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Debt, sanctions and disrepair: Venezuela’s oil sector in agony

Caracas, Venezuela | AFP | After decades of being Venezuela’s cash cow, the state oil company PDVSA is a ragged shadow of its former self: overburdened, underfed, and in hock to Russian and Chinese creditors.

The woes of the group, whose full name is Petroleos de Venezuela S.A., look set to worsen because of US sanctions imposed last month restricting its access to credit.

Oil production keeps declining and much of what is exported goes to repay billions of dollars in loans.

That puts the government of President Nicolas Maduro in a very tight spot.

It relies on PDVSA’s export income for 96 percent of foreign earnings, and to pay for many social programs.

Reduced oil revenues means “there is a real chance of default,” said Tamas Varga, an analyst at London-based PVM Oil Associates.

– Sanctions and storm –

Venezuela faces additional problems in the form of US sanctions.

In July, Washington imposed direct sanctions on PDVSA’s financial chief, Simon Zerpa, making it illegal for US individuals or companies to do business with him.

In August, President Donald Trump ratcheted up the pressure with broader sanctions against any new PDVSA bonds and the ability of its US subsidiary Citgo to repatriate cash.

The aim is to “deny the Maduro dictatorship a critical source of financing to maintain its illegitimate rule,” the White House said.

What the measures do is effectively cut off PDVSA’s option of restructuring its debts through a new bond issue.

Maduro railed that they amounted to a financial and economic blockade, as ratings agency Fitch downgraded Venezuela and warned default was now likelier.

The country has to make $3.8 billion in debt payments in October and November, while its foreign currency reserves have sunk under $10 billion.

Another complication, whose effects are yet to be fully felt, came with Hurricane Harvey in Texas. The storm ripped through a part of the United States that is home to a third of American refining capacity — some of it geared to handling Venezuelan crude.

PDVSA’s president, Nelson Martinez, said last week that one of the company’s refineries, in hard-hit Corpus Christi, was not damaged but had to shut down.

The aftermath of the storm, which saw oil tankers unable to offload crude, could prove to be a tough blow to Venezuela’s fragile oil export system.

“The storm could impose financial pain on Venezuela without the United States actually sanctioning it, since US demand for the country’s crude will fall, at least for as long as the refineries are down, thus forcing Caracas to find other outlets, and likely agree to significant discounts, for its oil,” Antoine Halff, a director for global oil markets at Columbia University’s Center on Global Energy Policy, told the Financial Times newspaper.

“That would add to the Maduro regime’s struggle to meet debt payments,” he said.

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