petroleos de venezuela, sa venezuelan national petroleum company

PETROLEOS DE VENEZUELA, S.A.
VENEZUELAN NATIONAL PETROLEUM COMPANY
Avenida Libertador, La Campiña
Apartado 169, Caracas 1010-A,
Bolivarian Republic of Venezuela
(Address of Principal Executive Offices)
Table of Contents
Page
1.- Factors affecting Forward-Looking Statements .....................................................................ii
2.- Summary
Social Development
1
2
3.- Selected Financial and Operating Data
2
4.- Managament´s Discussion and Analysis of Financial Condition and Results of Operations 7
5.- Liquidity and Capital Resources .........................................................................................24
6.- New Accounting Standards .................................................................................................26
7.- Legal Proceedings................................................................................................................27
8.- Quantitative and Qualitative Disclosures about Market Risk ..............................................27
Signatures ................................................................................................................................33
Annex A ..................................................................................................................................34
Index to Condensed Consolidated Interim Financial Statements.............................................. F-1
IFO30-06-07
i
As used in this report, references to “dollars” or “$” are to the lawful currency of the
United States and references to “Bolivars” or “Bs.” are to the lawful currency of Venezuela. A
unit conversion table and a glossary of certain oil and gas terms, including abbreviations for
certain units, used in this report are contained in Annex A.
1.- Factors affecting Forward-Looking Statements
This report contains “forward-looking statements”. Such statements are subject to risks
and uncertainties related to Venezuelan and international 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. Such
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 hydrocarbons deposits, as well as unknown or unforeseen difficulties in extracting,
transporting or processing any hydrocarbons found or doing so 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 the forward-looking statements, which speak only as
of the date of this report. We undertake no obligation to publicly release any revision to these
forward-looking statements to reflect events or circumstances after the date of this report.
ii
2.- Summary
Petróleos de Venezuela, S.A. (PDVSA) is a company incorporated in 1975 and domiciled
in the Bolivarian Republic of Venezuela (Venezuela), and is the holding company of a group of oil
and gas companies, among others. PDVSA and its subsidiaries (PDVSA or the Company) are
wholly-owned by the Bolivarian Republic of Venezuela, which controls PDVSA through the
Ministry of Popular Power for Energy and Petroleum) (formerly Ministry of Energy and Mines
- MENPET). PDVSA is responsible, in Venezuela, for developing the hydrocarbon industry, as
well as, planning, coordinating, supervising and controlling the activities of its subsidiaries, both
in Venezuela and abroad. Most of its foreign subsidiaries are responsible for refining and
marketing activities in North America, Europe and the Caribbean.
The main activities of PDVSA are governed by the Organic Hydrocarbons Law, and gas activities
are regulated by the Organic Law of Gas Hydrocarbons of September 1999 and its Regulation
dated June 2000.
PDVSA is the largest vertically integrated oil company in Latin America with daily
average crude oil production of 2,843 MBPD for the six months ended June 30, 2007, and the
fourth largest vertically integrated oil company in the world as measured by total assets at
year-end 2005, based on information published by Petroleum Intelligence Weekly, a trade
publication. PDVSA carries out 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 and Europe. PDVSA owns 100% of CITGO, a refiner and marketer of transportation
fuels, petrochemicals and other industrial oil-based products in the United States.
All hydrocarbon reserves in Venezuela are owned by Venezuela and not by PDVSA.
Under the Organic Hydrocarbons Law of 2001, as amended, all activities relating to the
exploration and exploitation of hydrocarbons and their derivatives are reserved for 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 reserves for the next 80 years.
PDVSA sells crude oil to the United States, Canada, the Caribbean, Europe, South
America, and Asia. In addition, PDVSA refines crude oil 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. PDVSA is also engaged in the
exploration and production of gas from offshore sources.
PDVSA’s registered office is located at Avenida Libertador, La Campiña, Apdo. 169,
Caracas 1010-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 report.
1
Social Development
The Venezuelan National Constitution and the Organic Hydrocarbons Law mandates
PDVSA to contribute manpower and financial resources to social programs developed and
administered by the Venezuelan government. More specifically, Article 5 of the Organic
Hydrocarbons Law mandates that all revenues generated by the Venezuelan government from oil
activities shall be used to promote health programs, macroeconomic stabilization funds and
investments. PDVSA has made significant contributions to social programs, promoting and
participating in Venezuela’s social and economic development. Since 2004, PDVSA has
participated in and contributed significant funding towards low income housing, agricultural
developments and other social programs. For example, in January 2004, we approved the
creation of a trust fund referred to as Fondo Para el Desarrollo Económico y Social del País, or
FONDESPA, which is designed to allocate amounts to programs related to projects, goods and
services, development of infrastructure and roads, agricultural activities, health and education.
PDVSA’s subsidiaries, such as Corporación Venezolana del Petróleo, S.A., or CVP, and
Palmaven S.A., or Palmaven, contribute managerial and financial resources to support social
programs related to education, healthcare, job creation and subsidized food distribution programs.
CVP amended its charter in 2004 to focus on social and welfare activities.
In support of social projects developed by the Venezuelan government from 2003 to June
30, 2007, we have incurred expenses of $ 29,427 million, of which $ 7,243 million have been
recorded during the six months ended June 30, 2007 and are included in the consolidated
statement of income for that period.
3.- Selected Financial and Operating Data
The following table summarizes certain selected consolidated financial and operating
data of PDVSA as of June 30, 2007 and December 31, 2006 and for the six months ended June
30, 2007 and 2006. The following table should be read in conjunction with our consolidated
interim financial statements included herein, which have been prepared in accordance with
International Financial Reporting Standards (IFRSs). The consolidated financial statements of
PDVSA as of June 30, 2007 and for the six months ended June 30, 2007 and 2006 are unaudited.
2
At June 30 ,
At December 31,
2007
2006
(in millions of U.S. dollars)
Balance Sheet
Cash and cash equivalents
3,560
1,875
Restricted cash
1,134
848
Recoverable value added tax
1,391
776
Notes and accounts receivable
13,651
9,546
Inventories
6,42 3
7,003
Prepaid expenses and other assets
5,174
2,985
Assets classified as held for sale
445
Total current assets
Restricted cash, net of current portion
Recoverable value added tax, net of current port
ion
Investment s in non -consolidated investees
Property, plant and equipment, net
-
31,778
23,033
1,796
1,928
3,542
3,460
3,423
2,503
44,377
42,503
Deferred income tax
4,205
3,443
Long-term account s receivable and other assets
3,550
92,671
3,659
80,529
Account s payable to suppliers
6,486
6,379
Current portion of long -term debt
1,983
652
Income tax payable
2,444
2,487
640
374
9,770
9,263
Total assets
Employee benefits and other postretirement benefits
Accruals and other liabilities
Current liabilities
21,323
19,155
11,595
2,262
Employee benefits and other postretirement benefits, net of
current portion
1,875
1,731
Deferred income tax
1,679
2,089
2,558
2,189
39,030
27,426
Long-term debt, net of current portion
Accruals and other
liabilities , n et of current portion
Total liabilities
Stockholder’s equity
Total liabilities and
stockholder’s equity
53,641
92,671
53,103
80,529
3
Six m onths e nded June 30 ,
2007
2006
(in millions of U.S. dollars)
Income Statement
Sales of crude oil and products:
41,580
49,612
1,099
1,036
225
219
42,904
50 ,867
16,646
20,333
Operating expenses
4,875
7 ,648
Exploration expenses
52
34
1,795
1,479
(16)
(33)
Selling, administrative and general expenses
1,129
932
Royalties and other taxes
8,974
8,705
Financing expenses
310
93
Other expenses , net
Total costs and expenses
828
7 57
34,593
39 ,9 48
Equity in earning s of non -consolidated investees
364
695
Gain on sale of investment in
641
-
9,316
11 ,614
Social development expenses
7,243
6 ,719
Income before income tax
2,073
4 ,89 5
Income tax
1,177
2 ,050
896
2,84 5
625
2,68 4
Minority interests
271
161
Net income
896
2 ,84 5
Exports and international markets
In Venezuela
Other sales
Net revenues
Cost and expenses
Purchases of crude oil and products
Depreciation and depletion
Asset impairment
affiliates of
CITGO
Income before social development expenses and
Net income
income tax
Net income:
Attributable to
the C ompan y’s stockholder
4
OPERATING DATA
Six months Ended June 30,
2007
2006
(MBPD, except as otherwise indicated))
Venezuela´s crude oil production
PDVSA´s crude oil production
Third party participation in Orinoco Belt
Total
2,843
291
3,134
2,920
356
3,276
PDVSA´s crude oil production
Crude oil own production
“Empresas Mixtas” / Operating Agreements
Pdvsa´s participation in Orinoco Oil Belt
Total
Liquid petroleum gas (BOE)
Total crude oil and liquid petroleum gas
2,361
299
183
2,843
175
3,018
2,296
398
226
2,920
176
3,096
Natural gas (MMCFD)
3,965
3,932
Refinery production
Venezuela
Curaçao
United States
Europe
Total refinery production
1,128
219
1,070
264
2,681
1,174
199
1,398
229
3,000
Venezuela´s sales volume exported
Crude Oil
Refined Products
Total exports (1)
2,096
774
2,870
2,222
812
3,034
PDVSA's export sales -geographical breakdown
United States and Canada
Caribbean, Central America and South America
Europe
Asia and others
Total
1,154
853
254
292
2,553
1,247
835
316
262
2,660
Average export price/barrel ($/barrel)
53.81
56.36
Sales volume domestic market
Natural gas (MMCFD)
Other products
2,741
563
2,697
533
Average domestic sales price/barrel ($/barrel)
7.13
7.32
Average production cost ($/barrel)
Including operating agreements and “empresas mixtas”
Excluding operating agreements and “empresas mixtas”
4.01
4.05
3.54
3.27
(1) Includes 317 MBPD on June 30, 2007 and 374 MBPD on June 30, 2006, corresponding to third parties
interests in the Orinoco Oil Belt Associations.
5
FINANCIAL DATA
Six months Ended June 30,
2007
2006
(in millons of U.S. dollar)
Capital Expenditures
In Venezuela
Exploration and Production
Refining, trade and Supply
Gas and other
Total Venezuela
Foreign-Refining
Total
2,091
670
787
3,548
275
3,823
1,078
212
376
1,666
305
1,971
Social development expenses
FONDEN
Social investment plan
Missions
Social programs
FONDESPA
Other social programs
Total
3,120
1,395
999
345
0
1,384
7,243
2,920
1,395
1,364
147
229
664
6,719
6
4.- Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Basis of Presentation
The economic environment of our operations involves mainly the international market for
crude oil and refined products. As such the dollar is our functional currency and most of our
financial transactions are denominated in dollars. The following discussion should be read in
conjunction with our consolidated interim financial statements included herein.
The consolidated financial statements of PDVSA as of June 30, 2007 and December 31,
2006 and for the six months ended June 30, 2007 and 2006 included the Company, its affiliates
and jointly controlled entities.
Overview
PDVSA is a vertically integrated oil and gas company engaged in the exploration,
development and production of oil and gas and the refining, marketing transportation and
distribution of crude oil, gas and petroleum products. During the six months ended June 30,
2007, our average daily output of crude oil reached 2,843 MBPD from 2,920 MBPD in the same
period of 2006. PDVSA explores and produces hydrocarbons in Venezuela and sells crude oil to
the United States, Canada, the Caribbean, Europe, South America and Asia. Additionally,
PDVSA refines crude oil and other feedstock in Venezuela and abroad into a variety of products,
including gasoline, diesel, fuel oil and jet fuel, petrochemicals and industrial products, lubricants
and waxes and asphalt. PDVSA is also engaged in the gas business. Refined petroleum products
are transported from our refineries primarily by tankers, pipelines and barges, and then through
terminals to our customers. These refined petroleum products are sold to wholesale marketers,
convenience stores, airlines, and other manufacturers as feedstock.
Based on the new social responsibility of PDVSA, set forth in Articles 302 and 311 of
the Constitution of the Bolivarian Republic of Venezuela and Article 5 of the Organic
Hydrocarbons Law, regarding PDVSA’s involvement in the country’s social development and in
order to support the development of infrastructure, highways and roads, agricultural, health and
educational programs and other investments in Venezuela, PDVSA participates in diverse
programs established by the National Government.
Factors affecting Operating Results
PDVSA’s consolidated financial results depend primarily on the volume of crude oil
produced 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
7
determining our financial condition and results of operations since 1990, and are expected to
continue to be principal factors in determining our financial condition and results of operations
for the foreseeable future.
Trends affecting our Business
Our upstream operations are primarily focused on increasing reserves of crude oil,
increasing the overall recovery factor of crude oil, continuing the development of extra-heavy
crude oil projects, increasing the availability of gas, and improving existing technology in order to
maximize the return on our investments.
With respect to the downstream business, our investments are focused on increasing
refining capacity, product enhancement and environmental compliance in Venezuela and the
United States, expanding our markets in Latin America, the Caribbean and Asia, and improving
the efficiency of our refining processes and marketing activities.
Changes in product quality specifications have been, and will continue to be, an important
driver in our downstream capital expenditures program. Market analysis in the regions we serve
indicate that Tier II gasoline, ultra low sulfur diesel, Group II and III lube base oils and high
performance asphalts will be required over the next four to six years. The use of some of these
products is being mandated directly by regulatory agencies, while others are the indirect result of
regulation. Ultimately, our customers will require all of these products in addition to others not
currently defined.
Moreover, the high capital requirements needed to produce lower sulfur content fuels and
higher quality lubricant base stocks and asphalts place a premium on facilities already equipped
to produce these products, which may lead to the further consolidation of refining capacity in
specific markets.
The refined products business continues to be very competitive. Industry analysts predict
demand growth of 1% to 2% per year in the United States for the next five to ten years, creating
expansion opportunities for U.S. refineries, which are currently operating at near capacity.
