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PDVSA headquarters in Caracas. According to unofficial estimates in 2015, PDVSA’s gross income was more than $26 billion, but costs totaled more than $39 billion. (Photo: PDVSA)
Wednesday, May 3, 2017

Venezuela: The PDVSA Default

PDVSA depends almost exclusively on Russian and Chinese loans to avoid default.

Inter-American Dialogue 

Venezuelan state oil company PDVSA on April 12 staved off default by making some $2.2 billion in bond payments. The possibility of the cash-strapped company defaulting has raised alarm among U.S. lawmakers, who have expressed concerns about the possibility that Rosneft could take control of Houston-based Citgo, because PDVSA used a stake in Citgo as collateral for a loan that it obtained from the Russian state oil company. Will PDVSA be able to continue making its scheduled bond payments? If it defaults, what are the consequences for PDVSA, President Nicolás Maduro’s government and importers of Venezuelan oil? What would result from Rosneft taking control of Citgo?

Carlos A. Rossi, president and owner of EnergyNomics in Venezuela: PDVSA and Venezuela are at a breaking point regarding debt repayment, having passed the point of no return of self-recovery some 22 months ago when Saudi Arabia decided to help out its OECD clients by driving the price of oil to less than half of what it was the summer of 2014. As the oil price collapsed, the full nakedness of its pseudo-socialist model came into full view of all Venezuelans. Between 2014 and 2016, Venezuela’s GDP contracted some 25 percent, imports 63 percent, export income (oil) 31 percent and international reserves some 50 percent while inflation rose by more than 920 percent. To top it all, since Venezuela lacks sufficient hard currency to cover imports of basic goods, manufacturing inputs, debt payments and PDVSA capital goods, all of which have suffered, oil production has declined over the same period by about 20 percent.

According to unofficial estimates in 2015, PDVSA’s gross income was more than $26 billion, but costs including production and refining, liquid imports and its state commitments to China and elsewhere totaled more than $39 billion, not including the nearly $4 billion we estimate it owes PDVSA’s foreign partners and suppliers. The total cash deficit in PDVSA’s income statement is more than $47 billion, which needs to be financed. Venezuela’s gamble is that the world needs oil to recover its meager GDP growth to prevent the country from imploding. That is only half true, because the world is now convinced that the only way to recover Venezuela’s energy and economic health is through a political catastrophe for the unpopular, dictatorial Venezuelan regime, so that it can be replaced by a forward-looking government with a credible action plan that restores investor confidence. Since PDVSA desperately needs to borrow to cover its debt payments, it needs to increase its collateral abilities in oil and gold assets, but that, too, has dangerous consequences, as the new government will either depend on a very large balloon loan from the IMF or World Bank, or will have its oil reserves divided up among its creditors.

Gustavo Coronel, a founding board member of PDVSA: PDVSA is in a desperate financial crisis, depending almost exclusively on Russian and Chinese loans to avoid default. In several ways, the company has already defaulted, since it has failed to pay suppliers and contractors, some of which are resorting to capturing PDVSA oil cargoes in Caribbean terminals in order to get reimbursed. My guess is that PDVSA will be able to keep bond payments for this year, with the help of the countries mentioned above, for two reasons: One is political. China already has more than $60 billion in loans to Venezuela and it sees an orderly transition in Venezuela as the best way to recover its money. The other reason is that many of PDVSA’s bonds are in the hands of government elites and friends. In an important way, therefore, the government is obtaining more loans in order to transfer the money received from Russia and China to its own pockets. As for the impact of default, I believe this impact is already being felt as PDVSA deteriorates daily. Importers know well that PDVSA can collapse at any moment and are adjusting. The government is falling in slow motion. A change in government is getting closer by the minute, and the existing financial mess will most probably have to be faced by whoever replaces this narco-regime.

Michael Lynch, president of Strategic Energy & Economic Research in Amherst, Mass.: Venezuela’s financial situation has become increasingly desperate, and a default could put its U.S. unit of state oil firm PDVSA, Citgo, in the hands of Rosneft, which holds collateral bonds worth 49.9 percent of the company. This does not appear imminent, but could happen before the year is out. Alternatively, PDVSA could sell Citgo in part or in total to Rosneft, and earn about $3 billion in cash and debt forgiveness. Such a move would no doubt raise howls of protest from many U.S. politicians, but might go through anyway, given the Trump administration’s free-market bent (at least among the senior officials). The damage to PDVSA would be primarily to its reputation, but Citgo has been a reliable customer for its crude. And Rosneft might arrange a long-term supply to lock-in the preferred crude for the refineries. But Mexican and Canadian heavy crudes could also displace Venezuelan crudes, and finding new customers, especially more distant ones, could reduce the price the company receives for its crude by $2 a barrel or so, meaning about $500 million a year less in revenue. Despite concerns about Russian ownership of Citgo, the truth is that it would provide economic leverage over Russia. Rosneft could, at best, resell the company to avoid potential lawsuits from any of a number of aggrieved parties that cannot reach into Russia for legal settlements, and at worst it would simply operate Citgo normally. It might export products to governments that the U.S. disapproves of, such as Syria, but given that the world market is fungible, this would have no tangible effect.

Republished with permission from the Inter-American Dialogue's weekly Energy Advisor



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