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24/11/2017 | Latin America - PDVSA Struggles to Keep Venezuela Solvent

Neil Thompson

Summary:Since its creation with the nationalization of Venezuelan oil in 1976, PDVSA has stood at the heart of Venezuela’s oil-dependent economy. Over the years the company has provided the Venezuelan government with billions of dollars for social development projects.

 

But now the PDVSA cash cow is starting to run dry. Caracas has increasingly been forced to use PDVSA assets to service national debt and secure loans from Russian and Chinese firms. Global oil prices remain down from their previous triple-digit highs. Then there’s the country’s aging energy infrastructure, which is investment-starved and failing after decades of capital expenditure budgets being diverted to the government.

With Caracas struggling to service its debts and stave off a default, PDVSA’s death spiral couldn’t have come at a worst time. Is this the end of the PDVSA-Caracas cash loop? 

Background

 Caracas struggling to service its debtsRatings agency Standard & Poor’s has said the oil-rich Latin American nation of Venezuela has failed to make $200m in repayments on its foreign debt, putting it into “selective default.” Venezuela is also overdue on four payments worth another $420m (though the grace period on these has not yet expired). Altogether, Venezuela owes its creditors $140bn, much of it to Russia and China, which have made efforts to ease the terms of the debts to keep the socialist regime afloat. However, recent oil-for-loan deals have crippled Venezuela’s ability to earn hard currency revenue by diverting oil shipments away from Petróleos de Venezuela, S.A. (PDVSA), the Venezuelan state-owned oil and natural gas company, in order to make debt service repayments.

Although PDVSA has flirted with default itself, a last-minute deal with Russia kept the company, and therefore Venezuela, afloat for now. The controlling bodies of the emerging bond and credit derivatives markets have also yet to decide if PDVSA’s failure to make payments by the required deadline constitutes a “credit event,” i.e. a moment when a default has occurred and holders of Venezuela’s myriad debts would require payment in full. Part of the reason for this delay is expectation of a rescue from Russia. Yet there is also an overriding fear of triggering a general collapse of the complex multiple debt structures which Caracas has built up over the past decade. PDVSA has credit insurance worth $250 million compared with debts of $30 billion on outstanding bonds. The company’s debt in turn is only a fraction of the money Venezuela owes its creditors, leading many to question the wisdom of forcing a default now.

The Russian oil company Rosneft has gradually acquired a great deal of influence in the Latin American country as a result of oil-for-loan deals. Venezuela has since become Rosneft’s largest source of crude outside Russia. Faced with dwindling cash flow and mounting arrears on its dollar-denominated debt, PDVSA now seems to be reduced to mortgaging assets to stay afloat. Amid payment delays to suppliers and a lack of investment, PDVSA has also seen its oil output decline since 2012 – a trend which has accelerated this year.

PDVSA: diverting supplies, shifting assets. Forced to make catch-up plans for its delayed cargos and prioritize between different customers whom aren’t receiving their full orders, PDVSA has deferred to national interests and reduced crude sales to its US refining unit Citgo Petroleum. Instead these supplies have been diverted to Rosneft. The Venezuelan firm has also offered to transfer control of its CRP complex, the largest domestic refining complex, to state-owned oil companies from Russia and China. The CRP complex, which consists of the 635K bbl/day Amuay refinery and the 305K bbl/day Cardón refinery, was once one of the most advanced in the world and is still considered a valuable asset, despite years of neglect.

PDVSA is supposedly negotiating separate 10-year leases which would transfer operational control of the Amuay refinery to Russia’s state-controlled Rosneft and the Cardón refinery to state-owned PetroChina. However, the proposed agreement would include commitments by Rosneft and PetroChina to invest a minimum combined $7bn to gradually upgrade the refineries and their associated facilities over roughly five years. The new entities would operate separately from each other, with Rosneft and PetroChina each owning an 80 percent stake in their own venture, alongside a 20 percent share of an unnamed Venezuelan entity. One possible candidate under consideration is Camimpeg, a new oil and mining company controlled by the Venezuelan armed forces.

These new deals could also be subject to US sanctions, particularly should any Venezuelan refineries transfer into Rosneft’s hands. Rosneft of course is already subject to various US and EU sanctions stemming from Russia’s involvement in Ukraine.Impact

The Maduro government has vowed to keep making its payments responsibly, but the mortgaging of key assets at PDVSA suggests Caracas is totally dependent on Beijing and Moscow, both for debt forgiveness in the present, and to ensure its oil infrastructure doesn’t collapse for lack of investment in the future. Of Venezuela’s total debt of $150bn, $45bn is government debt and another $45bn is money state-owned oil producer PDVSA owes, suggesting that China and Russia will control Venezuela’s oil production over the next few years in much the same way countries like Britain used to do in Middle Eastern states through vehicles like the Anglo-Persian Oil Company. However, this shouldn’t imply that Russia and China are working together; increasingly the two are competing to expand their influence in foreign oil markets. Whether they can share in Venezuela remains to be seen, and President Maduro will doubtlessly be trying to play them off against each other given the absence of a U.S. seat at the table.

Forecast

The latest deal with Russia seems to have saved Venezuela from a sovereign default for now, though Caracas still owes Moscow $8bn and China $28bn. It is also dependent upon the pair for political protection from a deeply hostile U.S. However, even given the hobbled state of its oil infrastructure, the Venezuelan economy relies on oil for 95 percent of its export revenues.

Given how fiercely anti-colonial Latin American countries are historically, and how unstable Venezuelan politics has been since the death in 2013 of former president Hugo Chavez, leaning on China and Russia so heavily will be very politically unpopular. Any new leadership rollover in Caracas could be sweeping and deeply anti-Russian and Chinese in nature. After almost 20 years of divisive Chavista rule, any future government formed from today’s opposition in Venezuela is unlikely to rely solely on Russian and Chinese protection; this new hypothetical regime could garner support from the United States, at least initially.

There’s also a considerable element of risk in Chinese and Russian investments into the future of the Maduro regime. Put simply, these investments are anything but a sure thing given the state of the Venezuelan economy and the country’s political stability. To a certain degree Beijing has recognized this fact and has started to scale back its support over the past year or so.

Geopoliticalmonitor.com (Canada)

 



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