Bankrupt Venezuela Is Demanding Oil From JV Partners Without Payment

Now that Venezuela, and its state-owned petroleum company PDVSA, were both officially declared in default on their debt by ISDA last Friday, analysts were closely watching what the insolvent Maduro government would do next, now that it is - at least on paper - isolated from most international capital markets (with the occasional loophole when it comes to Chinese and Russian funds). We didn't have long to wait, and as Reuters reports, a cash-strapped, and bankrupt, PDVSA has resorted to siphoning oil from its cash-paying joint ventures with foreign firms to feed its domestic refineries.

In one example, PDVSA asked its Petropiar joint venture with Chevron to turn over as much as 45% of the oil it planned to export in November without payment. While state-owned PDVSA predictably did not respond to a request for comment by Reuters, Chevron - which stands to lose far more - similarly declined to comment. Reduced exports of Petropiar’s crude is mainly having an impact on customers in the United States, according to one of the sources and Thomson Reuters trade flows data.

PDVSA started requesting some cargoes from Petrocedeno for the Paraguana Refining Center (CRP). Now it is asking Petropiar to relinquish almost half of its crude production,” the Reuters source said.

From August through October, PDVSA took at least 1 million barrels per month of heavy crude from Petropiar after acquiring Zuata Sweet crude from Petrocedeno earlier this year. It is seeking 2 million barrels, or 45% of Petropiar’s total production for November.

Venezuela's action is a bizarre form of self-cannibalization, as PDVSA's joint ventures export upgraded crude to buyers around the globe and as such, Maduro's diversion cuts into the main source of the government’s revenue. The likely reason why the government has resorted to such a drastic decision, one which will significantly cut into Venezuela's only source of dollar funding, is to deal with intermittent, and increasingly acute fuel shortages plaguing the nation because of the poor condition of its refineries, which in some cases are working at a third of capacity.  

Reuters confirms as much, "the lack of these exports add to the nation’s cash crunch as President Nicolas Maduro tries to restructure some $60 billion in debt to bondholders" even as some of Venezuela’s oil exports are already under oil-for-loan agreements with Russia and China, as we reported this summer

In addition to the Petropiar joint venture with Chevron, PDVSA has this year taken oil for its domestic refineries from its Petrocedeno project with Total and Statoil. The diversions are adding new strains to the ventures’ cash flow. Foreign partners in several joint ventures also have been required since last year to pay for imported naphtha used to dilute the Orinoco Belt’s oil when upgraders are not operating or working at reduced capacity, further hurting their earnings.

Worse, the cash grab impacts not only PDVSA, but the international partners: "The joint ventures are expected to be compensated for the diverted oil through dividends paid to the partners. However, some foreign oil firms operating in Venezuela have been unable to repatriate such payments to their parent companies."

Meanwhile, Venezuela's dometic oil industry is crashing as PDVSA’s finances are so weak it is struggling to find the funds to drill wells, maintain oilfields and keep pipelines and ports working, Reuters notes. For context, according to the latest OPEC numbers, Venezuela’s overall crude output declined in October to its lowest since 1989.

Sanctions imposed by the United States on Venezuela and its state-run company PDVSA have not helped, and have also contributed to weaker exports this year as most offshore energy coutnerparts demand letters of credit, which however no banks will endorse due to fears of Venezuela's escalating sanctions.

As a last ditch measure, Maduro’s government has increasingly turned to ally Russia for the cash and credit it needs to survive as China has not extended any more credit to Venezuela amid delays in oil shipments, Reuters reported in August.

Meanwhile, PDVSA’s U.S. refining unit, Citgo Petroleum, in July started boosting its imports of Venezuelan upgraded crude from the joint ventures as a way of offsetting declining purchases from its parent company, which is struggling to cover oil-for-loan agreements to Russian and Chinese companies amid falling output. 

Citgo has struggled to buy crude supplies directly from non-Venezuelan producers because of U.S. sanctions levied this year, according to trade sources. U.S. banks have been avoiding extending even short-term credit to PDVSA and its subsidiaries, which have affected Citgo’s oil purchases. Citgo has said it is not facing credit issues.


But Citgo’s effort to compensate for PDVSA’s export problems might not last, one of the sources said, as the growing supply of the joint ventures’ crude to Venezuelan refineries is undermining its ability to purchase upgraded oil.

And on Tuesday, Venezuela unveiled its latest "solution" to Citgo's problems: as Bloomberg reported this morning, Venezuela's Public Prosecutor, Tarek William Saab, said authorities arrested Citgo’s interim President Jose Pereira. Additionally, Citgo’s Tomeu Vadell, Alirio Zambrano, Jorge Toledo, Gustavo Cardenas y Jose Luis Zambrano were also detained. This latest radical "solution" will only accelerate Venezuela's gasoline fiasco, which coming from the nation with the largest petroleum reserves in the world, is the final - and most ironic yet - indiginity of the socialist state.


downwiththebanks E.F. Mutton Tue, 11/21/2017 - 16:20 Permalink

The Gringos have robbed Venezuela blind for five centuries.Zerohedge refuses to publish anytihng about the loser MUD party, the failed coups, the election defeats, and the blizzard of retraded articles about TOILET PAPER.But they will post daily about the POOR, POOR, POOR, POOR hedge fund parasites not being allowed to steal with impunity.  Waaaa, say the white people.  Boo Hoo.  Woe is me.

In reply to by E.F. Mutton

NoDebt Tue, 11/21/2017 - 14:08 Permalink

If socialists were in charge of operating the beach they would run out of sand in two years and blame the ocean for not providing enough. 

DaiRR Tue, 11/21/2017 - 14:16 Permalink

All hail Venezuelan Socialsm marching on.  There's no end to the needless misery when a government's bedrock is blaming all problems on free enterprise.

youngman Tue, 11/21/2017 - 14:41 Permalink

this will shut off any hope of buying parts and machinery for the oilfields to keep running...they need parts all the time...and you would be an idiot to sell him anything right now...he has been screwing suppliers for years now I hope they have learned....doubt it though

bornlastnight Tue, 11/21/2017 - 14:54 Permalink

Hitler did the same thing by diverting troops attacking Moscow to going after the Baku oil fields.  In the end, he got neither oil nor Moscow.  To add insult to injury, he lost lost his 6th Army at Stalingrad.  Maduro needs to brush up on history because he's following the same lunatic moves that caused Hitler to Arkancide himself.

gdpetti hanekhw Tue, 11/21/2017 - 15:24 Permalink

Yes, so why  not just create some billion dollar accounts overseas for use to pay off these bills? Why let the USA/Israel/EU/China/Japan have all the fun? Yes, it will have to be 'crypto' like the other fiats, but that's the way the game is played until it crashes into reality... .so why not just pretend you have billions of dollars offshore? Isn't that what the others do? They just declare billions and trillions by fiat... as a small country, you have to work this magic show slightly differently, but essentially the same.... it's all a con game...

In reply to by hanekhw

silverer Tue, 11/21/2017 - 15:43 Permalink

To the people of Venezuela,

Greetings to your families. We hope you find yourselves well. We all hope you have learned something from your great adventure and experiment with socialism. The next would-be leader should be assassinated on the spot if they promise you anything more than a good joke and a prayer for your children. And while you ponder that, make sure you add something like the 2nd amendment in the US Constitution to your constitution. It will shorten up the waiting period for the next inept leader.