Venezuela: PDVSA Closer to Ruin

PDVSA subsidiary Citgo is set to be half-owned by Crystallex after a recent ruling. Here a Citgo gas station in Georgia. (Photo:  Michael Rivera)

The recent Citgo ruling is a serious blow to Venezuela and its oil company.

Inter-American Dialogue

A U.S. federal judge on Aug. 9 issued a ruling that authorizes the seizure of Citgo Petroleum, Venezuelan state oil company PDVSA’s Houston-based refiner. Now-defunct Canadian gold miner Crystallex International, which filed the legal action against Citgo to collect a $1.4 billion compensation award to satisfy a Venezuelan government debt, will be able to control shares of Citgo’s U.S.-based parent company. PDVSA has appealed the ruling.

Soon after, Venezuela made a payment to U.S.-headquartered mining company Gold Reserve using $88.5 million worth of government bonds in order to partially satisfy a $1 billion settlement agreement. What can be expected from the Citgo case? What consequences would the legal decision have on PDVSA’s financial struggles and Venezuela’s economy at large? Is Maduro implementing the right measures to avoid economic collapse, and what else can be done to ensure PDVSA’s recovery?

Francisco J. Monaldi, fellow in Latin America energy policy and lecturer in energy economics in the Baker Institute for Public Policy at Rice University: The Crystallex ruling and the more recent announcement of a PDVSA agreement to pay ConocoPhillips $2 billion in exchange for a lifting of the injunctions on PDVSA’s facilities in the Dutch Caribbean show how PDVSA and the Venezuelan government are increasingly facing the consequences of unpaid expropriations and debt default. These attempts at seizing assets and export flows could escalate as claimants and creditors try to move ahead of others in getting a piece of whatever is left. It could be a shark fest of litigation. There are many others with potential claims over Citgo assets and income—including Citgo and PDVSA bondholders and creditors, Rosneft and ConocoPhillips, among others—and the value of Citgo is significantly higher than the Crystallex claim, so the judicial process would have to sort out that long line of claimants. It might take a while, but eventually PDVSA would lose control over Citgo. In the short run, that could affect the supply of diluents and products to PDVSA, hindering extra-heavy oil exports. In the long run, it is a significant strategic loss in the competition with Canadian crude for access to the U.S. Gulf Coast market. PDVSA is on a death spiral of declining production, cashflow and investment; and these legal actions would only make it worse. There is no path to Venezuela’s recovery without dealing with these issues. That would require a lifting of sanctions, a rescue package from the IMF and the international community, and a credible macro adjustment program. In other words, it requires a political transition.

Michael Lynch, president of Strategic Energy & Economic Research in Amherst, Mass.: The judicial authorization of the seizure of Citgo Petroleum as part of a settlement of a legal action against the government of Venezuela might mean little in the short term, as any action is delayed by appeals, but it adds another nail to the coffin of the administration of President Maduro. His inability to separate market forces from political struggle has reduced a mighty nation to the verge of collapse, and his authoritarian nature means that he has insulated himself from recognizing the true situation in the country. Printing money has created inflation, which cannot be ended by presidential fiat: manufacturers cannot produce goods if they are continually losing money, and stores cannot sell goods for less than they are paying. The high oil prices from 2003 to 2014 allowed the Chávez administration to paper over economic problems with first, oil revenue, and then oil-financed  debt, but borrowing against future oil production is like eating your seed corn: you are starving the future to feed the present. As debt payments grow and productivity activity shrinks, a vicious cycle is entered that reduces the capital available for investment and thereby lowers future income, ensuring that debt will grow even more. Venezuela is close to the point where its lack of capital and high debt, including from judgments over the nationalization of foreign assets, will prevent it from engaging in foreign trade. Imports of parts and materials to sustain oil production should largely cease, and oil exports will be at risk of seizure, leaving the government without funds and unlikely to survive.

