Venezuelan oil too big to fail, at least for China and Russia

Bloomberg

Venezuela’s sudden demand to renegotiate its billions in debt could complicate life for its two biggest oil patrons, China and Russia.
President Nicolas Maduro caught bondholders off guard with a vow to wring debt relief from Venezuela’s creditors, sending the country’s bonds tumbling. But the move may also have been calculated to reassure the countries that are among Maduro’s biggest lenders, and the most vital customers of his nation’s crown-jewel oil industry.
State-owned Petroleos de Venezuela SA, keeper of the world’s largest oil reserves, has seen output drop to a 14-year low, beset by the country’s economic collapse, a global plunge in crude prices and US sanctions. As American refineries, once PDVSA’s top customers, have bought less, China and Russia have stepped in. The two countries have loaned more than $60 billion to boost production there, prepaying for more than a billion barrels.
“Venezuela is too important for the likes of China and Russia to let it fail,” said Thomas Onley, an analyst at consultant Facts Global Energy, in a phone interview. “Things are getting tough, no question about that, but China and Russia are the backstop.”
At a rally in Caracas, Maduro said his cash-strapped country would seek talks with creditors, including for PDVSA’s outstanding debt. He blamed American sanctions for drying up the well for new financing.
The step to restructure debt comes as Venezuela stands to receive more revenue for its oil. The country’s crude oil basket price rose to CNY350.75 ($52.90) a barrel on Friday, the highest since July 2015. And Venezuela did approve a $1.1 billion principal payment on a PDVSA bond on Thursday.
However, that came with the country holding just $10 billion left in hard-currency reserves, a sign, perhaps, of how wary Maduro might be of getting the oil company embroiled in a messy default. That he immediately followed that with a demand for relief is an indication he sees the situation as unsustainable.
In 2001, Venezuela was pumping more than 3 million barrels a day. Last month, national crude production fell to 1.95 million barrels a day and Venezuelan rig counts are at their lowest level since June 2012.
With output tanking, PDVSA has been forced to buy more cargoes from abroad to blend with its own, tar-like low-quality oil. Meanwhile, many of its refineries have shut because of recurring breakdowns or a lack of domestic supplies to process.
Sanctions imposed by US President Donald Trump, meant to punish Maduro’s crackdown on his political opposition, helped drive down exports to the US by 35 percent from August to October. Over the same period, daily shipments to China doubled while cargoes to Russia’s state-owned oil company Rosneft PJSC more than tripled, according to US Customs data and a shipping report compiled by Bloomberg. But income from those sales are limited because they’re repayments for previous loans.
Turning to the risky process of renegotiation may be the price paid by Venezuela to preserve that lifeline, said Francisco Monaldi, a fellow in Latin American energy policy at Rice University in Houston.
“Russia and China have incentives to provide financing just for oil investment, so that they are able to get the oil repayments,” Monaldi said in an email. “If Venezuela was able to successfully restructure the debt with bond holders that would make it more attractive for Russia and China
to help, but giving them more money just to pay bond holders is unlikely to happen.”