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Venezuela Oil: Wiped Out!

Venezuela’s passage towards communism has sent out messages that are crystal clear. To investors it says: "We don’t want you in Venezuela."


On January 8, President Hugo Chávez announced that he would put the four companies currently upgrading crude in the Orinoco Oil Belt (Petrozuata, Cerro Negro, Sincor and Hamaca) totally under the control of the Bolivarian government. With this unilateral and untimely announcement, the President trashed long months of negotiations aimed at turning the upgraders into mixed enterprises in which the State would have the majority shareholding. But things did not end there.

One day later, on January 9, the Ministry of Energy and Oil ordered the four upgraders to cut their production by 195,000 barrels a day, that is 30% of their total production. And it so happens that this is the same number of barrels by which the members of OPEC agreed to cut their production at the meetings held last October and November.

That means that the Executive is forcing the upgraders to absorb the entire cut agreed at the OPEC meeting, when it would only be fair to share out those 195,000 barrels among all the country’s oil companies, including, naturally, the state-owned PDVSA. If the cut were equally distributed, they would only have to reduce their production by 36,000 b/d. However, it’s common knowledge that the government is not known for being precisely even-handed or fair.

This order has been interpreted by many observers as an intolerable maneuver to bring pressure to bear to force the foreign partners to cooperate in the arbitrary and illegal take-over of a controlling interest in their companies by the government and to do away with their right to protest.

So it comes as no surprise that, after these freakish orders by the government, Fitch Ratings downgraded the upgraders’ debt classification from B+ to CCC. In the not too distant past, these companies were ranked by the risk rating firms as being “suitable for investment.” Last year, when the Chávez administration announced that it would change the upgraders over to mixed enterprises, Fitch Ratings classified the debts of these oil companies as “speculative.” Now, in view of the government’s decision to nationalize them, it has downgraded them to CCC. That means that those liabilities are now considered to be “high risk owing to possible default on payment”; put another way, it practically rates them as junk bonds.

But Venezuela’s passage towards communism is not only affecting the debt ratings of these companies by the risk rating firms. To cut a long story short, this decision by the government has sent out messages that are crystal clear. To investors it says, “We don’t want you in Venezuela”! and to lenders it announces, “We don’t need you!"

This column is based on an editorial in VenEconomy. Republished with permission.

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