While this growth trend would appear to be positive for refining and marketing companies, the
industry has always exhibited strong competitive tendencies, and recent corporate consolidations
have resulted in cost reduction synergies and economies of scale that have translated into
competitive pricing in the marketplace and lower refining margins.
With respect to our gas business, we are actively promoting private sector participation in
the exploration, production and processing of non-associated gas reserves. In addition, our
distribution processes will be expanded and enhanced in order to increase our domestic and
international market shares. We will also increase our focus on the LNG markets.
8
Impact of Production Quotas
Historically, members of the 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 July 1998, OPEC’s production quotas have
resulted in a worldwide decline in crude oil production and substantial increases in international
crude oil prices.
Throughout 2001, the OPEC agreed to oil production cuts for its members. Three
production cuts were made in February, April and September 2001, resulting in a total decrease
in our production in 2001 of 407 MBPD compared to our production level in 2000. In January
2002, pursuant to production agreements with OPEC members in effect from January 2002, we
decreased our production by 174 MBPD. Our total production quota increased from 2,647
MBPD in December 2003 to 3,107 in December 2004. Venezuela’s OPEC production quota
increased by 113 MBPD to 3,223 MBPD in July 2005. At the 141st Extraordinary Meeting of
the Ministerial Conference of OPEC on June 1, 2006, the Ministerial Conference decided to
maintain OPEC’s production levels and to reaffirm “(OPEC’s) determination to guarantee that
prices remain at acceptable levels.” The conference participants noted that market fundamentals
have stayed unchanged since its last review, with the market continuing to be oversupplied and
crude and product stocks continuing to be at acceptable levels.
The participants also agreed that oil prices are being affected by geopolitical tensions, the
speculations on futures market and the lack of global refining capacity in the medium and long
term. From July 2005 to October 2006, the production quota assigned to Venezuela was 3,223
MBPD.
At the Consultative Meeting of the Conference of OPEC on October 19, and 20, 2006 in
Doha, Qatar, it was decided to reduce production by 1.2 MMBPD from current production of
approximately 27.5 MMBPD to 26.3 MMBPD effective as of November 1, 2006. Venezuela
reduced its production by 138 MBPD from that date.
The average price of the OPEC basket decreased by $1.51 per barrel, or 2%, from $61.21
per barrel for the six months ended June 30, 2006 to $59.70 per barrel for the six months ended
June 30, 2007 due to market conditions. The average prices of our exports, including refined
products, decreased $2.55 per barrel, or 5%, from $56.36 per barrel for the six months ended
June 30, 2006 to $53.81 per barrel for the six months ended June 30, 2007.
Impact of Inflation and Devaluation
While more than 97% of our revenues and a significant portion of our expenses are in
dollars, some of our operating costs (including income tax liabilities) are incurred in Bolivars. As
a result, our financial condition and results of operations are affected by the Venezuelan inflation
9
rate and the timing and magnitude of any change in the $/Bs exchange rate during a given financial
reporting period.
On February 5, 2003, the Venezuelan government established an exchange control regime,
and fixed the exchange rate for the sale and purchase of foreign currency at Bs. 1,600.00 to $1 and
Bs. 1,596.00 to $1, respectively. On February 7, 2004 the foreign exchange rate for the sale and
purchase of foreign currency was established at Bs. 1,920.00 to $1 and Bs. 1,915.20 to $1,
respectively. On March 5, 2005 a new foreign exchange rate for the sale and purchase of foreign
currency was established at Bs. 2,150.00 to $1 and Bs. 2,144.60 to $1, respectively.
Exchange rates at the end of the
period derived from the exchange
agreement with the Central Bank
of Venezuela (Bs/$1)
Average Exchange rate
Increment in the CPI (%)
June 30,
December 31,
2007
2006
2,150.00
2,150.00
2,150.00
8%
2,150.00
17%
June 30,
2006
2,150.00
December 31,
2005
2,150.00
2,150.00
6%
2,110.00
14%
Recent Developments
Loan Agreements
As of June 30, 2007, PDVSA has an aggregate of $13,578 million of debt outstanding that
matures on various dates through 2037.
During 2007, the Republic, PDVSA’s stockholder, approved an issuance of bonds, as
well as other indebtedness.
On January 8, 2007 the public tender of bonds was approved up to $5,000 million due in
10, 20 and 30 years (2017, 2027 and 2037). Our subsidiary PDVSA Petróleo acts as a guarantor
of all bonds, and the funds obtained will be used for capital investments. This issue was
supervised and regulated by the BCV, and is exempt from the scope of the Capital Markets Law
of Venezuela, on the basis that PDVSA is a state-owned company. Because of the high demand
of investors and the favorable conditions of these debt instruments, the stockholder on 26
February 2007 authorized an increase of this issue from $5,000 to $7,500 million, in order to
obtain additional resources necessary for the purchase of shares of companies in the electricity
sector, as well as other investments approved by the stockholder of PDVSA. The annual coupon
for the issued bonds is 5.25%, 5.375% and 5.50%, due in 10, 20 and 30 years, respectively. The
10
combined issue of these bonds generated a premium of 5.5%. The bonds pay interest and
principal in U.S. dollars.
On April 12, 2007, bonds totaling $7,500 million were issued.
In January 2007, PDVSA obtained a credit facility of $1,124 million with a consortium of
banks led by BNP Paribas. This loan is due on January 30, 2008 and may be extended for an
additional year with the approval of lenders representing over 50% of the original commitment.
This loan bears interest at a rate equivalent to LIBOR, plus an increase based on the country risk
of Venezuela established by Standard & Poor’s. As of the date of the issue, this increase was
1.15%.
In February 2007, PDVSA obtained a credit facility amounting to $3,500 million with a
consortium of banks led by the Japan Bank for International Cooperation (JBIC). This loan has
a term of 15 years and bears interest at a rate equivalent to LIBOR plus 1.13% and includes cash
payment options or delivery of crude oil and products at market prices, subject to an agreement
of minimum amounts reviewed every three years. At June 30, 2007 PDVSA had drawn down a
total of $2,300 million under the credit facility at an average interest rate of 6.52%. As of June
30, 2007 the balance of this debt is $2,244 million with an average interest rate of 6.50%.
At June 30, 2007, PDVSA has credit lines available for $ 1,150 million.
Transition of Orinoco Belt Projects, Decree-Law 5,200
On February 26, 2007, the Government of the Bolivarian Republic of Venezuela issued
Decree-Law 5,200 Migration to “Empresas Mixtas” of the Orinoco Oil Belt Association
Agreements, as well as the Risk Exploration Agreements and Profit Sharing Agreements;
therefore, the associations Petrolera Zuata, S.A., Sincrudos de Oriente, S.A., Petrolera Cerro
Negro, S.A. and Petrolera Hamaca, C.A. must become “Empresas Mixtas”, whereby the
subsidiary CVP, or any other appointed subsidiary holds no less than 60% of the shares, in
accordance with the provisions of the Organic Hydrocarbons Law. Also existing agreements in
the West Paria Gulf, East Paria Gulf and the block referred to as La Ceiba; as well as Orifuels
Sinoven, S.A. (SINOVENSA) must be converted into “Empresas Mixtas” under the same
structure as indicated above.
In this connection, transition commissions were created for each association, which
incorporated the directors to ensure the transfer of control of all of their activities to the new
state companies. Also, this Decree-Law granted the partners a term, beginning on the date of its
publication, to set the terms and conditions of their possible involvement in the new “Empresas
Mixtas”. An additional term was granted to submit the terms and conditions to the National
Assembly, for the purpose of seeking authorization, in accordance with the Organic
Hydrocarbons Law. Once that term has elapsed, without an agreement being reached for
incorporation and operation of the “Empresas Mixtas”, the Bolivarian Republic of Venezuela,
11
through PDVSA, will assume directly the activities performed by different associations, to
maintain its continuity, in the public and social interest.
Pursuant to this Decree-Law, since May 1, 2007, PDVSA took control of all facilities
relating to the above associations.
At present, negotiations with different partners of associations are in process, without
reaching final agreements.
On June 26, 2007, Memorandums of Understanding were signed with international
companies establishing the conditions of the migration according to the Hydrocarbon Law.
PDVSA’s and the third parties participation in the “Empresas Mixtas” are as follows:
Cerro Negro
PDVSA´S
THIRD PARTIES
PARTICIPATION PARTICIPATION
83.33%
BP
16.67%
SINCOR
60.00%
Total
Statoil
30.30%
9.70%
70.00%
Chevron
30.00%
Golfo de Paria Oeste
(Corocoro)
74.00%
ENI
26.00%
Golfo de Paria Este
(POSA)
60.00%
Inerapia
Sinopec
8.00%
32.00%
PROJECT
Hamaca (Ameriven)
PDVSA took 100% control of Petrozuata and La Ceiba, and continues conversations
with the China National Petroleum Corporation in order to agree the final structure related of
SINOVENSA.
In September 2007, PDVSA and Harvest Vinccler signed an agreement for the conversion
into the “Empresa Mixta” “Petrodelta”; PDVSA will have 60% of the shares and Harvest
Vinccler 40%.
Official Gazette 38,785, of October 8, 2007, published the law on the effects of the
migration process to “Empresas Mixtas” of Joint Ventures of the Orinoco Oil Belt; as well as the
Risk Exploration and Profit Sharing Agreements, which established the time limit for the private
parties to reach agreements for the incorporation of “Empresas Mixtas” and for cases where
agreement is not reached, PDVSA or a subsidiary will assume the operating activities.
12
In Official Gazette 38,798, of October 9, 2007, the National Assembly approved the
creation of the “Empresas Mixtas”: PetroMonagas, S.A. (formerly Cerro Negro), PetroCedeño,
S.A. (formerly SINCOR), PetroPiar, S.A. (formerly Hamaca), East and West Paria Gulf, where
PDVSA will have a participation of 83.33%, 60%, 70% and 74%, respectively.
During August 2007, CVP paid to Petro-Canada $75 million as settlement of the La Ceiba
Association Agreement.
Currency Exchange Agreement 9
On March 22, 2007, Official Gazette 38,650 published Currency Exchange Agreement 9,
which established that PDVSA may acquire foreign currencies directly from the BCV, up to the
amount authorized to reimburse the funds placed abroad, in accordance with what was
established in Article 113 of the BCV Law. On February 8, 2007, the Board of Directors of the
BCV authorized PDVSA to keep a special fund for an amount equal to $3,500 million to support
“The Plan Siembra Petrolera 2007–2013”.
Certificate of Reserves in the Carabobo Block of the Orinoco Oil Reserves
In May 2007, PDVSA received a certificate from an independent company determining
the existence of 30,660 million barrels of Original Oil on Site (POES) in the Carabobo Block 2,
Carabobo Area of the Orinoco Oil Reserves. This certification estimates proved reserves of 6,000
million barrels, using a recovery factor of 20%. This certification is being reviewed and validated
by the Ministry of Popular Power for Energy and Petroleum.
Acquisitions and Dispositions
Acquisitions
According to the guidelines and strategic objectives of the National Government, during
2007 the stockholder of PDVSA authorized the purchase of shares of several entities operating in
the country’s electricity sector. These shares were recorded at cost and management believes that
the effects of not consolidating these companies at June 30, 2007, are not material in relation to
the consolidated financial statements as of that date. A summary these operations follows.
C.A. La Electricidad de Caracas
On February 15, 2007, PDVSA signed an agreement with The AES Corporation (AES)
and its subsidiary AES Shannon Holding, B.V. for the purchase of its participation in C.A. La
Electricidad de Caracas (EDC), equivalent to 82.14% of the total shares outstanding, for $739
million. According to Venezuelan law, to purchase the remaining outstanding shares, PDVSA
made a public offer.
13
From April 8 to May 8, 2007, PDVSA made a public tender offer to purchase up to
17.86% of the remaining outstanding shares of EDC, at a bolivar equivalent of $0.2734 per share
(determined at the official exchange rate for the sale of dollars effective as of the closing date).
This included, at the same time, the public tender offer in Venezuela and one in the United States
of America for the purchase of all outstanding American Depositary Shares (ADS’s), each
representing 50 EDC shares at a price of $13.6675 for each ADS.
As a result of the public tender offer and the agreement with AES, PDVSA acquired
93.61% of the EDC shares in circulation for a total amount of $844 million.
Sistema Eléctrico del Estado Nueva Esparta, C.A.
On February 8, 2007, PDVSA entered into a memorandum of understanding with CMS
Energy Corporation for the purchase of its shares in Sistema Eléctrico del Estado Nueva Esparta,
C.A. (SENECA), for $106 million, which represents 88% of the capital stock of that company.
On March 7, 2007, the stockholder of PDVSA approved the purchase which was made on March
30, 2007.
Electricidad de Valencia, S.A.
On July 6, 2007, PDVSA acquired 100% of the shares of the Electricidad de Valencia,
S.A. (ELEVAL) for $190 million.
Other Companies in the Electricity Sector
During 2007, PDVSA entered into negotiations in order to acquire the shares of
Turbogeneradores de Venezuela, S.A. (TURBOVEN), Termobarrancas, C.A.; and C.A. Luz y
Fuerza Eléctricas de Puerto Cabello (CALIFE). The Company’s management is currently
negotiating with the stockholders of these companies in order to reach an agreement on the terms
and conditions of the purchase.
Dispositions
CITGO is engaged in the refining, marketing and transportation of petroleum products
including gasoline, diesel fuel, jet fuel, petrochemicals, lubricants, asphalt and refined waxes. We
operate fuel refineries in Louisiana, Texas and Illinois and asphalt refineries in New Jersey and
Georgia. CITGO’s interests in these refineries result in a total crude oil capacity of
approximately 861,000 barrels per day. We employed approximately 4,000 employees and had
total assets of approximately $8.8 billion as of June 30, 2007. In the first six months of 2007, we
generated $1.1 billion of net income on total revenues of $18.7 billion which includes gain on sales
of investments in affiliates of approximately $641 million.
