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 State-run firm PDVSA faces around $5.2 billion in payments to
bondholders in 2016, much of it in October and November, a sum that
some experts say it will be hard-pressed to meet after the
government used nearly all of its available cash reserves to pay
$1.5 billion in maturities last week.
A default could curtail some of the OPEC member's exports by
crippling its ability to import crude and fuels used to blend its
extra heavy oil, experts and sources say. It could also degrade the
quality of domestic gasoline by limiting purchases of necessary
components.
With the risk growing and payment delays to suppliers already
emerging, some firms that sell to PDVSA have begun hedging their
bets by using intermediaries or seeking higher prices, fearful they
might never get paid, according to sources who deal with the firm.
"A possible PDVSA default is worrying for everybody," a source from
a U.S. oil company that buys from PDVSA told Reuters. And if they
scrape together enough funds to pay off bondholders, "they will not
be able to pay suppliers."
The implications of a default for global oil supplies swamped by the
biggest glut in decades are difficult to divine, but experts are
closely watching the deteriorating finances of exporters for
anything that could jolt markets.
"Of course, Venezuela is at the top of the list," Daniel Yergin,
vice chairman of analysis firm IHS, told Reuters last week.
Without imports of light crudes and diluents like naphtha that have
rose to some 110,000 barrels per day (bpd) in 2015, PDVSA may be
unable to export an estimated 235,000 bpd of its own heavy blends,
according to calculations based on Thomson Reuters trade flows data
- a disruption that could help curb an oversupplied global market.
Most of the country's estimated 2 million bpd of exports, a portion
of them secured against long-term loans, would likely still flow as
PDVSA's entire output is not dependent on imports and it has been
increasing shipments to political allies.
Crude blend supplies to the United States and Asia could also be
sustained if PDVSA's partners, including U.S. Chevron <CVX.N>,
Russia's Rosneft <ROSN.MM>, Spain's Repsol <REP.MC> and China's
CNPC, step in to secure more diluents, as PDVSA has already asked
them to do.
Yet a default would also likely reduce fuel components imports,
which have risen to some 85,000 bpd due to growing use of cheap
high-octane gasoline and falling domestic production.
Venezuela was the United States' third crude supplier last year and
Latin America's sixth-largest buyer of U.S. fuels.
DIGGING OUT OF DEBT
While PDVSA's pending fourth-quarter debt payments of some $3.3
billion appear beyond its means, a default is far from a certainty,
and its president Eulogio Del Pino said this week it is taking all
measures to avoid it.
Even so, short of a sudden, unexpected recovery in crude prices,
asset sales, new loans or refinancing agreements, the odds look
long, said Benjamin Ramsey from JP Morgan.
While not yet calling for a credit event in Venezuela, a JP Morgan
report said PDVSA's best intentions "cannot nonetheless trump the
cold, hard realities of diminished cash flow."
Refinancing efforts, including a bond swap through its pension fund,
are making little visible progress. Expected dividends from its U.S.
unit Citgo Petroleum along with money coming from Russian Rosneft's
<ROSN.MM> stake increase in a joint venture would not be enough to
reach October with full pockets, a government source said.
Some PDVSA suppliers are already edging away.
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A prominent trading firm has recently been using local
intermediaries in Venezuela to secure payments when supplying PDVSA,
as selling directly or providing it with even minimal credit are no
longer options, a source said.
PDVSA this month failed to award two spot tenders to buy gasoline
components because of high price premiums, a reflection, according
to one source who participated in the offer, of growing payment
risks.
To ensure its supply lines remain open, PDVSA has signed deals with
India's Reliance Industries <RELI.NS> and Rosneft to exchange crude
by fuels.
PDVSA's close ties with CNPC and PetroChina Co <601857.SS> could
also guarantee some imports, but those could still be not enough to
secure all barrels needed, traders said.
LEGAL RESOURCES
Even though any legal response to a default would have to pass
through an external court to target PDVSA's assets, clauses included
in bond contracts make the company more exposed than the country to
any actions taken by creditors to claim owed money, according to
lawyers and experts.
Amid ongoing arbitration cases, oil giant ExxonMobil <XOM.N> was
granted court orders in 2008 that temporarily froze up to $12
billion in PDVSA's overseas assets and $315 million in a joint bank
account in New York. It was done through an extraordinary legal
resource called 'Mareva injunction' that surprised Venezuela.
Even though the injunction was later overturned, that case and
others that followed have exposed PDVSA's bank accounts, tankers,
cargoes and external terminals and refineries to the legal power of
creditors.
PDVSA has taken steps recently to protect itself, including moving
the accounts that collect money from its exports to China's CITIC
Bank <601998.SS> from Banco Espirito Santo <BESN.D>.
Getting a court order to freeze an account in China would be more
difficult than acquiring access to those in the United States. Some
PDVSA sales could also be protected if it delivers at its ports
under prepayment agreements, so cargoes are owned by the buyer when
leaving Venezuela, lawyers said.
After selling facilities in Germany, the Caribbean and the United
States, PDVSA's former president, Rafael Ramirez, recommended the
government in 2014 to also get rid of all Citgo's operations to
protect the company against potential efforts to seize assets,
according to a document seen by Reuters.
But even though the U.S. unit was offered for sale, the attempt was
abandoned in 2015 after Venezuela asked it to raise $2.5 billion in
loans and bonds on PDVSA's behalf.
(Reporting by Marianna Parraga, with additional reporting by Corina
Pons and Alexandra Ulmer in Caracas and Anna Driver in Houston;
Editing by Jonathan Leff and Andrew Hay)
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