved by the execution of several note agreements which provide for (i) the assumption by PDVSA of a portion of its affiliates’ debt (evidenced in outstanding commercial invoices and contracts) with certain strategic suppliers; (ii) the novation of said commercial debt into a financial debt that cancels the former one; and (iii) the issuance of a three-year note (or several notes) regulated by a note agreement, with quarterly amortizations and an annual interest rate of 6.5%, to each of the participating strategic suppliers. The aforementioned conversions of commercial debt have been successfully executed with GE Capital EFS Financing, Inc., Cementaciones Petroleras Venezolanas, S.A., Petroalianza, C.A., Maritime Contractors de Venezuela, S.A., Weatherford Latin America, S.C.A., Servicios Halliburton de Venezuela, S.A., Environmental Solutions de Venezuela, C.A., Proambiente, S.A., Elecnor, S.A. and Servicios Picardi, C.A., for a total amount of U.S.$1,151 million.

 

  In July 2016, PDVSA issued in favor of Banco de Venezuela three renewable investment certificates for a total amount of Bs. 30,000 million (equivalent to U.S.$ 76 million) with a maturity date of three months and an annual 18% interest rate to be paid monthly. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Loan Agreements.”

This table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Use of Proceeds” and our annual audited consolidated financial statements and the notes to those statements included elsewhere in this offering circular.

 

     As of December 31, 2015  
     Actual      As Adjusted  
     (in millions of U.S. dollars)  

Debt and capital lease obligations:

     

New Notes offered hereby(1)

     —           3,550   

Other guaranteed notes and bonds(2)

     32,318         28,768   

Other facilities agreements(3)

     8,053         9,648   

Loans guaranteed by export credit agencies

     2,869         2,869   

Capital lease obligations

     476         476   
  

 

 

    

 

 

 

Total Debt(4)

     43,716         45,311   

 

47


     As of December 31, 2015  
     Actual      As Adjusted  
     (in millions of U.S. dollars)  

Non-controlling interests

     21,468         21,468   

Shareholder’s equity(5)

     69,411         69,411   
  

 

 

    

 

 

 

Total Capitalization

     134,595         136,190   
  

 

 

    

 

 

 

 

(1) Reflects the issuance of U.S.$3,550 million of New Notes without giving effect to OID. Assumes the exchange of 50% of Existing Notes for New Notes and an exchange ratio of 1 to 1.
(2) Reflects the exchange of 50% of Existing Notes for New Notes. Includes the Existing Notes and other secured and unsecured notes outstanding as of December 31, 2015. See “Management’s Discussion and Analysis and Results of Operations- Loan Agreements.”
(3) Includes U.S.$1,595 million consists of U.S.$126 million drawn by PDVSA from financing from Banco de Venezuela, a new investment certificate issued in favor of BANDES of U.S.$100 million, and Senior Guaranteed Notes issued for a total amount of U.S.$1,151 and three investment certificates issued in favor of Banco de Venezuela for a total amount of U.S.$76 million, and U.S.$142 million drawn by PDVSA from a credit facility with Banco San Juan Internacional, Inc. See “Management’s Discussion and Analysis and Results of Operations – Loan Agreements.”
(4) Total debt “Actual” does not include U.S.$1,559 million of debt incurred in 2016. See “Management’s Discussion and Analysis and Results of Operations – Loan Agreements.”
(5) Excludes non-controlling interests.

Except as disclosed above, there has been no material change to our capitalization since December 31, 2015.

 

48


SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table presents our selected consolidated financial and operating information as of the dates and for each of the periods indicated. This information is qualified in its entirety by reference to, and should be read together with, our annual audited consolidated financial statements, including the notes thereto, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section included elsewhere in this offering circular. Our selected consolidated statement of comprehensive income data for the years ended December 31, 2015, 2014 and 2013, the selected consolidated statement of financial position data as of December 31, 2015, 2014 and 2013 and the selected consolidated statement of cash flow data as of December 31, 2015, 2014 and 2013, have been derived from our annual audited consolidated financial statements and related notes thereto included elsewhere in this offering circular. Our selected consolidated statement of comprehensive income data for the years ended December 31, 2012 and 2011, the selected consolidated statement of financial position data as of December 31, 2012 and 2011, and the selected consolidated statement of cash flow data as of December 31, 2012 and 2011, have been derived from our annual audited consolidated financial statements and related notes thereto which have not been included in this offering circular. Our annual audited consolidated financial statements were prepared in conformity with International Financial Reporting Standards (IFRS) and audited in accordance with International Standards on Auditing.

On December 22, 2015, the shareholder of PDVSA, the Bolivarian Republic of Venezuela, approved a plan to transfer ownership of a portion of PDVSA’s non-oil subsidiaries directly to it at their book value which was U.S.$2,314 million as of December 31, 2015. According to the shareholders resolution, transfer is required to occur within a period of no more than one year following the meeting. The ownership transfer will transfer the subsidiaries outside of the PDVSA corporate structure, and is intended to enable PDVSA to focus on petroleum-related activities. The following affiliates constitute the segregated subsidiaries: PDVSA América, S.A.; PDVSA Industrial, S.A.; PDVSA Naval, S.A.; PDVSA Salud, S.A.; PDVSA Agrícola, S.A.; PDVSA Gas Comunal, S.A.; PDVSA Desarrollos Urbanos, S.A. and Empresa Nacional de Transporte, S.A.

As a result of the foregoing, PDVSA restated its 2013 and 2014 financial statements and has presented the financial results of the segregated subsidiaries as Discontinued Operations for 2015, 2014 and 2013.

Since PDVSA’s audited financial statements include only two comparative years, the 2014 and 2013 audited consolidated financial statements have been restated to reflect results from Discontinued Operations. Results for 2012 and 2011 have not been restated to reflect results from Discontinued Operations as required by IFRS, and remain as originally presented in the respective year.

For the years 2015, 2014 and 2013, the results from the discontinued operations are presented as line item “Discontinued Operations” and separately as a “Summary Consolidated Statement of Comprehensive Income Information from Discontinued Operations.”

 

     As of and for the years ended December 31,  
Summary consolidated statement of comprehensive income information    2015     2014(4)     2013(4)     2012(1)      2011(1)  
     (in millions of U.S. dollars)  

Continuing operations:

           

Sales of crude oil, products and others(2)

     55,339        101,552        110,719        124,459         124,754   

Finance income

     16,830        20,343        9,316        3,152         765   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total income

     72,169        121,895        120,035        127,611         125,519   

Costs and expenses:

           

Purchases of crude oil and products, net

     22,965        37,266        36,754        40,012         39,783   

Operating expenses

     16,828        27,400        23,733        22,974         14,511   

Exploration expenses

     50        76        140        492         163   

Depreciation and amortization

     8,995        8,038        8,096        7,105         6,871   

Selling, administrative and general expenses(5)

     [0     [0     [0     3,998         3,730   

Production tax, extraction tax and other taxes

     6,294        13,466        19,262        17,730         17,671   

 

49


     As of and for the years ended December 31,  
Summary consolidated statement of comprehensive income information    2015     2014(4)     2013(4)     2012(1)     2011(1)  
     (in millions of U.S. dollars)  

Finance costs

     2,393        4,065        2,880        3,401        3,649   

Share in equity accounted investees(6)

     [0     [0     [0     (64     278   

Other expenses, net

     3,986        9,946        4,239        3,013        3,501   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     61,511        100,257        95,104        98,661        90,157   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before contributions for social development and income tax

     10,658        21,638        24,931        28,950        35,362   

Social contributions(3)

     9,189        5,321        13,023        17,336        30,079   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit before income tax

     1,469        16,317        11,908        11,614        5,283   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax

     (3,717     5,106        7,186        7,279        2,007   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit from continuing operations

     5,186        11,211        4,722        4,335        3,276   

Discontinued operations:

          

Gain (loss) from discontinued operations, net of income tax(7)

     2,159        (2,137     11,113        —          1,353   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit

     7,345        9,074        15,835        4,335        4,629   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income:

          

Remeasurements of defined benefits, net of tax

     (4,998     1,390        (3,824     792        (269

Differences on translation of foreign currency

     241        2,001        896        22        87   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     2,588        12,465        12,907        5,149        4,447   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to:

          

Company’s stockholder

     6,504        7,386        14,254        2,798        2,773   

Non-controlling interests

     841        1,688        1,581        1,537        1,856   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit

     7,345        9,074        15,835        4,335        4,629   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income attributable to:

          

Company’s stockholder

     1,747        10,777        11,326        3,612        2,591   

Non-controlling interests

     841        1,688        1,581        1,537        1,856   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     2,588        12,465        12,907        5,149        4,447   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) For comparative purposes, our summary consolidated statements of comprehensive income information for the years ended December 31, 2012 and 2011 have been restated to reflect the application of IAS 19 enacted by the IASB, pursuant to which a series of changes to the methods used for the accounting of employee benefits, has been instituted.
(2) Sales of crude oil, products and others, includes exports and overseas, net in Venezuela and sales of food, services and others.
(3) Prior years were reflected as separate line items consisting of “contributions for social development” and “FONDEN.”
(4) Our summary consolidated statements of comprehensive income information for the years ended December 31, 2014 and 2013 have been restated to reflect the application of IFRS 5 in order to account for discontinued operations as of December 31, 2015.
(5) For presentation purposes, our summary consolidated statements of comprehensive income information for the years ended December 31, 2015, 2014 and 2013, have been reclassified as follows: amounts previously reflected in the “Selling, administrative and general expenses” line item (in the amounts of U.S.$1,712 million, U.S.$9,211 million and U.S.$4,217 million, respectively) have been incorporated into the “Operating expenses” line item.
(6) For presentation purposes, our summary consolidated statements of comprehensive income information for the years ended December 31, 2015, 2014 and 2013, have been reclassified as follows: amounts previously reflected in the “Share in equity accounted investees” line item (in the amounts of U.S.$86 million, U.S.$94 million and U.S.$33 million, respectively) have been incorporated into the “Other expenses, net” line item.
(7) This amount corresponds to the discontinued operations of the year ended December 31, 2011. On October 15, 2010, PDVSA entered into a purchase agreement with Rosneft Holdings Limited S.A. (Rosneft Holdings) a subsidiary of Rosneft Oil Company OJSC (Rosneft), of U.S.$1,600 million for all the shares held in Ruhr Oël GMBH (ROG) and another amount determined by the values of accounts receivable and inventories of PDVSA Marketing International, S.A. (PMI Panamá) on the transaction date. On May 3, 2011, PDVSA completed the purchase process with Rosneft Holdings and, in accordance with the purchase agreement entered into on October, 2010 received U.S.$3,716 million recognizing a gain of U.S.$1,353 million, which is presented in the consolidated statement of comprehensive income for the year ended on December 31, 2011, under profit (loss) of discontinued operations, net of tax.

 

50


Summary consolidated statement of financial position information    As of and for the years ended December 31,  
     2015     2014     2013     2012(1)     2011(1)  
     (in millions of U.S. dollars)  

Assets

          

Property, plant and equipment, net

     127,033        141,248        129,831        115,905        98,221   

Other non-current assets

     20,371        30,020        33,330        27,419        26,938   

Restricted cash

     604        284        227        218        314   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current assets

     148,008        171,552        163,388        143,542        125,473   

Inventories

     9,676        11,764        12,963        11,606        10,116   

Notes and accounts receivable

     18,206        24,357        36,020        41,706        31,576   

Restricted cash

     326        1,292        1,327        2,112        1,714   

Prepaid expenses and other assets

     7,083        9,884        8,289        11,225        4,665   

Assets held for disposal(2)

     12,823        —          —          —          —     

Cash and cash equivalents

     5,821        7,911        9,133        8,233        8,610   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

     53,935        55,208        67,732        74,882        56,681   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

     201,943        226,760        231,120        218,424        182,154   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity attributable to:

          

Company’s Stockholder

     69,411        67,751        62,263        61,907        59,690   

Non-controlling interests

     21,468        22,006        22,223        10,579        9,939   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity

     90,879        89,757        84,486        72,486        69,629   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

          

Financial debt

     36,916        39,871        36,353        35,647        32,496   

Other non-current liabilities

     21,456        41,406        45,055        39,231        32,996   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total non-current liabilities

     58,372        81,277        81,408        74,878        65,492   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial debt

     6,800        5,865        7,031        4,379        2,396   

Trade accounts payable

     19,052        20,855        21,404        16,747        12,376   

Income tax payable

     3,444        9,554        10,116        2,267        4,452   

Liabilities related to assets held for disposal(2)

     4,390        —          —          —          —     

Other current liabilities

     19,006        29,006        26,675        47,667        27,809   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

     52,692        55,726        65,226        71,060        47,033   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

     111,064        137,003        146,634        145,938        112,525   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total equity and liabilities

     201,943        226,760        231,120        218,424        182,154   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Debt to Equity Ratio(3)

          

Total debt including capital lease

     43,716        45,736        43,384        40,026        34,892   

Debt / Equity (%)

     48     51     51     55     50

 

(1) The summary consolidated statements of financial position information as of December 31, 2012 and 2011 have been restated to reflect the application of IAS 19 enacted by the IASB, pursuant to which a series of changes to the methods used for the accounting of employee benefits has been instituted. See note 3(f) to the annual audited consolidated financial statements.
(2) Accounts for discontinued operations as of December 31, 2015. See “Presentation of Financial Information—Discontinued Operations.
(3) Calculated as total financial debt and capital leases, including current portion, divided by stockholder’s equity.

 

     As of and for the years ended December 31,  
     2015     2014(2)     2013(2)     2012(1)     2011(1)  
     (in millions of U.S. dollars)  
Summary consolidated statement of cash flow information                               

Net cash provided by operating activities

     15,183        14,292        21,903        21,543        12,392   

Net cash used in investment activities

     (17,355     (24,448     (22,381     (25,221     (13,728

Net cash provided from financing activities

     467        10,812        1,533        3,301        3,929   

 

(1) The summary consolidated statements of cash flow information as of December 31, 2012 and 2011 have been restated to reflect the application of IAS 19 enacted by the IASB, pursuant to which a series of changes to the methods used for the accounting of employee benefits has been instituted. See note 3(f) to the annual audited consolidated financial statements.
(2) Our summary consolidated statements of comprehensive income information for the years ended December 31, 2014 and 2013 have been restated to reflect the application of IFRS 5 in order to account for discontinued operations as of December 31, 2015.

 

51


     As of and for the years ended December 31,  
     2015      2014      2013      2012      2011  
     (in millions of U.S. dollars)  

Venezuela’s proved reserves (mmbls)(1)

              

Crude Oil

     300,878         299,953         298,353         297,735         297,571   

Natural gas in boe(2)

     34,715         34,201         33,981         33,864         33,661   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Hydrocarbons in boe

     335,593         334,154         332,334         331,599         331,232   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Venezuela’s Production (mbpd)

              

PDVSA’s Crude Oil Production

     2,746         2,785         2,899         2,910         2,991   

Total crude oil

     2,746         2,785         2,899         2,910         2,991   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PDVSA’s production (mbpd)

              

Crude Oil(1)

     2,746         2,785         2,899         2,910         2,991   

Natural gas liquids

     117         114         116         124         138   

Natural gas in boe(2)

     913         831         796         768         731   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Hydrocarbons in boe

     3,776         3,730         3,811         3,802         3,860   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average production cost ($/boe)

              

Including operating service agreements (3)

     10.68         18.05         11.40         11.09         7.53   

Excluding operating service agreements (3)

     3.93         15.10         10.63         10.86         7.23   

PDVSA’s refining capacity (mbpd)(4)

              

Venezuela

     1,303         1,303         1,303         1,303         1,303   

Caribbean

     401         401         401         401         401   

United States

     1,074         1,089         1,089         1,089         1,089   

Europe

     29         29         29         29         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total refining capacity

     2,807         2,822         2,822         2,822         2,822   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Sales volume exported (mbpd)

              

Crude oil

     1,950         1,895         1,935         2,060         1,917   

Refined products

     475         460         490         508         552   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total exports

     2,425         2,357         2,425         2,568         2,469   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average sales export price ($/bl)

              

Crude oil

     44.65         88.42         98.21         100.75         98.67   

Refined products

     36.25         90.47         97.49         104.43         105.11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total exports

     39.98         85.75         99.08         103.42         100.11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Proved reserves include both proved developed and undeveloped reserves, as well as our equity participation in former operating agreements with third parties in connection with the Orinoco Oil Belt projects.
(2) Gas production is net of gas used for reinjection purposes. Gas is converted to boe at a rate of 5.8 thousand cubic feet of natural gas per barrel of crude oil.
(3) Calculated by dividing total costs (excluding depreciation, depletion and production tax payments) and expenses of crude oil, gas and NGL producing activities by total crude oil, NGL and net gas (boe) produced.
(4) Amounts represent our interest in the refining capacity of all refineries in which we hold equity or leasehold interest.

 

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Summary Consolidated Statement of Comprehensive Income Information from Discontinued Operations

 

     As of and for the years ended
December 31,
 
Summary consolidated statement of comprehensive income information    2015      2014(1)      2013(1)  
     (in millions of U.S. dollars)  

Discontinued operations:

        

    

        
  

 

 

    

 

 

    

 

 

 

Total income

     3,845         6,544         14,291   

Costs and expenses

     1,307         7,896         2,519   

Results from operational activities

     2,538         (1,352      11,772   

Income tax

     379         785         659   
  

 

 

    

 

 

    

 

 

 

Gain (loss) from discontinued operations, net of income tax

     2,159         (2,137      11,113   

 

(1) Our summary consolidated statements of comprehensive income information for the years ended December 31, 2014 and 2013 have been restated to reflect the application of IFRS 5 in order to account for discontinued operations as of December 31, 2015.

Summary Consolidated Statement of Cash Flow Information from Discontinued Operations

 

     Years ended December 31,  
     2015      2014(1)      2013(1)  
     (in millions of U.S. dollars)  

Summary consolidated statement of cash flow information

        

Discontinued operations:

        

Net cash provided by operating activities

     1,971         3,703         (412

Net cash used in investment activities

     (1,370      (3,312      (756

Net cash provided from financing activities

     (146      (51      137   

Cashflows of cash resulting from (used in) discontinued operations

     455         340         (1,031

 

(1) Our summary consolidated statements of comprehensive income information for the years ended December 31, 2014 and 2013 have been restated to reflect the application of IFRS 5 in order to account for discontinued operations as of December 31, 2015.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our annual audited consolidated financial statements including the notes thereto, contained elsewhere in this offering circular. This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in “Risk Factors” and other matters set forth in this offering circular. For a description of our critical accounting policies, please see note 4 of our annual audited consolidated financial statements.

Overview

We are a corporation (sociedad anónima) organized under the laws of Venezuela, formed in 1975 by the Venezuelan government to coordinate, monitor and control all operations relating to hydrocarbons. We are wholly owned by Venezuela and are the holding company for a group of oil and gas companies. We are the fifth largest vertically integrated oil company in the world with daily crude oil production of 2,746 million barrels per day as of December 31, 2015, or mbpd, as measured by a combination of operational data, including volume of reserves, production, refining and sales, based on information published in Petroleum Intelligence Weekly on November 16, 2015, a trade publication. We carry out our exploration, development and production (“upstream”) operations in Venezuela and our sales, marketing, refining, transportation, infrastructure, storage and shipping (“downstream”) operations in Venezuela, the Caribbean, North America, South America, Europe and Asia. Through PDV Holding, a wholly-owned subsidiary, we indirectly own 100% of CITGO, a refiner and marketer of transportation fuels, petrochemicals and other industrial oil-based products in the United States. We plan to invest in upstream and downstream projects in Venezuela and abroad in order to satisfy the current and expected global increase in energy demands.

Factors Affecting Operating Results

Our operating results are a function of oil and gas prices, the volumes and the mix of crude oil and gas and refined petroleum products supplied to customers, refinery margins, utilization rates of refining capacity and operational costs.

Contributions for Social Development

Pursuant to the Venezuelan Constitution, the Organic Hydrocarbons Law and social policy, we are required to foster Venezuela’s socio-economic development and the welfare of its citizens. To that effect, we make and are expected to continue to make significant financial contributions to social programs, including transfers to FONDEN (Fondo de Desarrollo Nacional) and other programs, which are included in our annual budget together with other expenses aimed to fund specific social projects, as determined by our Board of Directors, certain of which are recorded as part of our capital expenditures in accordance with applicable accounting rules.

FONDEN is a special fund that was created by the government of Venezuela in 2005 as a corporation (sociedad anónima) to finance and manage investment projects, public education, health care and other welfare projects in Venezuela, in order to promote the economic and social development of the country.

We contribute funds to FONDEN through mandatory transfers required under the Decreto con Rango, Valor y Fuerza de Ley que Crea Contribución Especial por Precios Extraordinarios y Precios Exorbitantes en el Mercado Internacional de Hidrocarburos (Law Decree on the Creation of Special Contribution on Excess Prices and Exorbitant Prices in the International Hydrocarbons Markets) as amended on February 20, 2013, published in the Official Gazette No. 40,114 dated as of February 20, 2013, pursuant to which any time the oil basket prices are higher than the price established in the National Budget Law of the respective fiscal year, a tax is assessed based on the formula described below.

Pursuant to the law decree, in any month in which the average Venezuelan oil basket price exceeds the budgeted price per barrel, but is equal to or less than U.S.$80 per barrel, oil and oil derivatives exporters (including us) must pay a tax on exports calculated by multiplying the number of barrels they export in such month by 20% of

 

54


the amount of the average Venezuelan oil basket price for such month that is greater than the budgeted price per barrel and equal to or less than U.S.$80. In any month in which the average Venezuelan oil basket price is greater than U.S.$80 and less than U.S.$100 per barrel, the tax is assessed at the amount specified in the previous sentence for the first U.S.$80 and at 80% of the total amount of the difference between U.S.$80 and the average price. In any month in which the average Venezuelan oil basket price is equal to or greater than U.S.$100 and less than U.S.$110 per barrel, the tax is assessed at the amount specified in the preceding sentences for the first U.S.$100 and at 90% of the amount in the excess of U.S.$100. Finally, in any month in which the average Venezuelan oil basket price is equal to or greater than U.S.$100, the tax is assessed as specified in the preceding sentences for the first U.S.$110 and at 95% of the excess of the average Venezuelan oil basket price over U.S.$110. The contributions received from this tax are paid directly to FONDEN in U.S. dollars on a monthly basis to carry out social development and infrastructure projects.

Historically, our social development contributions, whether made through financial contributions to FONDEN or to other social programs directly funded by us, have been calculated based on our revenues in U.S. dollars. PDVSA, through its annual budget, determines the social contributions to be made by PDVSA during the course of the year. However, PDVSA sends monthly reports to the Venezuelan government for the approval of such disbursements for social contributions, and the Venezuelan government may approve or request a change in the levels of such contributions. In the past, there has always been a margin between our revenues and social development contributions. Between 2011 and 2015, the average social contributions represented 14% of our revenues. We contributed a total of U.S.$30,079 million in 2011, a total of U.S.$17,336 million in 2012, a total of U.S.$13,023 million in 2013, a total of U.S.$5,321 million in 2014, and a total of U.S.$9,189 million in 2015 to social development, which are reflected as social development expenses in our consolidated statements of income included elsewhere in this offering circular. These contributions were made in addition to taxes and dividends we paid to Venezuela in such fiscal years, as well as the social projects we have funded, which are recorded as part of our capital expenditures because they relate to one of our oil and gas production projects.