Our transportation fuel customers include branded wholesale marketers, convenience
stores and airlines, located mainly east of the Rocky Mountains. We generally market our
asphalt to independent paving contractors on the East Coast of the United States. We sell
lubricants principally in the United States to independent marketers, mass marketers and
14
industrial customers. We sell petrochemical feedstocks and industrial products to various
manufacturers and industrial companies throughout the United States. We sell petroleum coke
primarily in international markets. CITGO markets gasoline through agreements with
independent marketers and does not own or operate any of the CITGO branded locations.
Prior to 2007, CITGO’s obligations to its independent marketers exceeded the capacity
of its refinery production and CITGO purchased significant quantities of refined products from
affiliated and non-affiliated suppliers to offset the shortfall. In 2006, CITGO decided to
restructure its light oil marketing activities to better focus on sales of products manufactured
from its refineries and refineries owned by its affiliates. Associated decisions were made not to
renew a sales agreement involving 7-Eleven, formerly CITGO’s largest customer and to
discontinue sales to its independent marketers in 10 midwestern states and portions of three
other states. The restructuring of these marketing activities involved the 2006 sale of CITGO’s
41.25% interest in LYONDELL-CITGO Refining LP and the termination of a related product
supply agreement under which CITGO purchased light oils produced by the refinery owned by
that entity.
Effective April 1, 2007 CITGO completed the restructuring of its light oil marketing
activities. Its marketing efforts continue to be focused primarily in areas that are well located
within existing distribution networks and which are located within the continental United States,
east of the Rocky Mountains. CITGO remains one of the nation’s top ten largest branded
gasoline suppliers serving approximately 9,000 independently owned and operated CITGObranded retail outlets which supply approximately 5% of the gasoline consumed in the United
States.
On January 26, 2007, CITGO closed on the sale of its ownership of approximately 6.8%
of the outstanding capital stock of Explorer Pipeline Company. On February 27, 2007, CITGO
completed the sale of its ownership of approximately 15.8% of the outstanding capital stock of
Colonial Pipeline Company. However, these sales will have no adverse impact on CITGO’s
ability to ship on these common carrier pipelines; nor were such sales conditioned upon any
commitment to continue shipping on such pipelines.
In April 2006, CITGO commissioned an investment bank to conduct due diligence and
solicit potential buyers for CITGO Asphalt Refining Company (CARCO), a wholly-owned
subsidiary of CITGO. CARCO owns and operates two asphalt refineries in Paulsboro, New
Jersey and Savannah, Georgia. The carrying value of these assets is $445 million, and these
comprise properties, plant and equipment for $170 million, net of accumulated depreciation for
$130 million and $275 million, mainly of crude oil and by-products inventory.
In August 2006, CITGO retained an investment bank to evaluate the potential sale of a
wholly-owned pipeline from Houston to Oklahoma, known as the Eagle Oil Pipeline, four Texas
terminals and the Fauna storage facility, hereafter collectively known as the “Southwest Assets”,
and its 16% share of an additional pipeline and four terminals located in Ohio, hereafter
15
collectively known as the “Ohio Assets”, as well as a terminal in Iowa and a terminal in
Kentucky. As of October 2007 CITGO has entered into agreements for the sale of the
Southwest Assets and the Ohio Assets.
At the extraordinary stockholder’s meeting of PDVSA held on January 20, 2006, it was
approved to transfer, for no consideration, all of the shares of Pequiven to the Bolivarian
Republic of Venezuela, in order to comply with the provisions of the Law Fostering
Development of Petrochemical, Carbochemical and Similar Activities, enacted in December 2005.
To meet the guidelines established by the Ministry of Popular Power for Energy and
Petroleum and strategic plans of PDVSA, the Company continued temporarily to support
financially the activities of Pequiven. This support included loans for working capital to carry
out the investment plan for 2006, discounts on methane gas prices and financing of accounts
receivable up to 180 days.
Results of Operations – Six months ended June 2007 compared to six months ended June
2006
The production of crude oil, condensate and liquid petroleum gas of PDVSA averaged
3,018 MBPD during the six months ended June 30, 2007, compared to an average of 3,096
MBPD produced during the same period in 2006. Of this total of 3,018 MBPD, 25 % was light
crude oil and condensates, 33% was medium crude oil, 37% was heavy crude oil and the
remaining 5% was liquid petroleum gas. Our net production of natural gas (net of amounts reinjected) was 3,964.4 MMCFD during the six months ended June 30, 2007 compared to 3,932.1
M MCFD during the same period in 2006. All of our crude oil and natural gas production
operations are located in Venezuela.
During the six months ended June 30, 2007, our net output of refined petroleum products
(including output representing our equity interest in refineries held by our affiliates in the United
States and in Europe) was 2,681 MBPD. Of this total, 1,128 MBPD (42%) was produced in our
Venezuelan refineries, 219 MBPD (8%) in the Isla Refinery in Curaçao, 1,070 MBPD (40%) was
produced by the refineries in the United States, and the remaining 264 MBPD (10%), was
produced by our European joint ventures.
Total Revenues
Our total revenues decreased $7,963 million, or 16%, from $ 50,867 million during the six
months ended June 30, 2006 to $42,904 million during the same period in 2007. The main reason
for the decrease results from a reduction in the volume of sales of CITGO of 357 MBPD and the
reduction of $/bl 2.40 in the average sales price.
16
The main reasons for the decrease in volumes were the sale of our interest in
LYONDELL-CITGO, and the end of CITGO’s contract to sell refined product to 7-Eleven on
September 30, 2006 which was not renewed.
The following table sets forth a summary of our consolidated exports and international
market sales for the six months ended June 2007 and 2006:
PDVSA’s Exports and International Market Sales Volume
Refined petroleum products
Crude oil
Total
Average Price/Barrel ($/Barrel)
Six months ended June 30,
2007
2006
MBPD
% of Total
MBPD % of Total
3,145
66%
3,633
70%
1,607
34%
1,550
30%
4,752
100%
5,183
100%
51.15
53.55
Our consolidated sales of 4,752 MBPD in the first six months of 2007, compared to
5,183 MBPD in the first six months of 2006, consist primarily of exports of crude oil and refined
petroleum products from Venezuela, sales by our international subsidiaries of crude oil and
refined petroleum products purchased from third parties and Venezuelan domestic sales. Our
sales during the first six months of 2007 consisted of 1,607 MBPD of crude oil and 3,145 MBPD
of refined products, as compared to 1,550 MBPD of crude oil and 3,633 MBPD of refined
products during the first six months of 2006.
Export Revenues of Crude Oil and Refined Products
Our exports decreased in volume by 4% from 2,660 MBPD in the six months ended June
30, 2006 to 2,553 MBPD in the same period in 2007. Our average export price per barrel,
including crude oil, refined petroleum products and liquid petroleum gas, was $ 53.81 for the six
months ended June 30, 2007, compared to $56.36 for the same period in 2006, representing a 5%
decrease. As a result, our export revenues derived from such products decreased by $1,897
million in the six months ended June 30, 2007 as compared to the same period in 2006.
17
The following table sets forth the primary markets for Venezuelan crude oil, refined
petroleum products and liquid petroleum gas for the six months ended June 30, 2007 and 2006:
PDVSA's Export Sales - Geographical Breakdown
Six months ended June 30,
2007
2006
(MBPD, except as otherwise
indicated)
United States and Canada
Caribbean, Central America and
South America
Europe
Asia and others
Total
1,154
853
254
292
2,553
1,247
835
316
262
2,660
PDVSA exports all of the crude oil that we produce that is not processed in our
Venezuelan refineries (including Isla Refinery in Curaçao). Of our total exports of crude oil and
refined products of 2,553 MBPD for the six months ended June 30, 2007, 1,838 MBPD were
exported (including Isla Refinery in Curaçao) as crude oil and 715 MBPD were exported as
refined petroleum products. For the purpose of calculating export volumes, we treat crude oil
processed in Isla Refinery in Curaçao as an export of crude oil from Venezuela and do not treat
the sale of refined petroleum products from Isla Refinery as an export of refined petroleum
products from Venezuela.
Revenues of International Subsidiaries
As of June 2007, the total volumes of crude oil and refined petroleum products that we
sold exceeded our total production of crude oil and liquid petroleum gas. During the six months
ended June 30, 2007, we produced 3,018 MBPD of crude oil and liquid petroleum gas, compared
to 4,752 MBPD of total sales. CITGO, a wholly owned subsidiary of PDV America, Inc.,
generates most of the sales in excess of our crude oil and liquid petroleum gas production
primarily because it purchases crude oil and refined petroleum products from third parties
(including affiliates) for supply to its refining and marketing network in the United States.
Total sales of refined petroleum products by CITGO during the six months ended June
30, 2007 were approximately 1,332 compared to 1,689 MBPD for the same period in 2006. Sales
decreased $6,700 million, or 27%, in the six months ended June 30, 2007 as compared to the
18
same period in 2006, due to a decrease in the average sales price of 8% and a decrease in sales
volume of 21%.
Domestic Sales
During the six months ended June 30, 2007 we sold 563 MBPD of refined petroleum
products (including liquid petroleum gas) and 2,741 MMCFD of natural gas in Venezuela,
compared to the 533 MBPD of refined petroleum products and 2,697 MMCFD of natural gas
for the same period in 2006, representing an increase in sales of refined petroleum products and
natural gas of 6% and 2%, respectively. The increase was mainly due to higher demand.
Equity in Earnings of Non-Consolidated Investees
Equity in earnings of non-consolidated investees decreased $331 million, from $695
million for the six months ended June 30, 2007 to $364 million by the same period in 2006,
primarily due to the sale of our interest in LYONDELL-CITGO LP.
Cost and Expenses
Purchases of Crude Oil and Products
Purchases of crude oil and products decreased by 18% from $20,333 million for the six
months ended June 30, 2006 to $16,646 million for the same period in 2007. CITGO purchases
crude oil and refined petroleum products from third parties for supply to its refining and
marketing network in the United States. CITGO’s purchases of crude oil from us totaled
approximately 412 MBPD during the six months ended June 30, 2007, compared to 421 MBPD
for the same period in 2006. For the first six months of 2007, PDVSA also purchased 431
MBPD of crude oil to meet our supply commitments and as feedstock in our refineries.
Operating Expenses
Our operating expenses decreased by $2,773 million, or 36 %, from $ 7,648 in the six
months ended June 30, 2006 to $ 4,875 million for the same period in 2007. This decrease is
mainly due to the migration of operating agreements to “Empresas Mixtas” from March 31, 2006
and the elimination of the payment of stipends, operational fees and capital fees related to the
operating agreement. In addition, CITGO sold its 41.25% participation in LYONDELL-CITGO
in August 2006 and also, in January and February 2007, CITGO sold its 6.8% and 15.8%
interests in Explorer Pipeline Company and Colonial Pipeline Company, respectively, generating
decrease in refining costs during the first semester of 2007.
19
Selling, Administrative and General Expenses
Our selling, administrative and general expenses increased by 21 %, from $ 932 million for
the six months ended June 30, 2006 to $1,129 million during the same period in 2007, mainly due
to the increase in labor costs.
Financing Expenses
Our financing expenses increased by 233 % from a total of $ 93 million for the first six
months of 2006 to $310 million during the same period in 2007. The variation is mainly due to
the increase in the amount of debt outstanding, from $3,071 million at June 30, 2006 to $13,578
million at June 30, 2007.
New debt contracted during the period from June 2006 to June 2007, is represented
principally by:
 Unsecured bonds maturing in 2017, 2027 and 2037 for $3,000 million, $3,000
million, and $1,500 million, respectively, bearing annual interest of 5.25%, 5.375% y 5.50%,
respectively, coupons are paid semi-annually.
 Loans guaranteed by government agencies of export and financial institutions, $
2,300 million, bearing interest at LIBOR plus 1.13%, maturing in 2022.
Long- term debt at June 30, 2007 and June, 30 2006 consists of the following (in millions
of dollars):
Six months ended June 30,
2007
2006
Long-term debt
13,578
3,071
Less current portion of long-term debt
Long-term debt, net of current portion
1,983
11,595
309
2,762
Weighted average variable interest rate
Weighted average fixed interest
6.05810 %
7.85290 %
6.16126 %
7.84404 %
Taxes
For the first six months period of 2007, PDVSA expensed $10,151 million in taxes, compared to
$10,755 million in 2006, representing a decrease of 6%. The consolidated effective income tax
rate for the six month period ended June 30, 2007 was 56.7% (for the year ended December 31,
20
2006 the rate was 42,5% and for the six months ended June 30, 2006 this rate was 41.8%). This
change in the effective tax rate was mainly due to a decrease as a result of the regular readjustment
for inflation and the effect of the conversion into dollars, and an increase resulting from an
increase in the provision for legal contingencies, the net effect of which resulted in a lower
effective tax rate.
A summary of the tax effects on our consolidated operations for the six months ended
June 30, 2007 and 2006 follows (in millions of dollars):
Income taxes
Production and other taxes
Six months ended June 30,
2007
2006
1,177
2,050
8,974
8,705
10,151
10,755
Impact of Taxes on Net Income and Cash Flows
Income tax expense is based on accounting records in Bolivars, in accordance with the
Venezuelan income tax law. For tax purposes, Venezuelan companies are required to reflect the
impact of inflation and the variations in the rate of the Bolivar relative to the 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 Bolivars. When such tax liabilities
are translated into dollars, the adjustments may create a material difference between the effective
tax rate paid when expressed in dollars and the statutory rate in Bolivars.
On May 24, 2006 an amendment to the Organic Hydrocarbons Law modified existing
taxes and created new taxes as described below.
Royalty and Production tax. The Organic Hydrocarbons Law came into effect in
January 2002 and among other things increased the royalty tax rate from 16 2/3% to 30% based
on the volume of extracted hydrocarbons. 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%. For natural
bitumen, the Organic Hydrocarbons Law provides for a tax of 16 2/3% to 30%, based on the
profitability of reservoirs. The tax is fully deductible for the purposes of determining net taxable
income. On May 24, 2006, the Organic Hydrocarbons Law was updated to provide for a
production tax at a rate of 33%, which is partially compensated with the royalty tax.
