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Saturday, October 20, 2018

Tightening Noose: Venezuela's Crisis Deepens

Maritime Activity Reports, Inc.

May 8, 2018

© Anatoly Menzhiliy / Adobe Stock

© Anatoly Menzhiliy / Adobe Stock

The news that Venezuela's PDVSA has diverted a crude tanker from Curacao after ConocoPhillips moves to satisfy a $2 billion arbitration award signals that worst may be yet to come.
 
Reuters is reporting that Venezuela's state-run PDVSA ordered a tanker waiting to discharge at its Curacao terminal to divert to Venezuelan waters after ConocoPhillips introduced an order in a Caribbean court to seize its inventories and other assets in the island, according to a shipper and Reuters data on Tuesday.
 
More than two days after at least two Caribbean courts ordered the temporary retention of inventories and facilities in Bonaire, Curacao, Aruba and St. Eustatius at U.S. oil firm Conoco's request to satisfy a $2 billion arbitration award against PDVSA, the rapidly deteriorating crisis in Venezuela appears to be getting even worse. The move, intended to enforce a $2 billion arbitration award over a decade-old nationalization of Conoco’s projects in the South American country, puts PDVSA in an edven more difficult position. That’s because the facilities on the three islands allows PDVSA to process, store and blend a significant portion PDVSA's oil for export.
 
The $2 billion arbitration award represents just a fraction of Conoco's $33 billion claim against state-run PDVSA. But, Conoco's latest legal action threatens to further erode PDVSA's already anemic and declining oil revenues. With virtually all of its income dependent on oil exports, Venezuela arguably cannot afford to lose any of its remaining capacity, something which has been reported to have dipped by a third since its peak. Local refineries operated at less than one-half capacity in the first quarter of this year.
 
Venezuela’s deepening recession has resulted in shortages of medicine and food, as well as the loss of many of its citizens as they seek better conditions elsewhere. For its part, Conoco said in an e-mailed statement to Reuters, “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.” And, Conoco is not alone in its quest to satisfy the loss of its assets and investments. Exxon Mobil also has arbitration claims over the nationalization of its projects in Venezuela.
 
Separately, PDVSA, assessing its own options, on Friday ordered its tankers in the Caribbean to return to Venezuelan waters and await further instructions, according to Reuters. In the last year, several cargoes of Venezuelan crude have reportedly been seized over unpaid freight fees and related debts.
 
The once proud, now nationalized Venezuelan oil industry has long been a juggernaut in the global oil industry and by some estimates; was once the world's fifth largest oil exporter and furthermore sits on top of the world’s largest proven reserves. Oil is the South American nation’s chief source of income, and the trouble being experienced there now is wreaking havoc with the nation’s standard of living and its ability to pay bills, feed its citizens and more importantly, provide the wherewithal to invest in its crumbling infrastructure. 
 
The average Venezuelan adult today, as the national crisis deepens, has lost twenty pounds over the last 12 months. With food shortages now the rule rather than the exception, it is a difficult situation.
 
Late last year, Reuters also reported that more than a few of Venezuela's crude-stained oil tankers can’t operate in international waters. The hulls, contaminated by an oily sheen in local loading berths, have to be cleaned before traveling to many foreign ports, where the environmental enforcement authorities are predictably stricter. The labor intensive procedure, says Reuters, is the cause of “chronic delays for dozens of tankers that deliver Venezuela’s principle export to customers worldwide.”
 
The delayed, soiled tankers are but one manifestation of many in the country’s downward spiral. That’s because without the funds to maintain ships, upgrade refineries and related ports and tank farms, Venezuela can’t increase oil exports. More than 90 percent of all Venezuelan export revenues are rooted in energy and low oil prices (now rebounding somewhat) have exacerbated the problem. Beyond this, crude production in the country, according to some reports, dipped has last year to a 23-year low.
 
For many years, PDVSA could count on help from like-minded allies but support (and patience) from those players is wearing thin. Losing access to the tepid lines of credit that they still desperately cling to might be the final blow. As oil tankers sit idle because payments remain unauthorized, the crisis only deepens precipitously. Current events and recent wire coverage of the situation doesn’t suggest that anything is going to improve in 2018.
 
Also according to a Reuters report, “the International Energy Agency predicts output will fall at least 500,000 bpd to 1.5 million bpd in 2018.” A drop that severe would all but eliminate any chance that cash-strapped Venezuela – by itself – could continue to satisfy its obligations on a reported $60 billion in foreign debt. The latest news, then, comes at the worst possible moment for Venezuela and PDVSA.

 

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