Now that Venezuela, and its state-owned petroleum company PDVSA, were both officially declared in default on their debt by ISDA last Friday, analysts were closely watching what the insolvent Maduro government would do next, now that it is - at least on paper - isolated from most international capital markets (with the occasional loophole when it comes to Chinese and Russian funds). We didn't have long to wait, and as Reuters reports, a cash-strapped, and bankrupt, PDVSA has resorted to siphoning oil from its cash-paying joint ventures with foreign firms to feed its domestic refineries.
In one example, PDVSA asked its Petropiar joint venture with Chevron to turn over as much as 45 percent of the oil it planned to export in November without payment. While state-owned PDVSA predictably did not respond to a request for comment by Reuters, Chevron - which stands to lose far more - similarly declined to comment. Reduced exports of Petropiar’s crude is mainly having an impact on customers in the United States, according to one of the sources and Thomson Reuters trade flows data.
“PDVSA started requesting some cargoes from Petrocedeno for the Paraguana Refining Center (CRP). Now it is asking Petropiar to relinquish almost half of its crude production,” the Reuters source said.
From August through October, PDVSA took at least 1 million barrels per month of heavy crude from Petropiar after acquiring Zuata Sweet crude from Petrocedeno earlier this year. It is seeking 2 million barrels, or 45 percent of Petropiar’s total production for November.
Venezuela's action is a bizarre form of self-cannibalization, as PDVSA's joint ventures export upgraded crude to buyers around the globe and as such, Maduro's diversion cuts into the main source of the government’s revenue. The likely reason why the government has resorted to such a drastic decision, one which will significantly cut into Venezuela's only source of dollar funding, is to deal with intermittent, and increasingly acute fuel shortages plaguing the nation because of the poor condition of its refineries, which in some cases are working at a third of capacity.
Reuters confirms as much, "the lack of these exports add to the nation’s cash crunch as President Nicolas Maduro tries to restructure some $60 billion in debt to bondholders" even as some of Venezuela’s oil exports are already under oil-for-loan agreements with Russia and China.
In addition to the Petropiar joint venture with Chevron, PDVSA has this year taken oil for its domestic refineries from its Petrocedeno project with Total and Statoil. The diversions are adding new strains to the ventures’ cash flow. Foreign partners in several joint ventures also have been required since last year to pay for imported naphtha used to dilute the Orinoco Belt’s oil when upgraders are not operating or working at reduced capacity, further hurting their earnings.
Worse, the cash grab impacts not only PDVSA, but the international partners: "The joint ventures are expected to be compensated for the diverted oil through dividends paid to the partners. However, some foreign oil firms operating in Venezuela have been unable to repatriate such payments to their parent companies."
Meanwhile, Venezuela's domestic oil industry is crashing as PDVSA’s finances are so weak it is struggling to find the funds to drill wells, maintain oilfields and keep pipelines and ports working, Reuters notes. For context, according to the latest OPEC numbers, Venezuela’s overall crude output declined in October to its lowest since 1989.
Sanctions imposed by the United States on Venezuela and its state-run company PDVSA have not helped, and have also contributed to weaker exports this year as most offshore energy counterparts demand letters of credit, which however no banks will endorse due to fears of Venezuela's escalating sanctions.
As a last-ditch measure, Maduro’s government has increasingly turned to ally Russia for the cash and credit it needs to survive as China has not extended any more credit to Venezuela amid delays in oil shipments, Reuters reported in August.
Meanwhile, PDVSA’s U.S. refining unit, Citgo Petroleum, started boosting its imports of Venezuelan upgraded crude from the joint ventures as a way of offsetting declining purchases from its parent company, which is struggling to cover oil-for-loan agreements to Russian and Chinese companies amid falling output.
Citgo has struggled to buy crude supplies directly from non-Venezuelan producers because of U.S. sanctions levied this year, according to trade sources. U.S. banks have been avoiding extending even short-term credit to PDVSA and its subsidiaries, which have affected Citgo’s oil purchases. Citgo has said it is not facing credit issues.
But Citgo’s effort to compensate for PDVSA’s export problems might not last, one of the sources said, as the growing supply of the joint ventures’ crude to Venezuelan refineries is undermining its ability to purchase upgraded oil.
And on Tuesday, Venezuela unveiled its latest "solution" to Citgo's problems: as Bloomberg reported this morning, Venezuela's Public Prosecutor, Tarek William Saab, said authorities arrested Citgo’s interim President Jose Pereira. Additionally, Citgo’s Tomeu Vadell, Alirio Zambrano, Jorge Toledo, Gustavo Cardenas y Jose Luis Zambrano were also detained. This latest radical "solution" will only accelerate Venezuela's gasoline fiasco, which coming from the nation with the largest petroleum reserves in the world, is the final - and most ironic yet - indignity of the socialist state.
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