21
On November 30, 2005, the Ministry of People’s Power for Energy and Petroleum and
PDVSA Petróleo entered into an agreement to establish the terms for the payment of production
tax on hydrocarbons exploitation and on participation in the extraction of associated substances,
namely coque and sulfur, during the hydrocarbons upgrading and refining process. The agreement
became effective on December 1, 2005.
Surface tax: The surface tax is calculated at the annual rate of 100 tax units (TU) for
each square kilometer or fraction of surface extension of land granted and not exploited. 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
royalty calculation). The taxpayer may deduct from the amount to be paid what it will pay as
royalty, 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 national territory (based on
the sale price of these hydrocarbons).
Income Tax: In January 2002, an amendment to Venezuelan income tax laws came into
effect that reduced the income tax rate applicable to our Venezuelan subsidiaries engaged in the
production of hydrocarbons and related activities from 67.7% to 50%.
On September 25, 2006, an amendment to the income tax laws provided for the following
changes:
Article 11 previously excluded the Orinoco Oil Belt associations from an income tax rate
of 50%. Effective January 1, 2006, Article 11 only excludes those companies, whether integrated
or not, 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.
22
Article 56 previously granted a tax discount equivalent to 8% of the amount of new
investments and an additional 4% for investments in hydrocarbons recovery, gas conservation
and hydrocarbon valuation. Effective as of fiscal year 2006, Article 56 provides a tax discount of
10% for investments in assets, programs and activities related to the conservation and protection
of the environment. This discount does not apply to companies involved in the exploitation of
hydrocarbons and related activities.
An amendment to the Venezuelan Income Tax Law was published on February 16, 2007,
which includes the following: (i) interest paid to related parties pursuant to the law is deductible
only to the extent that debt due to related parties and debt due to independent parties does not
exceed the debtor’s paid-in capital stock, (ii) the amount of a taxpayer’s indebtedness due to
related parties that exceeds its annual average net equity will be treated as net equity, and (iii)
foreign exchange profits or losses are deemed to have occurred in the fiscal year in which they are
realized or when the related assets or liabilities become due.
Value Added Tax (VAT): Prior to August 2004, Venezuela levied a wholesale tax (a form
of value added tax) of 16% on domestic sales transactions. Between September 2004 and
September 2005, Venezuela levied this tax at a rate of 15% and, as of October 1, 2005, reduced
the rate to 14%. On March 1, 2007, the President of Venezuela reduced the VAT rate to 11%
and, as of July 1, 2007, reduced it to 9%.
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, to us which
can be used to pay our future tax liabilities. During the first six months of 2006, we paid $209
million using CERTs. In 2006, we settled tax liabilities amounting to $647 million using CERTs.
The Partial Amendment to the Income Tax Law published in Official Gazette 38,529
dated September 25, 2006 supersedes all tax credits on new investments applicable to companies
in the hydrocarbons sector and related activities, and exempts them from application of tax
credits available for activities different from those relating to hydrocarbons. Until the date this
amendment was enacted, PDVSA and some of its Venezuelan subsidiaries were entitled to tax
credits for new investments in property, plant and equipment up to 12% of the amounts
invested, and the carryforward period may not exceed three years. Such credits, however, may
not exceed 2% of net taxable income according to the previous law.
The income tax law allows tax losses to be carried forward for three years to offset future
taxable income, except losses resulting from the application of the fiscal inflation adjustment,
which can be carried forward for one year.
Effective March 2002, and for the term of one year, the Venezuelan government
introduced a tax on certain banking transactions to be levied at a rate of 0.75%. In March 2003,
the term was extended for one more year, and this tax was raised to a rate of 1.00% until June
23
2003, when the rate was reduced to 0.75%. The tax rate was reduced to 0.50% from December
2003 and at the beginning of February 2006 this tax was eliminated.
In conformity with the Venezuelan 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 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 income tax. We undertake significant operations regulated
by transfer pricing rules.
5.- Liquidity and Capital Resources
Cash Flows from Operating Activities
For the six months ended June 30, 2007, PDVSA’s net cash used in operating activities
totaled $4,860 million, resulting from net cash used of $9,306 partially compensated by net cash
provided of $4,446.
The cash used is represented as follows: $4,105 million increase in notes and accounts
receivable, $2,080 million increase in prepaid expenses and other assets, mainly due to the
overpayment of income tax, the increase of $697 million in recoverable value added tax, the
payments of employee benefits of approximately $231 million and other adjustments to reconcile
net income of $2,193 million, which includes: $1,172 million of deferred income tax, $ 364 of
equity in earnings of non-consolidated investees, $641 of gain on sale of investment in affiliates
of CITGO and $16 of asset impairment.
The cash provided is represented as follows: $896 million of net income $1,795 million
of depreciation and depletion, $641 million of provision for employee benefits and other
postretirement benefits, $309 million of changes in inventory, $107 million increase in accounts
payable to suppliers, $607 increase in income tax payable, accruals and other liabilities and other
items of $91 million.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $3,896 million for the six months June 30,
2007, of which capital expenditures, net represent $3,823 million and $ 957 million represent the
purchase of several entities in of the electricity sector of the country, such as 93.61% of the total
outstanding shares of Electricidad de Caracas, C.A and 88% of the capital stock of Sistema
Eléctrico del Estado Nueva Esparta, C.A.. During the first six months ended June 30, 2007,
PDVSA received $280 million of dividends from investments in non-consolidated investees, and
$ 756 million from the sale of CITGO’s interest of 6.8% and 15.8% in Explorer Pipeline
Company and Colonial Pipeline Company, respectively.
24
Our capital expenditures were as follows ($ in millions):
For the six month period ended
June 30,
2007
2006
In Venezuela:
Exploration and Production
Refining
Gas and others
Foreign-refining
Total
2,091
670
787
3,548
275
3,823
1,078
212
376
1,666
305
1,971
Cash Flows from Financing Activities
Consolidated net cash from financing activities totaled approximately $10,441 million for
the six months ended June 30, 2007, resulting primarily from borrowings of $11,427 million in
order to obtain the necessary resources for the investment plans for the next 6 years (“Plan
Siembra Petrolera 2007–2012”), the stockholder of PDVSA has approved the issue of bonds, as
well as other borrowings. Debt repayments of $ 763 million, and dividends payments of $ 223
million.
Loan Agreements
As of June 30, 2007, PDVSA has an aggregate of $13,578 million of debt outstanding
maturing on various dates through 2037.
During 2007, the republic, PDVSA’s stockholder approved an issuance of bonds, as well
as other indebtedness.
On January 8, 2007 the public tender of bonds was approved up to $5,000 million due in
10, 20 and 30 years (2017, 2027 and 2037). Our subsidiary PDVSA Petróleo acts as a guarantor
of all bonds, and the funds obtained must be used for capital investments. This issue was
supervised and regulated by the BCV, and is exempt from the scope of the Capital Markets Law
of Venezuela, on the basis that PDVSA is a state-owned company. Because of the high demand
of investors and the favorable conditions of these debt instruments, the stockholder on 26
February 2007 authorized an increase of this issue from $5,000 to $7,500 million, in order to
obtain additional resources necessary for the purchase of shares of companies in the electricity
sector, as well as other investments approved by the stockholder of PDVSA. The annual coupon
25
for the issued bonds is 5.25%, 5.375% and 5.50%, due in 10, 20 and 30 years, respectively. The
combined issue of these bonds generated a premium of 5.5%. The bonds pay interest at principal
in U.S. dollars.
On April 12, 2007, bonds totalize $7,500 million were issued.
In January 2007, PDVSA obtained a credit facility of $1,124 million with a consortium of
banks led by BNP Paribas. This loan is due on January 30, 2008, and may be extended for an
additional year with the approval of lenders representing over 50% of the original commitment.
This loan bears interest at a rate equivalent to LIBOR plus an increase based on the country-risk
of Venezuela, established by Standard & Poor’s.
In February 2007, PDVSA obtained a credit facility amounting to $3,500 million with a
consortium of banks led by the Japan Bank for International Cooperation (JBIC). This loan is
due in 15 years and bears interest at a rate equivalent to LIBOR plus 1.13% and includes cash
payment options or delivery of crude oil and products at market prices, subject to an agreement
of minimum amounts reviewed every three years. At June 30, 2007 PDVSA had drawn down a
total of $2,300 million under the credit facility at an average interest rate of 6.52%. As of June
30, 2007 the balance of this debt is $2,244 million with an average interest rate of 6.50%.
At June 30, 2007, PDVSA has credit lines available for $ 1,150 million.
On April 30, 2007, $ 1.17 million was declared and paid as a dividend and $ 85 million
was paid as advances of dividends to stockholder.
Our scheduled debt payments from July to December 2007, and for the years 2008,
2009, 2010, 2011 and thereafter totals $510 million, $1,780 million, $474 million, $1,637
million, $431 million and 8,746 million respectively.
6.- New Accounting Standard
March 2007, IASB issued International Accounting Standards 23 revised Borrowing
Costs (IAS 23), which is effective for periods beginning on or after January 1, 2009. This
standard is being evaluated by management and it is not expected that its application will
significantly affect the consolidated financial statements. During the six months ended June 30
2007, the IASB issued Interpretation 13 (IFRIC 13) Client Fidelity Programmes. IFRIC 13 will
be effective for periods beginning on or after of July 1, 2008.
PDVSA is assessing these new standards, and based on its analysis to date, it believes
that they will not have a significant impact on the condensed consolidated interim financial
statements at June 30, 2007.
26
7.- Legal Proceedings
In September 2005, the company New Brunswick Power Corporation (“NB Power”)
filed a lawsuit at a Canadian Court and an arbitration request before the International Council for
Dispute Resolution of the American Arbitration Association of New York against PDVSA,
Bitúmenes del Orinoco, S.A. (BITOR) and the Bolivarian Republic of Venezuela, alleging, among
other things, the failure to comply with an Orimulsión® supply contract. Such procedures were
suspended until the Federal Court of New York rules on a petition filed by PDVSA and BITOR
relating to the existence of the Contract or lack thereof. NB Power, seeks compensation for
damages for Cdn$2,000 million (Canadian dollars). On July 25, 2007, PDVSA paid $110 million
in an out of court settlement with NB Power.
As of June 30, 2007 the Company is involved in other claims and legal actions in the
normal course of business of $6,078 million. These claims and legal actions have not varied
significantly since December 31, 2006; therefore the opinion then issued by management and its
legal advisors, remains in effect concluding that, the outcome of these claims would not have a
material adverse effect on the Company’s financial position, results of operations or liquidity.
Based on an analysis of the information available, a provision is included in accruals and
other liabilities at June 30, 2007 and December 3, 2006 for $1,569 million and $860 million,
respectively. If the lawsuits and claims known were resolved in an adverse manner for the
Company for amounts greater than those accrued, then such results could have material adverse
affect on the Company’s results of operations. Although it is not possible to predict the
outcome of these matters, management, based in part on the advice of its legal counsel, does not
believe that it is probable that losses associated with such legal proceeding, exceeding the
estimates already recognized, are significant for the Company’s financial situation or results of
operations.
8.- Quantitative and Qualitative Disclosure about Market Risk
Introduction
We are exposed to hydrocarbon price fluctuations, interest rate fluctuations and foreign
currency exchange risks. To manage these exposures, we have defined certain benchmarks
consistent with our preferred risk profile for the environment in which we operate and finance
our assets. We do not attempt to manage the price risk related to all of our inventories of
hydrocarbon products. As a result, at June 30, 2007, we were exposed to price risks with respect
to a substantial portion of our hydrocarbon inventories. The following disclosure does not
27
attempt to quantify the price risks associated with such commodity inventories. All matters
related to market risks are managed by our international subsidiaries.
Commodity Derivative Instruments
We balance our crude oil and refined product supply and demand and manage a portion of
our price risk by entering into petroleum commodity derivative contracts through our subsidiary
CITGO. Changes in the fair value of these contracts are recorded in cost of sales and operating
expense.
The following tables present contractual amounts with open positions at June 30, 2007
and 2006 for commodity derivatives, and includes futures purchased and futures sold:
28
Commodity De rivative s
Open Positions at June 30, 2007
Commodity
Derivative
Maturity
Date
Number of
Contracts
Contract
Value
Long/(Short)
Market
Value(3)
Asset/(Liability)
($ in millions)
No Lead Gasoline (1) Futures Purchased
Futures Sold
Forward Purchase Contracts
Forward Sale Contracts
2007
2007
2007
2007
175
(990)
1,776
(1,877)
$
$
$
$
16.3
(90.0)
132.9
(148.9)
$
$
$
$
16.5
(92.5)
133.2
(148.2)
Distillates (1)
Futures Purchased
Futures Purchased
Futures Sold
OTC Swaps (Pay Fixed / Receive Float) (4)
OTC Swaps (Pay Float / Receive Fixed) (4)
OTC Swaps (Pay Fixed / Receive Float) (4)
OTC Swaps (Pay Float / Receive Fixed) (4)
Forward Purchase Contracts
Forward Sale Contracts
Forward Sale Contracts
2007
2008
2007
2007
2007
2008
2008
2007
2007
2008
303
449
(4)
112
(10)
163
(3)
394
(1,888)
(489)
$
$
$
$
$
$
$
$
$
$
24.5
37.3
(0.3)
29.9
(125.3)
(41.4)
$
$
$
$
$
$
$
$
$
$
26.5
39.5
(0.3)
0.8
(0.5)
0.9
(0.1)
29.6
(127.9)
(43.5)
Crude Oil (1)
Futures Purchased
Futures Sold
Listed Put Options Purchased
Listed Put Options Sold
OTC Put Options Purchased
OTC Put Options Sold
Forward Purchase Contracts
Forward Sale Contracts
2007
2007
2007
2007
2007
2007
2007
2007
865
(50)
44
(294)
1,000
(500)
3,441
(1,247)
$
$
$
$
$
$
$
$
58.5
(3.5)
50.2
(62.9)
$
$
$
$
$
$
$
$
61.3
(3.5)
0.1
(0.6)
1.0
(0.7)
52.2
(66.3)
Natural Gas (2)
Futures Purchased
Listed Call Options Purchased
Listed Put Options Sold
OTC Options Purchased
OTC Options Sold
2007
2007
2007
2007
2007
300
1,400
(1,400)
600
(1,800)
$
$
$
$
$
2.6
-
$
$
$
$
$
2.3
0.5
(0.8)
0.7
0.6
Ethanol (1)
Forward Sales Contracts
2007
3,311
$
-
$
(1.7)
(1)
(2)
(3)
(4)
Thousands of barrels
Ten-thousands of mmbtu
Based on actively quoted prices.
