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PDVSA: Trials and Tribulations

Posted by Luciano Mezzalira on Apr 2, 2019 2:11:09 PM

PDVSA: Trials and Tribulations

A key member of our Americas team, Luciano Mezzalira, is a proud Venezuelan, and has been following the ongoing political crisis in the country.  We've covered the challenges of compliance issues in our earlier article. In our latest piece, Luciano covers the issues surrounding national oil company Petróleos de Venezuela S.A. (PDVSA), and how this is impacting its exposure to the shipping markets.

How has it come to this?

While the trauma of Venezuelans is well publicised, it is useful to remind oneself that many of the issues impacting the country have their origins in the performance of PDVSA. PDVSA remains one of the world’s largest oil companies in terms of reserves, and for decades has been by far the largest corporation in Venezuela and the single largest contributor to the country’s GDP. However, it is now regarded as technically bankrupt (see below), has a damaged reputation, and has been sanctioned by the US government. The drop in the price of oil and lack of investment are amongst the reasons cited in the press and by experts as some of the causes for the company’s problems, but deep political interference (and the ensuing allegations of corruption and mismanagement) in PDVSA by the increasingly isolated Maduro administration (and that of his predecessor, Hugo Chavez) are seen as the primary contributing factors to the company’s present situation.

Since Hugo Chavez, the former Army Lieutenant Colonel and first leader of the 'Bolivarian Revolution', was elected President in 1999, PDVSA has experienced a complete transformation. The state-owned company is widely regarded as having been used to support the political aims of the ruling PSUV – Socialists United Party, with part of its income directed at financing populist government projects (some of which with laudable aims, such as tackling poverty). While there is nothing unusual about this (there are many other national oil companies used in similar ways), this business model came to be viewed by some as detrimental to the company, so much that, in 2002, a massive strike of PDVSA staff virtually stopped oil production for two months. This strike arguably laid the seeds of PDVSA’s current position, with the aftermath seeing nearly 20,000 company employees being fired and scores of qualified staff leaving PDVSA. Presumably to prevent a recurrence of this strike (the Venezuelan economy reportedly shrunk 27% in the aftermath), key management positions at the company were filled by regime supporters, several of whom with political or military backgrounds and without any experience in the oil sector (including Major General Manuel Quevedo, a long-term member of Venezuela’s armed forces, being appointed as PDVSA’s current CEO and Venezuela’s Oil Minister).

Despite this interruption, PDVSA enjoyed strong trading conditions for much of the early 2000s as high oil prices and surging demand from developing nations improved PDVSA’s fortunes. Indeed, PDVSA's 'Informe de Gestion Annual' (Annual Management Report) from 2015 anticipated PDVSA’s production increasing from circa 3m barrels per day to 6m barrels per day by 2019.  However, the company was already suffering from the sharp fall seen in oil prices from mid-2014 which, in addition to politically-appointed management, allegations of high corruption levels, the continued use of the company for political reasons (such as selling subsidised crude and products to a number of left-leaning Latin American and Caribbean countries) and, from July 2016, a gradually more hostile sanctions environment in relation to Venezuela, created a perfect storm for the national oil company (and for the wider nation). PDVSA saw its oil production capacity fall from about 3m barrels per day to nearer 1m barrels per day, with the company still needing to service significant debt obligations to foreign and domestic investors. The Maduro government announced, in late 2017, that it would halt almost all foreign debt payments, leaving Venezuela (which is reported to owe USD 31bn of sovereign bonds and USD 28bn in PDVSA bonds — total external debt is estimated to be around USD 140bn) in default.

While PDVSA continued to buy and sell crude and products despite these challenges, the company was hit with a further refinement of the US government's sanctions regime in 2019, with the regime now directly targeting PDVSA's trades. The new sanctions required those trading with PDVSA or subsidiaries in USD to pay funds to specific 'blocked accounts' and, following a wind down period ending between 28 April 2019 and 27 July 2019, will essentially prevent non-US persons from trading with PDVSA and its subsidiaries via the United States or through the United States financial system (for all intents and purposes, preventing USD-denominated transactions). Full details of the new US government sanctions can be found here

The impact on shipping

As discussed, PDVSA’s problems are not new. Despite this, the company remained a major charterer of tanker tonnage from well-known owners and operators until recently. Transactions with the company were certainly challenging (with regular changes in personnel) and payment often significantly delayed. However, much of this risk was priced into the charter rates concerned and during our coverage of PDVSA over the last two decades, reports of payment defaults were rare. The sanctions environment and notable incidents such as the arrest of foreign-owned tankers in late 2018/early 2019, however, have led to a rapid change in the stance adopted by ship owners with regard to their dealings with PDVSA. We have seen significant changes in the structure of contracts involving PDVSA’s imports and exports, with a narrowing of counterparties (with Russian, Chinese, and Indian buyers and sellers coming to the fore), a greater use of FOB purchases and C&F sales, offshore ship-to-ship transfers, and the insertion of much lower profile intermediaries in such transactions, presumably to further distance companies from the sanctions environment. Insurers are very aware of the impact of sanctions on their business, and have issued circulars to clients to this effect.

Where now?

There seem to be very few options available to the Maduro regime in Venezuela, and PDVSA’s near-term future is tightly aligned to the success of Western efforts to enforce regime change. While support for Juan Guaidó, the Speaker of the Venezuelan National Assembly and widely recognised interim President of Venezuela is growing (reports have suggested that Venezuelan National Assembly has appointed a new board for PDVSA's US refining subsidiary CITGO Petroleum Corporation), the Maduro government has enjoyed support from Russia and China. It is not inconceivable that Western governments will seek to increase pressure on Venezuela by making PDVSA's remaining trades more difficult; one would presume that, at the end of the wind down period, trades would have to both avoid the United States and be transacted in a currency that is not USD. Ship owners and operators will have to be very sure of their due diligence if involved in Venezuela-linked trades, both in the run-up to, and after, 28 April 2019. 

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