Trends Affecting our Business

In our upstream operations, we are focused primarily on completing the quantification of our proved reserves of crude oil in the Orinoco Oil Belt, increasing the overall recovery factor of crude oil by improving existing technology, continuing the development of extra-heavy crude oil projects through new joint ventures with selected partners, and increasing the availability and industrialization of gas, particularly in our offshore reservoirs.

With respect to our downstream business, we are investing in upgrading our refining infrastructure in Venezuela, increasing refining capacity in new markets such as Latin America, the Caribbean and, particularly, in Asia. We comply with all environmental standards in these areas and in all areas in which we operate. As of December 31, 2015, PDVSA had invested U.S.$29.06 million in Venezuela towards the implementation of an environmental protection plan and various environmental projects, such as programs for monitoring the conservation of environmental and natural resources, measuring the quality of liquid effluents, and performing annual measurements of atmospheric emissions and air quality studies.

The refining business represents an important challenge over the next few years. The combination of reduced refining margins, particularly for deep conversion capacity refiners, stringent environmental requirements, and a depressed economy with a weak demand for refined products, have caused many businesses to cease operations. We have been reducing costs, delaying certain investment projects and reformulating debt structures with respect to some of our international subsidiaries to manage the effects of the depressed economy.

In Venezuela, we continue to supply the local market in order to satisfy an increasing demand. However, we are developing a project to convert an important portion of vehicles in Venezuela to natural gas consumption, which will enable us to export more gasoline. In addition, we are developing an important project in Venezuela to increase deep conversion capacity in the Puerto La Cruz Refinery.

With respect to our gas business, we are actively promoting private sector participation, in partnership with us, in the exploration, production and processing of non-associated offshore gas reserves.

 

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Impact of Production Quotas

Our consolidated financial results depend primarily on the volume of crude oil we produce and the price levels for hydrocarbons. The level of crude oil production and the capital expenditures needed to achieve such level of production have been among the principal factors determining our financial condition and results of operations since 1990 and are expected to remain the principal factors in determining our financial condition and results of operations for the foreseeable future.

Historically, members of OPEC have entered into agreements to reduce their production of crude oil. Such agreements have sometimes increased global crude oil prices by decreasing the global supply of crude oil. Venezuela is a party to and has complied with such agreements, and we expect that Venezuela will continue to comply with such production agreements with other OPEC members. Since 1998, OPEC’s production quotas have resulted in a worldwide decline in crude oil production and substantial increases in international crude oil prices.

Beginning with the 160th Meeting of the Conference of OPEC, convened on December 14, 2011 in Vienna, Austria, to the present, OPEC decided to maintain a production level of 30.0 mbpd, including production from Libya, and also agreed that OPEC member countries would, if necessary, take steps (including voluntary downward adjustments of output) to ensure market balance and reasonable price levels.

During 2015, the OPEC crude basket price decreased by U.S.$46.77 per barrel, or 49%, from U.S.$96.30 per barrel in 2014 to U.S.$49.53 per barrel in 2015. The average price of our exports, including refined products, decreased by U.S.$45.77 per barrel, or 53%, from U.S.$85.75 per barrel in 2014 to U.S.$39.98 per barrel in 2015.

The prices of crude were impacted by market volatility, as well as excess demand resulting from a lift of sanctions against Iran and the utilization of US producers of fracking techniques. Accordingly, OPEC, led by Venezuela, proposed the maintenance of the production quota, with the goal of stabilizing prices; however, OPEC modified production quotas.

Impact of Inflation and Devaluation

While more than 76% of our revenues from sales and a significant portion of our expenses are in U.S. dollars, some of our operating costs (including income, production and extraction taxes) are incurred in Bolívares. As a result, our financial condition and results of operations are affected by the Venezuelan inflation rate and the timing and magnitude of any change in the $/Bs. exchange rate during a given financial reporting period.

Since 1998, the Venezuelan government has used exchange rates to moderate inflation, by devaluing the Bolívar within a pre-determined range. Effective February 13, 2002, however, the Venezuelan government and the BCV adopted a floating exchange rate system, as opposed to the band system previously in effect. As a result of the adoption of a floating exchange rate system, the Bolívar devalued substantially against the U.S. dollar and inflation accelerated in 2002.

On February 5, 2003, the Venezuelan government established an exchange control regime, and fixed the exchange rates for the sale and purchase of non-Venezuelan currency at Bs. 1.6 to U.S.$1 and Bs. 1.596 to U.S.$1, respectively.

On February 7, 2004, a new foreign exchange rate for the sale and purchase of non-Venezuelan currency was established at Bs. 1.920 to U.S.$1 and Bs. 1.915 to U.S.$1, respectively. On March 1, 2005, a new foreign exchange rate for the sale and purchase of non-Venezuelan currency was established at Bs. 2.150 to U.S.$1 and Bs. 2.145 to U.S.$1, respectively. During 2006, the exchange rate remained unchanged at Bs. 2.150 to U.S.$1.

Pursuant to Foreign Exchange Agreement No. 9, which was amended on March 22, 2007 and on August 11, 2009, we may only sell to the Central Bank non-Venezuelan currency required to meet our operational costs in local currency and other obligations. We may maintain funds in non-Venezuelan currencies to cover our non-Venezuelan currency operational, investment and financing expenditures and other obligations, up to a maximum amount not to exceed at any time certain thresholds determined by the Central Bank. On March 2, 2006, the Central Bank authorized us to maintain, at any time, up to U.S.$2 billion in non-Venezuelan currency to cover

 

56


our non-Venezuelan currency operational, investment and financing expenditures, as well as other obligations. In addition, on February 8, 2007, the Central Bank authorized us to maintain, at any time, up to U.S.$3.5 billion in non-Venezuelan currency to cover expenditures related to our Business Plan. On March 6, 2015, the Central Bank renewed the authorization to maintain up to U.S.$3.5 billion in non-Venezuelan currency to cover our expenditures related to our Business Plan.

On January 8, 2010, the Venezuelan government, through the Ministry of Finance and the Central Bank, enacted Foreign Exchange Agreement No. 14, which established a dual exchange rate regime (Convenio Cambiario No. 14), and was in place throughout 2010. As of January 11, 2010, the dual exchange rate regime established an exchange rate of Bs. 2.60 to U.S.$1 for essential goods, including food, health, imports of machinery and equipment, science and technology, as well as all non-petroleum public sector transactions and other special cases. The exchange rate for all other transactions was set at Bs. 4.30 to U.S.$1. This dual exchange rate regime abrogated Foreign Exchange Agreement No. 2 from March 1, 2005, which established a single exchange rate for all transactions of Bs. 2.15 to U.S.$1.

Pursuant to Article 5 of Foreign Exchange Agreement No. 14, the exchange rate applicable to the sale of non-Venezuelan currency by PDVSA to the Central Bank to cover local currency expenditures was either Bs. 4.2893 to U.S.$1 or of Bs. 2.5935 to U.S.$1, depending on the Central Bank’s requirements to cover the sale of non-Venezuelan currency to third parties at the rates of Bs. 2.60 to U.S.$1 or Bs. 4.30 to U.S.$1 as provided by Foreign Exchange Agreement No. 14. In addition, Article 5 of Foreign Exchange Agreement No. 14 required that at least 30% of the non-Venezuelan currency sales to the Central Bank be at the rate of Bs. 2.5935 to U.S.$1.

On December 30, 2010, the Venezuelan government, through the Ministry of Finance and the Central Bank, enacted an amendment to Foreign Exchange Agreement No. 14 (Convenio Cambiario No. 14), effective as of January 1, 2011, which abrogated the multiple official exchange rates regime in effect since January 2010, establishing a single official fixed exchange rate. Pursuant to such amendment to the Foreign Exchange Agreement No. 14, the single official exchange rate was fixed, for all purposes, at Bs. 4.30/U.S.$1 for the sale of non-Venezuelan currency and at Bs. 4.2893/U.S.$1 for the purchase of non-Venezuelan currency.

On January 13, 2011, an amendment to Foreign Exchange Agreement No. 15 (Convenio Cambiario No. 15) was published (and amended on January 27, 2011), extending the application of the Bs. 2.60 /U.S.$1 exchange rate for the sale of non-Venezuelan currency in transactions involving non-Venezuelan currency (or AAD) issued by the Venezuelan Foreign Exchange Commission (Comisión de Administración de Divisas, or CADIVI) on or before December 31, 2010, provided that such transactions have not settled as of the date of the amendment. In addition, in order to qualify for the extended application of the Bs. 2.60/U.S.$1 exchange rate, the transactions involved must relate to imports into Venezuela of food and health products, payments of expenses of Venezuelan students studying abroad, the payment of expenses for health recovery, sports, culture and scientific investigations, payments to retired persons abroad and other cases as determined by CADIVI in its discretion.

On February 8, 2013, the Ministry of Finance and the Central Bank enacted an amendment of the Foreign Exchange Agreement No. 14 (Convenio Cambiario No. 14), effective as of February 9, 2013. Pursuant to this amendment, the official exchange rate was fixed at Bs. 6.30/U.S.$1 for the sale of foreign currency, and Bs. 6.2842/U.S.$1 for the purchase of foreign currency.

On December 30, 2013, the Ministry of Finance and the Central Bank enacted Foreign Exchange Agreement No. 24 (Convenio Cambiario No. 24), effective as of December 30, 2013. Pursuant to this Foreign Exchange Agreement, foreign currency originating from activities and transactions that differ from exports of hydrocarbons of PDVSA and its affiliates, joint ventures created under the Organic Hydrocarbons Law, and service companies that are part of the so-called Petroleum Industrial National Conglomerate (Conglomerado Nacional Industrial Petrolero) may be sold at an exchange rate based on the most recent foreign currency auction granted through the direct and indirect currency conversion mechanism, “Supplementary System for the Administration of Foreign Currency” (“SICAD”), as published by the BCV on its web page, less 0.25%. This Foreign Exchange Agreement No. 24 was abrogated on April 4, 2014 by Foreign Exchange Agreements No. 27 and No. 28.

On March 10, 2014, the Ministry of Finance and the Central Bank enacted Foreign Exchange Agreement No. 27 (Convenio Cambiario No. 27), effective as of March 10, 2014, published in Official Gazette No. 40,368

 

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dated March 10, 2014, which established SICAD II, a new system for currency exchange that operates in parallel to SICAD. This new system created a new legal variable exchange rate, and unlike SICAD, SICAD II operates via auctions that are held on a daily basis by the Central Bank and are open to the general public in Venezuela for the exchange of currency between U.S. dollars and Bolívares. Unlike SICAD, the proceeds from SICAD II transactions are not restricted to a specific list of uses, provided that SICAD II is not available for use by PDVSA directly. The SICAD II exchange rate may not be lower than the exchange rate established in Foreign Exchange Agreement No. 14 dated February 8, 2013, published in Official Gazette No. 40,108 dated February 8, 2013 (Bs. 6.30/U.S.$1 for the sale of foreign currency, and Bs. 6.2842/U.S.$1 for the purchase of foreign currency). The Central Bank publishes a reference exchange rate for SICAD II operations on a daily basis on its official website.

On April 3, 2014, the Ministry of Finance and the Central Bank enacted Foreign Exchange Agreement No. 28 (Convenio Cambiario No. 28), effective as of April 4, 2014. Pursuant to this Foreign Exchange Agreement, foreign currency originating from activities and transactions other than from sales and/or exports of hydrocarbons by PDVSA, its affiliates and joint ventures created under the Organic Hydrocarbons Law, may only be sold at an exchange rate based on the most recent foreign currency auction granted through SICAD II, as published by the BCV, less 0.25%. The sale of foreign currency originating from oil exports by PDVSA, its affiliates and joint ventures are made at the exchange rate of Bs. 6.2842/U.S.$1 set forth in Exchange Agreement No. 14. Additionally, pursuant to this Foreign Exchange Agreement, foreign currency originating from activities carried out by service companies that are part of the so-called Petroleum Industrial National Conglomerate (Conglomerado Nacional Industrial Petrolero) may only be sold at an exchange rate equivalent to the most recent last foreign currency auction granted through SICAD II, as published by the BCV. Both Foreign Exchange Agreement No. 27 and 28 abrogate and replace Foreign Exchange Agreement No. 24 enacted on December 30, 2013.

On February 10, 2015, the Ministry of Finance and the Central Bank enacted Foreign Exchange Agreement No. 33 (Convenio Cambiario No. 33), published in the Official Gazette No. 6,171 dated February 10, 2015. Through this Foreign Exchange Agreement No. 33, a new foreign exchange system was created, known as Sistema Marginal de Divisas (SIMADI). This system replaced SICAD II, which ceased its operations on February 12, 2015. SIMADI consists of a mechanism to buy and sell foreign currency at a rate set by market transactions where the general public and private and public entities can offer and buy foreign currency without such funds being limited to a specific use or purpose. Likewise, this system established two types of operations based on the amount to be offered or bought in the relevant transaction: (i) high value operations, where the minimum amount to be offered or bought was set at U.S.$3,000; and (ii) retail operations, where the minimum amount to be offered or bought is set at U.S.$300, as published in an Official Communication issued by the Central Bank, dated February 11, 2015. Under the regime of Foreign Exchange Agreement No. 33 there were three (3) official exchange rates: (i) the exchange rate of the CENCOEX of Bs. 6.30/U.S.$1; (ii) the exchange rate of SICAD I and (iii) the exchange rate of SIMADI.

On March 9, 2016, the Ministry of Finance and the Central Bank enacted Foreign Exchange Agreement No. 35 (Convenio Cambiario No. 35), effective as of March 10, 2016, published in Official Gazette No. 40,865 dated March 9, 2016, which established two exchange rates: (i) a protected exchange rate (known as “DIPRO”) fixed at 9.975 to buy and Bs. 10.00 to sell for products related to the food and pharmaceuticals sectors as well as other sectors specified in the Foreign Exchange Agreement and; (ii) the complementary floating exchange market rate (known as “DICOM”), which varies in accordance with market needs, for the remaining sectors.

The exchange transactions derived from the export and/or sale of hydrocarbons by PDVSA and its affiliates and joint ventures, as well as those derived from financing operations, financial instruments, capital contributions, asset sales, dividends, collection of debts, and provision of services can be made using any of the exchange rates described above, or any other rate; provided, that if any rate other than the exchange rates described above is to be used, such rate shall be reduced in one-quarter of a percent (0.25%) and must be authorized by the Vice-presidency of the Economic Sector, the Ministry for Bank and Finance and the Central Bank.

The Foreign Exchange Agreement No. 35 provides that the mechanisms for the exchange transactions provided in the partially abrogated Foreign Exchange Agreement No. 33 of February 10, 2015, published in the Extraordinary Official Gazette No. 6,171 dated February 10, 2015, shall continue to remain in force until such mechanisms are replaced pursuant to a subsequent Foreign Exchange Agreement. Therefore, the acquisition of foreign currency at the DICOM exchange rate shall continue to be executed through the SIMADI system, which consists of auctions that are held on a daily basis by the Central Bank and are open to the general public in Venezuela for the exchange of currency between U.S. dollars and Bolívares.

 

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The annual devaluation rate based upon the official exchange rate for 2014 and 2015 was 0% and 0%, respectively, and the inflation rate was 68.54% and 180.90% for 2014 and 2015, respectively. The following table presents the exchange and inflation rates at December 31 for the years ended 2011 through 2015:

 

     As of and for the year ended December 31,  
     2015      2014      2013      2012      2011  
     (in millions of U.S. dollars)  

Exchange rates at period-end derived from exchange agreement with the BCV (Bs./$1)

     6.30         6.30         6.30         4.30         4.30   

Exchange Rate in SICAD (Bs/$1)

     13.50         12.00         11.30         —           —     

Exchange Rate in SICAD II (Bs/$1)

     52.10         49.99         —           

Exchange Rate in SIMADI (Bs/$1)

     198.69               

NCPI(1) Increase (%)

     180.90         68.54         56.20         20.07         27.57   

 

(1) National Consumer Price Index

In 2014 and 2015, PDVSA conducted foreign exchange operations with the Central Bank through various exchange agreements. Based on these agreements, PDVSA modified its exchange rate contained in its audited consolidated financial statements for 2014 and 2015, and as a result, recognized an exchange gain of U.S.$17,656 million in 2014 and U.S.$15,039 million in 2015, due to the fact that on the dates of the modifications to the exchange rates established in such agreements PDVSA held a net passive monetary position in Bolívares. From January 1, 2016 through the date of this offering circular, PDVSA conducted foreign exchange operations with the Central Bank through various exchange agreements. As a result of these agreements, PDVSA utilizes a modified exchange rate and all 2016 amounts referenced in U.S. dollars in this offering circular, unless otherwise noted, reflect such modified exchange rate.

Functional and Presentation Currency

Our operations are conducted mainly in the international market for crude oil and refined petroleum products. Therefore, the U.S. dollar is our functional currency. See note 3 to our annual audited consolidated financial statements.

Presentation of Consolidated Results

Descriptions contained in the Results of Operations sections below, with the exception of the descriptions of “Profit” and “Results from Discontinued Operations,” do not include the results from Discontinued Operations.

Results of operations for the year ended December 31, 2015 compared to the year ended December 31, 2014

Production

All of our crude oil, liquid natural gas and gas production operations are located in Venezuela. Our production of crude oil averaged 2,746 mbpd in 2015, a 1% decrease from 2,785 mbpd in 2014, primarily because the efforts to increase the production of additional barrels were not sufficient to offset the rate of decline of mature reservoirs. Our production of liquid natural gas averaged 117 mbpd in 2015, as compared to 114 mbpd in 2014. This increase was primarily due to increased output as a result of the gas segregation projects in the North of Monagas, which increased the richness of the gas in the entrance of the gas processing plants in Santa Barbara. Our production of gas (net of amounts re-injected) was 5,296 mmcfd in 2015, a 10% increase as compared to 4,818 mmcfd in 2014. This increase is primarily due to the growth in the production of gas in the Eastern Executive Direction of Production due to the increase in the gas-oil ratio (GOR) in the wells at the Furrial Division and Punta de Mata.

The net output of refined petroleum products (including output representing our equity interest in refineries held by our affiliates in the United States and Europe) was 2,055 mbpd in 2015, as compared to 2,184 mbpd in 2014. This decrease was primarily the result of the exclusion of refined petroleum products originating from the Chalmette Refinery, as PDVSA’s share of this refinery was sold in 2015.

 

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Total Income

Total income decreased by U.S.$49,726 million, or 41%, to U.S.$72,169 million in 2015 from U.S.$121,895 million in 2014. This decrease was primarily due to a decrease in the average export price of the Venezuelan basket.

Exports of Crude Oil and Refined Products

Exports represented 85% of our sales volumes for the year ended December 31, 2015. Our exports increased in volume by 3% to 2,425 mbpd in 2015 from 2,357 mbpd in 2014. This increase was primarily due to an increase in the sale of crude oil outside of Venezuela as a result of reallocation of domestic sales. In addition, exports of refined petroleum products increased by 15 mbpd, or 3%, to 475 mbpd, from 2014 to 2015 due to a decrease in volume of refined petroleum products placed in the domestic market, which resulted in the increase of the volume to be exported. The average export price per barrel for Venezuelan crude oil, refined petroleum products and natural gas liquids was U.S.$44.65 in 2015, as compared to U.S.$88.42 in 2014, representing a 50% decrease.

Sales Revenues of International Subsidiaries

During 2015, our total sales of crude oil, refined petroleum products and natural gas liquids were 2,357 mbpd during 2014 as compared to 2,425 mbpd of total sales of such products for 2015. CITGO generates most of the sales in excess of our crude oil and natural gas liquids production because it purchases crude oil and refined petroleum products from third parties (including unconsolidated affiliates) to supply CITGO’s refining and marketing network in the United States. CITGO’s sales revenues decreased by U.S.$14.6 million, or 37%, to U.S.$24.6 million in 2015 from U.S.$39.2 million in 2014, due to a decrease in average sales price.

Domestic Sales

We sold 594 mbpd of refined petroleum products (including liquid natural gas) domestically in 2015, a 10% decrease as compared to 663 mbpd sold domestically in 2014. This decrease was mainly due to effect of the legislation and related measures passed to prevent the smuggling and extraction of fuel, which reduced sales in border cities. We also sold 239 mbpd of oil equivalent of gas in 2014 and 278 mbpd of oil equivalent of gas in 2015. Domestic sales decreased 10% from U.S.$663 million in 2014 to U.S.$594 million in 2015. This decrease was primarily due to exchange rates used in transactions pursuant to the exchange control regulations on the financial statements.

Sales of crude oil, products and others

Sales of crude oil, products and others decreased by 45.5%, from U.S.$101,552 million in 2014 to U.S.$55,339 million in 2015. The decrease was mainly due to the decline in the average price of the Venezuelan export basket.

Finance Income

Our finance income decreased by U.S.$3,513 million, or 17%, from U.S.$20,343 million in 2014 to U.S.$16,830 million in 2015. This decrease was principally due to the adjustment of the exchange rate.

Costs and Expenses

Purchases of Crude Oil and Refined Petroleum Products, Net of Inventory Variation

Our purchase of crude oil and refined petroleum products, net of inventory variation decreased by 38% to U.S.$22,965 million in 2015 from U.S.$37,266 million in 2014, despite an increase on a volume basis. This decrease was primarily due to the decline in oil prices.

 

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Operating Expenses

Our operating expenses decreased by U.S.$10,572 million, or 39%, to U.S.$16,828 million in 2015 from U.S.$27,400 million in 2014. This decrease was the result of a decrease in the sales and administration expenses and the adjustment of the exchange rate.

Exploration Expenses

Our total exploration expenses were U.S.$50 million in 2015, which was a decrease of U.S.$26 million, or 34%, as compared to U.S.$76 million in 2014. The decrease in exploration expenses is primarily attributable to the fluctuation in the average Bolívares/USD exchange rate applicable to exploration expenses.

Depreciation and Amortization

Depreciation and amortization increased by U.S.$957 million, or 12%, to U.S.$8,995 million in 2015 from U.S.$8,038 million in 2014. This increase was primarily a result of the capitalizations and increase of the regular operations of PDVSA’s and its affiliates’ oil business, mainly of PDVSA Gas.

Production Tax, Extraction Tax and Other Taxes

Production tax, extraction tax and other taxes decreased by U.S.$7,172 million, or 53%, to U.S.$6,294 million in 2015 from U.S.$13,466 million in 2014. This decrease is primarily due to a decrease in the average settlement price to U.S.$34 per barrel.

Finance Costs

Finance costs decreased by U.S.$1,672 million, or 41%, to U.S.$2,393 million in 2015 from U.S.$4,065 million in 2014. This decrease in financial expenses resulted primarily from the fluctuation in the average Bolívares/USD exchange rate, which impacted the Bolívar-denominated portions of financing costs.

Contributions for Social Development

Contributions for social development increased by U.S.$6,200 million, or 308%, to U.S.$8,215 million in 2015 from U.S.$2,015 million in 2014 mainly due to disbursements through Fondo Independencia, a fund funded by the differential gained by PDVSA as a result of the difference between the official exchange rate and the rate applicable to the production tax calculation. These disbursements were made, despite the fact that the oil barrel price was lower than the price required by law for such disbursement. In support of social projects carried out by the Bolivarian Republic of Venezuela, PDVSA contributed U.S.$4,010 million to the “Gran Misión Vivienda Venezuela,” created by the Bolivarian Republic of Venezuela in April 2011, in order to address housing needs in Venezuela. During 2013, 2014 and 2015, PDVSA did not provide contributions to this program.