Luisa Palacios, co-head of emerging markets at Medley Global Advisors and non-resident fellow at the Center on Global Energy Policy at Columbia University: Crystallex’s legal victory against Venezuela significantly raises the risk that PDVSA will lose control of Citgo. While this might not be imminent, we see several risks ahead. First, losing Citgo will mean further downside risks to oil production, if the 125,000 barrels per day (bpd) of oil products Venezuela imports from the United States are affected in any way. A portion of Venezuela’s oil trade with the United States is the result of a swap arrangement with Citgo in exchange for crude. Second, there is a risk Venezuela will divert part of the 150,000 bpd of oil it currently ships to Citgo to alternative buyers or markets, given the risk of attachment of that crude. Third, it also means a higher risk of default for PDVSA 2020 bondholders, the only bond that Venezuela remains current on. Fourth, it opens the door for a messy legal battle between creditors of Venezuela, PDVSA, Citgo and expropriated companies, with uncertain consequences for Citgo’s future and its integrity. Fifth, at the margin, this increases the chances of political change for two reasons: 1.) It opens another international front with creditors further cornering the Maduro regime and overwhelming its capacity to respond; and, 2.) It could increase social tensions at home, if it limits Venezuela’s capacity to import fuels, further accentuating the ongoing electricity crisis and requiring even more gasoline rationing. Parallel to these mounting legal risks, the government has been announcing a series of economic measures aimed at trying to stabilize the economy and oil production. The Maduro regime is unlikely to achieve either. Some of the measures announced seem irrelevant, others look like a step in the right direction, but still highly insufficient, and huge questions remain on their implementation.

Gustavo Coronel, a founding board member of PDVSA: The judge’s legal decision enables Crystallex or any other creditor of PDVSA to try to seize 50.1 percent of Citgo shares, which–if successful – would give it control over Citgo. The other 49.9 percent of Citgo shares were given as guarantees for a loan the Russian company Rosneft made to PDVSA. Clearly, this decision places PDVSA in imminent risk of losing the company, which is one of its few significant assets abroad. Although PDVSA has appealed the ruling by the U.S. federal Court, Citgo is now fair game for Crystallex or any other creditor, such as ConocoPhillips, trying to get PDVSA to pay them. This new development places the Venezuelan regime of Nicolás Maduro in a desperate situation. A $1.1 billion payment on two bond issues, which became due on Aug. 15, remains unpaid. All analysts coincide that the financial crisis has now become a political crisis, too. The new financial measures that Maduro announced on Aug. 17 consist of still another devaluation of the currency and promise further economic chaos in the country. We are witnessing the last moments of the chavista Titanic. In my view, PDVSA is not recoverable, and a new model of oil industry management will be required to replace the current, failed model of a single state-owned oil company having the exclusive control of oil industry operations. Such a change in model can only be done under a new, non-Chavista government.

Asdrúbal Oliveros, director, and Guillermo Arcay, economist, both at Ecoanalítica in Caracas: Venezuela is financially strained. Even after defaulting on more than $5.7 billion in bonds, there aren’t enough exports to finance the country’s imports.

According to our estimates for the second half of this year, the government needs to finance a $3.2 billion cash flow deficit if it wants to maintain imports at the same level as last year’s second half. Hence, they are faced with three main options: receiving a new credit line from China, selling more than a third of Venezuela’s international reserves, or slashing 68.8 percent of non-oil imports.

This situation was worsened by the recent ruling from a court in Delaware and OFAC’s issuing of ‘General License 5,’ which gave Crystallex the right to seize a portion of Citgo’s parent company’s shares and exposed a flank through which creditors can pressure Venezuela and PDVSA to pay. Following the verdict, Venezuela has settled a similar case with Gold Reserve and another one with ConocoPhillips, which amount to $3 billion combined. Venezuela made an initial payment of $88.5 million in bonds to Gold Reserve and promised to pay ConocoPhillips $500 million in amortization in the next 90 days. Faced with new payments and declining exports, Venezuela has allegedly begun an expensive attempt at stabilizing its hyperinflation, which could force it to spend an additional portion its international reserves. The nation’s future looks grim, and its government seems to be avoiding the necessary reforms to stop an all-out economic calamity. 

Republished with permission from the Inter-American Dialogue's weekly Energy Advisor


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