Venezuela’s Humanitarian, Economic and Political Crisis Analysis
Venezuela, one of the founding members of the OPEP produced an average crude oil production of 2.5mn barrels per day (bpd) in 2016. This oil production has fallen dramatically to 1.23mn bpd today mostly due to underinvestment and a huge debt load. Since 2010, the country has been facing a socioeconomic crisis which is the worst economic crisis in its history and among the worst crises experienced in the Americas, with hyperinflation, soaring hunger, disease, crime and death rates, and massive emigration from the country.
PDVSA is the Venezuelan state-owned oil and natural gas company. It has activities in exploration, production, refining and exporting oil as well as exploration and production of natural gas. Since its founding in January 1976 with the naturalization of the Venezuelan oil industry, PDVSA has dominated the oil industry of Venezuela and is the world's fifth largest oil exporter. Oil reserve in Venezuela are the largest in the world (302bn barrels) and the state-owned PDVSA provides the government of Venezuela with substantial funding resources. It is the primary source of revenue for the government with a refining capacity of 2.5mn bpd.
CITGO Petroleum Corp. (CITGO) a US-based refiner is indirectly owned 100% by PDVSA. This flourishing company with a USD 500 million revenue has long been the cash generator of the Maduro regime. Until Donald Trump prevents him from repatriating this money to Caracas with the sanctions put in place in August 2017. With the new sanctions (embargo on Venezuela oil import with the US being the biggest importer of this oil) unleashed by Donald Trump, Citgo won’t be able to process and market Venezuela oil and this will jeopardize the economy already in a very bad state.
In 2017 Venezuela has about USD 36 billion USD-denominated sovereign bonds and Debt of around USD 50 – 60 billion that it owes to China and Russia, with PDVSA have the majority (USD 28bn outstanding). China and Russia have a huge investment in Venezuela and some Analyst believes that Russia's exposure in the county’s Sovereign bonds is largely limited to an outstanding $3.15bn loan. By contrast, they are very few western companies left in the country; China is by far the first creditor of Venezuela that the Bolivarian regime repays in barrels of oil, Russia comes second with a very offensive strategy: it delivers weapons to Nicolas Maduro. Above all, via Rosneft, Russia invests in the direct extraction of crude to exploit the fabulous Venezuelan reserves which are considered the largest in the world. Rosneft is present in five projects and has taken care to secure its investment by obtaining a 49% stake in the American Petroleum Citgo. This chicken with golden eggs is so coveted and valued at USD10 billion.
Given the illegitimate elections back in August 2017 and the humanitarian crisis which has worsened since, the US government applied sanctions to Venezuela, prohibiting US persons from transacting in any new issues by either the sovereign or PDVSA (leaving the country without access to FX and precipitating default on bond payments in November 2017). These financial sanctions on Venezuela which restrict investment in its debt and equity issued by the government and PDVSA virtually shut Venezuela’s access to USD capital markets, threatening its ability to refinance the sizable impending external debt maturities
Consequently, S&P downgraded the sovereign to Selective Default (SD) while Moody’s lowered it to C and PDVSA missed interest’s payments on several global debts since November 2017. Venezuela debt is in default and has not paid interest for two years. PDVSA has historically resorted to alternative funding options such as bilateral and oil-linked deals with oil-consuming countries, and loans from Joint Venture partners. However, considering the missed interest payments on its global debt and heightened political and economic tensions in the country, more funding through this route looks difficult.