Floating price based on market index designated in contract; fixed price agreed upon at date of contract.
29
Commodity Derivatives
Open Positions at June 30, 2006
Commodity
Derivative
Maturity
Date
Number of
Contracts
Contract
Value
Long/(Short)
Market
Value(3)
Asset/(Liability)
($ in millions)
No Lead Gasoline (1) Futures Purchased
Futures Sold
OTC Swaps (Pay Float / Receive Fixed) (4)
Forward Purchase Contracts
Forward Sale Contracts
2006
2006
2006
2006
2006
175
(175)
(25)
2,991
(2,030)
$
$
$
$
$
16.3
(16.3)
248.8
(179.1)
$
$
$
$
$
16.3
(16.3)
(0.1)
260.8
(182.4)
Distillates (1)
Futures Purchased
Futures Purchased
Futures Sold
Futures Sold
OTC Swaps (Pay Fixed / Receive Float) (4)
OTC Swaps (Pay Fixed / Receive Float) (4)
Forward Purchase Contracts
Forward Sale Contracts
Forward Sale Contracts
2006
2007
2006
2007
2006
2007
2006
2006
2007
959
505
(221)
(1)
225
275
1,757
(2,109)
(587)
$
$
$
$
$
$
$
$
$
80.6
44.7
(18.9)
(0.1)
142.6
(136.5)
(53.2)
$
$
$
$
$
$
$
$
$
85.2
46.5
(18.8)
(0.1)
0.7
0.9
145.8
(143.3)
(54.6)
Crude Oil (1)
Futures Purchased
Futures Sold
Listed Call Options Purchased
Listed Call Options Sold
Listed Put Options Purchased
Listed Put Options Sold
OTC Swaps (Pay Fixed / Receive Float) (4)
Forward Purchase Contracts
Forward Sale Contracts
2006
2006
2006
2006
2006
2006
2006
2006
2006
671
(701)
249
(245)
245
(145)
25
2,473
(775)
$
$
$
$
$
$
$
$
$
48.0
(50.2)
56.5
(54.9)
$
$
$
$
$
$
$
$
$
50.1
(52.3)
0.3
(0.3)
0.1
59.7
(57.3)
Natural Gas (2)
Futures Purchased
Futures Purchased
Futures Sold
Futures Sold
Listed Call Options Purchased
Listed Call Options Sold
Listed Put Options Purchased
Listed Put Options Sold
OTC Put Options Sold
2006
2007
2006
2007
2006
2006
2006
2006
2006
73
15
(30)
(15)
10
(10)
51
(45)
(324)
$
$
$
$
$
$
$
$
$
4.9
1.2
(2.0)
(1.5)
-
$
$
$
$
$
$
$
$
$
4.6
1.3
(1.8)
(1.5)
0.1
(0.1)
0.4
(0.3)
(1.4)
(1)
(2)
(3)
(4)
Thousands of barrels
Ten-thousands of mmbtu
Based on actively quoted prices.
Floating price based on market index designated in contract; fixed price agreed upon at date of contract.
30
Futures maturities of long-term at June 30, 2007 and June 30, 2006 are as follows (in
millions of dollars)
Short-term and Long-term Debt
at June 30, 2007
Expected
Maturities
Fixed Rate Debt
Variable Rate Debt
TOTAL
US$
US$
US$
15
9
17
June 2007 – June 2008
July 2008 – December 2008
2009
2010
2011
Thereafter
Total
1,968
297
457
1,638
424
906
5,690
7
7,840
7,888
1,983
306
474
1,638
431
8,746
13,578
Short-term and Long-term Debt
at June 30, 2006
Expected
Maturities
June 2006 – June 2007
June 2007 – December 2007
2008
2009
2010
2011
Thereafter
Total
Fixed Rate Debt
Variable Rate Debt
US$
US$
11
6
18
17
340
392
298
307
412
156
137
146
1,223
2,679
TOTAL
309
313
430
173
137
146
1,563
3,071
Foreign Exchange Risk
The U.S. dollar is our functional currency, since a significant portion of our revenues and
debt, as well as the majority of our costs, expenses and investments are denominated in dollars.
We generally do not enter into foreign currency derivative transactions to hedge against
movements in exchange rates. We are, however, exposed to foreign currency exchange risk
associated with our recoverable luxury and wholesale tax receivables, notes and accounts
receivable, and long-term and short-term debt denominated in currencies other than the U.S.
dollar, as summarized below:
31
At June 30, At December 31,
2007
2006
($ in millions)
Monetary Assets
Bolivars
Euros
Other currencies
Monetary
Liabilities
Bolivars
Yen
Euros
Other currencies
Net
Bolivars
Yen
Euros
Other currencies
Total
15,056
458
9
15,523
11,056
452
15
11,523
21,625
219
44
63
21,951
12,591
249
3
42
12,885
(6,569)
(219)
414
(54)
(6,428)
(1,535)
(249)
449
(27)
(1,362)
32
SIGNATURES
PDVSA has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
PETROLEOS DE VENEZUELA, S.A.
Date: December 28, 2007
By:
/s
Name:
Title:
Víctor Eduardo Aular B.
Chief Financial Officer
33
ANNEX A
Measurement Conversion Table
1 barrel
=
42 U.S. gallons
1 barrel of oil equivalent
=
1 barrel of crude oil
1 barrel of crude oil per day
=
Approximately 50 tons of
crude oil per year
1 cubic meter
=
33.315 cubic feet
1 metric ton
=
1,000 kilograms
1 metric ton of crude oil
=
Approximately 7.3 barrels of
crude oil (assuming a specific
gravity of 33º)
1 metric ton of oil
equivalent
=
Approximately 1,125 cubic
meters of natural gas
=
5,800 cubic feet of gas
(based on the actual
average equivalent
energy content of
PDVSA’s proved
natural gas reserves)
=
Approximately 2,205
pounds
34
Glossary of Certain Oil and Gas Terms
Unless the context indicates otherwise, the following terms used in this report have the
meanings set forth below:
2D
Two dimensional seismic lines (Km).
3D
Three dimensional seismic lines (Km2).
4D
Three dimensional seismic lines (Km2) taken at different periods of
time.
Alquilation
The process of producing alquilates (refined products used to
enhance gasoline).
AQUACONVERSION®
A proprietary technology for the thermal/catalytic conversion of
heavy crude oil and residuals by treatment with steam and
additives, to reduce the viscosity of heavy crude oil fractions and
residuals.
API gravity
An indication of density of crude oil or other liquid hydrocarbons
as measured by a system recommended by the American Petroleum
Institute (API), measured in degrees. The lower the API gravity,
the heavier the compound. For example, asphalt has an API gravity
of 8° and gasoline has an API gravity of 50°.
Barrels (or bbl)
Barrels of crude oil, including condensate and natural gas liquids.
BCF
Billions of cubic feet.
BOE
Barrels of oil equivalent.
BPD
Barrels per day.
Cetane index
An index used to measure diesel quality based on the efficiency
with which the fuel ignites; the higher the number the higher the
quality of the diesel.
Condensate
Light carbon substances produced from natural gas that condense
into liquid at normal temperatures and pressures associated with
surface production equipment.
Crude oil
Crude oil containing condensate.
Crude slate (or slate)
A listing of the various crudes that are processed in a refinery
during a given period in a given configuration.
Distillate
Liquid hydrocarbons distilled from crude or condensate.
Extra-heavy crude oil
Crude oil with an average API gravity of less than 11°.
FCC
The FCC unit is the basis of modern refineries. It “cracks” heavy
molecules of crude oils into smaller, lighter ones that can then be
used in the formulation of gasolines.
35
Feedstocks
Partially refined petroleum that is added to the crude slate and
converted into refined petroleum products.
Fractionator
A processing unit that breaks down feedstocks into desired fractions
(specific boiling ranges).
Heavy crude oil
Crude oil with an average API gravity of less than 21°.
Hydrotreatment
The process of removing sulfur from a hydrocarbon stream in the
presence of a catalyst.
Km
Kilometer.
Light crude oil
Crude oil with an average API gravity of 30° or more.
LNG
Liquefied natural gas.
Medium crude oil
Crude oil with an average API gravity of 21° or more and less than
30°.
MBPD
Thousands of barrels per day.
MCF
Thousands of cubic feet.
MCFD
Thousands of cubic feet per day.
MMCFD
Millions of cubic feet per day.
MDWT
Thousand deadweight tons; a designation for the size or
displacement of a ship.
M3D
Cubic meters per day.
MM3D
One thousand cubic meters per day.
MMB
Millions of barrels.
MMMB
Billions of barrels.
Olefins
A class of unsaturated hydrocarbons.
Pitch
Black or dark viscose substance obtained as a residual in the
distillation of oil (bituminous—resin).
Proved reserves
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and
engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reserves under existing
economic and operating conditions, i.e., prices and costs as of the
date the estimate is made. Prices include consideration of changes
in existing prices provided only by contractual arrangements, but
not escalations based upon future conditions.
Proved developed reserves Proved developed oil and gas reserves are reserves that can be
expected to be recovered through existing wells with existing
equipment and operating methods. Additional oil and gas expected
to be obtained through the application of fluid injection or other
36
improved recovery techniques for supplementing natural forces and
mechanisms of primary recovery are included as “proved developed
reserves” only after testing by a pilot project or after the operating
of an installed program has confirmed through production response
that increased recovery will be achieved.
Proved undeveloped
reserves
Proved undeveloped oil and gas reserves are reserves that are
expected to be recovered from new wells on undrilled acreage, or
from existing wells where a relatively minor expenditure is required
for recompletion, but does not include reserves attributable to any
acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such
techniques have been proven to be effective by actual testing in the
area and in the same reservoir. Reserves on undrilled acreage are
limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be
demonstrated with certainty that there is continuity of production
from the existing productive field.
Reformer
A processing unit that converts naphtha into higher octane
components.
Spud
To begin to drill a well.
37
PETROLEOS DE VENEZUELA, S.A. AND SUBSIDIARIES (PDVSA)
(Wholly owned by the Bolivarian Republic of Venezuela)
CONDENSED COSOLIDATED INTERIM FINANCIAL STATEMENTS
F-1
PETRÓLEOS DE VENEZUELA, S.A.
AND SUBSIDIARIES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Condensed Consolidated Interim
Financial Statements
Six-month period ended June 30, 2007
With Independent Auditors’ Report Thereon
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Condensed Consolidated Interim Financial Statements
Six-month period ended June 30, 2007
Table of Contents
Pages
Independent Auditors’ Report on Review of Condensed Consolidated Interim Financial
Information
1-2
Condensed Consolidated Interim Balance Sheet
3
Condensed Consolidated Interim Statement of Income
4
Condensed Consolidated Interim Statement of Stockholder’s Equity
5
Condensed Consolidated Interim Statement of Cash Flows
6
Notes to the Condensed Consolidated Interim Financial Statements:
(1)
Reporting Entity
7
(2)
Basis of Presentation:
(a) Statement of Compliance
(b) Functional and Presentation Currency
(c) Use of Estimates and Judgements
7
7
8
8
(3)
Significant Accounting Policies
8
(4)
Recently Issued Accounting Standards
8
(5)
Exchange Agreement with the Banco Central de Venezuela (BCV)
9
(6)
Transactions and Balances in Currencies other than the Dollar
9
(7)
Prepaid Expenses and Other Assets
10
(8)
Property, Plant and Equipment, Net
10
(9)
Long-term Accounts Receivable and Other Assets
11
(10) Joint Development Activities
11
(11) Assets Classified as Held for Sale
12
(12) Purchase of Electricity Sector Companies
13
(13) Sale of Non-consolidated Investees
13
(14) Income Tax
14
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Condensed Consolidated Interim Financial Statements
Six-month period ended June 30, 2007
Table of Contents, Continued
Pages
(15) Long-term Debt
14-15
(16) Accruals and Other Liabilities
15-16
(17) Capital Stock and Reserves
16
(18) Related Party Transactions
16-18
(19) Operating Segments and Geographic Data
18-19
(20) Litigation and Other Claims
19-20
(21) New Laws:
(a) Special Powers Law
(b) Monetary Reconversion Law
(22) Subsequent Events:
(a) Organic Law for Reorganization of the Electricity Sector
(b) Recently Issued Accounting Standards
(c) Litigation and Other Claims
(d) Sale of Citgo’s Assets
(e) Joint Development Activities
(f)
Purchase of Companies in the Electricity Sector
(g) Collective Labor Contract
(h) Financial Transactions Tax Law
20
20
20
21
21
21
21
21
21-22
22
22
22
Independent Auditors’ Report on Review of
Condensed Consolidated Interim Financial Information
To the Stockholder and Board of Directors of
Petróleos de Venezuela, S.A.:
Introduction
We have reviewed the accompanying condensed consolidated interim balance sheet of Petróleos de Venezuela,
S.A. and its subsidiaries (PDVSA) (wholly-owned by the Bolivarian Republic of Venezuela) as of June 30, 2007
and the related condensed consolidated statements of income, stockholder’s equity and cash flows for the sixmonth period then ended (interim financial information). We did not review the interim financial information as
of June 30, 2007, and for the six-month period then ended of the following subsidiaries: Petroindependiente,
S.A.; Petroboscán, S.A.; Petroregional del Lago, S.A.; Petroquiriquire, S.A.; Petrolera Sino-Venezolana, S.A.
and Baripetrol, S.A., which reflect total assets constituting 3% as of June 30, 2007 and net income constituting
56% for the period then ended, of the related consolidated totals. The interim financial information of those
subsidiaries was reviewed by other auditors, whose reports as of June 30, 2007 have been furnished to us and our
conclusion, insofar as it relates to the amounts included in the interim financial information of those subsidiaries
as of that date and for that period, is based solely on the reports of other auditors. The management of PDVSA is
responsible for the preparation and fair presentation of the accompanying condensed consolidated interim
financial information in accordance with International Financial Reporting Standard IAS 34 Interim Financial
Reporting. Our responsibility is to express a conclusion on this condensed consolidated interim financial
information based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements 2410 Review of
Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial
information consists of making inquiries, primarily of persons responsible for financial and accounting matters,
and applying analytical and other review procedures. A review is substantially less in scope than an audit
conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain
assurance that we would become aware of all significant matters that might be identified in an audit.
