Venezuela's Cash Crunch Means Waiting Five Months to Get PaidBy
PDVSA sales to U.S. down 35% since sanctions began in August
Experience of Ecuador shows default could make situation worse
Off the Caribbean island of Curacao, a huge tanker has been bobbing in the water for five months waiting to get paid by Venezuela’s state-owned oil company for its cargo of crude oil -- the latest sign that the nation’s cash crunch could get a lot worse as more debts come due.
Petroleos de Venezuela SA, which controls the world’s largest crude reserves, has been hit hard by low prices and U.S. sanctions that are increasing the risk of default on the country’s debt. Output plunged, PDVSA was forced to buy more cargoes from abroad to blend with its tar-like low-quality oil, and refineries were forced to shut because of recurring breakdowns or a lack of domestic crude to process. On Friday, PDVSA made a payment on a 2020 bond and it’s due to make another one on Nov. 2.
While the financial and political crisis has already wrecked the economy, a default by PDVSA could make things even worse if the experience of another oil exporter in South America is any guide. In a report last year, Torino Capital LLC said Venezuela risked falling into the same problem that Ecuador did after it defaulted in 2008. Oil traders started demanding bigger discounts on Ecuadorean crude out of concern that bondholders would try to seize the barrels they were buying.
“The sanctions are hurting Venezuela much worse than initially expected,” said Francisco Monaldi, who researches Latin American energy policy at the Baker Institute at Rice University in Houston. “U.S. refiners pay in cash for the crude, and if Venezuela is losing access to that kind of money, it means PDVSA is in for big financial trouble down the road.”
Venezuelan shipments to American refiners are down 35 percent since late August, tanker data compiled by Bloomberg show. The slump began after the U.S. imposed sanctions to punish President Nicolas Maduro for moves deemed anti-democratic. PDVSA is the government’s biggest source of export income. The sales decline is compounding a lack of revenue from exports to China, India and Russia, which are receiving crude as payment for earlier loans.
Finances are so tight that a PDVSA refinery on Curacao can’t afford to buy enough oil to process. The tanker Tulip, loaded with U.S. crude, has been drifting offshore since May awaiting payment. At the end of last year, PDVSA owed $42 billion.
More than $1.2 billion of the company’s debt is coming due in the next few days, and investors are showing less confidence that funds will be transferred. On Thursday, PDVSA’s dollar bonds fell more than 4 cents with yields on notes due 2020 jumping more than 2 percentage points to 17.3 percent. Venezuela is already two weeks late on coupons for a slew of other bonds.
Like Venezuela, Ecuador is dependent upon oil revenue. When the country defaulted in 2008, it was forced to offer bigger discounts, which resulted in a plunge in oil revenue, according to a report by Francisco Rodriguez, the chief economist at New York-based investment bank Torino Capital. Rodriguez couldn’t be reached for comment on Thursday.
After years of mismanagement, Venezuela is close to running out of money after oil prices plunged from more than $100 a barrel in 2014 to $50 today. After arresting opposition leaders, Maduro has moved to rewrite the constitution and strip power from congress. U.S. President Donald Trump imposed sanctions targeting Maduro and PDVSA.
That’s making it difficult for U.S. refiners, especially those that need a letter of credit from a domestic bank to guarantee payments to the Venezuelan company. Few American lenders want to be in a position of potentially running afoul of their government’s sanctions. The U.S. imported $9.31 billion of crude oil from Venezuela last year, Census data show.
Refiners including Valero Energy Corp., Chevron Corp. and PBF Energy Inc. imported 741,000 barrels a day from Venezuela, the Energy Information Administration estimates.
But as those sales drop, Venezuela is sending more to repay loans from other countries. Daily shipments to China doubled since August to 451,613 barrels, while cargoes to Russia’s state-owned oil company Rosneft PJSC more than tripled, according to U.S. Customs data and a shipping report compiled by Bloomberg.
Over the past decade, China and Rosneft loaned at least $70 billion to Venezuela for oil production and infrastructure projects.
“When the U.S. is turning the back on you, it’s useful to be in good terms with your two biggest lenders,” Russ Dallen, a managing partner at Caracas Capital Markets, a Venezuela-based investment bank. “That might even help PDVSA to get old loans to be rolled over.”
But the oil slump is continuing to put a strain on the company and the government. Production in June fell to the lowest in 14 years. Domestic refineries have cut back on processing because of multiple breakdowns and the reduced oil supply.
The U.S. probably will ratchet up sanctions over the next 12 months if Maduro refuses to change his behavior, which means PDVSA will become more dependent on Russia and China for new loans, according to Risa Grais-Targow, an analyst at Eurasia Group. Default is “likely” next year, she said in a report. PDVSA owes an estimated $3 billion in 2018.
“China will likely shy away from meaningful new financing, while additional deals with Russia face limitations on both sides,” Grais-Targow said. “Still, there is some room for additional deals with Russia that could help the government to scrape by next year as well.”
— With assistance by Ben Bartenstein