For the year ended December 31, 2015, contributions to FONDEN decreased by U.S.$2,332 million, or 70%, to U.S.$974 million, from U.S.$3,306 million for the year ended December 31, 2014, as a result of decrease in oil prices.

Share in Equity Accounted Investees

Share in equity accounted investees increased by U.S.$8 million, or 9%, to a loss of U.S.$86 million in 2015 from a loss of U.S.$94 million in 2014. This increase resulted mainly from the exclusion of the results from Discontinued Operations, and the sale of PDVSA’s share of the Chalmette Refinery.

Income Tax

Income tax during 2015 decreased by U.S.$8,823 million, or 173%, to a credit of U.S.$3,717 million from a debit of U.S.$5,106 million in 2014. This decrease was principally due to the sale of foreign currency made by CVP through SIMADI, the decrease in total income, exchange rate losses, and inflation adjustments.

 

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Results from Discontinued Operations

Income from Discontinued Operations during 2015 decreased by U.S.$2,699 million, or 41.2%, to U.S.$3,845 million from U.S.$6,544 million in 2014. Costs and expenses from Discontinued Operations during 2015 decreased by U.S.$6,589 million, or 83.5%, to U.S.$1,307 million from U.S.$7,896 million in 2014.

Results for operational activities from Discontinued Operations during 2015 increased by U.S.$3,710 million, or 274.4%, to a profit of U.S.$2,538 million from a loss of U.S.$1,352 million in 2014. Income tax from Discontinued Operations during 2015 decreased by U.S.$406 million, or 52%, to U.S.$379 million from U.S.$785 million in 2014.

Profit

Profit during 2015 decreased by U.S.$1,729 million, or 19.1%, to U.S.$7,345 million from U.S.$9,074 million in 2014. This decrease was principally due to the decrease in sales of crude oil, products and others, and losses from differential exchange rates in transactions pursuant to the exchange control regulations.

Results of operations for the year ended December 31, 2014 compared to the year ended December 31, 2013

Production

All of our crude oil, liquid natural gas and gas production operations are located in Venezuela. Our production of crude oil averaged 2,785 mbpd in 2014, a 4% decrease from 2,899 mbpd in 2013, primarily because efforts to increase the production of additional barrels were not sufficient to offset the rate of decline of mature reservoirs. Our production of liquid natural gas averaged 114 mbpd in 2014, as compared to 116 mbpd in 2013. This decrease was primarily due to a decrease in the quality of the gas being supplied to certain liquid natural gas extraction plants. Our production of gas (net of amounts re-injected) was 4,818 mmcfd in 2014, a 4% increase as compared to 4,616 mmcfd in 2013. This increase is primarily due to an increase in the gas-oil ratio (GOR) in the deposits of northern Monagas as a result of gas injections.

The net output of refined petroleum products (including output representing our equity interest in refineries held by our affiliates in the United States and Europe) was 2,184 mbpd in 2014, as compared to 2,207 mbpd in 2013. This was primarily caused by the decrease in the volume of refined petroleum products produced in Venezuela.

Total Income

Total income increased by U.S.$1,860 million, or 2%, to U.S.$121,895 million in 2014 from U.S.$120,035 million in 2013. This increase was primarily due to an increase in our finance income, which was due primarily to the effect of changes in the applicable exchange rate Bolívar/U.S. dollar. This increase in total income was partially offset by a decrease in the total amount of our exports and overseas sales, due to a decrease in the average export price of the Venezuelan basket.

Exports of Crude Oil and Refined Products

Exports represented 81% of our sales volumes for the year ended December 31, 2014. Our exports decreased in volume by 2% to 2,357 mbpd in 2014 from 2,425 mbpd in 2013. This decrease was primarily due to an increase in sales of crude oil in Venezuela. In addition, exports of refined petroleum products decreased by 30 mbpd, or 6%, to 460 mbpd, from 2013 to 2014, due to an increase in the consumption and demand for refined petroleum products in the Venezuelan domestic market. The average export price per barrel for Venezuelan crude oil, refined petroleum products and natural gas liquids was U.S.$88.42 in 2014, as compared to U.S.$98.08 in 2013, representing a 10% decrease.

Sales Revenues of International Subsidiaries

During 2014, the total volume of crude oil and refined petroleum products that we sold exceeded our total production of crude oil and natural gas liquids. Our total sales of crude oil, refined petroleum products and natural

 

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gas liquids were 2,425 mbpd during 2013 as compared to 2,357 mbpd of total sales of such products for 2014. CITGO generates most of the sales in excess of our crude oil and natural gas liquids production because it purchases crude oil and refined petroleum products from third parties (including unconsolidated affiliates) for supply to CITGO’s refining and marketing network in the United States. CITGO’s sales revenues decreased by U.S.$3.0 million, or 7%, to U.S.$39.2 million in 2014 from U.S.$42.2 million in 2013 due to a decrease in average sales price as sales volumes remained relatively flat.

Domestic Sales

We sold 663 mbpd of refined petroleum products (including liquid natural gas) domestically in 2014, a 6% decrease as compared to 703 mbpd sold domestically in 2013. This decrease was mainly due to effect of the legislation passed and related measures taken to prevent the smuggling and extraction of fuel. We also sold 247 mbpd of oil equivalent of gas in 2013 and 231 mbpd of oil equivalent of gas in 2014. Domestic sales increased 153% from U.S.$1,064 million in 2013 to U.S.$2,690 million in 2014, primarily due to the increase in gas stations under PDVSA’s control, resulting from the takeover of stations under wholesaler names pursuant to the Local Market Reorganization Plan (Plan de Reordenamiento del Mercado Interno).

Sales of crude oil, products and others

Sales of crude oil, products and others decreased by 8%, from U.S.$110,719 million in 2013 to U.S.$101,552 million in 2014. The decrease was mainly due to a decrease in the average export price of crude oil and refined products.

Finance Income

Our finance income increased by U.S.$11,027 million, or 118%, from U.S.$9,316 million in 2013 to U.S.$20,343 million in 2014. This increase was principally due to the effect of the change in the exchange rate, pursuant to which balances in Bolívares of monetary items were translated into U.S. Dollars using the new exchange rate, giving rise to an exchange gain derived from holding a net passive monetary position in Bolívares at the date of the change to the exchange rate.

Costs and Expenses

Purchases of crude oil and products, net

Our purchase of crude oil and refined petroleum products, net increased by 1.3% to U.S.$37,266 million in 2014 from U.S.$36,754 million in 2013. This increase was primarily due to the increase in the volume of sales to third parties.

Operating Expenses

Our operating expenses increased by U.S.$3,667 million, or 15%, to U.S.$27,400 million in 2014 from U.S.$23,733 million in 2013. This increase was the result of the increased cost of labor benefits as a result of the collective bargaining agreement entered into in February 2014, which was partially offset by the decrease in the Bolívar-denominated portion of these expenses due to the differential exchange rates in transactions pursuant to the exchange control regulations.

Exploration Expenses

Our total exploration expenses were U.S.$64 million in 2014, which was a decrease of U.S.$76 million, or 46%, as compared to U.S.$140 million in 2013. The decrease was the result of the decline in the portion in Bolívares due to the fluctuation in the exchange rates in transactions pursuant to the exchange control regulations.

Depreciation and Amortization

Depreciation and amortization decreased by U.S.$58 million, or 7.2%, to U.S.$8,038 million in 2014 from U.S.$8,096 million in 2013. This decrease was primarily a result of the exclusion of the results from Discontinued Operations.

 

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Production Tax, Extraction Tax and Other Taxes

Production tax, extraction tax and other taxes decreased by U.S.$5,796, or 30%, to U.S.$13,466 million in 2014 from U.S.$19,262 million in 2013. This decrease is primarily due to the decrease in production and the decline of the average wellhead price.

Finance Costs

Finance costs increased by U.S.$1,185 million, or 41%, to U.S.$4,065 million in 2014 from U.S.$2,880 million in 2013. This increase in financial expenses resulted primarily from the issuance of the new debt.

Contributions for Social Development

Contributions for social development decreased by U.S.$7,702 million, or 59%, to U.S.$5,321 million in 2014 from U.S.$13,023 million in 2013 mainly due to the modification of the oil prices considered as extraordinary from U.S.$70 USD/bbl to U.S.$80 USD/bbl pursuant to the Ley que Crea Contribución Especial por Precios Extraordinarios y Precios Exorbitantes en el Mercado Internacional de Hidrocarburos (Law that Creates Special Contributions for Extraordinary Prices and Exorbitant Prices in the International Hydrocarbons Market), as well as due to a decline in the average price of the Venezuela crude oil basket and the reduction of the Bolívar-denominated portion of expenses as a result of the conversion of such portion to foreign currency. In support of social projects carried out by the Bolivarian Republic of Venezuela, PDVSA contributed U.S.$4,010 million to the “Gran Misión Vivienda Venezuela,” created by the Bolivarian Republic of Venezuela in April 2011, in order to address housing needs in Venezuela. During 2013 and 2014, PDVSA did not provide contributions to this program.

Likewise, contributions to FONDEN decreased by U.S.$1,888 million, or 36%, to U.S.$3,306 million, for the year ended December 31, 2014, from U.S.$5,194 million for the year ended December 31, 2013, as a result of the decrease of Venezuela’s crude oil basket price.

Share in Equity Accounted Investees

Share in equity accounted investees increased by U.S.$29 million, or 24%, to a U.S.$94 million loss in 2014 from a loss of U.S.$123 million in 2013. This increase resulted mainly from the exclusion of the results from Discontinued Operations.

Income Tax

Income tax during 2014 decreased by U.S.$2,080 million, or 29%, to U.S.$5,106 million from U.S.$7,186 million in 2013. This decrease was principally due to the reduction in the current income tax.

Results from Discontinued Operations

Income from Discontinued Operations during 2014 decreased by U.S.$7,747 million, or 54.2%, to U.S.$6,544 million from U.S.$14,291 million in 2013. Costs and expenses from Discontinued Operations during 2014 increased by U.S.$5,377 million, or 213.5%, to U.S.$7,896 million from U.S.$2,519 million in 2013.

Results for operational activities from Discontinued Operations during 2014 decreased by U.S.$13,124 million, or 111.5%, to a loss of U.S.$1,352 million from a profit of U.S.$11,772 million in 2013. Income tax from Discontinued Operations during 2014 increased by U.S.$126 million, or 19.1%, to U.S.$785 million from U.S.$659 million in 2013.

Profit

Profit during 2014 decreased by U.S.$6,761 million, or 42.7%, to U.S.$9,074 million from U.S.$15,835

 

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million in 2013. This decrease was principally due to an increase in operating, sales and general expenses as a result of an increase in labor benefits. Additionally, the decrease was due to a loss resulting from discontinued operations in the non-oil sector and the depreciation of the value of assets associated with certain refineries, which was offset by the increase in finance income and the decline in the contributions to social development.

Impact of Taxes on Net Income and Cash Flows

In accordance with Venezuelan income tax law, our income tax expense is based on our accounting records as recorded in Bolívares. For fiscal purposes, Venezuelan companies are required to reflect the impact of inflation and, subject to certain conditions, the variations in the rate of the Bolívar relative to the U.S. dollar and other foreign currencies by adjusting non-monetary assets and stockholder’s equity on their fiscal balance sheets. The Venezuelan income tax law considers any gain resulting from this adjustment as taxable income and any loss as a deductible expense. Such adjustments affect our taxable income and therefore the amount of our income tax liability in Bolívares. When such tax liabilities are translated into U.S. dollars, the adjustments may create a material difference between the effective tax rate paid when expressed in U.S. dollars and the statutory rate in Bolívares.

On May 24, 2006, an amendment to the Organic Hydrocarbons Law modified existing taxes and created new taxes as described below.

Production tax. The Organic Hydrocarbons Law provides for the payment by oil companies of a royalty levied at a 30% rate on the volume of extracted hydrocarbons, which can be paid in kind or in cash, at the government of Venezuela’s option. For mature reservoirs or extra-heavy crude oil from the Orinoco Oil Belt, the Organic Hydrocarbons Law provides for a tax of 20% to 30%. The tax is fully deductible for the purposes of determining net taxable income.

Surface tax. The surface tax is calculated at the annual rate of 100 tax units for each square kilometer or fraction thereof. Surface tax is determined based on the concession area not under production, with an annual increase of 2% for five years and 5% in subsequent years.

General consumption tax. The general consumption tax is determined at a rate ranging between 30% and 50% of the price paid by the final customer and is applicable to each liter of hydrocarbon-derived product sold in the domestic market. The consumption tax rate is determined annually.

We are also taxed on our own consumption, equivalent to 10% of the value of each cubic meter of hydrocarbon-derived product consumed as fuel oil in our operations, calculated based on the final sale price.

Extraction tax. The extraction tax is calculated at a rate of one third of the value of all the liquid hydrocarbons extracted from an oil field (from the same base established by the law for production tax calculation). The taxpayer may deduct from the amount to be paid what it will pay as a production tax, including any additional royalty paid in advance.

Export registration tax. The export registration tax is calculated at a rate of one thousandth of the value of all hydrocarbons exported from a port in the national territory (based on the sale prices of these hydrocarbons).

Income tax. Our Venezuelan subsidiaries engaged in the production of hydrocarbons and related activities are subject to a 50% income tax.

Article 11 of the Venezuelan Income Tax Law provides for a 34% reduced tax rate for companies that carry out exploration and exploitation activities of non-associated gas or processing, transport, distribution, storage, commercialization and export activities of gas and their components and those companies devoted exclusively to the refining or upgrading of heavy and extra-heavy crude oil.

Pursuant to the Venezuelan Income Tax Law, taxpayers subject to income tax who carry out import, export and loan operations with related parties domiciled abroad are obliged to determine their income, costs and

 

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deductions by applying transfer pricing rules. We have obtained studies supporting our transfer pricing methodology. The resulting effects are included as a taxable item in the determination of our income tax. We undertake significant operations regulated by such transfer pricing rules.

Windfall contribution. We contribute funds to FONDEN through mandatory transfers required under the Decreto con Rango, Valor y Fuerza de Ley que Crea Contribución Especial por Precios Extraordinarios y Precios Exorbitantes en el Mercado Internacional de Hidrocarburos (Law Decree on the Creation of Special Contribution on Excess Prices and Exorbitant Prices in the International Hydrocarbons Markets) as amended on February 20, 2013, published in the Official Gazette No. 40,114 dated February 20, 2013. This amendment provides for an increase of U.S.$10 per barrel (from U.S.$70 to U.S.$80 per barrel) the budgeted price per barrel on which the excess windfall contribution described below is imposed. Under this windfall contribution, any time the oil basket prices are higher than the price established in the National Budget Law of the respective fiscal year, a tax is assessed based on the formula described below. The Board of Directors does not have discretion to declare and/or retain contributions, and all contributions are made in accordance with Venezuelan law. Pursuant to the law decree, in any month in which the average Venezuelan oil basket price exceeds the budgeted price per barrel, but is equal to or less than U.S.$80 per barrel, oil and oil derivatives exporters (including us) must pay a tax on exports calculated by multiplying the number of barrels they export in such month by 20% of the amount of the average Venezuelan oil basket price for such month that is greater than the budgeted price per barrel and equal to or less than U.S.$80. In any month in which the average Venezuelan oil basket price is greater than U.S.$80 and less than U.S.$100 per barrel, the tax is assessed at the amount specified in the previous sentence for the first U.S.$80 and at 80% of the total amount of the difference between U.S.$80 and the average price. In any month in which the average Venezuelan oil basket price is equal to or greater than U.S.$100 and less than U.S.$110 per barrel, the tax is assessed at the amount specified in the preceding sentences for the first U.S.$100 and at 90% of the amount in the excess of U.S.$100. Finally, in any month in which the average Venezuelan oil basket price is equal to or greater than U.S.$110, the tax is assessed as specified in the preceding sentences for the first U.S.$110 and at 95% of the excess of the average Venezuelan oil basket price over U.S.$100. The per barrel prices described above were each increased by U.S.$10 per barrel from the prices that were in effect prior to the amendment of the law decree on February 20, 2013. The contributions received from this tax are paid directly to FONDEN in U.S. dollars on a monthly basis to carry out social development and infrastructure projects.

Value Added Tax (VAT). Venezuela levies a value added tax at a 12% rate on sales. As an exporter, each of our Venezuelan operating subsidiaries is entitled to a refund for a significant portion of such taxes paid, which we classify on our balance sheet as recoverable value added tax. The Venezuelan tax authority issues tax recovery certificates, or CERTs, which can be used to pay future tax liabilities. In 2001, we were able to pay U.S.$209 million through CERTs. In 2002, 2003, 2004, 2005, 2007, 2009, 2010, 2011, 2012, 2013, 2014, and 2015, we did not settle any tax liabilities through CERTs. In 2008 and 2006, we settled tax liabilities amounting to U.S.$682 million and U.S.$647 million through CERTs, respectively.

A summary of the tax effects on our consolidated operations for the years ended December 31, 2015, 2014 and 2013 is as follows:

 

     For the year ended December 31,  
     2015      2014      2013  
     (in millions of U.S. dollars)  

Income tax

     (3,717      5,106         7,186   

Production and other taxes

     6,294         13,466         19,262   
  

 

 

    

 

 

    

 

 

 

Total

     2,577         18,572         26,448   
  

 

 

    

 

 

    

 

 

 

Liquidity and Capital Resources

Liquidity

As of December 31, 2015, we had cash and cash equivalents of $5,821 million. Our primary sources of liquidity are cash flow from operations and short- and long-term borrowings in U.S. dollars and Bolívares. We must continue to invest capital to maintain or increase the number of hydrocarbon reserves that we operate and the

 

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amount of crude oil that we produce and process. In the ordinary course of business, we and our subsidiaries enter into loan agreements and credit facilities to fund our capital requirements and liquidity needs. A number of the credit facilities and loan agreements entered into by our subsidiaries contain covenants that restrict their ability to, among others, make certain payments, incur additional debt, pay dividends, encumber assets and dispose of certain assets.

We do not have funds designated for, or subject to, permanent reinvestment in any country in which we operate. Distributions of the earnings of our subsidiaries are subject to the withholding taxes imposed by the subsidiaries’ jurisdictions of incorporation. From time to time, however, we may be unable to receive dividends from our subsidiaries and associated company as a result of a lack of distributable reserves or limitations under our contractual arrangements.

In addition, we are also limited in usage of certain cash, with such restricted cash constituting an aggregate amount of $930 million as of December 31, 2015, either because such cash deposits are time deposits or as a result of the loan covenants relating to our assets in Bolívares.

Our principal needs for liquidity generally consist of capital expenditures related to oil and gas exploration and production, refining, trade and supply and working capital requirements (e.g., maintenance costs). As part of our growth strategy, we have embarked on an ambitious capital expenditure plan to expand and upgrade our existing production and refining capacity. These and our activities in the future may require us to make significant capital expenditures and/or raise significant capital. Additionally, we are required by Venezuelan law to make significant financial contributions to social programs. While we determine the social contributions to be made by us during the course of the year, we send monthly reports to the Venezuelan government for the approval of such disbursements for social contributions, and the Venezuelan government may approve or request a change in the levels of such contributions. Between 2011 and 2015, our average social contributions represented 14% of our revenues. See “— Contributions for Social Development.” The availability of these sources of capital when the need arises will depend upon a number of factors, some of which are beyond our control. Additionally, we may not be able to find additional financing on commercially reasonable terms. See “Risk Factors — Our liquidity and ability to generate cash depends on many factors beyond our control, and any failure to meet our debt obligations could harm our business, financial condition, and results of operations.” We believe that our liquidity is sufficient to cover our working capital needs in the ordinary course of our business.

Contractual Obligations

The following table presents our contractual obligations as of December 31, 2015 (by maturity):

 

     Payments due by period  
     Book Value      Contractual
Cash Flow
     Less than 1
year
     1 to 3 years      3 to 5 years      More than
5 years
 
     (in millions of U.S. dollars)  

Long term debt

     43,240         65,102         9,947         16,698         12,326         26,132   

Finance lease obligations

     476         633         90         290         52         201   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     43,716         65,735         10,036         16,988         12,378         26,333   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Cash Flows from Operating Activities

For the year ended December 31, 2013, our net cash provided by operating activities amounted to U.S.$21,903 million, which represents an increase of U.S.$360 million, or 2%, from our net cash provided by operating activities of U.S.$21,543 million in 2012. The main factors contributing to this increase were an increase in net income, a gain from sale and exchange operations, and higher deferred tax benefits.

For the year ended December 31, 2014, our net cash provided by operating activities amounted to U.S.$14,292 million, which represents a decrease of U.S.$7,611 million, or 35%, from our net cash provided by operating activities of U.S.$21,903 million in 2013. The main factor contributing to this decrease was a decrease in net income due to an increase in operating costs. In addition, a significant increase of the income derived from exchange gain was recorded.

For the year ended December 31, 2015, our net cash provided by operating activities amounted to U.S.$15,183 million, which represents an increase of U.S.$891 million, or 6.23%, from our net cash provided by operating activities of U.S.$14,292 million in 2014. The main factor contributing to this increase was a decrease in the net foreign exchange gain.

Cash Flows from Investing Activities

For the year ended December 31, 2013, net cash used in investment activities totaled U.S.$22,381 million compared to U.S.$25,221 million for 2012. This decrease was due to a decline in acquisitions of property, plants and equipment.

For the year ended December 31, 2014, net cash used in investment activities totaled U.S.$24,448 million compared to U.S.$22,381 million for 2013. This increase was due to an increase in the addition of properties, plants and equipment, which were mainly acquired by PDVSA Petróleo, S.A. as a result of the execution of investment programs.

For the year ended December 31, 2015, net cash used in investment activities totaled U.S.$17,355 million compared to U.S.$24,448 million for 2014. This decrease resulted from acquisitions of properties, plants and equipment. In addition, restricted cash decreased by U.S.$646 million in 2015, compared to a U.S.$146 million increase registered in 2014, due to the decline in the balance of certain letters of credit and liquidity accounts.

For the three-year period ended December 31, 2015 our capital expenditures were as follows:

 

     For the year ended December 31,  
     2015      2014      2013  
     (in millions of U.S. dollars)  

In Venezuela:

        

Exploration and Production

     13,132         13,854         12,750   

Refining, trade and supply

     1,764         2,088         4,342   

Gas

     959         4,295         2,868   

Others

     1,336         4,181         2,938   
  

 

 

    

 

 

    

 

 

 
     17,191         24,418         22,898   

Foreign-Refining

     607         426         400   

Others

     308         207         232   
  

 

 

    

 

 

    

 

 

 

Total

     18,106         25,051         23,530   
  

 

 

    

 

 

    

 

 

 

Restricted Cash

The purpose of the FEM (formerly known as FIEM) is to achieve budgetary stability at the national, state and local levels. Under the original terms of the regulations governing the FEM, we and the Venezuelan government, acting on its own behalf and on behalf of states and municipalities, contributed royalties, dividends, tax revenues and transfers related to the petroleum sector in excess of the average of payments on account of royalties, dividends, tax revenues and transfers.