Accordingly, we do not express an audit opinion on the accompanying condensed consolidated interim financial
information.
Conclusion
Based on our review and the review reports of the other auditors, nothing has come to our attention that causes us
to believe that the accompanying condensed consolidated interim financial information as of June 30, 2007 and
for the six-month period then ended is not prepared, in all material respects, in accordance with IAS 34 Interim
Financial Reporting.
(Continued)
Emphasis of Matters
We draw your attention to the following matters:

We audited PDVSA’s consolidated balance sheet as of December 31, 2006 and the related consolidated
statements of income, stockholder’s equity and cash flows for the year then ended, and we issued our
unqualified report thereon on June 15, 2007.

We did not perform a review of the condensed consolidated interim statements of income, stockholder’s
equity and cash flows for the six-month period ended June 30, 2006, or the related explanatory notes;
consequently, we do not express a conclusion thereon. This condensed consolidated interim financial
information was prepared by the management of PDVSA and is presented solely for comparative purposes.
ALCARAZ CABRERA VÁZQUEZ
Dimas Castro Bustillos
Public Accountant
C.P.C. Nº 5326
October 26, 2007
Caracas, Venezuela
2
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Condensed Consolidated Interim Balance Sheet as of June 30, 2007
(In millions of U.S. dollars)
Asse ts
June 30,
2007
(unaudite d)
De ce mbe r 31,
2006
3,560
1,134
1,391
13,651
6,423
5,174
445
1,875
848
776
9,546
7,003
2,985
-
31,778
23,033
1,796
3,542
3,423
44,377
4,205
3,550
1,928
3,460
2,503
42,503
3,443
3,659
92,671
80,529
6,486
1,983
2,444
640
9,770
6,379
652
2,487
374
9,263
21,323
19,155
15
11,595
2,262
16
1,875
1,679
2,558
1,731
2,089
2,189
39,030
27,426
53,641
53,103
92,671
80,529
Note
Current asset:
Cash and cash equivalents
Restricted cash
Recoverable value added tax
Notes and accounts receivable
Inventories
Prepaid expenses and other assets
Assets classified as held for sale
18
7
11
Total current assets
Restricted cash, net of current portion
Recoverable value added tax, net of current portion
Investments in non-consolidated investees
Property, plant and equipment, net
Deferred income tax
Long-term accounts receivable and other assets
18
12, 13
8
9
Total assets
Liabilitie s and Stockholde r's Equity
Current liabilities:
Accounts payable to suppliers
Current portion of long-term debt
Income tax payable
Employee benefits and other postretirement benefits
Accruals and other liabilities
15
16
Total current liabilities
Long-term debt, net of current portion
Employee benefits and other postretirement benefits, net
of current portion
Deferred income tax
Accruals and other liabilities, net of current portion
Total liabilities
Stockholder's equity, see statement of condensed consolidated
interim stockholder's equity
17
Total liabilities and stockholder's equity
The accompanying notes form part of the condensed consolidated interim financial statements.
3
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Condensed Consolidated Interim Statement of Income
(In millions of U.S. dollars)
Note
Sales of crude oil and products:
Export and international markets
In Venezuela
Other sales
For the six months
e nde d June 30,
2007
2006
(unaudite d)
18
Costs and expenses:
Purchases of crude oil and products
Operating expenses
Exploration expenses
Depreciation and depletion
Asset impairment
Selling, administrative and general expenses
Royalties and other taxes
Finance expenses
Other expenses, net
41,580
1,099
225
49,612
1,036
219
42,904
50,867
16,646
4,875
52
1,795
(16)
1,129
8,974
310
828
20,333
7,648
34
1,479
(33)
932
8,705
93
757
34,593
39,948
18
8
Equity in earnings of non-consolidated investees
Gain on sale of investment in affiliates of CITGO
18
13
Income before social development expenses
and income tax
Social development expenses
18
Income before income tax
Income tax
14
Net income
Net income:
Attributable to the Company's stockholder
Minority interests
The accompanying notes form part of the condensed consolidated interim financial statements.
4
364
641
695
-
9,316
11,614
7,243
6,719
2,073
4,895
1,177
2,050
896
2,845
625
271
2,684
161
896
2,845
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Condensed Consolidated Interim Balance Sheet as of June 30, 2007
Six months ended June 30, 2007
(In millions of U.S. dollars)
Note
Balances at January 1, 2006
Capital
stock
Equity attributable to the Company's stockholder
Retained Earnings
Total
Legal
Accumulated
Additional
attributable to
reserves and
(losses)
contribution of
Company's
other
income
Total
stockholder
stockholder
39,094
8,825
Net income
-
-
Equity distribution to stockholder
-
Dividends paid
-
Balances at June 30, 2006
Balances at January 1, 2007
Net income
-
47,014
81
47,095
2,684
2,684
-
2,684
161
2,845
(2,582)
(2,809)
-
(2,809)
(70)
(2,879)
-
(1,317)
(1,317)
-
(1,317)
39,094
8,598
(2,120)
6,478
-
45,572
172
45,744
39,094
8,860
(471)
8,389
3,233
50,716
2,387
53,103
-
-
625
625
-
625
271
896
(85)
(85)
-
(85)
Advances to stockholder on account of
dividends
17
-
-
M inority interests of "Empresas M ixtas"
in dividends declared by those
companies
17
-
-
-
-
-
-
39,094
8,860
69
8,929
3,233
51,256
Balances at June 30, 2007
Total
stockholder's
equity
7,920
(227)
(905)
Minority
interests
The accompanyingnotes form part of the condensed consolidated interim financial statements.
5
-
-
(273)
2,385
(1,317)
(85)
(273)
53,641
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Condensed Consolidated Interim Statement of Cash Flows
(In millions of U.S. dollars)
For the six months
ended June 30,
2007
2006
(unaudited)
Cash flows from operatingactivities:
Net income
Adjustments to reconcile net income to net cash
(used in) from operatingactivities Depreciation and depletion
Asset impairment
Cost of asset retirement obligations
Deferred income tax
Provision for employee benefits and other postretirement benefits
Equity in earnings of non-consolidated investees
Gain on sale of investment in affiliates of CITGO
Changes in operatingassets Notes and accounts receivable
Inventories
Prepaid expenses and other assets
Recoverable value added tax
Changes in operatingliabilities Accounts payable to suppliers
Income taxpayable, accruals and other liabilities
Payments of employee benefits and other postretirement benefits
896
2,845
1,795
(16)
91
(1,172)
641
(364)
(641)
1,479
(33)
(856)
480
(695)
-
(4,105)
309
(2,080)
(697)
(3,758)
685
(4,137)
(463)
107
607
(231)
262
4,725
(234)
Total adjustments
(5,756)
(2,545)
Net cash (used in) from operatingactivities
(4,860)
Cash flows from investingactivities:
Capital expenditures, net
(Increase) decrease in restricted cash
Sale of investments in affiliate of CITGO
Incorporation of non-consolidated investees
Dividends received from non-consolidated investees
Other changes in investments
Net cash (used in) from investingactivities
Cash flows from financingactivitites:
Increase in long-term debt
Payments of long-term debt
Dividend advances to stockholder and dividends paid
Dividends paid - minority interests
Net cash from (used in) financingactivities
Net increase in cash and cash equivalents
300
(3,823)
(154)
756
(957)
280
2
(1,971)
3,053
527
148
(3,896)
1,757
11,427
(763)
(85)
(138)
(339)
(1,317)
-
10,441
(1,656)
1,685
401
Cash and cash equivalents at January 1
1,875
1,800
Cash and cash equivalents at June 30
3,560
2,201
The accompanyingnotes form part of the condensed consolidated interim financial statements.
6
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
(1)
Reporting Entity
Petróleos de Venezuela, S.A. is a company incorporated and domiciled in the Bolivarian Republic of
Venezuela and is located at Edificio Petróleos de Venezuela, Torre Este, Avenida Libertador, La Campiña,
Apartado 169, Caracas 1010-A.
Petróleos de Venezuela, S.A. and its subsidiaries (PDVSA or the Company) are wholly-owned by the
Bolivarian Republic of Venezuela, which controls PDVSA through the Ministry of Popular Power for
Energy and Petroleum (formerly Ministry of Energy and Mines - MENPET). PDVSA is responsible, in
Venezuela, for developing the hydrocarbon industry; and planning, coordinating, supervising and
controlling the activities of its subsidiaries, both in Venezuela and abroad (see note 10). Most of the
foreign subsidiaries are responsible for refining and marketing activities in North America, Europe and the
Caribbean. Based on the new social responsibility of PDVSA, set forth in Articles 302 and 311 of the
Constitution of the Bolivarian Republic of Venezuela and Article 5 of the Organic Hydrocarbons Law,
regarding PDVSA’s involvement in the country’s social development and in order to support the
development of infrastructure, highways and roads, agricultural, health and educational programs and other
investments in Venezuela, PDVSA participates in diverse programs established by the National
Government (see notes 9 and 18).
PDVSA’s condensed consolidated interim financial statements as of and for the six months ended
June 30, 2007, comprise the Company and its subsidiaries, its affiliates and jointly-controlled entities.
PDVSA’s consolidated financial statements as of and for the year ended December 31, 2006 are available
at the Company’s main office.
(2)
Basis of Presentation
(a)
Statement of Compliance
These condensed consolidated interim financial statements have been prepared in accordance with
the International Financial Reporting (IFRS) IAS 34 Interim Financial Reporting issued by the
International Accounting Standards Board (IASB). They do not include all of the information
required for full annual consolidated financial statements, and should be read in conjunction with the
Company’s consolidated financial statements as of and for the year ended December 31, 2006 and
the respective independent auditors’ report dated June 15, 2007.
On October 9, 2007, the Board of Directors approved the condensed consolidated interim financial
statements as of and for the six months ended June 30, 2007.
7
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
(b)
Functional and Presentation Currency
The condensed consolidated interim financial statements and its notes are presented in U.S. dollars
(dollars or $), which is the functional currency of the Company since the main economic
environment of the operations of PDVSA is the international market for crude oil and refined
products. Additionally, a significant portion of revenues and long-term debt as well as most costs,
expenses and investments are denominated in dollars.
The financial information presented in dollars has been approximated to millions.
(c)
Use of Estimates and Judgements
In order to prepare the condensed consolidated interim financial statements, management is required
to make estimates, judgements and assumptions affecting the application of accounting policies and
the reported amounts of assets, liabilities, income and expenses. The Company uses its best
estimates and judgements; nevertheless, actual results may differ from those estimates. For the
preparation of these condensed consolidated interim financial statements, the significant judgements
made by management in applying the Company’s accounting policies and the key sources of
estimation uncertainty were the same as those that applied to the consolidated financial statements as
of and for the year ended December 31, 2006.
(3)
Significant Accounting Policies
The accounting policies applied by PDVSA in these condensed consolidated interim financial statements
are the same as those applied by PDVSA in its consolidated financial statements as of and for the year
ended December 31, 2006.
(4)
Recently Issued Accounting Standards

In March 2007, the IASB issued the revised International Accounting Standard 23 Financing Costs
(IAS 23), which will be effective for periods beginning on or after January 1, 2009.

During the six months ended June 30, 2007, the IASB issued Interpretation 13 (IFRIC 13) Customer
Loyalty Programmes. IFRIC 13 will be effective for periods beginning on or after July 1, 2008.
PDVSA is assessing these new standards, and based on its analysis to date, it believes that they will not
have a significant impact on the condensed consolidated interim financial statements at June 30, 2007.
8
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
(5)
Exchange Agreement with the Banco Central de Venezuela (BCV)
On March 22, 2007 Official Gazette 38,650 published Currency Exchange Agreement 9, which established
that PDVSA may acquire foreign currencies directly from the BCV, up to the amount authorized, to
reimburse funds placed abroad, in accordance with that established in Article 113 of the BCV Law. Based
on this Agreement, on February 8, 2007, the Board of Directors of the BCV authorized PDVSA to keep a
special fund up to the amount of $3,500 million to support the “Plan Siembra Petrolera 2007 - 2013”.
(6)
Transactions and Balances in Currencies other than the Dollar
PDVSA has the following monetary assets and liabilities denominated in currencies other than the dollar,
which are converted to dollars at the exchange rate prevailing at the balance sheet date (in millions of
dollars):
Monetary assets:
Bolivars
Euros
Other currencies
Monetary liabilities:
Bolivars
Yen
Euros
Other currencies
Net monetary liability position
June 30,
2007
De ce mbe r 31,
2006
15,056
458
9
11,056
452
15
15,523
11,523
21,625
219
44
63
12,591
249
3
42
21,951
12,885
(6,428)
(1,362)
The exchange rates to the dollar at the interim period-end, average semi-annual exchange rates and the
inter-semester increase in the Consumer Price Index (CPI), published by the BCV were as follows:
June 30,
2007
Exchange rate for the dollar for the six-month period ended (Bs/$1)
Exchange rate for the dollar for the six-month period ended ($/!1)
Average semi-annual dollar exchange rate (Bs/$1)
Inter-semester increase in the CPI (%)
9
2,150
1.35
2,150
8
2006
2,150
1.28
2,150
6
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
(7)
Prepaid Expenses and Other Assets
Prepaid expenses and other assets are summarized as follows (in millions of dollars):
Income tax overpayments (see note 18)
Trading securities
Advances to suppliers and contractors
Prepaid insurance
Derivative assets
Other assets
June 30,
2007
De ce mbe r 31,
2006
3,966
264
427
7
510
2,077
309
175
84
52
288
5,174
2,985
During the six months ended June 30, 2007 income tax overpayments include additional payments for
$1,658 million, corresponding to the 2007 estimated income tax return.
