Despite "Ruthless Economic War", Venezuela, PDVSA Avoid Default With $2.6 Billion Payment

Tyler Durden's picture

Bondholders confirmed that Venezuela's state-owned oil company PDVSA made principal and interest payments of $2.2 billion today, avoiding default yet again despite what Vice President Tareck El Aissami called a "ruthless economic war" being waged against the Maduro government.

 

That's the good news, the bad news is that PDVSA has $62 billion more in principal and interest due over the next few years...

 

As Reuters reports, President Nicolas Maduro's government has met commitments to Wall Street investors for years by slashing imports of basic goods such as food and medicine, spurring chronic product shortages. Maduro says the country is victim of an "economic war" led by opposition businesses.

"Despite the ruthless economic war, in conspiracy with local media and foreign news agencies, spurred by imperialists and their internal cronies ... the revolutionary government has paid $2.557 billion," El Aissami said in a statement on Twitter.

 

The payments due on Wednesday included interest and principal on PDVSA's maturing 2017 bond as well as interest on its 2027 and 2037 notes.

 

PDVSA's bonds were up across the board, with the benchmark 2022 rising 1.750 points to yield 31.404 percent.

 

Venezuela's bonds are the highest-yielding of any emerging market security due to concerns about default.

 

Maduro has dismissed default talk as a smear campaign against his administration.

He may want to 'swap' some more of his nation's assets with China soon though as Reserves just hit a new 15 year low...

 

And as we noted previoously, as OPEC begins to discuss extending the cut, in part to combat a flood of U.S. supply, Venezuela’s role in the world oil market amplifies. Convincing a financially weak quasi-dictatorship to slow down the production of its country’s primary economic asset is a tough sell. And yet, this is likely what members of the Organization of Petroleum Exporting Countries will have to do with Venezuela in order to meaningfully curb global oil supply.

Oil prices will be particularly sensitive to Venezuela’s role in the next few months, with one of two extreme outcomes likely to occur, both of which will miss OPEC’s target forecasts for Venezuela. In the first scenario, as Venezuela continues to prioritize debt servicing above all else, Venezuelan President Nicolas Maduro may find ways to marginally boost production, eroding the 8 percent of OPEC’s planned production cuts the country accounts for. The second scenario would see an escalation of Venezuela’s current crisis, preventing the country from importing the necessary light crude it needs to blend with its heavy oil. This would see Venezuela production falling below OPEC’s predictions, providing a needed and unexpected boost to global oil supply cut efforts. These scenarios would carry vastly different consequences, both of which need to be considered in any analysis of the evolving OPEC supply management saga.

Scenario 1: Drill, Baby, Drill!

With creditors tightening their grip on Venezuela’s gasping financial throat, Maduro is stuck in a chess game where pressing the proverbial “drill, baby, drill” button may be the only option, given his complete dismissal of the option of default. Venezuela’s state-owned PDVSA recently announced it will indeed make its slated $2.1 billion bond payment on April 12, easing recent default concerns.

In addition to the servicing of upcoming scheduled payments, Venezuela’s production is shackled by an oil-for-loan agreement with China that Venezuela already owes a significant backlog on, according to Reuters. Over a quarter of Venezuela’s daily oil production could already be committed to this agreement, if the requirements match those analyzed by a November Harvard research paper by Igor Hernandez and Francisco Monaldi. Once the grace period China allotted expires, they write, “the government’s debt agreements with China involve a significant and increasing amount of production.”

Debt service is not the only aggressor inflicting wounds upon the idea of cutting production. Social programs and other fiscal expenditures in Venezuela are heavily dependent on the revenues from crude oil, because oil generates 40-70 percent of government income in Venezuela, with the range depending on the price of oil. Continued low oil prices pose two risks to government spending: first, the obvious cut that comes from decreased oil prices; and secondly, the high breakeven costs in the Orinoco Oil Belt may eventually force Maduro to exercise the option of lowering royalties in the field to encourage new projects.

What this means for Venezuela’s oil production is simple: if the country is to continue to service its debt – something Maduro swears by – and maintain its current fiscal spending levels, the country is without any option aside from maintaining or expanding production. What’s more is the move towards one-man rule could boost Venezuela’s oil production, as the recently overruled legislature was standing in the way of Maduro’s plan to add joint-ventures in his plan to generate quick cash.

This poses a challenge for oil bulls and decreases the odds that OPEC can count on Venezuela to deliver a further production cut should the cartel move forward with an extended cut agreement. If it does not originate in Venezuela, the 8 percent cut expected from Venezuela must come from some other country, a fact that could create damaging tensions in OPEC negotiations.

Scenario 2: Not So Fast, Maduro!

The answer to Venezuela’s financial problems is not as simple as just drilling for more oil; in fact, operational and systematic challenges limit the amount of crude Venezuela can produce in almost the same way that debt servicing requirements and government demands limit the amount of production Venezuela can afford to cut.

These operational challenges and financial difficulties could generate a larger than expected cut from Venezuela. Over the past decade, missed payments and the downward political spiral drove many risk-averse foreign operators out of the country. Why invest in a country where receiving payment is akin to betting on a game of roulette? Better yet, a rigged game of roulette.