 

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In February 2011, in accordance with instructions by the Bolivarian Republic of Venezuela, all of the funds held by PDVSA in the FEM were transferred to the Fondo de Desarrollo Nacional (FONDEN). As of December 31, 2015, there were no funds deposited in the FEM.

Funds for Extra-heavy Crude Oil Projects in the Orinoco Oil Belt. Certain restricted funds allocated to the extra-heavy crude oil projects in the Orinoco Oil Belt correspond to restricted cash that cannot be utilized in the operations of the subsidiary of PDVSA Petróleo. The funds, deposited mainly in money market accounts in financial institutions abroad, are restricted in order to comply with commitments related to the financing received for the development of these projects. See note 16 to our annual audited consolidated financial statements.

Trusts in BANDES. During 2003 and 2004, CVP and the Bank for Social and Economic Development of Venezuela (known as “BANDES”) entered into trust agreements for the administration and investment of certain trust assets intended for (i) Programs and Projects of Housing and Infrastructure Development, (ii) Programs and Projects related to Ezequiel Zamora Fund for Agricultural Investment, (iii) Programs and Projects of the Works, Goods and Services intended for the Development of Infrastructure, Agricultural Activity, Highways, Health and Education (“FONDESPA”), and (iv) the Integral Agreement for cooperation with the Republic of Argentina between Venezuela and the Republic of Argentina, and approved by the Board of Directors of PDVSA on July 15, 2004.

Fund for Social and Economic Development of the Country (FONDESPA). This fund was approved on January 23, 2004 and established in dollars at BANDES with funds from crude oil exports and its products exceeding the budgeted average price per barrel, net of production tax, taxes and other direct expenses in 2004, 2005 and 2006. No funds have been transferred to this trust since 2006. During 2014, we retired part of the funds held in this trust. See note 16 to our annual audited consolidated financial statements.

The Integral Agreement of Cooperation with the Argentine Republic. This fund was created in July 2004 and comprises cash and securities in dollars received from Compañía Administradora del Mercado Mayorista Eléctrico Sociedad Anónima (CAMMESA), Argentina’s State energy company, for the sales of crude oil and related products by PDVSA under the agreement. Payments from this fund will be made only to companies in the Argentine Republic for the import of products from Argentina into Venezuela, which are included as contributions for social development. In 2012, a new trust was set up under this agreement that additionally includes collections from Energía Argentina, S.A. (ENARSA). During 2015 and 2013, contributions made to this trust were U.S.$431 million and U.S.$567 million, respectively. No contributions were made to this trust in 2014. See note 16 of our annual audited consolidated financial statements.

Cash Flows from Financing Activities

As of December 31, 2013, we had outstanding aggregate indebtedness amounting to U.S.$43,384 million maturing on various dates through 2035. As of December 31, 2013, consolidated net cash flow received from financing activities totaled U.S.$1,533 million, a decrease of U.S.$1,768 million from our net cash flow received from financing activities for the year ended on December 31, 2012, which amounted to U.S.$3,301 million. This decrease was due to an increase in the payments of financial debt and a decline in the issuance of new debt instruments.

For the year ended December 31, 2014, consolidated net cash flow received from financing activities totaled U.S.$10,812 million, which represents an increase of U.S.$9,279 million from our net cash flow received from financing activities for the year ended on December 31, 2013, which amounted to U.S.$1,533 million. This increase was due to the issuance of new debt instruments.

For the year ended December 31, 2015, consolidated net cash flow received from financing activities totaled U.S.$467 million, which represents a decrease of U.S.$10,345 million from our net cash flow received from financing activities for the year ended on December 31, 2014, which amounted to U.S.$10,812 million. This decrease was mainly related to a decrease in the cash flow proceeds from the issuance of financial debt and a stable trend of payments of financial debt.

 

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The most recent dividends declared during 2013, 2014 and 2015 were paid in the year they were declared. In April 2013, dividends were declared and paid in the amount of U.S.$952 million to the Bolivarian Republic of Venezuela, and charged to accumulated income. In December 2013, dividends were declared to the Bolivarian Republic of Venezuela in the amount of U.S.$10,000 million. In March 2014, dividends were declared to the Bolivarian Republic of Venezuela in the amount of U.S.$5,000 million. In September 2014, dividends were declared and paid in the amount of U.S.$289 million to the Bolivarian Republic of Venezuela, and charged to accumulated income. In March 2015, dividends were declared in the amount of U.S.$87 million to the Bolivarian Republic of Venezuela. Payments of these dividends were offset against accounts receivable owed by the Bolivarian Republic of Venezuela arising from agreements related to the sale of crude oil by PDVSA to other countries.

Loan Agreements

Below is a description of the material loan agreements and credit facilities entered into by us and our subsidiaries.

Investment Certificates

In February 2009, we issued three 18-month term investment certificates in favor of Fondo de Protección Social de los Depósitos Bancarios (“FOGADE”) having an aggregate total principal dollar equivalent amount of U.S.$1,000 million. These certificates were issued and are payable in Bolívares, and interest accrues annually on the certificates at 9.5%. In 2010, we paid an aggregate principal amount of U.S.$500 million, while the amortization of the remaining balance under each certificate was extended until February 2012 and then renewed until August 2013. At the end of 2012 and 2011, the aggregate principal amount outstanding under these certificates was U.S.$500 million and U.S.$500 million, respectively. These certificates were renewed in August 2013, August 2014 and August 2015, for additional 12-month periods.

In December 2010, we issued two 8% short term investment certificates having an aggregate principal amount of U.S.$465 million in favor of Banco del Tesoro, Banco Universal C.A. (“Banco del Tesoro”) (wholly-owned by the Bolivarian Republic of Venezuela). These certificates were renewed in January 2011, January 2012, January 2013, January 2014, January 2015 and January 2016 for additional 12-month periods.

In 2011, we issued six 8% short term investment certificates totaling U.S.$721 million, denominated in Bolívares, in favor of Banco del Tesoro, Banco Universal C.A. (“Banco del Tesoro”), payable upon maturity. In January 2012, we paid off one of the certificates having a principal amount of U.S.$116 million (equivalent to Bs. 500 million). The remaining certificates were renewed in 2013, 2014 and 2015. In April 2016, we renewed four of remaining certificates, which are to have a maturity of July 2016, and we renewed one certificate, which is to have a maturity of August 2016.

In February 2012, we issued two 8% investment certificates totaling U.S.$465 million, denominated in Bolívares, in favor of Banco de Venezuela, Banco Universal S.A. (“Banco de Venezuela”). These certificates have a three-month term and an option to renew. These certificates have been subsequently renewed and mature in August 2016.

In December 2015, PDVSA issued in favor of Banco de Venezuela seven renewable investment certificates for a total of U.S.$145 million (Bs. 10.000 million) maturing in 2018, 2019 and 2020, with an annual interest rate of 14% to be paid on a quarterly basis.

In October 2015, PDVSA issued in favor of Banco de Desarrollo Económico y Social de Venezuela (BANDES) a renewable investment certificate for a total of U.S.$150 million, with a maturity date of 30 days and a 6.00% interest rate to be paid at maturity. The investment certificate has been subsequently renewed under the same conditions in June 2016 and July 2016. In June 2016, U.S.$30 million of such certificate were amortized.

In February 2016, PDVSA issued in favor of Banco de Desarrollo Económico y Social de Venezuela (BANDES) a renewable investment certificate for a total of U.S.$100 million, with a maturity date of 30 days and a 6.00% interest rate to be paid at maturity. The investment certificate has been subsequently renewed under the same conditions in July 2016.

 

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In July 2016, PDVSA issued in favor of Banco de Venezuela three renewable investment certificates denominated in Bolívares in an aggregate amount of U.S.$76 million with a maturity date of three months and an annual 18% interest rate to be paid monthly.

Unsecured Bonds and Long-Term Debt

On April 12, 2007, PDVSA issued three series of U.S. dollar denominated bonds irrevocably and unconditionally guaranteed by PDVSA Petróleo, S.A., having a U.S.$7,500 million face amount and maturing in 2017, 2027 and 2037. Interest on these series of bonds accrues at a 5.25%, 5.375% and 5.5% rate per annum, respectively.

On October 29, 2010, we received the equivalent in Bolívares of U.S.$3,000 million from the issuance and placement of U.S.$3,000 million U.S. dollar denominated senior notes due 2017, irrevocably and unconditionally guaranteed by PDVSA Petróleo, S.A. Interest on such notes accrues at a rate per annum equal to 8.5%.

In October 2009, PDVSA completed the public offering U.S.$1,413 million, U.S.$1,413 million and U.S.$435 million in bonds (“Petrobonos”) due 2014, 2015 and 2016, respectively. This public offering was made in coordination with the BCV and the Ministry of People’s Power for Economy and Finance. As a result of this issuance, PDVSA received the Bolívar-equivalent of U.S.$4,501 million from local buyers. In August 2010, PDVSA reopened the Petrobonos due 2014 and issued an additional U.S.$1,587 million in bonds. Furthermore, in November 2013, PDVSA reopened the Petrobonos due 2016 and issued an additional U.S.$565 million in bonds. In November 2013, the bonds due 2013 (which were issued in November 2010 and reopened in July 2011 and September 2011), were swapped for 8% PDVSA bonds due November 2016, which were held by the Fund of Active Workers and Pensioned Workers of PDVSA. In October 2015, following the maturity of the Petrobonos due 2015, PDVSA paid U.S.$515 million in cash and exchanged the remaining bonds held by PDVSA’s related entities were for one-year promissory notes for an aggregate amount of U.S.$898 million with a 10% rate per annum payable semiannually, subject to automatic renewal.

In November 2010, we completed a swap process of zero-coupon bonds issued in July 2009 with a 2011 maturity, and exchanged U.S.$550 million of these bonds, for U.S.$618 million U.S. dollar denominated senior notes maturing on November 17, 2013 using an exchange ratio of 1.125. The senior notes are irrevocably and unconditionally guaranteed by PDVSA Petróleo, S.A. Interest on such notes accrues at a rate per annum equal to 8.0%. These notes were subsequently exchanged in November 2011 for 9% senior notes due 2021 as described further below.

In addition, in January 2011, we issued U.S.$3,150 million aggregate principal amount of additional senior notes due 2017 through a reopening of the notes issued on October 29, 2010.

On February 17, 2011, we completed the public offering of U.S.$3,000 million in bonds, payable in U.S. dollars upon maturity in 2022 with an annual performance coupon of 12.75%. In such offering, we received from local buyers a total of Bs. 12,900 million (U.S.$3,000 million). The issuance of these New Notes was authorized by the National Securities Superintendence under the Article N°2 of the Securities Market Law.

On July 8, 2011, PDVSA carried out a private placement of bonds with the Central Bank and certain pension funds for U.S.$1,783 million, through the reopening of the 8% senior notes due 2013 issued in November 2010. Such bonds in the amount of U.S.$1,372 million were delivered to the Central Bank on July 14, 2011, and in the amount of U.S.$410 million were delivered to such pension funds on September 9, 2011.

On November 17, 2011, PDVSA issued U.S.$2,394 million 9% senior notes due 2021 for cash and in exchange for certain outstanding U.S. Dollar denominated 8% senior notes due 2013.

On May 17, 2012, PDVSA issued U.S.$3,000 million senior notes due 2035, irrevocably and unconditionally guaranteed by PDVSA Petróleo, S.A. Interest on such notes accrues at a rate per annum equal to 9.75%. These notes were purchased by the Central Bank and several government-owned banks in Venezuela.

In July 2012, PDVSA issued agricultural bonds denominated in Bolívares in aggregate amounts of U.S.$140 million, U.S.$279 million and U.S.$279 million, maturing in 2015, 2016 and 2017, respectively. This

 

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issuance was carried out in coordination with the BCV and the ministry of People’s Power for Economy and Finance and the bonds were placed with national banks by means of auctions, resulting in a premium in the bond issuance of U.S.$11 million.

In November 2013, upon the maturity of the U.S. Dollar denominated 8% senior notes due 2013, PDVSA exchanged U.S.$440 million of these notes held by a workers’ pension fund and paid the remaining U.S.$705 million outstanding on the notes. In the same month, PDVSA reopened the U.S. Dollar denominated 8% senior notes due 2016 and issued an additional U.S.$565 million (Bs. 3,560) in notes. These bonds were exchanged in full for the 2013 bonds held by the workers’ pension fund and a discount of U.S.$126 million was generated by the transaction.

On November 15, 2013, PDVSA issued U.S.$4,500 million senior notes due 2026, irrevocably and unconditionally guaranteed by PDVSA Petróleo, S.A. Interest on such notes accrues at a rate per annum equal to 6.00%. All such notes were purchased by the Central Bank, certain PDVSA suppliers and vendors and Banco de Venezuela.

On May 16, 2014, PDVSA issue U.S.$5,000 million senior notes due 2024, irrevocably and unconditionally guaranteed by PDVSA Petróleo, S.A. Interest on such notes accrues at a rate per annum equal to 6.00%. All such notes were purchased by Banco de Venezuela.

On October 28, 2014, PDVSA issued U.S.$3,000 million of senior notes due 2022, irrevocably and unconditionally guaranteed by PDVSA Petróleo, S.A. Interest on such notes accrues at a rate per annum equal to 6.00%. All such notes were purchased by the Central Bank.

For a description of all our consolidated long-term debt incurred prior to December 31, 2015, see note 23 to our annual audited consolidated financial statements for the year ended on such date.

Conversion of Commercial Debt with Strategic Suppliers

PDVSA has implemented different transactions that allow to partially convert the outstanding commercial debt maintained with certain commercial suppliers into financial debt. This conversion is achieved by the execution of several note agreements which provide for (i) the assumption by PDVSA of a portion of its affiliates’ debt (evidenced in outstanding commercial invoices and contracts) with certain strategic suppliers; (ii) the novation of said commercial debt into a financial debt that cancels the former one; and (iii) the issuance of a three-year note (or several notes) regulated by a Note Agreement, with quarterly amortizations and an annual interest rate of 6.5%, to each of the participating strategic suppliers.

From May 2016 to the date of this offering circular, the aforementioned transactions have been successfully executed with GE Capital Financing, Inc., Cementaciones Petroleras Venezolanas, S.A., Petroalianza, C.A., Maritime Contractors de Venezuela, S.A., Weatherford Latin America, S.C.A., Servicios Halliburton de Venezuela, S.A., Environmental Solutions de Venezuela, C.A., Proambiente, S.A., Elecnor, S.A. and Servicios Picardi, C.A. for a total amount of U.S.$1,151 million.     

JBIC

In February 2007, a group of banks, led by the JBIC, issued us two 15-year term credit facilities having a combined aggregate principal amount of U.S.$3,500 million. Interest on such loans accrues at a rate per annum equal to LIBOR plus a margin ranging from 0.5% to 6.5%. During 2010, 2011, 2012, 2013 and 2014, PDVSA paid U.S.$233 million per year. As of December 31, 2015, the outstanding loans amounted to U.S.$1,459 million. Under the terms and conditions of this facility, we are subject to certain restrictive covenants, including an obligation to maintain certain financial ratios. As of December 31, 2015, we were in compliance with all such ratios based on annual determinations.

In February 2011, Panavenflot Corp, a PDV Marina affiliate entered into a facility agreement with JBIC in an aggregate amount of ¥20,000 million (equivalent to U.S.$257 million) to finance the construction of four aframax tankers, which related loans mature in March 2023, July 2023, February 2024 and April 2024. As of December 31, 2015 the outstanding amount under this agreement is U.S.$110 million.

 

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On June 28, 2011, we entered into: (i) a U.S.$750 million advance facility loan agreement with Santa Inés B.V. and The Bank of Tokyo-Mitsubishi UFJ, LTD and (ii) a U.S.$750 million advance facility loan agreement with Oriente Financing Company B.V. and Mizuho Corporate Bank, LTD. These loan agreements each have three tranches: Tranche A is a commitment of U.S.$338 million with a LIBOR plus 4.10% annual interest rate, Tranche B is a commitment of U.S.$338 million with a LIBOR plus 1.50% annual interest rate, and Tranche C is a commitment of U.S.$75 million with a LIBOR plus 8.75% annual interest rate. Interest for each tranche is paid quarterly and the final maturity date is the sixtieth quarter. The proceeds from these facilities will be allocated to the support of various oil and gas projects. On August 17, 2011, funds from these loan agreements, for a total amount of U.S.$1,500 million, were drawn by PDVSA for the financing of the deep conversion project of the Puerto La Cruz and El Palito refineries upon satisfaction of the conditions precedent for the loans. As of December 31, 2015, the outstanding balance for this loan was U.S.$1,050 million.

China Development Bank Corporation

On February 27, 2012, we entered into a credit agreement with CDBC for the purchase of petroleum related goods and services from the People’s Republic of China for U.S.$500 million. The rate of interest under this facility is LIBOR plus 4.55%, quarterly amortization payments, a maturity of 6 years or 72 months and a 30-month grace period, during which time no interest accrues or interest payments become due. Payments under this facility may be made with the proceeds from the sale of crude oil and related products at market prices. As of December 31, 2015, an amount of U.S.$495 million from this credit agreement was drawn by PDVSA.

In June 2013, Petrolera Sinovensa, S.A. (or Petrosinovensa), a joint venture in which we have a majority interest, entered into a facility agreement with CDBC, in an aggregate principal amount of U.S.$4,015 million to finance the development and construction of facilities for the purpose of increasing Petrosinovensa’s oil production capacity. Loans made under the facility agreement accrue interest at LIBOR plus 5.8% or 5.9% per annum and mature 10 years from the date all conditions precedent in the facility agreement have been satisfied or waived. Pursuant to an associated guarantee, PDVSA has a payment guarantee obligation of 60% of Petrosinovensa’s payment obligations under the facility agreement. As of December 31, 2015, U.S.$699 million from this facility agreement was drawn by Petrosinovensa.

In December 2014, PDVSA entered into a U.S.$1,500 million working capital loan facility with CDBC. The rate of interest under this facility is LIBOR plus 6.25%. Interest payments are made quarterly and the term of the facility is 36 months. As of December 31, 2015, U.S.$150 million has been amortized. Payments under this facility may be made through the delivery of crude oil and related products at market prices. As of December 31, 2015, the outstanding balance for this loan was U.S.$1,200 million.

Banco del Tesoro

In November 2011, we entered into a loan agreement with Banco del Tesoro for a total aggregate amount of Bs. 500 million (equivalent to U.S.$116 million). The rate of interest is 9.50% annually and the term is five years with a 12-month grace period. The proceeds from this loan were allocated to the manufacturing sector. As of December 31, 2015, the outstanding balance for this loan was Bs. 143 million (equivalent to U.S.$2 million).

In November 2011, we entered into a loan agreement with Banco del Tesoro for a total aggregate amount of Bs. 500 million (equivalent to U.S.$116 million). The rate of interest is 9.50% annually and the term is six years with a 24 -month grace period, during which time no interest accrues or interest payments become due. The proceeds from this loan will be allocated to the agricultural sector. As of December 31, 2015, the outstanding balance for this loan was Bs. 273 million (equivalent to U.S.$4 million).

In January 2012, we entered into a Bs. 500 million loan agreement with Banco del Tesoro (equivalent to U.S.$116 million). The rate of interest is 9.50% annually and the term is six years with a 24-month grace period, during which time no interest accrues or interest payments become due. The proceeds from this loan were allocated to the agricultural sector. As of December 31, 2015, the outstanding balance for this loan was Bs. 334 million (equivalent to U.S.$5 million).

 

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In March 2013, PDVSA entered into a credit facility with Banco del Tesoro for Bs. 4,000 million (equivalent to U.S.$635 million), with an annual variable interest rate initially equivalent to 9.50% for use in the agro-industrial sector. As of December 31, 2015, the total aggregate amount of the loan has been drawn by PDVSA. As of December 31, 2015, the amount outstanding under this loan was Bs. 1,779 million (equivalent to U.S.$26 million).

In September 2013, PDVSA entered into two loan agreements with Banco del Tesoro for a total aggregate amount of Bs. 2,000 million (equivalent to U.S.$317 million). The annual variable rate of interest for each loan was initially equivalent to 12.00% and the term is five years. The proceeds from one of these loans will be allocated to industrial projects and proceeds from the other loan will be allocated to working capital. As of December 31, 2015, the outstanding balance for each of these loans was Bs. 642 million (equivalent to U.S.$9 million).

In February 2014, PDVSA entered into a Bolívar denominated loan agreement with Banco del Tesoro for U.S.$476 million (Bs. 3,000 million) with an initial annual variable interest rate of 12% and a term of five years. The proceeds from the loan were used to finance the deep conversion project of the Puerto La Cruz Refinery. As of December 31, 2015, the outstanding balance under this loan was Bs. 2,850 million (U.S.$41 million).

In August 2014, PDVSA entered into a loan agreement with Banco del Tesoro for a total aggregate amount of Bs. 1,100 million (equivalent to U.S.$175 million). The interest rate is 12% annually and the term is eight years. The proceeds from this loan were allocated to the manufacturing sector. As of December 31, 2015, the outstanding balance for this loan was Bs. 928 million (equivalent to U.S.$13 million).

Banco de Venezuela

On June 3, 2011, PDVSA entered into agreements with Banco de Venezuela (owned by BANDES) for two loans with a total amount equal to Bs. 4,000 million (equivalent to U.S.$930 million), both due in 2018 with an initial annual fixed interest rate of 9.5% for the first calendar quarter and a variable rate for subsequent quarters, not to exceed interest rates fixed by the Central Bank. These loans are for use in the manufacturing and agriculture sector. As of December 31, 2015, the outstanding balance for these loans was Bs. 3,360 million (equivalent to U.S.$49 million).

In November 2011, we entered into two loan agreements, one in the amount of Bs. 2,000 million (equivalent to U.S.$465 million), and the other in the amount of Bs. 300 million (equivalent to U.S.$70 million), with Banco de Venezuela. The rate of interest for each loan is 9.50% annually. The Bs. 2,000 million loan (equivalent to U.S.$465 million) has a term of 6 years with a 24-month grace period. The proceeds from this loan were allocated to the agricultural sector. The term of the Bs. 300 million loan (equivalent to U.S.$70 million) expired in February 2012 and it was paid in full in March 2012. As of December 31, 2015, the outstanding balance for the Bs. 2,000 million loan was Bs. 1,200 million (equivalent to U.S.$17 million).

In December 2011, we entered into a loan agreement with Banco de Venezuela in the amount of Bs. 2,000 million (equivalent to U.S.$465 million). The rate of interest for the loan is 9.50% annually. The loan has a term of 5 years with a 12-month grace period. The proceeds from this loan will be allocated to the manufacturing sector. As of December 31, 2015, the outstanding balance on this loan was Bs. 700 million (equivalent to U.S.$11 million).

In 2012, PDVSA entered into the following additional loan agreements with Banco de Venezuela:

 

    A March 2012 loan for Bs. 2,000 million (equivalent to U.S.$465 million) with an annual interest rate of 9.5%, variable every quarter, variable principal amortizations and a grace period of six months, which matured in March 2015 and was paid in full. The proceeds from this loan were allocated to working capital.

 

    A March 2012 loan for Bs. 2,000 million (equivalent to U.S.$465 million) with an annual interest rate of 9.5%, variable every quarter, and with variable principal amortizations and a grace period of 30 months, during which time no interest accrues or interest payments become due, maturing on March 23, 2017. The proceeds of this loan were allocated to the manufacturing sector. As of December 31, 2015, the outstanding balance of this loan was Bs. 1,480 million (equivalent to U.S.$22 million).