(8)
Property, Plant and Equipment, Net
Acquisitions and Disposals
During the six months ended June 30, 2007, the Company acquired assets with a cost of $3,728 million
(for the six months ended June 30, 2006: $1,965 million). Also, assets with a net carrying value of $6
million were disposed of during the six months ended June 30, 2007 (for the six months ended June 30,
2006: $27 million).
Reversals of Impairment Loss
During the six months ended June 30, 2007, PDVSA carried out the relevant impairment assessments, and
based on the new market conditions and the related business, identified the need to reverse $16 million of
impairment losses recognized in prior periods, mainly relating to certain gas production, trading and
transportation assets (for the six months ended June 30, 2006: $33 million).
10
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
(9)
Long-term Accounts Receivable and Other Assets
Long-term accounts receivable and other assets are summarized as follows (in millions of dollars):
June 30,
2007
Long-term accounts receivable - energy agreements
Long-term accounts receivable from related parties
(see note 18)
Entities executing the Fondo para el Desarrollo
Económico y Social (FONDESPA)
Materials and supplies
Buildings used by government entities (see note 18)
Other
December 31,
2006
1,017
707
955
1,483
860
48
84
586
882
45
87
455
3,550
3,659
(10) Joint Development Activities
Migration of the Orinoco Oil Belt Association Agreements to “Empresas Mixtas”
Within the policies of “Full Petroleum Sovereignty” and for the purpose of ending privatization of the
Venezuelan oil sector, which began in the 1990’s, on February 26, 2007, the Government of the Bolivarian
Republic of Venezuela issued Decree-Law 5,200, Migration to “Empresas Mixtas” of the Orinoco Oil Belt
Association Agreements, as well as the Risk Exploration and Profit Sharing Agreements; therefore, the
associations Petrolera Zuata, S.A., Sincrudos de Oriente, S.A., Petrolera Cerro Negro, S.A. and Petrolera
Hamaca, C.A. must become “Empresas Mixtas”, whereby the subsidiary Corporación Venezolana del
Petróleo, S. A. (CVP), or any other appointed subsidiary holds no less than 60% of the shares, in
accordance with the provisions of the Organic Hydrocarbons Law. Also, existing agreements in the West
Paria Gulf, East Paria Gulf and the block referred to as La Ceiba; as well as Orifuels SINOVEN, S.A.
(SINOVENSA) must be converted into “Empresas Mixtas” under the same structure as indicated above.
In this connection, transition commissions were created for each association, which incorporated directors
to ensure the transfer of control of all of their activities to the new state companies. Also, this Decree-Law
granted the partners a term, beginning on the date of its publication, to set the terms and conditions of their
possible involvement in the new “Empresas Mixtas”. An additional term was granted to submit the terms
and conditions to the National Assembly, for the purpose of seeking authorization, in accordance with the
Organic Hydrocarbons Law. Once that term has elapsed, without an agreement being reached for
incorporation and operation of the “Empresas Mixtas”, the Bolivarian Republic of Venezuela, through
PDVSA, will assume directly the activities performed by the different associations, to maintain continuity,
in the public and social interest.
11
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
Pursuant to this Decree-Law, since May 1, 2007, PDVSA is in charge of all facilities relating to the
abovementioned associations.
On June 26, 2007, PDVSA signed the memorandums of understanding with international companies,
partners of such Agreements, except for Petrolera Zuata, C.A. (Petrozuata) and Administradora Petrolera
La Ceiba, C. A., with which PDVSA did not reach an agreement. These memorandums define the share
participation in “Empresas Mixtas” to be formed and that will be submitted to the National Assembly, as
established in the Organic Hydrocarbons Law (see note 22-e).
In the cases of Petrozuata and Administradora Petrolera La Ceiba, C.A., PDVSA took control of the
activities of these Agreements.
In the case of SINOVENSA, PDVSA is in conversation with the China National Petroleum Corporation
(CNPC) to agree the final structure.
Migration of Operating Agreements to “Empresas Mixtas”
In June 2007, the National Assembly of Venezuela approved the creation of the “Empresas Mixtas”
Petrodelta, S.A. and Lagopetrol, S.A. with a participation of 60% and 69%, respectively, with the option
for the minority stockholders of Lagopetrol, S.A. to increase their participation up to 40% under certain
conditions (see note 22-e).
On March 5, 2007, PDVSA through its subsidiary Corporación Venezolana del Petróleo, S.A. (CVP),
subscribed an agreement with the companies Total Oil and Gas and British Petroleum, in order to settle all
participations, rights, shares or claims in relation to the extinguished exchange agreement, corresponding
to the field Campo Jusepín in Monagas State, for the amount of $250 million.
(11) Assets Classified as Held for Sale
During 2007, CITGO Petroleum Corporation and subsidiaries (CITGO) decided to sell the two asphalt
refineries, owned by CITGO Asphalt Refining Company (CARCO), located in Paulsboro - New Jersey and
Savannah - Georgia, United States of America. The carrying value of these assets is $445 million, and
these comprise properties, plant and equipment for $170 million, net of accumulated depreciation for $130
million, and $275 million, mainly inventories of crude oil and products.
12
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
(12) Purchase of Electricity Sector Companies
According to guidelines and strategic objetives of the National Government during 2007, the stockholder
of PDVSA authorized the purchase of shares of several entities operating in the country’s electricity sector.
These shares were recorded at cost and management believes that the effects of not consolidating these
companies at June 30, 2007, are not material in relation to the consolidated financial statements as of that
date (see note 22-a). A summary of these operations follows:
C.A. La Electricidad de Caracas
On February 15, 2007, PDVSA signed an agreement with The AES Corporation (AES) and its subsidiary
AES Shannon Holding, B.V. for the purchase of its participation in C.A. La Electricidad de Caracas
(EDC), equivalent to 82.14% of the shares. According to Venezuelan law, to purchase the remaining
outstanding shares, PDVSA must make a public tender.
From April 8 to May 8, 2007, PDVSA made a public tender to purchase up to 17.86% of the remaining
outstanding shares of EDC, at a bolivar equivalent of $0.2734 per share (determined at the official
exchange rate for the sale of dollars effective as of the closing date). This included, at the same time, the
public tender in Venezuela and one in the United States of America for the purchase of all outstanding
American Depositary Shares (ADS’s), each representing 50 EDC shares at a price of $13.6675 for each
ADS.
As a result of the public tender and the agreement with AES, PDVSA acquired 93.61% of the EDC shares
in circulation for a total amount of $844 million.
Sistema Eléctrico del Estado Nueva Esparta, C.A.
On February 8, 2007, PDVSA entered into a memorandum of understanding with CMS Energy
Corporation for the purchase of its shares in Sistema Eléctrico del Estado Nueva Esparta, C.A. (SENECA),
for $106 million, which represents 88% of the capital stock of that company. On March 7, 2007, the
stockholder of PDVSA approved the purchase which was made on March 30, 2007.
Other Companies in the Electricity Sector
During 2007, PDVSA began several negotiation processes in order to acquire the shares of the companies
Turbogeneradores de Venezuela, S.A. (TURBOVEN); Termobarrancas, C.A.; C.A. Luz and Fuerza
Eléctrica de Puerto Cabello (CALIFE). The Company’s management is currently negotiating with the
stockholders of these companies, in order to reach to an agreement on the terms and conditions of the
purchase (see note 22-f).
(13) Sale of Non-consolidated Investees
In January and February 2007, CITGO sold its 6.8% and 15.8% interests in Explorer Pipeline Company
and Colonial Pipeline Company, respectively. For these sales, CITGO received $756 million in cash and
recognized a gain on the sale of these investments of $641 million.
13
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
(14) Income Tax
The consolidated effective income tax rate for the six months ended June 30, 2007 was 56.7% (for the year
ended December 31, 2006 the rate was 42.5% and for the six months ended June 30, 2006 the rate was
41.8%). The change in the effective tax rate was mainly due to a decrease as a result of the regular
readjustment for inflation and the effect of the conversion into dollars, and an increase resulting from an
increase in the provision for legal contingencies, the net effect of which resulted in a lower consolidated
effective tax rate.
(15) Long-term Debt
The movement in long-term debt and its current portion, during the six months ended June 30, 2007, is
summarized as follows (in millions of dollars):
No m i na l
Inte re st ra te s
va l ue
Balan ce at Jan uary 1 , 2 0 0 7
m a turi ty
2 ,9 1 4
Inde bte dne ss
Issue o f bo n ds
Issue o f bo n ds
Issue o f bo n ds
Lo an guaran t eed by go v ern men t al agen cies
o f ex p o rt an d fin an cial in st it ut io n s
Un secured rev o lv in g lin e o f credit
Rev o lv in g lin e o f credit guaran t eed by subsidiary
in t h e Un it ed St at es o f America
Bo n ds issued by t h e subsidiary in t h e Un it ed
St at es o f America
Pa y m e nts
Secured bo n ds
Lin es o f credit
Lo an s guaran t ed in do llars
Lo an s guaran t eed in y en
Ex cha ng e va ri a ti o n
Ye a r o f
B a l a nce
5 .2 5 %
5 .3 7 5 %
5 .5 0 %
3 ,0 0 0
3 ,0 0 0
1 ,5 0 0
3 ,0 0 0
3 ,0 0 0
1 ,5 0 0
2017
2027
2037
LIBOR+ 1 .1 3 %
6 .3 4 % t o 6 .4 7 %
2 ,3 0 0
1 ,1 2 4
2 ,2 4 4
1 ,1 2 4
2022
2008
8 .2 5 %
1 ,1 5 0
458
5 .0 9 %
45
45
7 .3 3 % t o 8 .4 6 %
4 .3 4 % t o 6 .9 7 %
6 .1 3 % t o 7 .6 9 % (LIBOR +0 .5 %)
1 .7 0 % t o 2 .3 0 %
- Debt in y en
-
2037
(3 7 )
(5 2 0 )
(1 2 0 )
(2 5 )
(5 )
Balan ce at Jun e 3 0 , 2 0 0 7
1 3 ,5 7 8
Issue of Bonds and Other Borrowings
On January 8, 2007 and February 26, 2007 the public tender of bonds was approved up to $7,500 million
due in 10, 20 and 30 years (2017, 2027 and 2037). The subsidiary PDVSA Petróleo acts as a guarantor of
all bonds, and the funds obtained must be used for capital investments, among others. This issue was
supervised and regulated by the BCV, and is exempt from the scope of the Capital Markets Law of
Venezuela, on the basis that PDVSA is a state-owned company. The annual coupon for bonds issued is
5.25%, 5.375% and 5.50%, due in 10, 20 and 30 years, respectively. The combined issue of these bonds
generated a premium of 5.5%. The bonds are payable in U.S. dollars upon maturity.
14
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
Between April 12 and May 10, 2007, the process to issue the bonds was completed, placing the $7,500
million offered.
On April 2007, Decree 5,282 was published and established exoneration from the payment of income tax
on income, to holders, individuals and legal entities, from PDVSA’s bonds.
In January 2007, the Company obtained a credit facility of $1,124 million with a group of banks led by
BNP Paribas. This loan is due on January 30, 2008 and may be extended for an additional year with the
approval of lenders representing over 50% of the original commitment. This loan bears interest at a rate
equivalent to LIBOR plus an increase based on the country risk of Venezuela established by Standard &
Poor’s. As of the date of the issue, this increase was 1.15%.
In February 2007, a group of banks lead by the Japan Bank for International Cooperation (JBIC) approved
the granting of a loan to the Company of $3,500 million. This loan has a fifteen-year term, bears interest at
a rate equivalent to LIBOR plus 1.13% and includes cash payment options or delivery of crude oil and
products at market prices, subject to an agreement of minimum amounts reviewed every three years. At
June 30, 2007 the Company has received $2,300 million, and has made payments for $56 million, with a
remaining carrying value of $2,244 million.
(16) Accruals and Other Liabilities
Accruals and other liabilities are summarized as follows (in millions of dollars):
June 30,
2007
Taxes and contributions payable
Provision for litigation and other claims (see note 20)
Accounts payable to employees
Accrual for asset environmental obligations
Accrual for asset retirement obligations
Deferred income, net - premium on issue of bonds
(see note 15)
Accrued social development expenses
Dividends payable
Other
De ce mbe r 31,
2006
4,366
1,569
718
800
1,122
2,298
860
515
709
1,024
407
1,617
289
1,440
255
154
5,637
12,328
11,452
Less, current portion of accruals and other liabilities
9,770
9,263
Long-term portion
2,558
2,189
Sub-total
Taxes and contributions payable include income tax, value added tax, royalties payable and other taxes.
15
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
The Company increased the provision for litigation and other claims by $534 million due to the
unfavorable decision resulting from the review of the sentence filed by PDVSA with the Supreme Court of
Justice for prior years tax obligations (see note 20).
The item other includes mainly financial leasing, dividends payable, accrued expenses of foreign affiliates
and accounts payable to related parties.
(17) Capital Stock and Reserves
Dividends
During the six months ended June 30, 2007, advances to the stockholder on account of dividends, for $85
million, were paid in cash.
Minority Interests
Minority interests presented in the consolidated statement of stockholder’s equity are related to the
participation of minority investors in stockholder’s equity and consolidated results for the six months
ended June 30, 2007. During the first semester of 2007, a group of indirect subsidiaries (“Empresas
Mixtas”) decreed and paid dividends for $273 million to minority investors.