Due to this unfavorable investment environment “the number of active rigs [in Venezuela] has declined from 70 in December of 2015 to 51 in September of 2016.” Thus, the drilling situation itself is a function of the uncertainty that cements Venezuela’s position as a mysterious wild card in forecasts of world oil supplies. Venezuela’s oil production was already hurting from low prices and low investment, with total production declining 253,000 barrels per day between 2010 and the end of 2015; the persistence of an unfavorable investment environment in the country only exacerbates the issue, discouraging foreign operators from investing in Venezuela.

Venezuela’s reserves, which consist mostly of heavy crude, are particularly sensitive to the current low oil price environment. Not only do these reserves become uniquely unattractive to developers relative to other potential investments in a low oil price environment, but they also require substantial spending on imports of lighter crudes. These imports, which are required in order to make a marketable product, recently slipped  a trend that will further complicate supply issues.

Certain Uncertainty

In the near-term, Venezuela is set to surprise oil markets and potentially rock OPEC’s plans, regardless of whether its production slips or Maduro finds a way to encourage developers to crank up drilling to generate quick cash. The drama unfolding in Venezuela is sure to come to a head as its next debt payments come due, and oil markets will be watching its production closely.

History has shown time and time again that regimes that neglect the welfare of the people eventually collapse upon themselves. It may take months, years, or even decades, but eventually, they all come falling down. But until this collapse happens, the political turmoil will continue to complicate pending OPEC conversations and add an additional layer of uncertainty to the oil markets. There may be a degree of certainty in the long-term trajectory of the Maduro regime, but predicting the fate of Venezuela’s forecasted supply cuts in the short-term is a near impossible task.

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Whoa Dammit's picture

Amazing how bad stuff just happens these days to countries without western controlled Central Banks. I hate to think who they are going to go after when they are done destroying all of those countries.

serotonindumptruck's picture

It's commonly referred to as Ouroborus.

The snake is eating its tail.

Entropy.

Last man standing.

2_legs_bahhhhhd's picture

This sounds like a job for the IMF. The economic hitman of last resort.

Bob's picture

Yeah, funny that.  Paul Craig Roberts has been pretty consistent about that on Venezuela in particular.  He always includes it on his list of countries that the USSA is working to crush.  Like it has for the last hundred years of so.  

Communists in this hemisphere will not be tolerated.  Monroe doctrine with the usual Dr. Strangelove twist. 

Western media agrees to ignore it and we agree that it's fine to do so. 

Hey, they're fucking communists, for chrissakes.  Of course their shit can't work!

It gives me goosebumps watching them circle the drain.  

(A special hat tip to The Tylers for that one, btw.)

bruno_the's picture

Looks like Tylers are laser pointed at Venezuela. What is your problem? Let it be.

biker's picture
biker (not verified) Apr 12, 2017 8:18 PM

$4.50 USD barrel oil
Hamaca Ameriven API 25.7 +-5-9% & sulphur 1.4-1.8%

Non-Corporate Entity's picture

They know who comes next once the bread, pets, and zoo animals are gone. Trump and Xi are getting their bids in soon....maybe Putin. Banking cartels will crumble with the EU. We'll know soon enough when Trump and Yellen enter...The Octagon.

Bernie Madolf's picture

No toilet paper?

Fuck you, pay me.

Country burning down?

Fuck you, pay me.

Women and children dying.

Fuck you, pay me.

johnnycanuck's picture

Damn, and the neos were just getting their hooks into the Putin is going to takeover Citgo in 'Murika....the Great meme.

just the tip's picture

OT

i've never understood venezuela in opec.  the five original members, iran, iraq, kuwait, KSA, and venezuela.  if you look at a map of the world you will look at it and wonder WTF is venezuela doing there?  other than they all export oil to the US.  but when oil is exported it is distributed from a very large pot.  i digress

since the founding, iran and iraq were locked in a human wave war, iraq invaded kuwait, and imo KSA has been up to no good ever since.  what would have possibly caused the five founding members to look to form their organization in the first place and then wage hot wars amongst themselves.  all the while remaining in the organization.

i still can't understand why the fuck venezuela was ever even asked to join, and for that matter why they would stay.  what beenies do they get?  a bunch of latin americans sitting with a bunch of ragheads?  what do they have in common culturally?  geographically?  and for that matter, wasn't venezuela a stable democratic country in 1960?

and in a move that makes perfect sense, if you last name is rothschild, why put you headquarters in vienna?  ok, yeah, so when members are waging a hot war against one of the fellow members, the opec delegation will feel safe attending meetings.  or a sunni will not be forced to set foot in a shia country.  that makes perfect fucking sense.

maybe the CIA was mad they weren't asked to join.

sinbad2's picture

Venezuela is part of OPEC, because OPEC is controlled by the US. Venezuela was a virtual US colony until Chavez showed up.

BeanusCountus's picture

Watching Maduro get caught up in the politics and fail doesn't make me feel any better about the ruin it causes on the people. Sad.

Tugg McFancy's picture

They can't do maintenance or pay workers. Production cuts? No need, declines are baked in at this point.

sinbad2's picture

A white knight to the rescue? probably China

I once read a speech by a Chinese General, where he explained how the US loots countries, usually with a 10 year cycle.

First up the US makes cheap money available, and encourages the victim country or region to borrow. Then interest rates are raised, and sanctions etc are ap;lied and the target economy starts to struggle. Eventually the victim defaults and the US picks up the assets for cents in the dollar.

Seems like the Chinese might have got in before the US?

CHX13's picture

It's getting close to debtonation... TICK TOCK TICK TOCK...

The Iconoclast's picture

Yeah, sure, it's our fault.