 

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In March 2013, PDVSA entered into a credit facility with Banco de Venezuela for a total amount of Bs. 10,000 million (equivalent to U.S.$1,587 million), with an annual variable interest rate equivalent to 9.50%, which interest rate was modified in April, 2014 to 12% and further modified in April, 2015 to 12.5%, maturing between 2015 and 2018, and for use in the agro-industrial sector. As of December 31, 2015, PDVSA has drawn Bs. 9,293 million on this loan (equivalent to U.S.$1,475 million). As of December 31, 2015, the amount outstanding under this loan was Bs. 3,081 million (equivalent to U.S.$45 million).

In September and October 2013, PDVSA entered into two commercial loan agreements with Banco de Venezuela for a total amount of Bs. 1,200 million (equivalent to U.S.$190 million) and Bs. 2,800 million (equivalent to U.S.$444 million), respectively. Each loan has an annual variable interest rate initially equivalent to 12.00% and matures in September 2016. As of December 31, 2015 the amount outstanding under these loans was Bs. 2,760 million (equivalent to U.S.$40 million).

In July 2012, January 2013 and May 2013, Venezuelan Heavy Industries, C.A. a subsidiary of PDVSA Industrial, S.A., entered into loan agreements with Banco de Venezuela for an aggregate amount of Bs. 900 million (equivalent to U.S.$147 million). The July 2012 and January 2013 loans each have an annual variable interest rate equivalent to 13.50%, and mature in July 2014, January 2015, respectively. The May 2013 loan has an annual variable interest rate initially equivalent to 9.50% and matures in May 2018. As of December 31, 2015, the amount outstanding under this loan was Bs. 400 million (equivalent to U.S.$5.9 million). These July 2012 and January 2013 loans have matured and were paid in full.

In December 2013, PDVSA entered into a Bolívar denominated loan agreement with Banco de Venezuela for a total amount of U.S.$476 million (Bs. 3,000 million), with an initial variable interest rate of 12% and a term of five years. The proceeds from this loan were used to finance the deep conversion project of Puerto La Cruz Refinery. As of December 31, 2015, the outstanding amount under this loan is Bs. 3,000 million.

In 2014, PDVSA entered into the following additional loan agreements with Banco de Venezuela:

 

    In March 2014, PDVSA entered into a Bolívar denominated loan agreement with Banco de Venezuela for a total amount of U.S.$476 million (Bs. 3,000 million), with an initial variable interest rate of 12% and a term of five years. The proceeds from this loan were used to finance the deep conversion project of Puerto La Cruz Refinery. As of December 31, 2015 the outstanding balance on this loan was Bs. 2,850 million (equivalent to U.S.$41 million).

 

    Two loans entered into in September 2014 for Bs. 4,000 million (equivalent to U.S.$635 million) with an annual interest rate of 12% and maturing in September 2022. These loans were used in the agriculture and manufacturing sectors. As of December 31, 2015, the amount outstanding under these loans was Bs. 3,375 million (equivalent to U.S.$49 million).

In February 2016, PDVSA entered into a revolving credit facility with Banco de Venezuela for a total amount of Bs. 20,000 million (equivalent to U.S.$126 million). The facility has an annual interest rate of 14% and matures in February 2017.

Banco de Desarrollo Económico y Social de Venezuela (BANDES)

In December 2015, PDVSA entered into a loan agreement with Banco de Desarrollo Económico y Social de Venezuela (BANDES) for a total amount of U.S.$30 million. The rate of interest is LIBOR plus 6.5%. Interest payments are made monthly. The term of the agreement is 39 months. The outstanding amount under this loan is U.S.$30 million. Amortization under this loan will begin on September 3, 2016.

Deutsche Bank Trust Company Americas

In June 2014, PDV Marina, S.A. entered into a loan agreement with Deutsche Bank Trust Company Americas for a total aggregate amount of U.S.$111 million with an interest rate of 7% for the acquisition of tugs, which matures in May 2019. As of December 31, 2015 the outstanding amount under this loan is U.S.$39.5 million.

 

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In March 2015, PDVSA entered into a U.S.$500 million credit facility with Deutsche Bank Trust Company Americas. The rate of interest under this credit facility is LIBOR plus 7.2%. Interest payments are made monthly and the term of the credit facility is 24 months. As of December 31, 2015, U.S.$20,833 million has been amortized. Payments under this facility may be made with the proceeds received from sales of crude oil and related products at market prices. As of December 31, 2015, the outstanding balance on this credit facility was U.S.$312 million.

CT Energía Holding Ltd.

In December 2015, CT Energía Holding Ltd, a Maltese company, granted a Bolívar denominated loan to the joint venture Petrodelta, S.A for Bs. 4,023 (equivalent to U.S.$20 million). This loan has an annual interest rate of 12% per annum and matures on third anniversary of the disbursement of the full loan amount. The proceeds of this loan may be used to cover the working capital needs of PDVSA. The outstanding amount under this loan as of December 31, 2015 was Bs. 4,023 (equivalent to U.S.$20 million).

Credit Suisse

In June 2012, PDVSA Petróleo, S.A. entered into a credit facility with Phoenix Infrastructure Funding (Ireland) Limited, other lenders referred to therein and Credit Suisse AG, as arranger and administrative agent, to finance part of PDVSA’s modification and expansion of its refining facilities in Puerto La Cruz, Venezuela. The total amount available to be drawn under the credit agreement is U.S.$1,000 million, loans drawn on the facility have a term of seven years and interest on any such loans is 8.70% per annum. PDVSA Petróleo’s obligations under the credit agreement are guaranteed by PDVSA. On September 3, 2014, PDVSA Petróleo, S.A. extended and modified the facility in the amount of U.S.$1,289 million dated June 2012. The modified facility amount is U.S.$2,206 million, which shall have quarterly amortizations and a 14-month grace period. As of December 31, 2015, the entire amount of the facility was drawn by PDVSA Petróleo, S.A. As of December 31, 2015, the outstanding amount under this facility was U.S.$1,950 million.

Chevron Boscan Finance B.V.

In May 2013, Petroboscan, S.A., a joint venture in which we have a majority interest, entered into a facility agreement with Chevron Boscan Finance B.V., in an aggregate principal amount of U.S.$2,000 million to finance projects for purposes of increasing Petroboscan’s hydrocarbon production. Loans made under the facility agreement accrue interest at LIBOR plus 4.5% per annum and mature approximately ten years from the applicable draw date. Pursuant to an associated guarantee agreement, PDVSA has a payment guarantee of 60% of Petroboscan, S.A.’s payment obligations under the facility agreement. Such guarantee can increase to 100% of the borrower’s payment obligations under certain circumstances. As of December 31, 2015, the outstanding amount for this facility was U.S.$461 million.

ENI Investments PLC Loan Agreement.

In November 2012, PDVSA entered into a loan agreement with ENI Investments PLC for U.S.$1,742 million, with an interest rate of LIBOR plus 5.00%, for financing new developments in the Orinoco Oil Belt. As of December 31, 2015, the outstanding amount for this facility was U.S.$96 million.

Banco Nacional de Desenvolvimento Económico e Social (BNDES) Credit Agreement

In September 2011, PDVSA entered into a credit agreement with the Brazilian Development Bank (BNDES), for the construction of the Astillero del Alba (Alba Shipyard), a project managed by the subsidiary PDVSA Naval, for an amount of up to U.S.$638 million with an interest rate of LIBOR plus 2.20% and a maturity date in 2024. As of December 31, 2015, an amount of U.S.$240 million from this credit facility has been drawn by PDVSA.

Banco Bicentenario Banco Universal Commercial Loan Agreement

In November 2013, PDVSA entered into a Bolívar denominated loan agreement with Banco Bicentenario Banco Universal, C.A. for Bs. 500 million (equivalent to U.S.$79 million) with a variable interest rate of 9.50%, maturing in 2018. As of December 31, 2015, the outstanding amount for this facility was Bs. 333 million (equivalent to U.S.$5 million).

 

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In February 2014, PDVSA entered into a Bolívar denominated loan agreement with Banco Bicentenario Banco Universal, C.A. for Bs. 4,000 million (equivalent to U.S.$635 million) with a variable interest rate of 12%, maturing in 2019. The proceeds from this loan were used to finance the deep conversion project of Puerto La Cruz Refinery. As of December 31, 2015, the outstanding amount for this facility was Bs. 3,800 million (equivalent to U.S.$55 million).

In August 2014, PDVSA entered into a Bolívar denominated loan agreement with Banco Bicentenario Banco Universal, C.A. for Bs. 1,200 million (equivalent to U.S.$190 million) with a variable interest rate of 12%, maturing in 2022. The proceeds from this loan were used in the agriculture sector. As of December 31, 2015, the amount outstanding under this loan was Bs. 1.012 million (equivalent to U.S.$15 million).

Deutsche Bank, S.A.E.

In June 2010, PDVSA entered into a facility agreement with Deutsche Bank, S.A.E., in an aggregate amount of €59 million (equivalent to U.S.$78 million), to finance investments in the domestic refining sector. This facility was paid in full in March 2016.

GE Note

In March 2015, PDVSA issued a U.S.$257 million note in favor of General Electric Capital Corporation, with amortizations and interest to be paid monthly and an interest rate of 6.5% per annum. As of December 31, 2015, the outstanding amount under this note was U.S.$171 million. This note was issued a result of the conversion of PDVSA’s outstanding commercial debt maintained with General Electric Capital Corporation into financial debt.

Second GE Note

In May 2016, PDVSA issued a three-year note for the amount of U.S.$194 million in favor of GE Capital Financing, Inc., with amortizations and interest to be paid quarterly and an interest rate of 6.5% per annum. This note was issued a result of the conversion of PDVSA’s outstanding commercial debt maintained with GE Capital Financing, Inc. into financial debt. As of August 31, 2016, the outstanding amount under this note is U.S.$178 million.

CPVEN Note

In June 2016, PDVSA issued a three-year note for the amount of U.S.$100 million in favor of Cementaciones Petroleras Venezolanas, S.A., with amortizations and interest to be paid quarterly and an interest rate of 6.5% per annum. This note was issued a result of the conversion of PDVSA’s outstanding commercial debt maintained with Cementaciones Petroleras Venezolanas, S.A. into financial debt. As of August 31, 2016, the outstanding amount under this note is U.S.$100 million.

Petroalianza Note

In June 2016, PDVSA issued a three-year note for the amount of U.S.$100 million in favor of Petroalianza, C.A., with amortizations and interest to be paid quarterly and an interest rate of 6.5% per annum. This note was issued a result of the conversion of PDVSA’s outstanding commercial debt maintained with Petroalianza, C.A. into financial debt. As of August 31, 2016, the outstanding amount under this note is U.S.$100 million.

Maritime Note

In June 2016, PDVSA issued a three-year note for the amount of U.S.$117,571,234.31 in favor of Maritime Contractors de Venezuela, S.A., with amortizations and interest to be paid quarterly and an interest rate of 6.5% per annum. This note was issued a result of the conversion of PDVSA’s outstanding commercial debt maintained with Maritime Contractors de Venezuela, S.A. into financial debt. As of August 31, 2016, the outstanding amount under this note is U.S.$117,571,234.31.

 

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Weatherford Note

In June 2016, PDVSA issued a three-year note for the amount of U.S.$120,000,009.00 in favor of Weatherford Latin America, S.C.A., with amortizations and interest to be paid quarterly and an interest rate of 6.5% per annum. This note was issued a result of the conversion of PDVSA’s outstanding commercial debt maintained with Weatherford Latin America, S.C.A. into financial debt. As of August 31, 2016, the outstanding amount under this note is U.S.$120,000,009.00.

Halliburton Note

In June 2016, PDVSA issued a three-year note for the amount of U.S.$200,000,123.50 in favor of Servicios Halliburton de Venezuela, S.A., with amortizations and interest to be paid quarterly and an interest rate of 6.5% per annum. This note was issued a result of the conversion of PDVSA’s outstanding commercial debt maintained with Servicios Halliburton de Venezuela, S.A. into financial debt. As of August 31, 2016, the outstanding amount under this note is U.S.$200,000,123.50.

ESVENCA Notes

In June 2016, PDVSA issued two three-year notes in the amounts of U.S.$30,000,000.00 and 36,082,436.00 in favor of Environmental Solutions de Venezuela, C.A., with amortizations and interest to be paid quarterly and an interest rate of 6.5% per annum. These notes were issued a result of the conversion of PDVSA’s outstanding commercial debt maintained with Environmental Solutions de Venezuela, C.A. into financial debt. As of August 31, 2016, the outstanding amounts under these notes are U.S.$30,000,000.00 and 36,082,436.00.

PROAMSA Notes

In June 2016, PDVSA issued two three-year notes for the amount of U.S.$13,518,837.80 each in favor of Proambiente, S.A., with amortizations and interest to be paid quarterly and an interest rate of 6.5% per annum. These notes were issued a result of the conversion of PDVSA’s outstanding commercial debt maintained with Proambiente, S.A. into financial debt. As of August 31, 2016, the outstanding amount under each of these notes is U.S.$13,518,837.80.

Elecnor Notes

In July 2016, PDVSA issued two three-year notes for the amount of U.S.$50 million each and two three-year notes for the amount of U.S.$45 million each, all in favor of Elecnor, S.A., with amortizations and interest to be paid quarterly and an interest rate of 6.5% per annum. These notes were issued a result of the conversion of PDVSA’s outstanding commercial debt maintained with Elecnor, S.A. into financial debt. As of August 31, 2016, the outstanding amounts under these notes are U.S.$50 million for the two three-year notes issued the amount of U.S.$50 million each, and U.S.$45 million for the two three-year notes issued in the amount of U.S.$45 million each.

Servicios Picardi Note

In September 2016, PDVSA issued a three-year note for the amount of U.S.$36,753,463.54 in favor of Servicios Picardi, C.A., with amortizations and interest to be paid quarterly and an interest rate of 6.5% per annum. This note was issued as a result of the conversion of PDVSA’s outstanding commercial debt maintained with Servicios Picardi, C.A. into financial debt. As of September 12, 2016, the outstanding amount under this note was U.S.$ 36,753,463.54.

 

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Perenco Holdings

In August 2014, Perenco Holdings, a Bahamian company, approved a facility for an amount of U.S.$420 million for the joint venture Petrowarao, S.A. This facility had a variable interest rate of LIBOR plus 4.5% per annum. The maturity date of this facility is December 21, 2025. The proceeds of this facility were used to finance the business plan of Petrowarao. As of December 31, 2015 the outstanding amount under this facility was U.S.$17 million.

Banco San Juan Internacional Credit Facility

On March 23, 2016, PDVSA entered into a U.S.$300 million credit facility with Banco San Juan Internacional, Inc., comprised of a U.S.$70 million revolving loan facility with a 6.25% per annum interest rate, and a U.S.$230 million term loan facility with a 7.50% per annum interest rate. The maturity date for (i) each revolving loan is 18 months after the date of the relevant disbursement, and (ii) each term loan is 24 months after the date of the relevant disbursement.

CITGO Loan Agreements

With respect to outstanding debt of CITGO Holding as of December 31, 2015, please refer to “Appendix A—CITGO Holding, Inc. Report for the Fiscal Year Ended December 31, 2015,” page A-72 and note 9, page A-107.

CITGO Senior Secured Credit Facility. On July 29, 2014, CITGO replaced its former senior secured credit facility due 2017 with a new U.S.$1.6 billion senior secured credit facility, which consists of a five-year U.S.$900 million revolving credit facility and a seven-year U.S.$650 million term loan B (collectively, the “CITGO Senior Secured Credit Facility”), which are described further below.

A portion of the proceeds from the CITGO Senior Secured Term Loan B, after deducting original issue discounts of U.S.$7 million and debt issuance costs of U.S.$29 million, together with a portion of the proceeds from CITGO’s senior secured notes due 2022 issued on July 29, 2014 (the “CITGO Senior Secured Notes”) described further below, were used to (i) repay all amounts outstanding under CITGO’s former senior secured credit facility, (ii) purchase and redeem all of CITGO’s former senior secured notes due 2017 and (iii) pay a U.S.$300 million one-time dividend to the CITGO shareholder. The outstanding amount under this facility as of December 31, 2015 is U.S.$822 million, which consists of the sum of U.S.$180 million for the revolving credit facility and U.S.$642 million for the CITGO term loan B.

CITGO Senior Secured Credit Facility is secured by CITGO’s interests in its Lake Charles, Louisiana, Corpus Christi, Texas and Lemont, Illinois refineries, its trade accounts receivable and its inventories and guaranteed by CITGO’s material subsidiaries and is subject to covenants customary for senior secured financings.

Material covenant provisions under the CITGO Senior Secured Credit Facility include:

 

    CITGO’s debt to capitalization ratio must not be more than 0.6 to 1.0 at the end of each quarter;

 

    CITGO may not dispose of assets, subject to certain exceptions, including inventory in the normal course of business and a general exception for dispositions of assets (not including CITGO’s refineries or certain other properties); provided the proceeds in excess of an aggregate amount of U.S.$750 million are reinvested in assets related to the business of CITGO and its subsidiaries or applied to repay debt;

 

    CITGO may not incur additional indebtedness, subject to certain exceptions;

 

    CITGO may not incur any liens on its properties or assets, subject to certain exceptions, including liens incurred in connection with permitted indebtedness;

 

    CITGO may not enter into any hedging agreements, except in the ordinary course of business and for the purpose of directly managing certain risks;

 

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    CITGO’s termination obligations under hedging agreements that are secured by the collateral that also secures the CITGO Senior Secured Credit Facility and CITGO’s Senior Secured Notes cannot exceed U.S.$200 million;

 

    CITGO may not make new investments, subject to certain limited exceptions, including, limited investments in subsidiaries and joint ventures and a general exception for investments including loans to and other investments in affiliates, not to exceed at any time the greater of U.S.$200 million and 3% of consolidated net tangible assets; and

 

    In addition to the one-time dividend of U.S.$300 million, CITGO may declare and pay dividends out of (i) 100% of its net income arising after April 1, 2014 on a cumulative basis, plus (ii) amount equal to the U.S.$170 million dividend paid in May 2014, plus (iii) certain permitted proceeds of dispositions of assets; dividend payments will be subject to minimum liquidity requirement of U.S.$500 million and a maximum debt to capitalization ratio of 0.55 to 1.0, in each case after giving effect to the declaration and payment of such dividend.

CITGO Secured Revolving Credit Facility. CITGO obtained in July 2014 a U.S.$900 million secured revolving credit facility due July 29, 2019. As of December 31, 2015 and 2014, there was U.S.$180 million and U.S.$50 million, respectively, outstanding under this secured revolving credit facility. As of December 31, 2015 CITGO had U.S.$712 million of available borrowing capacity under this facility and outstanding letters of credit totaling approximately U.S.$8 million issued against this facility. The interest rate at December 31, 2015 for this facility was 5.25%. At December 31, 2015, CITGO’s quarterly commitment fee was 0.50%.

CITGO Senior Secured Term Loan. As set forth above, CITGO entered into a U.S.$650 million term loan B due July 29, 2021. A portion of the total proceeds from the CITGO Senior Secured Credit Facility and CITGO Senior Secured Notes was used to repay the former CITGO term loans due 2015 and 2017, which at the time of repayment had a total outstanding principal amount of U.S.$667 million plus accrued and unpaid interest. The interest rate on December 31, 2015 was the 1.00% LIBOR floor plus 3.50%, or 4.50%. The CITGO Term Loan B amortizes in amounts equal to 1.00% of its initial principal amount annually, payable in equal quarterly installments with the balance payable at maturity. The outstanding amount under this facility as of December 31, 2015 is U.S.$642 million.

CITGO Tax-Exempt Bonds. As of December 31, 2015 and December 31, 2014, CITGO had U.S.$108 million of outstanding industrial development revenue bonds, respectively, the proceeds of which have been enlisted in certain projects at its Lake Charles, Louisiana; Corpus Christi, Texas; and Lemont, Illinois refineries. An additional U.S.$290 million of industrial revenue bonds were repurchased by CITGO in 2010 and will be held in treasury until such time as these selected industrial revenue bonds are either retired or remarketed at CITGO’s option. The U.S.$108 million in principal amount of outstanding industrial revenue bonds are secured on an equitable basis by the same collateral and have similar covenants as the senior secured credit facility. The outstanding bonds bear interest at various fixed rates which ranged from 4.875% to 8.0% on both December 31, 2015 and 2014. The final maturity dates for the outstanding industrial revenue bonds range from 2023 to 2032.

CITGO Senior Secured Notes. On July 29, 2014, CITGO closed on a private placement of U.S.$650 million aggregate principal amount of 6.25% senior secured notes due August 15, 2022 (the “CITGO Senior Secured Notes”). At each of December 31, 2015 and December 31, 2014, CITGO had U.S.$650 million CITGO Senior Secured Notes outstanding. The CITGO Senior Secured Notes bear interest at a fixed rate of 6.25% per annum. Interest is payable semi-annually on February 15 and August 15 of each year. The CITGO Senior Secured Notes are secured on an equitable basis by the same collateral that secures the CITGO Senior Secured Credit Facility, except that lenders under CITGO’s secured revolving credit facility will have priority to proceeds of certain inventory comprising the collateral.

The CITGO Senior Secured Notes may be redeemed by CITGO (i) prior to August 15, 2017, at a redemption price equal to 100% of the aggregate principal amount plus the applicable premium and accrued interest; (ii) during the twelve-month period beginning on August 15, 2017, at a redemption price equal to 104.688% of the aggregate principal amount plus accrued interest; (iii) during the twelve-month period beginning on August 15, 2018, at a redemption price equal to 103.125% of the aggregate principal amount plus accrued interest; (iv) during

 

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the twelve-month period beginning on August 15, 2019, at a redemption price equal to 101.563% of the aggregate principal amount plus accrued interest; and (v) on or after August 15, 2020, at a redemption price equal to 100% of the aggregate principal amount plus accrued interest. In addition, prior to August 15, 2017, CITGO may redeem up to 40% of the CITGO Senior Secured Notes with the net proceeds from certain equity offerings at a redemption price equal to 106.25% of the aggregate principal amount plus accrued interest, so long as certain conditions are met.

Under the terms and conditions of the CITGO Senior Secured Notes, CITGO is subject to certain covenants, such as certain restrictions on the ability to incur, assume or permit to exist additional indebtedness; guaranty obligations or hedging arrangements; incur liens or agree to negative pledges in other agreements; make loans and investments; declare dividends, make payments on or redeem or repurchase capital stock; limit the ability of CITGO’s subsidiaries to enter into agreements restricting dividends and distributions; engage in mergers, acquisitions and other business combinations; prepay, redeem or purchase CITGO’s indebtedness; sell assets; and enter into transactions with affiliates.

CITGO Holding Senior Secured Term Loan B. On February 12, 2015, CITGO Holding entered into a three-year U.S.$1.3 billion senior secured term loan B (the “CITGO Holding Senior Secured Term Loan B”). The proceeds from the CITGO Holding Senior Secured Term Loan B (after factoring in the original issue discount and debt issuance costs), together with the proceeds from the CITGO Holding Senior Secured Notes, were used to (i) establish debt service reserve accounts, (ii) fund a U.S.$100 million working capital and general corporate purposes reserve for CITGO Holding and (iii) pay a one-time cash dividend of U.S.$2.2 billion from additional capital to CITGO Holding’s shareholder. The interest rate on December 31, 2015 was the 1.00% LIBOR floor plus 8.50%, or 9.50%. Initially, the CITGO Holding Senior Secured Term Loan B amortized in amounts equal to 1.00% of its initial principal amount annually, payable in equal quarterly installments.