(18) Related Party Transactions
PDVSA considers its non-consolidated investees, jointly-controlled companies, the Company’s directors
and executives, other companies that are also property of the stockholder and other government institutions
as related parties.
A summary of transactions and balances with related parties follows (in millions of dollars):
Six months e nde d
June 30,
2007
2006
Activities of the semester:
Sales
Equity interest in earnings
of non-consolidated investees
Costs and expenses:
Purchases of crude oil and products
Royalties and other taxes
Other
Estimated income tax expense in Venezuela
Social development expenses
16
10,689
11,289
364
695
2,061
8,974
53
1,498
7,243
1,329
8,705
177
1,835
6,719
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
Balances at end of the period:
Contributions to the Fondo para la Estabilización
Macroeconómica (FEM)
Trust funds with the Banco de Desarrollo
Económico y Social de Venezuela (BANDES)
Trust funds with Banfoandes,
Banco Universal, C.A. (BANFOANDES)
Income tax overpayments (see note 7)
Recoverable tax credits
Notes and accounts receivable
Long-term accounts receivable (see note 9)
Executing entities of FONDESPA (see note 9)
Investments in non-consolidated investees
Accounts payable to suppliers
Accruals and other liabilities (see note 16)
Buildings used by government entities
(see note 9)
Income tax payable in Venezuela
June 30,
2007
De ce mbe r 31,
2006
789
766
1,001
996
15
3,966
4,933
1,014
955
860
2,473
181
4,599
16
2,077
4,236
1,006
1,483
882
2,503
247
7,393
84
2,399
87
2,369
Supply agreements maintained by the subsidiary PDVSA Petróleo at June 30, 2007, remain in effect under
the same conditions disclosed at December 31, 2006.
During the six months ended June 2007 and 2006, CITGO sold to affiliated companies, mainly at market
prices, raw materials and other products for $271 million and $179 million, respectively. Balances relating
to these operations at June 30, 2007 and December 31, 2006, for $74 million and $63 million, respectively,
are included in notes and accounts receivable from related parties.
During the six months ended June 30, 2007 and 2006, CITGO purchased refined products from various
affiliated companies (LYONDELL-CITGO Refining, L.P. until June 30, 2006, Hovensa L.L.C. and
Chalmette Refining, L.L.C.) under long-term agreements. These purchases, for $2,031 million and $6,178
million, respectively, are included in the condensed consolidated interim statement of income as purchases
of crude oil and products. At June 30, 2007 and December 31, 2006, accounts payable to suppliers include
$171 million and $234 million, respectively, relating to these transactions.
During the six months ended June 30, 2007 and 2006, PDVSA purchased upgraded crude oil from
Petrozuata for $30 million and $151 million, respectively, which are included in purchases of crude oil and
products in the condensed consolidated interim statement of income. In addition, Petrozuata reimbursed
PDVSA Petróleo, operating expenses for $3 million and $4 million, corresponding to the six months ended
June 30, 2007 and June 30, 2006, respectively.
17
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
Long-term accounts receivable at June 30, 2007 and December 31, 2006 include balances with C. A. de
Administración y Fomento Eléctrico (CADAFE) for $647 million and $503 million, respectively, which do
not bear interest and have no fixed maturities. These accounts receivable from CADAFE result, mainly,
from the supply of light diesel by PDVSA Petróleo, which can be offset against energy supply services
provided by CADAFE. During the six months ended June 30, 2007 and 2006, PDVSA Petróleo offset
accounts receivable from CADAFE for $10 million and $29 million, respectively.
During the six months ended June, 30 2007 and 2006, compensation made by PDVSA to its directors for
salaries and social security contributions amounted to approximately $1.45 million and $1.38 million,
respectively.
The transactions undertaken with related parties at June 30, 2007 and December 31, 2006, do not indicate
necessarily the results that would have been obtained had these transactions been carried out with third
parties.
At June 30, 2007 and December 31, 2006, certain assets with a net carrying value of $84 million and $87
million, respectively, have been identified, that correspond to buildings owned by PDVSA used by entities
attached to government entities, for which agreements remain unchanged with respect to the conditions of
use and the treatment of maintenance expenses and other charges at December 31, 2006. At June 30, 2007
and December 31, 2006, the value of such buildings is presented under other assets (see note 9).
(19) Operating Segments and Geographic Data
Business Segments

The exploration and production activities include the search for oil and gas reserves and upgrading
of extra heavy crude; as well as the transportation of crude oil and associated gas to the refineries
and cracking plants.

The refining, trading and supply activities in Venezuela include the management of the refineries,
marketing and transportation of crude oil and refined products, under the PDV brand. Refining,
trading and supply activities in the United States of America comprise the administration of
refineries and the marketing of gasoline and products, mainly in the eastern and mid-west regions of
the US, under the CITGO brand.

The gas activity includes the management of gas processing plants, the upgrading, and
commercialization of natural and liquid gas, both for industrial and domestic use; as well as its
transportation, distribution, placement and sale.
Geographic Segments
Exploration and production activities of crude oil and gas are performed solely in Venezuela. Refining,
supply and trading activities are mainly in Venezuela and the United States of America.
18
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
The “Other” line item includes corporate related items and results of non-significant operations in
Venezuela, Europe and the Caribbean.
The financial information relating to the operating income and loss of the Company’s segments, for the six
months ended June 30, 2007 and 2006 is presented in the following table (in millions of dollars):
Exploration and
production
2007
2006
Refining,
trade and
supply
2007
2006
2007
2006
31,784
29,780
32,296
33,689
2,039
1,782
226
204
(29,928)
(27,056) (1) 36,417
38,399
-
-
17,963
-
24,704
-
-
-
8
5
(11,484)
-
(12,241) (1)
-
6,479
8
12,463
5
31,784
29,780
50,259
58,393
2,039
1,782
234
209
(41,412)
(39,297)
42,904
50,867
15,049
10,104
(8,688)
(1,034)
1,301
935
8
15
(1,457)
6,213
9,415
-
-
2,123
-
1,371
-
-
-
285
226
-
-
2,123
285
1,371
226
Total operating
income
(loss)
15,049
10,104
(6,565)
337
1,301
935
293
241
(1,457)
(606)
8,621
11,012
Sales of crude oil and
products:
In Venezuela
In the United States
of America
In other countries
Total income
Operating income (loss) of
segments:
In Venezuela
In the United States
of America
In other countries
Gas
(1)
Represents eliminations of intersegment sales.
(2)
Represents eliminations of intersegment sales, purchases and costs.
Other
2007 2006
Eliminations
2007
2006
Total
2007
(606) (2)
2006
(20) Litigation and Other Claims
In September 2005, the company New Brunswick Power Corporation (“NB Power”) filed a lawsuit at a
Canadian court and an arbitration request to the International Council for Dispute Resolution of the
American Arbitration Association of New York, against PDVSA, Bitúmenes Orinoco, S.A. (BITOR) and
the Bolivarian Republic of Venezuela, alleging, among other things the failure to comply with an
Orimulsión® supply contract. Such procedures were suspended until the Federal Court of New York rules
on a petition filed by PDVSA and BITOR regarding the existence of the Contract or lack thereof. NB
Power, seeks compensation for damages of Cdn$ 2,000 million (Canadian dollars). The management of
PDVSA and its legal advisors have stated that this contract was never signed; therefore, they have
defended the allegation that the contract is invalid. At June 30, 2006, the provision for litigation and other
19
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
claims includes $110 million for this concept (see note 22-c).
The Company is involved in other claims and legal actions in the normal course of business amounting to
$6,078 million. Except for that relating to an unfavorable case (see note 16) and that stated in the above
paragraph, these claims and actions have not varied significantly since December 31, 2006; therefore, the
opinion then issued by management and its legal advisors remains in effect, concluding that the outcome of
these claims will not have a material adverse effect on the Company’s financial position, results of
operations or liquidity.
Based on an analysis of the information available, a provision is included in accruals and other liabilities at
June 30, 2007 and December 31, 2006 for $1,569 million and $860 million, respectively (see note 16). If
known lawsuits and claims were resolved in an adverse manner for the Company for amounts greater than
those accrued, then such results could have a material adverse effect on the Company’s results of
operations. Although it is not possible to predict the outcome of these matters, management, based in part
on the advice of its legal counsel, does not believe that it is probable that losses associated with such legal
proceeding exceeding the estimates already recognized, are significant for the Company’s financial
position or results of operations.
(21) New Laws
(a)
Special Powers Law
On February 1, 2007 the National Assembly approved a law authorizing the President of the
Bolivarian Republic of Venezuela to enact a Decree-Law for a series of matters for a term of 18
months after its publication. According to this law, the eleven areas approved are related to the
transformation of government institutions, popular participation, economic, financial, fiscal and
energy matters.
(b)
Monetary Reconversion Law
On March 6, 2007 National Government enacted a Decree-Law for Monetary Reconversion, which
establishes beginning on January 1, 2008, a restatement of the monetary system’s unit equivalent to
one thousand current bolivars. Therefore, beginning on January 1, 2008, prices, salaries and other
social aspects, as well as taxes and other amounts in Venezuelan currency contained in the financial
statements, other accounting documents or securities, and in general, any transaction or reference
expressed in Venezuelan currency must be restated in the new currency (“Bolívares Fuertes” o “Bs.
F”). As part of the reconversion process, beginning October 1, 2007, the instruments used to display
prices of goods and services as well as others expressing monetary amounts shall use the unit prior to
restatement and the new one. Also, the new currency must be used in the financial statements for
years ended prior to January 1, 2008, approved after that date.
The Company’s management believes that the application of this new law will not affect
significantly the Company’s financial statements at June 30, 2007.
20
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
(22) Subsequent Events
Important events occurring after the balance sheet date at June 30, 2007 are presented below:
(a)
Organic Law for Reorganization of the Electricity Sector
Official Gazette 38,736, of July 31, 2007 published a Decree-Law for Reorganization of the
Electricity Sector, whereby the company Corporación Eléctrica Nacional, S.A. is created, attached to
the Ministry of Popular Power for Energy and Petroleum, to focus on the generation, transmission,
distribution and commercialization of power and electricity. The capital stock will be subscribed
75% by the Republic, through the Ministry of Popular Power for Energy and Petroleum, and 25% by
PDVSA. This Law instructs the Republic, Corporación Venezolana de Guayana (CVG) and PDVSA,
to transfer their shares in public electric companies to the Corporación Eléctrica Nacional, S.A.
Currently, the Company’s management is in the process of evaluating the mechanisms to transfer the
shares (see note 12).
(b)
Recently Issued Accounting Standards
In July 2007, the IASB issued Interpretation 14 (IFRIC14 IAS 19 – The Limit on a Defined Benefit
Asset, Minimum Funding Requirements and their Interaction). This interpretation is effective for
fiscal years beginning on or after January 1, 2008. This interpretation is being assessed by the
Company’s management and is not expected to have significant effects on the consolidated financial
statements.
(c)
Litigation and Other Claims
On July 25, 2007, the Company made a payment of $110 million in favor of NB Power for an extrajudicial agreement among the parties, whereby the claim is definitively extinguished (see note 20).
(d)
Sale of CITGO’s Assets
In October 2007, CITGO agreed to sell the Eagle Oil Pipeline as part of the markets review strategy
initiated in 2006.
(e)
Joint Development Activities
In September 2007, CVP and the company Harvest - Vinccler, C. A. signed the contract to convert to
the “Empresa Mixta” Petrodelta, S. A., whereby CVP will hold 60% of the shares and Harvest –
Vinccler, C. A. 40%.
21
(Continued)
PETRÓLEOS DE VENEZUELA, S.A. Y SUS FILIALES (PDVSA)
(Wholly-owned by the Bolivarian Republic of Venezuela)
Notes to the Condensed Consolidated Interim Financial Statements
Six months ended June 30, 2007
(These condensed consolidated interim
financial statements are unaudited)
Official Gazette 38,785, of October 8, 2007, published the Law on the Effects of the Migration
process to “Empresas Mixtas” of Joint Ventures of the Orinoco Oil Belt; as well as the Risk
Exploration and Profit Sharing Agreements, which establishes the time limit for the private parties to
reach agreements for the incorporation of “Empresas Mixtas”, and for cases where agreement is not
reached, PDVSA or a subsidiary will assume the operating activities.
In Official Gazette 38,798, of October 29, 2007, the National Assembly approved the creation of the
“Empresas Mixtas”: PetroMonagas, S.A. (formerly Cerro Negro), PetroCedeño, S.A. (formerly
SINCOR), PetroPiar, S.A. (formerly Hamaca), East and West Paria Gulf, where PDVSA shall have a
participation of 83.33%, 60%, 70%, 60% and 74%, respectively (see note 10).
During August 2007, CVP paid to Petro-Canada $75 million for settlement of the La Ceiba
Association Agreement (see note 10).
(f)
Purchase of Companies in the Electricity Sector
On July 6, 2007, PDVSA purchased 100% of the shares of C. A. Electricidad de Valencia
(ELEVAL) for $190 million.
(g)
Collective Labor Contract
On October 11, 2007, PDVSA signed a Collective Labor Contract effective until 2009, introducing
improvements in salaries and social benefits of the contractual payroll workers. This Contract will
cover over 760 new workers in the solids control area; although this activity is performed at the
productive drilling rigs, it was excluded in 1999 from the collective labor contract. The obligations
resulting from application of this contract will commence from the time the legal deposit is made,
which is estimated to be during the first two weeks of November 2007.
(h)
Financial Transactions Tax Law
On October 5, 2007, the National Government enacted the Decree-Law for the Financial
Transactions Tax for Companies and Economic Entities without Juridical Personality. This law
establishes that companies and economic entities without Juridical Personality shall pay an amount
equivalent to 1.5 % of the amount of the financial transactions undertaking. This Law will be
effective from November 1, 2007 until December 31, 2008.
22