"This Is Terrible For PDVSA": Conoco Begins Confiscating Venezuela Oil Assets, Infuriating China

While there is an increasingly more overt trade war being waged between China and the US, a more covert - and arguably important - contest between the two superpowers is currently being fought for spheres of influence, most notably in Africa, which is now largely a Chinese colony, in Latin America, where increasingly more countries are gravitating toward China and away from the "west", and more recently, even Europe.

Of all such "zones of influence", the one country where Beijing has arguably invested the most is Venezuela, and for obvious reasons: the country with the world's largest petroleum reserves has found itself in a spiraling economic crisis in recent years and with the US refusing to step in and provide much needed funding, it allowed both China and Russia to provide the Maduro regime with loans, mostly in the form of vendor financing, as new Chinese and Russians funds were wired in exchange for Venezuela oil delivery contracts, typically struck well below prevailing market prices.

Which is why China is sure to be incensed following the latest indirect attempt by the US to further limit Venezuelan oil output, and impair the production capacity of what has become one of China's key Latin Americans clients.

Here's what happened.

On April 25, ConocoPhillips won a ruling that said the US major was entitled to more than $2 billion from Venezuela’s insolvent state oil company, PDVSA, over the country’s expropriation of several oil projects more than a decade ago. The drawn-out international legal struggle began in 2007 when ConocoPhillips and Exxon Mobil refused to cede control of their major oil production ventures to the Venezuelan government, as demanded by Hugo Chávez, who was president.  The U.S. firm left the country after it could not reach a deal to convert its projects into joint ventures controlled by PDVSA, even as several other oil companies, including Chevron, Repsol of Spain and Total of France, agreed to the demand and accepted partnerships with the national oil company, Petróleos de Venezuela, better known as PDVSA.

The problem, however, now that Conoco has the greenlight to demand billions, is trying to collect on the court ruling: the Venezuelan government has resisted the demands of companies whose assets it has confiscated, and since it is effectively bankrupt, there is little it can be threatened with under conventional contract law.

So, following the April 25 ruling, in a statement the Houston-based ConocoPhillips said it would “pursue enforcement and seek financial recovery of its award to the full extent of the law.”

Over the weekend it did just that.

As Reuters updates, ConocoPhillips has moved to "take Caribbean assets" - i.e. confiscate - belonging to Venezuela's state-owned, solvency-challenged PDVSA as part of its unilateral enforcement of the $2 billion arbitration award.

The U.S. firm is said to have targeted PDVSA facilities on the islands of Curacao, Bonaire and St. Eustatius that accounted for about a quarter of Venezuela’s oil exports last year. The three play key roles in processing, storing and blending PDVSA’s oil for export.

The move, incidentally, is entirely legal: Conoco received court attachments freezing assets at least two of the facilities, and could move to sell them, one of the sources said.

What the confiscation of key Venezuela assets means is that the US oil major's legal maneuvers could further impair PDVSA’s already sharply declining oil revenue and the country’s convulsing economy. Venezuela is almost completely dependent on oil exports, which have fallen by a third since its peak and its refineries ran at just 31 percent of capacity in the first quarter.

Venezuela's collapsing oil production juxtaposed with the soaring US shale output, is shown in the Reuters chart below:

Making matters worse, this could be just the beginning of Conoco's aggressive confiscation: the company's claims against Venezuela and state-run PDVSA in international courts have totaled $33 billion, the largest by any company.

“Any potential impacts on communities are the result of PDVSA’s illegal expropriation of our assets and its decision to ignore the judgment of the ICC tribunal,” Conoco said in an email to Reuters.

Meanwhile, making confiscation a relatively simple venture for Conoco, PDVSA has extensive assets in the Caribbean. Some examples:

  • On Bonaire, it owns the 10-million-barrel BOPEC terminal which handles logistics and fuel shipments to customers, particularly in Asia, i.e. China.
  • In Aruba, PDVSA and its unit Citgo lease a refinery and a storage terminal.
  • On the island of St. Eustatius, it rents storage tanks at the Statia terminal, owned by U.S. NuStar Energy, where over 4 million barrels of Venezuelan crude were retained by court order, according to one of the sources.

Additionally, Reuters reports that Conoco also sought to attach PDVSA inventories on Curacao, "home of the 335,000-barrel-per-day Isla refinery and Bullenbay oil terminal. But the order could not immediately be enforced, according to two of the sources."

And this is where not only Caracas, but also China is about to get very angry.

While PDVSA’s shipments from Bonaire and St Eustatius terminals accounted for about 10% of Venezuela's total exports, the more important question is who were the recipients. According to Reuters, the exports were mostly crude and fuel oil for Asian customers including ChinaOil, China’s Zhenhua Oil and India’s Reliance Industries.

Which means China is about to see a significant decline in its Venezuela imports thanks to, you got it, a confiscation green lit by United States, and it will be most displeased.

Some more details on the confiscated assets: "From its largest Caribbean operations in Curacao, PDVSA shipped 14 percent of its exports last year, including products exported by its Isla refinery to Caribbean islands and crude from its Bullenbay terminal to buyers of Venezuelan crude all over the world."

Meanwhile, making matters worse, operations at the bankrupt state-owned oil company are grinding to a halt: PDVSA on Friday ordered its oil tankers sailing across the Caribbean to return to Venezuelan waters and await further instructions, according to a document viewed by Reuters. In the last year, several cargoes of Venezuelan crude have been retained or seized in recent years over unpaid freight fees and related debts.

“This is terrible (for PDVSA),” said a source familiar with the court order of attachment. The state-run company “cannot comply with all the committed volume for exports” and the Conoco action imperils its ability to ship fuel oil to China or access inventories to be exported from Bonaire.

And now the question is what will China do after a US company has effectively crippled Venezuela's oil output, forcing Beijing to look for much more expensive oil elsewhere.