The CITGO Holding Senior Secured Term Loan B is secured by 100% of CITGO’s capital stock and 100% of the limited liability company interests in CITGO Holding’s other direct subsidiaries, CITGO Holding Terminals, Southwest Pipeline Holding and Midwest Pipeline Holding, as well as by minority pipeline interests and terminals owned by these other subsidiaries, and is guaranteed by CITGO Holding’s direct subsidiaries other than CITGO.

The CITGO Holding Senior Secured Term Loan B also requires certain mandatory prepayment offers, based on specified percentages of excess cash flow and asset sale proceeds of certain asset sales. CITGO Holding made mandatory excess cash flow prepayment offers and the lenders partially accepted the offers resulting in prepayments of U.S.$527 million in 2015. CITGO Holding may also make optional prepayments on the CITGO Holding Senior Secured Term Loan B, which prepayments shall require (i) during the twelve-month period beginning on February 12, 2016, a premium of 2.00% of the principal amount prepaid; and (ii) during the twelve-month period beginning on February 12, 2017, a premium of 1.00% of the principal amount prepaid. The outstanding amount under this facility as of December 31, 2015 is U.S.$762 million.

Under the terms and conditions of the CITGO Holding Senior Secured Term Loan B, CITGO Holding is subject to certain covenants, such as restrictions on the ability to declare or pay dividends (except if CITGO Holding meets certain conditions). In addition, CITGO may not incur indebtedness unless it meets certain financial ratios, and it may not dispose of certain assets.

Material covenant provisions under the CITGO Holding Senior Secured Term Loan B are substantially similar to those contained in CITGO’s Senior Secured Credit Facility, with certain variances, including the following:

 

    Certain restrictions are more flexible with respect to CITGO and its subsidiaries, including (i) CITGO’s debt to capitalization ratio must not be more than 0.75 to 1.0 at the end of each quarter (rather than 0.60 to 1.0), and (ii) CITGO is not restricted from paying dividends to CITGO Holding;

 

    Generally the covenants contain more restrictive terms with respect to CITGO Holding and the CITGO Holding guarantors;

 

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    CITGO Holding must maintain a debt service reserve account with funds sufficient to cover twelve or eighteen months of interest and required amortization of principal payments on the senior secured term loan; and

 

    In addition to the one-time dividend of U.S.$2.2 billion, CITGO Holding may declare and pay dividends from excess cash flow and proceeds of certain asset sales not required to be applied to prepay indebtedness and from amounts released from its debt service reserve accounts, provided that the debt service reserve account is funded sufficiently to cover eighteen months of interest and required amortization of principal payments on the CITGO Holding Senior Secured Term Loan B following the date of such restricted payment and (iii) CITGO Holding’s leverage ratio must not be more than 2.0 to 1.0, in each case after giving effect to the dividends.

CITGO Holding Senior Secured Notes. Also on February 12, 2015, CITGO Holding closed on a private placement of a U.S.$1.5 billion aggregate principal amount of 10.75% senior secured notes due February 15, 2020 (the “CITGO Holding Senior Secured Notes”). At December 31, 2015, CITGO Holding had U.S.$1.5 billion CITGO Holding Senior Secured Notes outstanding. Interest is payable semi-annually on March 31 and September 30 of each year. The CITGO Holding Senior Secured Notes are secured on a ratable basis by the same collateral that secures the CITGO Holding Senior Secured Term Loan B, and are guaranteed by CITGO Holding’s subsidiaries other than CITGO.

The indenture governing the CITGO Holding Senior Secured Notes requires that CITGO Holding make offers to purchase the notes based on triggers similar to the mandatory prepayment for the CITGO Holding Senior Secured Credit Facility, following the repayment of the CITGO Holding Senior Secured Credit Facility. Prior to February 15, 2017, CITGO Holding may redeem up to 40% of the CITGO Holding Senior Secured Notes with the net proceeds from certain equity offerings at a redemption price equal to 110.75% of the aggregate principal amount plus accrued interest, so long as certain conditions are met. In addition, at any time the CITGO Holding Senior Secured Notes may be redeemed by CITGO Holding at a redemption price equal to 100% plus the applicable premium and accrued interest.

Under the terms and conditions of the CITGO Holding Senior Secured Notes, CITGO Holding is subject to certain covenants, such as restrictions on the ability to incur, assume or permit to exist additional indebtedness; guaranty obligations or hedging arrangements; incur liens or agree to negative pledges in other agreements; make loans and investments; declare dividends, make payments on or redeem or repurchase capital stock; limit the ability of CITGO Holding’s subsidiaries to enter into agreements restricting dividends and distributions; engage in mergers, acquisitions and other business combinations; prepay, redeem or purchase CITGO Holding’s indebtedness; sell assets; enter into transactions with affiliates; and maintain a debt service reserve account with funds sufficient to cover two or three semi-annual interest payments. CITGO Holding used a portion of the total net proceeds received from the CITGO Holding Senior Secured Term Loan B and the CITGO Holding Senior Secured Notes to establish a debt service reserve account.

Accounts Receivable Securitization Facility. CITGO owns a limited purpose consolidated subsidiary, CITGO AR2008 Funding Company, LLC (“AR Funding”). AR Funding established a non-recourse facility in June 2008 to transfer an undivided interest in specified trade receivables (the “pool”) to independent third parties, which is referenced to herein as the Secured Financing Arrangement. The interest that may be held by third parties at any one time under the Secured Financing Arrangement cannot exceed U.S.$450 million. The Secured Financing Arrangement has been renewed on multiple occasions, with a current maturity date of June 2, 2017. Under the terms of the Secured Financing Arrangement, new receivables are added to the pool as previously transferred receivables are collected (administered by CITGO).

As of December 31, 2015 and 2014, U.S.$551 million and U.S.$805 million, respectively, of CITGO’s accounts receivable comprised the designated pool of trade receivables owned by AR Funding. As of December 31, 2015 and 2014, U.S.$165 million and U.S.$250 million, respectively, of receivables in the designated pool that were held by third parties were included in accounts receivable, net and in the Secured Financing Arrangement on the consolidated balance sheets. As of December 31, 2015, CITGO had U.S.$67 million of available capacity under the Secured Financing Arrangement.

 

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Other Short-Term Liabilities

In December 2013, notes for a total amount of U.S.$21,524 million (equivalent to Bs. 135,600 million) were offset against accounts receivable as a method of payment for the sale to BCV of 40% of PDVSA’s shares in Empresa Nacional Aurífera, S.A.

During 2013, PDVSA recognized a decrease in liabilities for promissory notes denominated in Bolívares in the amount of U.S.$6,770 million as a result of the changes in the exchange rate. In addition, PDVSA issued promissory notes in the amount of U.S.$36,064 million for general corporate purposes, with annual interest rates ranging from 0.50% to 1.5% and maturing between 2015 to 2022. PDVSA also refinanced U.S.$15,579 million in promissory notes and paid promissory notes in the amount of U.S.$6,459 million.

At December 31, 2015, accounts payable to related parties were U.S.$6,650 million, corresponding to promissory notes issued in favor of the BCV.

At December 31, 2015, we had outstanding short-term liabilities with related entities amounting to U.S.$2,691 million, which consists mainly of taxes and contributions payable by U.S.$6,650 million and promissory notes in favor of the ONT having an aggregate principal amount of U.S.$11,145 million.

 

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BUSINESS

Overview

We are a corporation (sociedad anónima) organized under the laws of Venezuela, formed in 1975 by the Venezuelan government to coordinate, monitor and control all operations relating to hydrocarbons. We are wholly owned by Venezuela and are the holding company for a group of oil and gas companies. We are the fifth largest vertically integrated oil company in the world with daily crude oil production of 2,746 million barrels per day as of December 31, 2015, or mbpd, as measured by a combination of operational data, including volume of reserves, production, refining and sales, based on information published in Petroleum Intelligence Weekly on November 16, 2015, a trade publication. We carry out our exploration, development and production (“upstream”) operations in Venezuela and our sales, marketing, refining, transportation, infrastructure, storage and shipping (“downstream”) operations in Venezuela, the Caribbean, North America, South America, Europe and Asia. Through PDV Holding, a wholly-owned subsidiary, we indirectly own 100% of CITGO, a refiner and marketer of transportation fuels, petrochemicals and other industrial oil-based products in the United States. We plan to invest in upstream and downstream projects in Venezuela and abroad in order to satisfy the current and expected global increase in energy demands.

Our Business Plan outlines the development of production and refining projects totaling U.S.$132 billion in Venezuela, the Caribbean, Latin America and Asia during its initial stage between 2016 and 2025. Such expenditures are subject to the availability of cash from our operations, obtaining financing on reasonable terms and the favorable pricing of crude oil and gas. During the three-year period ended December 31, 2015, we invested U.S.$66,687 million in development projects in such regions. During the year ended December 31, 2015, we invested U.S.$18,106 million in such projects.

All hydrocarbon reserves in Venezuela are owned by Venezuela and not by us. Under the Organic Hydrocarbons Law, as amended, every activity relating to the exploration and exploitation of hydrocarbons and their derivatives is reserved to the government of Venezuela, which may undertake such activities directly or through entities controlled by Venezuela through an equity participation of more than 50%. At the current production rate of crude oil and gas, Venezuela has proved hydrocarbon reserves of crude oil for the next 301 years for oil and 73 years for gas.

We mainly sell crude oil to the United States, Canada, the Caribbean, Africa, Europe, South America and Asia. In addition, we refine crude oil, with a refining capacity of approximately 2.7 mmbpd and other feedstock in Venezuela and abroad into a number of products, including gasoline, diesel, fuel oil and jet fuel, petrochemicals and industrial products, lubricants and waxes, and asphalt. We are also engaged in the exploration and production of gas with a production of 913 boe per day as of December 31, 2015.

Our registered office is located at Avenida Libertador, La Campiña, Apartado 169, Caracas 1050-A, Venezuela, and our telephone number is 011-58-212-708-4111. Our website is: www.pdvsa.com. Information contained on our website is not part of this offering circular.

Social Development

Pursuant to the Venezuelan Constitution, the Organic Hydrocarbons Law and social policy, we are required to foster Venezuela’s socio-economic development and the welfare of its citizens. To that effect, we make and are expected to continue to make significant financial contributions to social programs, including transfers to FONDEN (Fondo de Desarrollo Nacional) and other programs, which are included in our annual budget together with other expenses aimed to fund specific social projects, as determined by our Board of Directors, certain of which are recorded as part of our capital expenditures in accordance with applicable accounting rules. We promoted and participated in Venezuela’s social and economic development by contributing significant funding to agricultural developments, development of infrastructure and roads, programs related to the provision of food, health and education to the poor, as well as several other programs. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Social Development Expenses.”

 

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We contributed a total of U.S.$30,079 million in 2011, a total of U.S.$17,336 million in 2012, and a total of U.S.$13,023 million in 2013 to social development, which are reflected as social development expenses in our consolidated statements of income included elsewhere in this offering circular. These contributions are in addition to taxes and dividends we pay annually to Venezuela, as well as the social projects we have funded, which are recorded as part of our capital expenditures because they relate to one of our oil and gas production projects.

Organizational Structure

We conduct our operations through our Venezuelan and international subsidiaries.

Through December 31, 1997, we conducted our operations in Venezuela through three main operating subsidiaries, Corpoven, S.A., Lagoven, S.A. and Maraven, S.A. In 1997, we established a new operating structure based on business units. Since then, we have been involved in a process of changing our organizational structure with the aim of improving our productivity, modernizing our administrative processes and enhancing the return on capital. The transformation process involved the merger of Lagoven, S.A. and Maraven, S.A. into Corpoven S.A., effective January 1, 1998, and the renaming of the combined entity PDVSA P&G. In May 2001, PDVSA P&G was renamed “PDVSA Petróleo, S.A.” and, by the end of 2002, certain non-associated gas assets were transferred to PDVSA Gas.

In accordance with instructions from the Venezuelan government and the guidelines of the Ministry of Petroleum, in 2006 and 2007, we finalized the conversion of operating service agreements into majority owned joint ventures and transferred association agreements to majority owned joint ventures, including the projects processing extra heavy crude oil in the Orinoco Oil Belt, as well as profit and risk exploration agreements.

Additionally, we have made several adjustments within our organization in order to enhance internal controls to improve our corporate governance and to align our operating structure with the long-term strategies of Venezuela by the adopting a new framework of operating structure that increases the involvement of our Board of Directors in our activities, and, at the same time, enhances our operational flexibility.

The following is a list of our material wholly-owned subsidiaries:

 

  PDVSA Petróleo, S.A.

 

  Corporación Venezolana del Petróleo, S.A.

 

  PDVSA Gas, S.A.

 

  PDVSA Servicios, S.A.

 

  PDV Marina, S.A.

 

  Bariven, S.A.

 

  PDV Holding, Inc.(1)

 

  PDVSA Industrial, S.A.

 

  PDVSA América, S.A.

 

(1) PDV Holding’s main subsidiary is CITGO Holding. PDVSA’s operations in the United States occur mainly through CITGO Holding’s subsidiaries, including CITGO and its subsidiaries.

 

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Business Overview

We engage in the following activities in the oil and gas industries through our subsidiaries:

 

  Upstream operations;

 

  Downstream operations; and

 

  Exploration and production of natural gas from offshore sources.

According to a comparative study published on November 16, 2015 by Petroleum Intelligence Weekly, a trade publication, we are the world’s fifth largest vertically integrated oil and gas company. Additionally, we ranked first in proved reserves of crude oil, according to the 2015 OPEC Annual Statistical Bulletin, and seventh in the world in crude oil production, seventh in refining capacity, sixth in proved gas reserves, fifteenth in gas production, and thirteenth in product sales, according to Petroleum Intelligence Weekly.

Venezuela’s crude oil and natural gas reserves and our upstream operations are located in Venezuela, while our downstream operations are located in Venezuela, the Caribbean, North America, South America, and Europe.

Our upstream and downstream operations include:

 

  Operating exploration, development and production of crude oil and gas and the development and operation of associated crude oil and gas production facilities;

 

  Operating refineries and marketing of crude oil and refined petroleum products in Venezuela under the PDV brand name and operating refineries and marketing of refined products for the international markets, including eastern and Midwestern regions of the United States under the CITGO brand name;

 

  Operating businesses in the Caribbean through the Isla refinery (a refinery and storage terminal which we lease in Curaçao), Camilo Cienfuegos refinery in Cuba, the Refidomsa refinery in the Dominican Republic and Petrojam refinery in Jamaica;

 

  Refining business in the United States with six refineries, three of which are owned by CITGO: Lake Charles, Louisiana refinery, Corpus Christi, Texas refinery and Lemont, Illinois refinery; and three in which we have a 50% interest: Hovensa refinery, which was closed in February 2012, and a vacuum oil and coke distilling plant named Merey Sweeny;

 

  Owning equity interests in two refineries (one that is 50%-owned by ExxonMobil and one that is 50%-owned by Hess) and in a coker/vacuum crude distillation unit (50%-owned by ConocoPhillips) through joint ventures in the United States;

 

  Refining businesses in Europe, through an affiliate of PDV Europa B.V.;

 

  Maritime transport activities through our subsidiary PDV Marina;

 

  Gas business through PDVSA Gas, a vertically integrated subsidiary in charge of gas extraction and processing for the production of liquefied natural gas, as well as transportation and marketing of gas in the domestic markets and exports of liquefied natural gas;

 

  Operating storage terminals in Bonaire and Curaçao in the Caribbean;

 

  Infrastructure and commercial services for clients for retail fuel and lubricants;

 

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  Owning equity interests in four refineries and the marketing of petroleum products in the United Kingdom and Sweden through a joint venture (that is 50%-owned by Neste Oil AB and 50%-owned by PDV Europa);

 

  Exploration and production services through PDVSA Servicios, S.A.;

 

  Research and development activities through INTEVEP, S.A.; and

 

  Shipping activities.

United States

PDV Holding owns 100% of CITGO through CITGO Holding. CITGO is one of the largest refiners of crude oil in the United States. CITGO’s crude oil refining capacity at December 31, 2015 was 749 mbpd across three refineries located in Lake Charles, Louisiana; Corpus Christi, Texas; and Lemont, Illinois. These refineries have refining capacities of 425 mbpd, 157 mbpd and 167 mbpd, respectively. CITGO manufactures or refines and markets transportation fuels as well as petrochemicals, other industrial products and lubricants in the United States. CITGO Holding’s consolidated financial statements also include accounts relating to pipelines and equity interests in pipeline companies and petroleum storage terminals.

CITGO’s transportation fuel customers include CITGO branded wholesale marketers and other light oil suppliers located in the United States (mainly east of the Rocky Mountains). Lubricants are sold principally in the United States to independent marketers, mass marketers and industrial customers. Petrochemical feedstock and industrial products are sold to various manufacturers and industrial companies throughout the United States. Petroleum coke is sold primarily in international markets.

In 2015, CITGO sold a total of 15.5 million gallons of refined products, compared to 14.8 million gallons sold in both 2014 and 2013.

In the United States, we also conduct our crude oil refining operations and refined petroleum product marketing through our wholly-owned subsidiary, PDV Holding, which owns 50% of Merey Sweeny (through PDV Sweeny), a joint venture with ConocoPhillips that owns and operates a coker and vacuum crude distillation unit in Sweeny, Texas. Prior to the sale of our interest to a third party on October 31, 2015, we also owned a 50% interest in the Chalmette Refinery, located in Chalmette, Louisiana, which was jointly owned with ExxonMobil. See “Business—Legal Proceedings— PDV Sweeny and ConocoPhillips Company.

Europe

Within Europe, we conduct our crude oil refining and refined petroleum product activities through our wholly-owned subsidiary, PDV Europa, which owns 50% interest in A.B. Nynäs Petroleum (“Nynäs”), a company with operations in Sweden and the United Kingdom and jointly owned with Neste Oil. Through Nynäs, we refine crude oil and market and transport asphalt, specialty products, lubricants, and other refined petroleum products.

Latin America and Caribbean

In recent years we have expanded our operations in Latin America and the Caribbean, including by making investments in refineries and entering into supply agreements. In the Caribbean, we operate the Isla refinery in Curaçao, which is leased on a long-term basis from the Netherlands-Antilles government through 2019. The Isla refinery has a nominal refining capacity of 335 mbpd. During 2012, the Isla Refinery was shut down periodically for maintenance and improvement, pursuant to an agreement with the government of Curaçao. As a result of such maintenance, the refinery’s production was limited to 180 mbpd in 2013. During 2014, the production at the Isla Refinery was 192 mbpd and during 2015, production at the Isla Refinery was 183 mbpd. Certain refinery projects which were included in prior business plans, such as: Refinería Abreu e Lima, in Pernambuco, Brazil and the “Eloy Alfaro Delgado” Pacific Refinery Complex in Ecuador were cancelled due to the decline in oil revenues.

 

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In Cuba, Jamaica and the Dominican Republic we own a 49% interest in the Cienfuegos, Kingston and Refidomsa refineries. The Cienfuegos refinery has a refining capacity of approximately 65 mbpd, while the Kingston refinery has an installed capacity of 35 mbpd. The Refidomsa refinery has a refining capacity of approximately 34 mbpd and supplies approximately 70% of the fuel oil market in the Dominican Republic. In July 2016, the partial shutdown of the Cienfuegos refinery due to maintenance was announced.

Energy Cooperation Agreements (Convenios de Cooperación Energética)

The Venezuelan government entered into the following agreements together with the governments of other countries, mainly from Latin America and the Caribbean: Caracas Energy Cooperation Agreement (CECA), Integral Agreement of Cooperation (IAC) and the Petrocaribe Energy Cooperation Agreement (PETROCARIBE) (collectively, the “Energy Cooperation Agreements”). These agreements establish, among others, that PDVSA will supply crude oil and products to the state oil companies of the participating countries. See note 7 to our annual audited consolidated financial statements for the year ended December 31, 2015.

In furtherance of the provisions set forth in the CECA, the IAC and the PETROCARIBE agreements, we entered into supply agreements with the national oil company of each of the countries participating in said agreements for the supply of 357 mbpd, 357 mbpd and 377 mbpd for the years ended December 31, 2015, 2014 and 2013, respectively. Most of these agreements provide for a sale price equal to the market value, payment terms between 30 and 90 days for a significant portion of every shipment, and long-term financing for the remaining portion (between 15 and 25 years) and they are effective for one year and may be extended by agreement of the parties involved. See note 8 to our annual audited consolidated financial statements.

A significant portion of a shipment varies depending on the current oil price; the higher the price, the lower the portion to pay and the higher the financing portion.

In 2000, the Venezuelan government entered into a cooperation agreement with the governments of Cuba, the Dominican Republic, Paraguay, Bolivia, Jamaica, and Uruguay that provides that we will enter into a supply agreement with the national oil company of each country for the supply of crude oil and refined products based on the number of barrels agreed by the Venezuelan government or provided under the CECA.

Pursuant to the IAC, we entered into an agreement with the national oil company of Cuba in 2000 for the supply of 53 mbpd of crude oil. The agreement was subsequently amended to provide for the supply of up to 98 mbpd of crude oil.

Trade Related Term Loan Facility

PDVSA supplies crude oil on behalf of the Bolivarian Republic of Venezuela in connection with three trade agreements between the Bolivarian Republic of Venezuela and the People’s Republic of China: Fondo Pesado I, Fondo Pesado II and Gran Volumen. Pursuant to these agreements, PDVSA has supplied an aggregate amount of 627 mbpd, 477 mbpd and 485 mbpd during 2015, 2014 and 2013, respectively.

Selected Supply Agreements

In November 2013, PDVSA entered into an oil-backed prepayment agreement with Gazprombank, in an aggregate amount of U.S.$1 billion. The proceeds of the prepayment will be applied towards expanding infrastructure and increasing production at the Petrozamora project, a joint oil exploration venture. As a result of the agreement, production at the project is expected to increase from 63,000 barrels per day to 104,000 barrels per day. The sale of oil produced by Petrozamora will support repayment under this agreement.

In December 2013, PDVSA Petróleo, S.A. and Petrozamora, S.A. (Petrozamora), a joint venture in which we have a majority interest, entered into a prepayment and reimbursement agreement with GPB Energy Services B.V., in an aggregate principal amount of U.S.$1,000 million. The proceeds of the prepayment will be used by Petrozamora to finance projects for purposes of increasing Petrozamora’s hydrocarbon production. The prepayments are divided into two components: (i) an initial prepayment (on a revolving basis) for U.S.$250 million and (ii) subsequent prepayments up to an amount of U.S.$750 million. As of December 31, 2015, the outstanding amount under this agreement is U.S.$73 million.

