As Venezuela continues its ungraceful careen off the cliff, few opportunities are left for the Latin American country to save itself from disaster. One such opportunity would be for the socialist nation to give up control of its oil industry to a foreign entity. And rumor has it that Venezuela is indeed considering such a drastic move, according to people close to the action.
How successful and practical is this solution, and who would be the likely takers?
Drastic Times, Drastic Measures
Selling off your country’s main source of income may seem like poor judgement. But after Venezuela has plundered its state-run oil company, Petroleos de Venezuela S.A. (PDVSA) to the brink of ruin and US stifled what little oil-revenue-generating activity remained, Venezuela doesn’t have many moves left.
The state of Venezuela has gone beyond drastic and into catastrophic. And ironically enough, the main source of Venezuela’s woes, aside from its leadership, comes from the very asset it is thinking about nixing.
PDVSA’s production has fallen to a 75-year low, at just 1 million bpd. PDVSA’s debt is going nowhere fast, holding at $34.5 billion last year. It is in default on its bonds, in part because it can’t export oil to anyone who is afraid of running afoul of US sanctions--which is nearly everyone--nor can it export its oil using any tanker company that is afraid of running afoul of sanctions either, even if to a willing participant. It had shut down all but two oil refineries--that is, until this week, when it shut the last two down as well, although that is said to be temporary.
And what’s worse, there is no end in sight to PDVSA’s struggles. And as PDVSA, so goes Venezuela.
Always Easier Said
But even if this has the potential to be a successful solution to what ails Venezuela, it is not without challenges.
The US sanctions that have crippled Venezuela’s entire economy by restricting oil exports would make a deal of this nature incredibly challenging; although no one is saying it is impossible.
US sanctions on Venezuela are far-reaching, and extend to nearly all participants in any crude oil exports out of Venezuela, even shipping companies. The threat is real; the United States has even threatened to freeze any US assets of any person or company that is determined to have “materially assisted” the Venezuelan government. Related: 5 Reasons Why Big Oil Is Here To Stay
Another challenge facing this grand scheme is that Venezuela’s constitution restricts foreign ownership. So, in order for ownership to be transferred to a foreign entity, its constitution would have to be rewritten. Again, difficult, but not impossible.
So who would be brave enough, wealthy enough, skilled enough, and eager enough to take Venezuela up on its offer? Venezuela has been in talks over the potential deal with the likes of Rosneft, Eni, and Repsol, according to Bloomberg.
And it isn’t the first time we’ve heard that.
ROSNEFT -- As Russia’s largest oil producer and Venezuela’s largest sponsor after China, Rosneft is a logical choice for taking over some PDVSA assets. They have the skills, and they could likely afford to write off some of that $800 million in debt that Venezuela owes it, in exchange for some hot assets. Rumor has it that Rosneft and PDVSA have kicked this idea around before, and apparently PDVSA has offered Rosneft ownership interests in as many as nine of PDVSA’s most prolific oil projects.
And they already have a working relationship on five joint Rosneft/PDVSA projects that collectively produced 59 billion barrels of oil in 2017. Rosneft is already in deep with PDVSA, and it cannot afford to have PDVSA or Venezuela fall apart. Not to mention that Russia’s propping up of PDVSA--at a time when the United States is trying to economically squeeze Venezuela so hard it forces a regime change--is tantamount to Russia flipping the United States the bird--no doubt in retaliation for US sanctions on Russia over that whole Crimea business.
And already it has scared the daylights out of the US by becoming a collateral holder of PDVSA’s US-based business, Citgo. A move by Rosneft into Venezuela’s oil business would be about much more than oil--it would be about its low-key spat with the United States, highlighting the importance of political aspects in addition to business aspects. Add to that the fact that Russia and Venezuela’s relationship is held together by top-level players, a Maduro ousting could jeopardize that relationship and weaken Russia’s influence in the United States’ backyard.
Russia is motivated not to allow that to happen. Related: The True Cost Of “Freedom Gas”
Rosneft is already moving to insulate itself from US sanctions by moving away from dollars, switching all its export contracts to euros last October, after the US threatened to sanction Rosneft for its dealings with Venezuela. Russia’s state-run oil firm exported $89 billion in oil and oil products in 2018.
REPSOL-- Venezuela is also courting Spanish Repsol, which has also extended loans to PDVSA under a crude for debt deal, although Repsol, too, like Rosneft, has whittled down its exposure to Venezuelan debt. As of July 2019, its exposure had fallen to $447 million. Shipments of crude oil has continued for the most part in 2019, shielded from US sanctions, which do not apply to crude/debt swaps.
ENI -- Last on the list of disclosed suitors is Italian Eni. Like the others, Eni has dolled out some cash to PDVSA in exchange for crude deliveries, and it already has an established working relationship with the Latin American country that dates back to 1998, including in the Perla gas field, the Junin 5 oil field, and the Corocoro oil field. It also has its hands in a refining JV with PDVSA.
The country missing from the list, quite puzzlingly, is China. PDVSA has borrowed more from China than any other country. And similar to Russia, China has unequivocally supported Nicolas Maduro. It is a marriage made in heaven between the cash-starved country holding the largest oil reserves and the cash-rich country who imports the most oil.
But unlike Rosneft, CNPC--one of China’s state-run oil giants--has actively moved to avoid running up against US sanctions, suspending crude oil loadings from Venezuela in August when it was unclear how the sanctions would shake out. CNPC has lent Venezuela billions, which has been paid back slowly through crude oil shipments.
While it is truly a long shot that Venezuela would turn over control of PDVSA to even a friendly country, partitioning off some of PDVSA’s assets may be the country’s only means of survival.
By Julianne Geiger for Oilprice.com
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The important thing is that Venezuela will never hand control of PDVSA even to Russia’s giant oil company Rosneft and Russia is not interested in controlling PDVSA. A possible alternative is that Venezuela could sign a deal with Russia giving it temporary control of PDVSA while US sanctions are on and ending the control once sanctions have been lifted.
Rosneft which already has a smooth working relationship on five joint projects with PDVSA
that collectively produce around 162,000 barrels a day (b/d) will continue to help PDVSA produce and market its crude worldwide and get paid for it. This arrangement is also enabling Russia to get payment for the loans it extended to Venezuela over the years most of which has already been paid by oil.
Unlike the United States which has been ogling Venezuela’s huge crude oil reserves, the largest in the world for years, China and Russia have been openly defying US sanctions by enhancing Venezuela’s crude oil production and also helping it sell its crude oil around the world and get paid for it respectively.
The people of Venezuela and their oil wealth are not for sale. They will be there long after US sanctions have been thrown into the dustbin of history. Moreover, the Venezuelan people will never allow the United States to get its hands on their oil reserves.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London