With Venezuela’s exports of crude on the brink of collapsing below 1m barrels a day to historic lows, the bull case for energy has additional support as creditors of the cash-strapped national oil company PDVSA threaten to seize overseas assets.
The global energy market is bracing for a spike in crude oil prices as Venezuela’s export troubles intensify, just as Iran’s foreign sales are set to drop because of new US sanctions after the Trump administration’s withdrawal from a nuclear deal.
A drop in both Venezuelan and Iranian supply could provide the “perfect cocktail” for oil at $100 a barrel next year or sooner, said analysts at London-based broker PVM.
Brent crude hit a near four-year high of $79 a barrel on Tuesday, which may raise pressure on Opec and Russia to unwind their 18-month-old production deal to reduce supplies.
Venezuela’s foreign oil sales have fallen 40 per cent from a year ago to 1.1m b/d in April, according to data from tanker tracker website Kpler.
And the Opec member’s exports are seen to be dropping sharply as troubles mount for PDVSA, with Russ Dallen of investment bank Caracas Capital saying that the company faces “an avalanche” of lawsuits over unpaid bonds.
US exploration and production company ConocoPhillips recently won court orders giving it control over refining and storage assets owned by PDVSA in the Caribbean, a hub for exporting Venezuelan crude to Asia.
The enforcement of a $2bn arbitration award, related to the nationalisation of Conoco projects in Venezuela in 2007, prompted PDVSA to suspend oil storage and shipping from Caribbean facilities and order the return of tankers to national waters to avoid seizure.
“This shows how devastating not paying arbitrations or debts that are owed by PDVSA . . . could be for the Venezuelan oil exports,” said Francisco Monaldi, at Rice University’s Baker Institute for Public Policy. “This will worsen the already catastrophic situation”.
One industry executive said it was unclear whether Conoco had possession of the seized assets, but PDVSA is challenging the court and trying to sidestep orders. “Short term, this will surely have an impact on both Venezuelan exports and oil markets.”
At least 150,000 b/d of Venezuelan crude was exported via the facilities targeted by Conoco. But not only are these supplies at risk, the knock-on effect of any seizures and related backlogs at ports in Venezuela could result in bigger falls in foreign sales.
Several oil tankers used by PDVSA have been seized by local authorities for non-payment of debts in the past. But now a fresh round of claims by PDVSA’s contractors could further stymie exports.
The drop in essential crude revenues comes ahead of a snap presidential election in Venezuela on May 20, where incumbent Nicolás Maduro is seeking a second term in office despite economic and social crises.
The country, which has the world’s largest proven crude reserves, faces a devastating recession and sizeable debt payments to bondholders, while also confronting other arbitration cases after a wave of nationalisations under the late leader Hugo Chávez.
SNC-Lavalin, a Canadian engineering and construction group, filed a legal suit in New York last week for default on a promissory note that would allow it to seize assets worth $25m. SNC’s claim is small, but others could follow from those holding identical financial instruments worth more than $2bn.
Mr Dallen of Caracas Capital said that SNC and the other noteholders could even get ahead of ConocoPhillips in the queue to seize PDVSA assets. “SNC doesn’t have to register its claim in court, it can just go ahead and enforce,” he said.
Such claims could multiply quickly if SNC’s lead is followed by holders of about $23bn worth of PDVSA’s eurobonds, said Mark Walker of advisory firm Millstein & Co in New York, who represents a committee of PDVSA and Venezuelan sovereign bondholders.
But Mr Walker warned that a wave of legal actions and asset seizures could go against creditors’ interests. “The fact is that PDVSA doesn’t have any money,” he said. “Creditors need to co-operate.”
He said that ConocoPhillips would do well to reach an agreement with PDVSA that allowed it to continue exporting and earning revenues.
The danger is that PDVSA may no longer be acting in a rational manner. Last month, two executives at US major Chevron, which has continued to operate in Venezuela, were arrested and charged with treason after reportedly refusing to sign over-priced supply contracts.
Until last year, says Mr Dallen, PDVSA had sought to keep its creditors engaged in helping to get its oil to market. But this changed in November with the appointment of Major General Manuel Quevedo as oil minister and head of PDVSA, who had no previous experience in the industry.
“Quevedo has declared war on everybody,” said Mr Dallen. “That’s just stupid. They’re your partners — you don’t lock people up for doing their job.”
The greatest danger to creditors and PDVSA’s exports is that Mr Quevedo could make use of a presidential decree on April 12 that gives him absolute control of the oil industry, including the explicit power to liquidate PDVSA.
Meanwhile, Gary Ross, head of oil at S&P Global Platts, warned that western energy majors could further scale back operations in Venezuela.
“There’s little evidence the slide in their production is going to slow,” said Mr Ross. Output has fallen by more than 500,000 b/d in the past year, according to Opec.
Meanwhile, although the Trump administration has already imposed far-reaching financial sanctions against Venezuela, an additional risk is potential direct penalties on the oil sector.
Sanctions on exports though would be a “bold move”, said Mr Ross. The risk of much higher oil prices would be difficult for the US government to tolerate.
If prices keep heading higher and more oil is lost from Venezuela, the US may consider tapping the country’s crude held in its strategic petroleum reserves. “There’s a very important election in November,” he added, referring to the US midterms. “I think [President] Trump would use the SPR.”