 

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Natural Gas Exploration and Production

Our natural gas exploration and production business is conducted by our vertically integrated wholly-owned subsidiary, PDVSA Gas. This subsidiary engages in onshore natural gas exploration and production activity and the processing of gas for NGL production, as well as transportation and marketing gas in the domestic market. Additionally, PDVSA Gas processes gas produced by our eastern and western exploration and production divisions, receiving all the remaining gas after consumption for our operations, for transport and marketing in the domestic market. Our wholly-owned subsidiary CVP manages offshore natural gas projects. Our wholly-owned subsidiary PDVSA Petróleo manages the offshore natural gas Mariscal Sucre Project, and CVP manages all other offshore natural gas projects with third parties.

Research and Development

We manage our research and development activities through our wholly-owned subsidiary INTEVEP.

Business Strategy

Our Business Plan takes into account the impact of the global economic conditions on the demand for oil and the expectations for global economic growth, as well as the projected supply of oil worldwide, the capabilities and challenges related to oil and gas production in Venezuela, and the consolidation of PDVSA’s non-oil businesses. Our Business Plan is based on the following key initiatives approved by the government of Venezuela:

 

  Exploration of Condensate and Light and Medium Crude Oil. We intend to focus primarily on areas that have been already explored and that are currently producing crude oil. All other exploration areas, both onshore and offshore, are open to third-party participation in partnership with us, under the framework of the Organic Hydrocarbons Law and the Venezuelan Constitution.

 

  Development of the Hugo Chávez Orinoco Oil Belt Magna Reserves. The Hugo Chávez Orinoco Oil Belt (“Orinoco Oil Belt”) area (55,314 km2) has been divided into 36 blocks for reserves quantification and certification of original oil on site purposes. There are approximately 1,469,011 million barrels of Original Oil in Place (“OOIP”) in the Orinoco Oil Belt. Of such amount, approximately 287,096 million barrels have been certified as recoverable reserves, based on a total recovery factor of 20%. See “Risk Factors – Venezuelan proved crude oil and gas reserve estimates involve some degree of uncertainty and may prove to be incorrect over time, which could adversely affect our ability to generate income.” We intend to participate actively in the development of these reserves.

 

  Production Growth in Mature Areas. We are investing in mature areas with a view to achieve a crude oil production capacity in these areas of 1,221 mbpd by 2025. The projected production in mature areas for the period leading up to 2025 includes the following: 767 mbpd from areas where we are the sole operator and 454 mbpd from joint ventures producing light, medium and heavy oil.

 

  Expansion of Orinoco Oil Belt Production. We intend to obtain 1,949 mbpd from the expansion of our existing and future operations in the Orinoco Oil Belt. This growth represents an increase of 629 mbpd from 1,320 mbpd in 2015 to 1,949 mbpd in 2025 (including 112 mbpd in mature areas of the Orinoco Oil Belt), which we plan to implement by developing our extra-heavy crude oil reserves, including a new upgrading facility and pipelines. The expected investment for the years 2016 through 2025 is U.S.$71,567 million. The expected total oil production capacity for 2025, including existing production and the expansion of the Orinoco Oil Belt, offshore crudes, NGL and the mature areas, is 3,180 mbpd. The growth of oil production capacity is expected to occur through joint ventures in which we typically have a 60% stake and international oil companies have the remaining 40% stake.

 

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  Development of Major Projects in Refineries. We intend to expand our refinery capacity from approximately 2.5 mmbpd in 2015 (1.3/1.2 mmbpd Venezuela/overseas capacity) to 2.7 mmbpd by 2025 (1.3/1.4 mmbpd Venezuela/overseas capacity). We expect that the implementation of this initiative will allow us to increase our production of refined petroleum products and upgrade our product slate towards higher-margin products, as well as to improve the efficiency of our existing refining capacity. The focus of our refining capacity expansion will be the incorporation of heavier crude oil from the Orinoco Oil Belt expansion into the national refinery system. We currently have in process a major upgrade project to increase the refining capacity of the Puerto La Cruz Refinery. Certain major projects which were part of prior business plans, such as Paraguaná and El Palito, have been postponed due to the decline in oil revenues. In addition, we intend to expand our refining capacity and develop a new refinery in Asia.

 

  Development of the Gas Sector. We have plans to continue developing our onshore and offshore gas reserves with third-party participation under the framework of the Venezuelan Organic Law of Gaseous Hydrocarbons. We intend to maintain our natural gas production from 7,756 mmcfd in 2015 to 7,699 mmcfd by 2025 (equivalent to 1.33 mbpd). In particular, we intend to focus on the development of the Delta Caribe, an initiative consisting of the Northeast Delta Caribbean Project and the Rafael Urdaneta Project in western offshore Venezuela. These projects involve the development of gas reserves located north of Paria (the Mariscal Sucre Project) and Gulf of Venezuela (Cardón IV/Rafael Urdaneta Project). With respect to northeast developments, we intend to link all blocks by a gas pipeline network to the future Güiria Hub, where an industrial complex, Gran Mariscal de Ayacucho, or CIGMA, is expected to be developed. For Gulf of Venezuela natural gas developments, we plan to connect the gas production blocks in the Península de Paraguaná with the domestic gas transportation system.

 

  Development of Infrastructure. We plan to implement an infrastructure program focused on multiple projects with the aim of securing the development of crude oil and gas reserves, particularly in the Orinoco Oil Belt. This program includes the building of about 8.0 million barrels of oil storage capacity, one liquid terminal in Punta Cuchillo (Orinoco River), the expansion of the existing liquid terminal in Jose, approximately 640 km in oil pipelines, the expansion of existing gas pipelines, and 1,924 km in new gas pipelines.

 

  Marketing of Crude and Products. We intend to continue supplying the local market and exporting crude oil, refined products and natural gas, including refineries and wholesalers in order to improve our margins, and maintaining our markets in Asia, Europe and North America related to the transport logistics. We expect to renew and expand our tanker fleet and increase our maritime transporting capacity from its current controlled fleet of 2,642 tdwt to 9,122 twdt by 2025, as well as increase the number of vessels we own from 26 vessels to 75. In addition, we are expanding and diversifying our marketing efforts in Latin America, the Caribbean and Asia, including China, India and Russia, with the goal of reaching total crude oil exports of 2.6 mbpd by 2025.

 

  Auto Gas Project. Since 2006, we have been developing a project aimed at reducing the domestic gasoline demand by creating natural gas dispatch facilities for vehicles and converting vehicles to dual fuel engines on a national scale. The project’s goals include the construction of 473 new compressed natural gas (“CNG”) stations, as well as the construction and outsourcing of more than 200 vehicle conversion centers and the reactivation of 141 existing CNG stations. As of December 31, 2015, we had 342 CNG stations and 39 vehicle conversion centers. Our total estimated investment in this project for the period beginning 2016 through 2025 is expected to be U.S.$2,189 million.

 

  Production Strategy with Naphtha Stripper for the Orinoco Oil Belt. We have implemented a production strategy in the Orinoco Oil Belt in order to start production before upgraders are built and operational. This strategy consists of the construction of one naphtha stripper that will allow transportation of extra-heavy crude oil diluted with naphtha from the production fields to the port terminals and/or storage tanks where the stripper is to be located. The stripper will remove naphtha diluted with extra-heavy crude oil to send it back to the production field for re-use as a transport diluting agent and to allow the extra-heavy crude oil to be blended with other light crudes in order to obtain a commercially viable crude product. The naphtha stripper will have a total capacity of 260 mbpd and will require an investment of U.S.$725 million. The basic engineering for the naphtha stripper is being completed and its construction is expected to be finalized by 2022.

 

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  Exploration Projects. Our prior exploration strategy, known as Integral Exploration Projects (PIEX), included eight exploration projects covering the entire national territorial area with the aim of adding an estimated 8,045 million barrels of crude oil and 40.0 trillion cubic feet of gas. Currently, we are focused on an exploration strategy focused on: (i) concentrating the exploration efforts in new and traditional areas that lead to the incorporation of new light and medium crude oil and non-associated gas; (ii) executing an exploration plan for the incorporation of reserves associated to the Cretaceous in the Orinoco Oil Belt and the Lake Maracaibo; (iii) increasing the proved reserves of light and medium crude oil and non-associated gas from the conversion of the probable reserves with the execution of re-exploration and outline projects; (iv) accelerating the integrated characterization of fields with the purpose of establishing the exploitation plans and strategies that enhance the volumetric growth in Venezuela; and (v) executing a Specific Exploration Plan in border areas in Venezuela to strengthen Venezuela. The Exploration Plan includes the acquisition of 7,258 km2 of seismic 2D and 4,065 km2 of seismic 3D in the period 2016 – 2025, 131 exploratory wells, and includes the addition of 1,047 mbpd of oil and 2.3 bcf of new natural gas reserves. The total estimated investment in these projects from 2016 through 2025 is U.S.$2,386 million. As of December 31, 2015, total disbursements in the projects since 2011 have amounted to U.S.$1,454 million.

Our Business Plan outlines the development of production and refining projects totaling U.S.$302 billion in Venezuela, the Caribbean, Latin America and Asia during its initial stage between 2014 and 2019. Such expenditures are subject to the availability of cash from our operations, obtaining financing on reasonable terms and the evolution of the price of crude oil and gas. We expect that 81% of these expenditures will come from us and 19% from our partners in the applicable projects. During the three-year period ended December 31, 2015, we invested U.S.$66,687 million in development projects in such regions. During the year ended December 31, 2015, we invested U.S.$18,106 million in such projects.

The implementation of our business strategy includes the following initiatives:

Exploration, production and upgrading. Our exploration and production strategy focuses on increasing our efforts to search for new light crude oil and medium crude oil reserves as well as the systematic replacement of such reserves in mature areas. We are developing new production areas and adjusting our production activities to cater toward market demands and agreements reached among OPEC members and other oil-producing countries.

During 2015, PDVSA’s exploration projects were completed in accordance with strategic guidelines included in the Plan de la Patria, Segundo Plan Socialista de Desarrollo Económico y Social de la Nación, 2013-2019 (National Plan for Social and Economic Development) and the Business Plan. As a result of steps taken in 2015, PDVSA incorporated new proven and probable reserves through the drilling, evaluation of eleven exploratory wells. At December 31, 2015, we had concluded three additional projects in Venezuela, some of which include: (i) Proyecto Flanco Norandino Este (PGO), (ii) Reexploración Bachaquero Lago, and (iii) Proyecto Barinas Este (PGP).

Refining. Our refining strategy focuses on expanding and improving the efficiency of our downstream operations. We are in the process of adding deep conversion capacity to the Puerto La Cruz Refinery in order to increase the efficiency of heavy crude oil processing, while maintaining our environmental compliance standards. In our refineries in the United States, Europe and the Caribbean, we intend to continue to invest in order to comply with quality standards required by those markets. In addition, we intend to invest in the Nanhai (Jie Yang) – China refinery. Certain refinery projects which were included in prior business plans, such as: Batalla Santa Ines and Petrobicentenario were cancelled due to the decline in oil revenues.

International marketing. We plan to continue expanding our international marketing operations to ensure the growth of our market share for our crude oil and refined petroleum products and to increase brand recognition for our products. We seek to diversify our customer portfolio by increasing and strengthening our commercial strategies in markets such as China, India, Japan, Russia and Southeast Asia. We also intend to expand our operations in the Caribbean and South America and aim to maintain our market position in the United States and some other European countries through a more efficient distribution system of CITGO’s refined petroleum products.

 

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In order to improve our logistic and maritime transportation capabilities, we intend to buy a set of 49 tankers (most of them VLCCs). These tankers are expected to increase the number of ships owned from 26 vessels to 75 by the end of 2025.

Domestic marketing. In Venezuela, we plan to continue to supply our products and promote the use of unleaded gasoline and to improve the competitive position of our network of service stations, lubrication centers and macro-stores. We also to intend to continue the development of our commercial network through business relationships and other associations and to increase our product supply to high-traffic airports.

Natural Gas. The development of the gas exploration and production business is one of our major goals. We intend to focus our activities on meeting the growing gas demand to foster national development and a higher standard of living. We plan to focus on creating attractive investment opportunities for the private sector in non-associated gas production. We intend to expand our transportation and distribution systems, processing and fractionation capacity, and develop new gas export ventures. We intend to continue to explore and develop non-associated gas reserves with the support of private investors. We are engaged in the development of a large gas distribution network in different cities to provide gas for residential, commercial and industrial purposes. We intend to promote an increased and more diverse use of gas in Venezuela.

Private Sector Participation in Natural Gas. In 2001, the Ministry of Petroleum completed a round of onshore non-associated gas licensing bids for exploration and production activities in 11 new onshore areas. Six areas were awarded to foreign and domestic investors: Yucal-Placer Norte, Yucal-Placer Sur, Barrancas, Tinaco, Tiznado and Barbacoas. During the first quarter of 2003, the Venezuelan government assigned two blocks within the Deltana Platform area (eastern Venezuela and on the maritime border with Trinidad & Tobago) to Statoil, Chevron and ConocoPhillips. In addition, the Ministry of Petroleum has plans for a new bidding round to explore and develop offshore resources in the west and northeast of Venezuela. These developments are likely to include projects for the production of LNG once demand in Venezuela has been met. The Ministry of Petroleum has defined an offshore gas project called Rafael Urdaneta located in the Venezuelan Gulf and northeast of Falcon State with an area of 30,000 km2 divided into 29 blocks to be offered in three phases. Phase one began during the second quarter of 2005, when the Venezuelan government offered the first six blocks to 37 national and foreign oil companies. During this phase, three blocks were awarded. During the third quarter, phase two began with the offering of 5 blocks (4 new and 1 from the 1st phase), 2 of which were awarded. Blocks Urumaco I and II were awarded to the Russian company Gazprom, block Cardón III was awarded to Chevron, block Cardón IV was awarded to Repsol-ENI and block Moruy II was awarded to Petrobras-Teikoku. The third phase is to be defined in the future. In April 2014, block Urumaco I was returned to the Republic of Venezuela pursuant to Resolution No. 031, dated April 21, 2014.

A discovery of approximately 9,500 billion cubic feet was made in 2010 in La Perla field (9.5 TCF), located within the Cardón IV Area. This field is being developed by ENI and Repsol pursuant to a license agreement. In 2012, the Ministry of Petroleum approved the commercial status of this field, and a contract for the sale of gas was entered into between the parties and PDVSA Gas, which guarantees the off-take and gas price for the project. Productions from this project started in July 2015 and by December 31, 2015, production levels reached 466 mmscfd.

Regulatory Framework in Venezuela

The hydrocarbons industry in Venezuela is regulated pursuant to the Organic Hydrocarbons Law, effective as of 2001, as amended, and the Organic Law of Gaseous Hydrocarbons, enacted in 1999. The Organic Hydrocarbons Law reserves oil-related activities to Venezuela. Under the Organic Hydrocarbons Law, private participation in hydrocarbon upstream activities, as well as gathering and initial transportation and storage, is allowed only through (Empresas Mixtas), or joint ventures, in which the Venezuelan government has more than 50% equity ownership. The Organic Law of Gaseous Hydrocarbons, which governs gas-related activities, provides for a non-reserved legal regime. Under the Organic Law of Gaseous Hydrocarbons, gas-related activities may be carried out by government entities or national and foreign private companies with no minimum government participation.

 

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Exploration, Production and Upgrading

During 2015, our production was 1,001 million barrels of oil, which has allowed us to reach an aggregate production of 70,166 million barrels of oil from January 1, 1914 through December 31, 2015. Venezuela’s commercial oil production is concentrated in the Maracaibo-Falcón Basin (previously known as the Western-Zulia Basin), which covers the states of Zulia and Falcón; the Barinas-Apure Basin (previously known as West Central Barinas and Apure Basin), which covers the Apure and Barinas states; the Eastern Basin which covers the states of Guárico, Anzoátegui, Monagas and Sucre; and the Carúpano Basin, incorporated since 2006, which covers the northern part of the state of Sucre, the state of Nueva Esparta as well as the territorial waters located offshore eastern Venezuela.

The following table presents our proved reserves, proved and developed reserves, production volume for 2013 and the ratio of proved reserves to annual production in Venezuela as of December 31, 2015.

 

     For the year ended December 31, 2015  
     Proved(1)      Proved developed      Production      Ratio Reserves/
Production
 
     (mmb)      (mbpd)      (mbpd)         

Crude Oil:

           

Condensed

     2,344         544         89         72   

Light(2)

     10,609         1,693         374         78   

Medium

     9,716         1,862         682         39   

Heavy and Extra-Heavy

     278,209         8,832         1,597         477   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Crude Oil

     300,878         12,931         2,742         301   
  

 

 

    

 

 

    

 

 

    

 

 

 

Gas in boe(3)

     34,715         6,784         1,300         73   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Natural Hydrocarbon in boe(4)

     335,593         19,715         4,042         227   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Developed and undeveloped.
(2) Production obtained from the top of wells, including condensates.
(3) Net natural gas production (gross production less natural gas reinjected).
(4) Does not include NGL.

The following table presents the location, production volume for 2015, discovery year, proved reserves and the ratio of proved reserves to annual production for each of our largest oil fields in Venezuela as of December 31, 2015.

 

Name of Field

   Location      Year of
Discovery
   2015 Production      Proved Reserves      Ratio Reserves/
Production
 
     (state of)      (year)    (mbpd)      (mmb)      (years)  

Zuata Principal

     Anzoátegui       1985      278         53.946         532   

Cerro Negro

     Anzoátegui       1979      199         32.491         448   

Cerro Negro

     Monagas       1979      299         23505         215   

Zuata Norte

     Anzoátegui       1981      27         9.610         991   

Uverito

     Monagas       1979      13         9.469         1.942   

Huyapari

     Anzoátegui       1979      151         4.561         83   

Bare

     Anzoátegui       1950      62         1.833         81   

Dobokubi

     Anzoátegui       1981      63         2.137         93   

Jobo

     Monagas       1953      8         1.303         437   

Melones

     Anzoátegui       1955      23         1.094         128   

Tia Juana Lago

     Zulia       1925      74         2.798         103   

Bloque VII: Ceuta

     Zulia       1956      68         2.076         67   

Bachaquero Lago

     Zulia       1930      42         1.576         39   

Urd. Oeste Lago

     Zulia       1955      55         1.342         80   

Boscan

     Zulia       1945      104         1.466         132   

Lagunillas Lago

     Zulia       1913      39         1.138         61   

Tia Juana Tierra

     Zulia       1925      23         1.131         132   

Lagunillas Tierra

     Zulia       1913      41         925         61   

Urd. Este Lago

     Zulia       1955      4         530         374   

Bloque III: Centro

     Zulia       1957      4         504         311   

Santa Bárbara

     Monagas       1993      165         1.362         23   

Mulata

     Monagas       1941      166         1.148         19   

El Furrial

     Monagas       1986      198         907         13   

Orocual

     Monagas       1958      14         616         125   

Travi

     Monagas       2004      1         447         838   

El Carito

     Monagas       1988      51         238         13   

Boquerón

     Monagas       1989      5         199         107   

Jusepín

     Monagas       1944      18         186         28   

Corocoro

     Sucre       1998      33         145         12   

 

93


Reserves

All oil and gas reserves located in Venezuela belong to Venezuela. We calculate oil and gas reserves and they are validated by the Ministry of Petroleum pursuant to Ministry of Petroleum’s hydrocarbon reserve manual definitions and rules. The Ministry of Petroleum’s rules include specific processes to calculate reserves, as well as to control data required by Venezuela, which enables a comparison among Venezuela’s and other countries’ reserves because these rules are similar to those used worldwide.

Proved reserves are volumes of hydrocarbons that are estimated with reasonable certainty. They are recoverable from known reservoirs in accordance with available geological and engineering data. Given the inherent uncertainty and limited nature of the reservoir data, the estimates of proved oil and gas reserves are subject to modifications overtime, as additional information becomes available. In accordance with our production facilities, proved reserves are classified as developed and not developed. Proved developed reserves are identified by the volume of hydrocarbons that is commercially recoverable from reservoirs from available wells. Proved reserves that are not developed are identified as those with significant hydrocarbons which will be obtained through investments in drilling new wells in areas not drained or the completion of existing wells.

The estimates of reserves are not precise and are subject to revision. We review these crude oil and gas reserves annually to take into account, among other things, production levels, field reviews, the addition of new reserves from discoveries, year-end prices, and economic and other factors. Proved reserve estimates may be materially different from the quantities of crude oil and gas that are ultimately recovered.

Proved developed reserves of crude oil and gas represented approximately 90% and 10%, respectively, of Venezuela’s total estimated proved crude oil and gas reserves on an oil equivalent basis at December 31, 2015.

Crude Oil. Venezuela had estimated proved crude oil reserves at December 31, 2015 totaling approximately 300,878 billion barrels. Based on production levels for 2015, estimated proved reserves of crude oil, including heavy and extra-heavy crude oil reserves that will require significant future development costs to produce and refine, have a remaining life of approximately 301 years.

Natural Gas. Venezuela had estimated proved reserves of gas totaling approximately 201,349 bcf (including an estimated 36,452 bcf associated with extra-heavy crude oil in the Eastern and Barinas-Apure Basin) as of December 31, 2015 compared to 35,265 bcf (or 6,080 mmb or boe) as of December 31, 2014. Venezuela’s gas reserves are comprised of associated gas that is developed incidental to the development of our crude oil reserves. A large proportion of our Venezuelan gas reserves are developed. During 2015, approximately 33% of the gas that we produced was reinjected for well pressure maintenance purposes.

The following table presents Venezuela’s proved reserves of crude oil and gas, which include both developed and undeveloped reserves. All of these reserves are located in Venezuela.

 

     For the year ended December 31,  
     2015      2014      2013      2012      2011  
     (in millions of barrels, unless otherwise indicated)  

Proved reserves:

              

Condensate

     2,344         2,357         2,384         2,618         2,647   

Light

     10,609         10,493         10,331         10,390         10,157   

Medium

     9,716         9,672         9,742         9,786         9,650   

Heavy

     18,688         18,692         17,597         17,805         17,733   

Extra-heavy(1)

     259,521         258,739         258,299         257,136         257,384   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total crude oil

     300,878         299,953         298,353         297,735         297,571   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ratio Reserves/Production (years)

     301         296         282         279         273   

 

94


     For the year ended December 31,  
     2015     2014     2013     2012     2011  
     (in millions of barrels, unless otherwise indicated)  

Natural gas in bcf

     201,349        198,368        197,089        196,409        195,234   

Natural gas in boe

     34,715        34,201        33,981        33,864        33,661   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hydrocarbons in boe

     335,593        334,154        332,334        331,599        331,232   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Proved developed reserves:

          

Condensate

     544        565        615        639        674   

Light

     1,693        1,786        1,829        1,891        1,932   

Medium

     1,862        1,725        1,911        2,071        2,237   

Heavy

     4,574        4,524        4,621        4,321        4,464   

Extra-heavy

     4,258        4,326        3,984        4,053        4,345   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total crude oil

     12,931        12,926        12,960        12,975        13,652   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Natural gas in bcf

     39,350        37,731        39,135        39,252        37,217   

Natural gas in boe

     6,784        6,505        6,747        6,768        6,417   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total hydrocarbons in boe

     19,715        19,431        19,707        19,759        20,069   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Percent of proved developed to total reserves:

          

Crude Oil

     4     4     4     4     5

Natural gas

     20     19     20     20     19

 

(1) Proved reserves of extra-heavy crude oil located in the Orinoco Oil Belt have a low development grade, and for December 31, 2015, included approximately 259,515 mmb.

