President Trump's newest sanctions attempting to curb some $11 billion of crude exports from Venezuelan state-oil company PDVSA (or Petroleos de Venezuela S.A.) to the United States this year has many world leaders worried about their international impact ranging from rapidly rising oil prices to new stress on debt payments owed by Caracas, but few are watching the potentially volatile waters just off Venezuela in the Caribbean where already long-simmering economic and legal tensions between suppliers and PDVSA tankers which aren't paying their bills could give way to an outright piracy situation as more and more servicing companies seize oil-laden tankers docked in Caribbean island ports until the balance is paid.
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Image via US Chamber of Commerce/Bloomberg
An explosive Bloomberg report begins by detailing an increasingly common scenario which sets a precedent on which western nations and firms could expand the U.S.-led economic war on Petroleum of Venezuela:
Laden with 400,000 barrels of Venezuelan oil, the Icaro sits in the azure waters of the Caribbean just off the Dutch island of Curacao. It’s been there more than a month, and it’s not going anywhere until state-owned oil company PDVSA pays its bills.
The Icaro has become an unlikely but telling symbol of Venezuela’s woes. And it shows how even before the U.S. sanctions-imposed Monday, PDVSA was facing trouble getting its oil delivered to customers around the globe. That could worsen as the regime looks to offset the loss of its U.S. market
Companies doing business with PDVSA — from fuel suppliers to mechanics to systems techs to tow-boat operators — often find themselves between a rock and a hard place when they don't get paid for their services, on the one hand seeking any means possible to obtain payment yet still wanting to stay in business with one of the world's largest oil producers and exporters. Increasingly they're getting desperate enough to risk severing their relationship with the Venezuelan oil giant altogether by turning to Caribbean courts to obtain the right to seize oil aboard docked or transiting vessels, a trend given new impetus based on this week's escalating events.
Now that the White House has called for "peaceful transition of power" away from the Maduro regime, and with companies sensing the likelihood of a coming storm of unrest, civil war, or potential external military intervention, companies are scrambling to secure collateral by force. “You put a lien on a cargo to make sure that when you get a court judgment, there will be something there you can sell to obtain what’s owed to you,” one Curacao-based lawyer working on the Icaro case told Bloomberg. “That might be your only chance to get paid.”
Multiple companies have now followed U.S. company ConocoPhillips' lead after it won a key victory in Dutch Caribbean courts last year which resulted in recouping a $2 billion arbitration award, according to Bloomberg. Conoco was able to see the extensive litigation through based on having first obtained a legal writ to detain 12 Venezuelan oil tankers when they passed through the Caribbean.
The Dutch Caribbean has become ground zero for such aggressive legal methods given that PDVSA operates terminals in Curacao, Bonaire, and Aruba to store and re-export crude oil to the United States and Asia, and at the same time Dutch law and courts have set a low threshold for holding non-paying companies accountable by allowing legal means to go after assets.
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As of December 2017, via Bloomberg
Meanwhile, PDVSA tankers have tried to avoid the Caribbean islands, something it may now no longer be able to do as the state-run company tries to recoup losses due to the new restriction to the U.S. market by ramping up exports to Asia. "Last year, in the wake of the Conoco spat, only 17 PDVSA vessels discharged in Curacao, compared with 132 in 2017," according to Bloomberg's numbers.
One of the most alarming sections of the Bloomberg report touches on the question of whether the political chaos in Venezuela could spill over into the Caribbean in the form of "tanker piracy" given "legal justification" by courts and companies anticipating regime change. Bloomberg reports:
For suppliers, seeking court redress isn’t likely to go away anytime soon because some can’t afford to wait for a regime change, said Kurt Barrow, a vice president at IHS Markit. Indeed, suppliers even track PDVSA oil cargoes every two to three weeks to see how close they get to the Caribbean territory, said one creditor who spoke on the condition of anonymity.
Thus as PDVSA takes increasing risk to weather US sanctions, its tankers will be forced to brush up against creditors seeking to halt transit, as Bloomberg notes, "if Venezuela wants to sell more oil to Asia because of the U.S. sanctions, it may need its facility in the Caribbean for storage — exposing it to more seizures."
And should tankers begin to be seized in large numbers, it will be interesting to see if the Maduro regime begins beefing up security and possibly militarizing the transport ships to protect Venezuela's lone and now choked economic lifeline.
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