Venezuela´s next debt default may be China

Venezuela is edging closer to default on its oil debt to China as state-owned PdV's production continues falling and the volume of cash-generating exports dwindles, energy ministry and company officials tell Argus .

PdV has been servicing debt to China with oil shipments for the past decade. But the company could be forced to start cutting back these shipments by January, if not sooner, so that the oil can be sold to cash-paying clients unless Beijing agrees to fresh loans or reschedules the debt, the officials said.

Venezuela currently owes Beijing about $23bn that it is paying down with oil exports which PdV books as debt payments that generate no revenue for the company or the central bank. As of August 2018 PdV had paid about $30bn of the $54bn in oil-backed loans it has secured from China since 2007.

This total includes a $4bn direct oil-backed loan China Development Bank made to PdV in first quarter 2016 when Caracas and Beijing signed a two-year agreement allowing PdV to halt oil debt principal payments for two years. That agreement expired in April 2018.

Beijing rejected Venezuelan pleas to extend the agreement when president Nicolas Maduro visited China in early September.

Maduro said last month that CDB had agreed to grant Venezuela up to $5bn in fresh financing structured as a credit line. But the funds have not yet been disbursed as Chinese officials managing the new loan ensure all funds are spent only on Venezuelan oil ventures in which Chinese state-owned CNPC holds minority stakes, namely the 130,000 b/d Sinovensa crude-blending venture at Jose, the 15,000 b/d PetroZumano upstream venture in eastern Venezuela, and the 400,000 b/d PetroUrica venture in the Orinoco oil belt which has not advanced since CNPC curbed capital outlays in 2016.

Maduro's failure to secure an extension of the expired agreement to postpone debt-related oil shipments means that PdV's oil exports to China booked as debt payment will rise to about 340,000 b/d as of October, from about 164,000 b/d now, company and ministry officials said.

But PdV's total oil exports to China and Russian oil-backed creditor Rosneft as of last month appear to be higher, suggesting that PdV's oil-backed debts may be larger than the numbers reported officially in energy ministry and PdV annual reports.

PdV internal data obtained by Argus shows that around 730,000 b/d or more than two thirds of Venezuela's September oil exports of around 1.1mn b/d, part of which came out of storage, went to service oil-backed debt. Another 100,000 b/d was swapped for gasoline and naphtha. Around 250,000 b/d was synthetic crude from PdV's Orinoco upgrading joint ventures, with part of the revenue going to PdV.

This leaves only around 100,000 b/d sold for 100pc cash revenue for PdV. At Venezuela's official current weekly export price of $72.40/bl, PdV would appear to be generating barely $7.2mn of daily oil export revenues.

PdV is trying to pay off a $1.5bn debt it owes Rosneft more quickly than a refinancing agreement signed in April 2018 stipulates, the officials said. Last month a naphtha cargo imported from the US was re-exported to a US client, with Rosneft getting the payment, a PdV executive said.

"The naphtha cargo re-exported to the US in September couldn't be offloaded as planned because of delays at the Jose terminal," the PdV executive said referring to an August dock collision. "The payment to Rosneft was booked against the $1.5bn debt."

When the 2016 debt to Rosneft is paid in full PdV will have about 69,000 b/d of crude and diluted crude oil (DCO) supplies it will be able to sell for cash to Rosneft or other clients.

PdV is also eyeing cuts to other preferential clients in the Caribbean, but up to 50,000 b/d of free crude supplies shipped to Cuba are unlikely to be interrupted, the PdV and ministry officials said.

"Oil supplies to Cuba are sacred to Maduro, who relies on Havana's assistance for a broad range of government, health and security services in Venezuela," a presidential palace official said.

As Venezuela's largest individual creditor and the recipient of the largest volume of PdV oil exports booked as oil debt payments, China is the likeliest candidate for a default in the form of cuts in oil deliveries, the official added. "Whether by a negotiated agreement in coming weeks or by force majeure, China tops the list of likely oil supply cuts as the government and PdV seek ways of generating more revenue."

Venezuela and PdV are estimated to have more than $190bn in external debt. Some $7bn in PdV and central government bond debt is in default. Almost $1bn in PdV 2020 bond debt is due on 27 October.

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