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Are Gulf Oil Producers Falling Into The ‘Venezuela Trap’?

Oil Rigs

Oman has struck a deal with several banks for a $4 billion loan to be repaid in future oil deliveries. Abu Dhabi signed a contract with commodity trading giant Vitol to supply it with over half a million tons of liquefied petroleum gas annually over the next decade in exchange for an upfront payment. According to the Wall Street Journal, other Middle Eastern producers are also considering oil-for-loan schemes, desperate for cash as oil prices stubbornly refuse to go up to the levels they need.

Will these producers fall into the trap that has already claimed Venezuela?

The South American country that is home to the largest oil reserves in the world owes China and Russia around $50 billion. The loans were provided in exchange for crude oil deliveries that Venezuela is now struggling to make.

The problem with loan-for-oil schemes is that it can cost the supplier market share in other countries. For Venezuela, this was India. After years of consistently building its presence in the Indian market – one of the top three in terms of oil consumption – PDVSA was forced to start reducing shipments to Indian refineries in order to meet its oil obligations to China and Russia.

Kazakhstan is another country that has turned to loan-for-oil schemes in difficult times. State-owned Kazmunaigaz closed a $3-billion deal with Vitol in 2015 to repay debts. In exchange for the advance payment, the company undertook to transfer to the trader supplies from its 20-percent stake in the Tengiz oil field. The field yields about a third of Kazakshtan’s oil output. Related: Russia Reaches 2/3 Of Oil Output Cut Target

Now Oman and Abu Dhabi are stripped of alternatives: it appears that they need cash and they need it fast, having resorted to this far from mutually beneficial option. Other producers in the region may also have to consider such deals as oil prices show no signs of improving – not nearly enough for the Middle Eastern economies with their expansive public service sectors, which are eating up a large part of oil revenues, and with their lavish spending programs.

While it’s a fact that local governments have implemented some cost-cutting measures, it is also a fact that reversing a decades-old spending habit is difficult, and the effects will not be felt overnight unless the governments want riots on their hands.

Loan-for-oil deals were made popular by Rosneft – the company has enough cash because it has access to the state coffers. Rosneft spent over $40 billion in such deals over the last three years to ensure crude oil supply at competitive rates and to spread risk among more producers.

Rosneft’s two latest such deals illustrate clearly why loan-for-oil deals are a last resort: one was a $3-billion prepayment contract with the autonomous region of Kurdistan – another oil producer that is suffering a major cash shortage. The other was a preliminary deal with Libya’s NOC, which is having serious headaches with various armed groups, preventing it from expanding production at the rate it would have liked. Related: Mysterious Outage In Libya Could Drive Oil Prices Higher

The problem for the oil suppliers is that sometimes there is just no alternative: it’s either loss of market share and future oil revenues, or no cash for investing in further oil production to ensure future oil revenues. Oil producers in such a situation are truly between a rock and a hard place.

By Irina Slav for Oilprice.com

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  • Bill Simpson on April 01 2017 said:
    After what the did to us with the Arab Oil Embargo, I don't feel a bit sorry for them.

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