Operations

During 2012, our exploration projects were completed in accordance with strategic guidelines included in the Plan de Desarrollo Económico y Social de la Nación 2007-2013 (National Plan for Social and Economic Development) and the Business Plan. We incorporated new proved and probable reserves through the drilling, evaluation and completion of three exploratory wells.

In 2015, we continued our geophysical operations and completed the processing of seismic data in the project Barinas Este 07G 3D, in the Boyacá region. We also acquired a total amount of 1,833 km2 of 3D seismic lines and 1,012 km2 of 2D seismic lines.

The following table summarizes our drilling activities for the periods indicated.

 

     For the year ended December 31,  
     2015      2014      2013      2012      2011  
     (Number of wells)  

Exploration wells:

              

Completed

     —           6         4         2         2   

Suspended

     2         —           —           —           —     

Under evaluation

     1         1         —           1         1   

In progress

     8         4         3         5         3   

Dry or abandoned

     —           —           2         1         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     11         11         9         9         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Of which are carry-overs

     2         3         6         4         1   

Development wells drilled(1)

     375         496         454         469         402   

 

(1) Includes wells in progress, even if they were wells drilled in previous years, and injector wells. The breakdown of the 454 wells for the year ended December 31, 2015 is as follows: 338 corresponds to PDVSA Petróleo and 37 corresponds to PDVSA Gas. This does not include 329 wells from the Liviano-Mediano joint venture and 196 wells from the Orinoco Oil Belt joint venture, for a total of 525 wells.

In 2015, Venezuela’s crude oil production capacity was 3,184 mbpd, of which 1,798 mbpd corresponds to PDVSA’s own production (568 mbpd in the eastern region, 634 mbpd in the western region and 577 mbpd in the Orinoco Oil Belt and 19 mbpd corresponds to PDVSA Gas) and 1,386 mbpd corresponds to joint ventures.

 

95


Our average oil production (which includes crude oil and natural gas liquids) for 2015 reached 2,863 mbpd, of which 1,655 mbpd corresponds to PDVSA’s own production (767 mbpd in the eastern region, 365 mbpd in the western region and 503 in the Orinoco Oil Belt and 20 mbpd corresponds to PDVSA Gas) and 1,208 mbpd corresponds to joint ventures. The increase in Orinoco Oil Belt production is due to an increase in the volume of activity in oil wells during the last year. During 2015, our average production cost of crude oil was of approximately U.S.$10.68 per barrel, including joint ventures. During 2015, our natural gas production amounted to 7,756 mmcfd, out of which 2,460 mmcfd was re-injected with the purpose of maintaining existing reservoir pressure. Net natural gas production reached 913 boe.

The following table summarizes our historical average net daily crude oil and natural gas production by type and by basin and the average sales price and production cost for the periods specified.

 

     For the year ended December 31,  
     2015      2014      2013      2012      2011  
     (in thousand barrels per day, unless otherwise indicated)  

Production

              

Crude oil:

              

Condensate

     93         110         116         107         104   

Light

     374         416         469         487         511   

Medium

     682         619         637         875         917   

Heavy/Extra-heavy

     1,597         1,640         1,677         1,441         1,459   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total crude oil

     2,746         2,785         2,899         2,910         2,991   

Natural gas liquids

     117         114         116         124         138   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total crude oil and NGL

     2,863         2,889         3,015         3,034         3,129   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Natural gas (mmcfd):

              

Gross production

     7,756         7,422         7,395         7,327         7,125   

Less: Reinjected

     2,460         2,604         2,779         2,871         2,884   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net natural gas (mmcfd)

     5,296         4,818         4,616         4,456         4,241   

Net natural gas (in mbpd boe)

     913         831         796         768         731   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

PDVSA’s crude oil production by basin:

              

Maracaibo-Falcón

     706         750         776         796         806   

Barinas-Apure

     32         38         41         46         55   

Eastern

     2,008         1,997         2,082         2,068         2,130   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total crude oil

     2,746         2,785         2,899         2,910         2,991   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Natural gas production by basin (mmcfd):

              

Maracaibo-Falcón

     718         718         771         796         787   

Barinas-Apure

     31         36         34         7         35   

Eastern

     7,007         6,668         6,590         6,524         6,303   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total natural gas

     7,756         7,422         7,395         7,327         7,125   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Average export price ($/Bl)

              

Crude oil ($ per barrel)

     44.65         88.42         98.08         103.42         100.11   

Gas ($ per MPC)

     0.93         2.51         0.66         0.95         0.88   

Average production cost ($/boe)(1)

              

Including operating service agreements (Empresas Mixtas)

     10.68         18.05         11.40         11.09         7.53   

Excluding operating service agreements (Empresas Mixtas)

     3.93         15.10         10.63         10.86         7.23   

 

(1) The average production cost per barrel is calculated by dividing the sum of direct and indirect costs of production (excludes depreciation and amortization) divided by the total volumes of production of crude oil, natural gas and liquid natural gas.

Venezuelan Crude Oil Production and Liquid Natural Gas Production Subject to Royalties

In 2015, Venezuela’s total crude oil production subject to royalties amounted to approximately 2,863 mbpd, of which 1,655 mbpd corresponds to PDVSA’s own production (767 mbpd in the eastern region, 365 mbpd in the western region and 503 in the Orinoco Oil Belt and 20 mbpd corresponds to PDVSA Gas), 1,208 mbpd corresponds to joint ventures.

 

96


Initiatives Involving Private Sector Participation

In the 1990s, we encouraged private initiatives and investment in the oil industry with the approval of the Venezuelan National Assembly, and we were permitted to enter into operating and association agreements with private entities. Pursuant to the guidelines of the Ministry of Petroleum, beginning in 2005, agreements and ventures with private parties were converted into joint ventures -Empresas Mixtas- where we held and continue to hold through CVP, one of our subsidiaries, a majority of the shares in each joint venture, as provided in the Organic Hydrocarbons Law.

Conversion of Operating Service Agreements to Empresas Mixtas

During 2006, 19 joint-operating agreements were converted into joint ventures, in which CVP has an equity holding between 60% and 80%.

 

Field

   Joint Venture    PDVSA’s interest
(through CVP)
   

Private shareholder’s interest

Kaki

   Petrolera Kaki, S.A.      60  

Inemaka 22.67% / Inversiones

Polar S.A. 17.33%

Cabimas

   Petrocabimas, S.A.      60   Sepca 40%

Onado

   Petronado, S.A.      60  

CGC 26%/ BPE 8.36%/

KNOC 5.64%

Guárico Oriental

   Petroguárico, C.A.      70   Teikoku 30%

Mene Grande

   Petroquiriquire, C.A.      60   Repsol 40%

Quiriquire

   Petroquiriquire, C.A.      60   Repsol 40%

Boscán

   Petroboscán, C.A.      60  

Chevron 39.20%/ INEMAKA

0.80%

LL-652

   Petroindependiente, C.A.      74.80   Chevron 25.20%

Falcón Este

   Petrocumarebo, S.A.      60   PFC 40%

Falcón Oeste

   Petrocumarebo, .S.A.      60   PFC 40%

Casma Anaco

   Petrocuragua, S.A.      60   CIP 28%/ Open 12%

Colón

   Baripetrol, S.A.      60  

Suizum 17.50%/

PERENCO 17.50/ PFC 5%

Urdaneta Oeste

   Petroregional del Lago, S.A.      60   Shell 40%

Acema

   Petroven-Bras, S.A.      60  

Petrobras 29.20%/ COROIL

10.80%

La Concepción

   Petrowayu, S.A.      60  

Petrobras 36%/ Williams

International Oil & Gas 4%

Mata

   Petrokariña, S.A.      60  

Petrobras 29.20%/ Inversora

Mata 10.80%

Oritupano-Leona

   Petroritupano, S.A.      60  

Petrobras 22%/ Venezuela US

18%

Pedernales

   Petrowarao, S.A.      60   Perenco 40%

Ambrosio

   Petrowarao, .S.A      60   Perenco 40%

B2X 70/80

   Lagopetrol, S.A.      69  

Integra Oil and Gas

SAS 26.35%/ Ehcopek 3.10%/

CIP 1.55%

Monagas Sur

   Petrodelta, S.A.      60   HRN 40%

Caracoles

   Petrolera Sino-Venezolana, S.A.      75   CNPC 25%

Intercampo Norte

   Petrolera Sino-Venezolana, S.A.      75   CNPC 25%

DZO

   Petroperijá, S.A.      60   DZO 40%

Boquerón

   Boquerón, S.A.      60  

Boqueron Holdings

26.67%/ PEI 13.33%

Exploration and Production in New Areas under Former Profit-sharing Agreements. In July 1995, the Venezuelan Congress approved profit-sharing arrangements pursuant to which private sector oil companies were offered the right to explore, drill and develop light and medium crude oil in ten designated blocks with a total area of approximately 13,774 km2, pursuant to the terms of the profit-sharing agreements entered into by such companies and CVP, our subsidiary appointed to coordinate, control and supervise these agreements. Under the profit-sharing agreements, CVP had the right to participate, at its option, with an ownership interest of between 1% and 35% in the development of any recoverable reserves with commercial potential. Eight oil fields were awarded to 14 companies in 1996. The awards were based on the percentage of pretax earnings that the bidders were willing to share with the Venezuelan government. The profit-sharing agreements provided for the creation of a control committee, as the authority with oversight power with respect to these agreements.

 

97


Originally, CVP was entitled to hold shares representing a maximum of 35% participation in the joint ventures that could be formed pursuant to profit-sharing agreements in the following oil fields.

 

Field

  

CVP Partners

  

Joint Venture

Western Paria Gulf

   Conoco Venezuela, C.A. — ENI — OPIC(1)    Compañía Agua Plana, S.A.

Eastern Paria Gulf

   Ineparia — Conoco Venezuela, C.A. – ENI – OPIC    Administradora del Golfo de Paria Este, S.A.

La Ceiba

   ExxonMobil – PetroCanada    Administradora Petrolera La Ceiba, C.A.

 

(1)  Profit-sharing agreements under Phase I (development).

On February 26, 2007, President Chávez issued Decree-Law No. 5,200 establishing the timeline and general guidelines for the transfer of the association agreements to joint ventures. As a result, our ownership interest increased to at least 60%. The subsequent transition decrees were published in the Official Gazette, completing the incorporation process of the referred joint ventures.

The following are the joint ventures operating the projects:

 

    Petrolera Paria, S.A.: operating the Golfo de Paria Este project formed between our subsidiary CVP holding 60% of the shares, Sinopec International Petroleum Exploration and Production Corporation holding 32% of the shares and INE Oil & Gas Inc. holding 8% of the shares.

 

    Petrosucre, S.A.: operating the Golfo de Paria Oeste project formed between our subsidiary CVP holding 74% of the shares and Eni Venezuela B.V. holding 26% of the shares.

 

    Petrolera Güiria, S.A.: operating the Golfo de Paria Central project formed between our subsidiary CVP holding 64.25% of the shares, INE Oil & Gas Inc. holding 16.25% of the shares and Eni Venezuela B.V. holding 19.50% of the shares.

Additionally, La Ceiba field is currently directly operated by our subsidiary PDVSA Petróleo.

Orinoco Oil Belt Extra-heavy Crude Oil Projects. Between 1993 and 1997, the Venezuelan National Assembly approved the creation of four vertically integrated joint venture projects in the Orinoco Oil Belt for the exploitation and upgrading of extra-heavy crude oil of average API gravity of 9° and marketing of the upgraded crude oil with API gravities ranging from 16° to 32°. These joint venture projects were implemented through association agreements between various foreign participating entities and us.

On February 26, 2007, President Chávez issued Decree-Law No. 5,200 establishing the timeline and general guidelines for the transfer of the association agreements to joint ventures. As a result, our ownership interest increased to at least 60%. The subsequent transition decrees were published in the Official Gazette, completing the incorporation process of the referred joint ventures. Under this decree, the associations of Hamaca, Sincor and Cerro Negro became joint ventures as described below. The fourth association, Petrozuata, is wholly owned by PDVSA Petróleo and was not transformed into a joint venture.

The current joint ventures operating in Orinoco Oil Belt are as follows:

 

    Petropiar, S.A. joint venture, operating the Hamaca project between our subsidiaries CVP holding 66% of the shares, Chevron Orinoco Holdings B.V. holding 30% of the shares and PDVSA Social, S.A. holding 4% of the shares.

 

    Petrocedeño, S.A. joint venture, operating the Sincor Project between our subsidiary CVP holding 56% of the shares, Total Venezuela, S.A. holding 30.32% of the shares, Sincor Netherlands B.V. (Statoil) holding 9.68% of the shares and PDVSA Social, S.A. holding 4% of the shares.

 

98


    Petromonagas, S.A. joint venture, operating the Cerro Negro Project by our subsidiary CVP holding 79.33% of the shares, Rosneft Energy GMBH holding 16.67% of the shares and PDVSA Social, S.A. holding 4% of the shares.

 

    Petrolera Sinovensa, S.A. (or Petrosinovensa) joint venture, operating in the Carabobo area between our subsidiary CVP holding 60% of the shares and CNPC Venezuela B.V. holding 40% of the shares.

 

    Petrolera Vencupet, S,A. is a joint venture formed by CVP holding 60% of the shares and CUPET holding 40% of the shares.

For the year ended December 31, 2015, total investments in the Petropiar, Petrocedeño, Petromonagas and Petrosinovensa projects were U.S.$1,715 million.

Oilfield Service Sector Entities

On May 7, 2009, the Venezuelan government enacted the Organic Law that Reserves to Venezuela the Assets and Services Related to Primary Hydrocarbons Activities (the “Reserve Law”), which provides for the reservation, in favor of Venezuela, of those assets and services related to the performance of the “primary activities” as set forth in the Organic Hydrocarbons Law (essentially, the activities of exploration, extraction in natural stage, gathering, transport, and initial storage of liquid hydrocarbons and associated gas). Those assets and services were previously provided by private oil service providers. It further provides that the reserved activities must be directly carried out by us or any of our affiliates designated for such purposes, or through joint venture companies under our control or the control of any of our affiliates.

In accordance with the provisions of the Reserve Law, the assets and services related to the primary activities that are subject to reserve are the following:

 

    Injection of water, steam or gas to increase a reservoir’s energy and improvement of the recovery factor;

 

    Compression of gas; and

 

    Those associated with activities in Lake Maracaibo: ships for the transportation of personnel, divers and maintenance; crane barges for the transportation of materials, diesel, industrial water and other inputs; tugs; flat barges, light vessels, cranes, cutting barges, pipeline and sub-aquatic cable laying or replacing barges; ship maintenance in workshops, docks and any type of dykes.

The Reserve Law explicitly provides that the reserved activities must be performed by Venezuela, by us or our affiliates, or through joint ventures under our control or the control of our affiliates. The Reserve Law provides that the Ministry of Petroleum will set out, by means of resolutions, those assets and services of companies or business sectors that are included within the scope of the Reserve Law. As of the date of this offering circular, the assets and activities of about 70 domestic and foreign companies have been named in a special resolution issued by such Ministry.

Following the mandate of the Reserve Law, during 2009 we were instructed by the Venezuelan government to take control of assets associated with the services activities subject to reserve pursuant to the Reserve Law. As of December 31, 2015, we were negotiating, on behalf of Venezuela, the applicable compensation to be paid, and as of today we have reached agreements with several of these entities.

 

99


Other Joint Ventures for exploration and production of light-medium crude

During 2007 and 2008, transfer decrees for the following joint ventures were completed:

 

    Petrozumano, S.A. is a joint venture formed by our subsidiary CVP (which holds 60% of the shares) and CNPC Venezuela B.V. (holding the remaining 40%) to conduct exploration and production activities of light-medium crude in the Freites and Aguasay municipalities of Anzoátegui and Monagas State, respectively;

 

    Petrolera Bielovenezolana, S.A. is a joint venture formed by our subsidiary CVP (which holds 60% of the shares) and Belorusneft (holding the remaining 40%) that was incorporated to conduct exploration and production activities of light-medium crude in the Freites municipality, Oritupano Norte and Ostra in Anzoategui State and in Lake Maracaibo; and

 

    Petrolera Indovenezolana, S.A is a joint venture that was formed by our subsidiary CVP (holding 60%) and ONGC Nile Ganga B.V. (holding 40%) to conduct exploration and production activities of light-medium crude in the San Cristóbal area of Anzoátegui and Guárico State.

During 2012, transfer decrees for the following joint ventures were completed:

 

    Petrozamora, S.A. is a joint venture formed by CVP (holding 60% of the shares) and Gazprombank Latin America Ventures B.V. (holding the remaining 40%) to conduct exploration and development in Lagunillas Tierra – Bachaquero Tierra;

 

    Petrourdaneta, S.A. is a joint venture formed by CVP (holding 60% of the shares) and Odebrecht E&P España (holding the remaining 40% of the shares) to conduct exploration and development in Mara Este, Mara Oeste and la Paz, Zulia state; and

 

    Petrolera Venangocupet, S.A. is a joint venture formed by CVP (holding 60% of the shares) and Commercial Cupet, S.A. (holding 20% of the shares) and Sonanlgol Pesquisa & Producao, S.A. (holding 20% of the shares) to operate in Miga y Melones, Anzoategui state.

National Industrial Conglomerate. The National Industrial Conglomerate, of which PDVSA is a member, is comprised of a group of Venezuelan companies and other enterprises that are producers of goods and services in the oil, gas and petrochemical industry seeking to jointly address the demand for goods, infrastructure and services of the oil, gas and petrochemical industry. The National Industrial Conglomerate provides benefits such as special contracting conditions with PDVSA, access to special financing through the state bank system and integration opportunities with joint investment funds, among others.

Overview of Main Projects with Private Sector Participation

We plan to invest in upstream and downstream projects. We have 220 projects planned between 2016 and 2025 in four strategic sectors. These projects include the construction of oil wells and production infrastructure, oil and gas pipelines, oil storage capacity, refineries and upgraders and loading docks and distribution facilities that will contribute to the development of Venezuela, while diversifying our markets, and strengthening energy integration.

 

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The following table sets forth a distribution of our main projects by sector:

 

Sector

   Number of Projects  

Oil & Natural Gas Production

     176   

PDVSA Gas

     29   

Domestic Operative Refineries

     4   

New Refineries, Upgraders and Terminals

     5   

Trade and Supply

     6   
  

 

 

 

Total

     220   
  

 

 

 

Orinoco Oil Belt Development Project

The Business Plan provides for the production of 1,949 mbpd of extra-heavy oil in the Orinoco Oil Belt by 2025, and the development of one upgrader, with a 400 mbpd capacity. In addition, the total estimated capital investment in the region for the period of 2016 through 2025 will be approximately U.S.$71,567 million.

During 2009, the Ministry of Petroleum initiated the Carabobo project, which provides for the construction of three integrated extra-heavy crude oil production projects through joint ventures with private sector participation of up to 40% of the shares in these companies.

As of December 31, 2015 there were two joint ventures in operation with respect to the Carabobo project:

(i) Petrocarabobo, where we hold 60% of the shares, and Repsol Exploración S.A., Petrocarabobo Ganga, B.V., PC Venezuela LTD and Indoil Netherlands B.V. holding 11%, 11%, 11% and 7% of the remaining shares, respectively. The expected production of Petrocarabobo is 400 mbpd when fully operative and 205 mbpd by 2025, and its purpose is to develop the primary activities in Blocks Carabobo Center and Carabobo North of the Carabobo Area; and

(ii) Petroindependencia, where we hold 60% of the shares, while Chevron Carabobo Holdings APS, Mitsubishi Corp (together with Inpex Corp.) forming Japan Carabobo UK Ltd., and Suelopetrol, hold 34.0%, 5.0% and 1.0% of the remaining shares, respectively.

The expected production of Petroindependencia is 400 mbpd when fully operative and 212 mbpd by 2025, and its purpose is to develop primary activities in Blocks Carabobo 2 South, Carabobo 3 North and Carabobo 5 of the Carabobo Area. In 2012, a new joint venture, Petrovictoria, was entered into in the Carabobo project. We hold 60% of the shares and Rosneft holds the remaining 40% of the shares. The expected production of Petrovictoria is 400 mbpd when fully operative and 163 mbpd by 2025.

 

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The following table outlines each party’s percentage interest in each of the joint ventures relating to the Carabobo project:

 

Project

  

Company

   Percentage
Interest
    Expected Production
(bpd)
 

Petrocarabobo

   PDVSA      60     205   
   REPSOL      11  
   PC Venezuela      11  
   Petrocarabobo Ganga      11  
   Indoil Netherlands B.V.      7  

Petroindependencia

   PDVSA      60     212   
   Chevron      34  
   JCU      5  
   Suelopetrol      1  

Petrovictoria

   PDVSA      60     163   
   Rosneft      40  

We have entered into four currently operational joint venture agreements with respect to the Junín project: Petromacareo (Junín 2), Petrourica (Junín 4), Petrojunin (Junín 5) and Petromiranda (Junín 6). Each joint venture agreement corresponding to the Junín projects grants PDVSA a 60% ownership of the entity’s outstanding shares. Petrovietnam Exploration Production Corporation, Ltd. holds the remaining 40% of outstanding shares in Junín 2. CNPC holds the remaining 40% of outstanding shares in Junín 4. ENI holds the remaining 40% of outstanding shares in Junín 5. A consortium comprised of Gazprom Neft and Rosneft OJSC holds 40% of the remaining shares in Junín 6. By 2025, the expected production levels for Junín 2, Junín 4, Junín 5 and Junín 6 are 0 bpd (development plan being reviewed), 12 bpd, 123 bpd and 116 bpd, respectively.

The following table outlines each party’s percentage interest in each of the joint ventures relating to the Junin project:

 

Project

  

Company

   Percentage
Interest
    Expected Production
(bpd)
 

Petromiranda

   PDVSA      60     116   
   Consorcio Nacional Petrolero      40  

Petromacareo

   PDVSA      60     0   
   Petrovietnam      40  

Petrourica

   PDVSA      60     12   
   CNPC      40  

Petrojunin

   PDVSA      60     123   
   ENI      40  

We expect that the combined production capacity of the Carabobo project and Junín projects will be 832 bpd by 2025.

We are also realizing a major investment plan called the “PSO Project” (Orinoco Socialist Project), which consists of designing and constructing all the required facilities for the provision of industrial services relating to the construction and operation of different upgraders, production facilities, pipelines (water, oil, gas and diluent), roads, trains and urban development works. The PSO Project will contribute to the social development of different regions impacted by the projects being executed in the northern region of Venezuela’s Orinoco river area, Bolívar and Sucre state area.

Mariscal Sucre Project

The Mariscal Sucre project focuses on the development of non-associated gas located offshore Venezuela in the Dragón, Patao, Mejillones and Rio Caribe fields, in the Northeast region of Venezuela. The main objective of the project is to develop new non-associated gas reserves to meet domestic market demand as well as for exploration of new reserves. This project includes the execution of 14 projects that will consist of drilling activities and the construction of production facilities and subsea gas pipelines. The estimated capital investment for the Mariscal

 

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Sucre project is U.S.$10,302 million and Bs. 12,943 million, of which U.S.$9,024 million has been invested as of December 31, 2015. The Mariscal Sucre project is expected to start production in 2017 at 280 mmpcd, achieving a production plateau of 1,215 mmcfd in 2023 upon completion of the project.

Jusepín 200 Project

The Jusepín 200 Project focuses on reducing gas emissions from the Jusepín complex through the installati