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Nationalization Worsens PDVSA’s Finances

Venezuela's recent nationalizations will worsen PDVSA's finances and scare off new investment, experts warn.

Inter-American Dialogue 

This month, the Venezuelan government has seized dozens of oil services companies. The nationalizations come as Venezuelan state oil company PDVSA is rumored to be considering issuing up to $3 billion in bonds to help cover outstanding debts to oil service providers, even as a number of US companies owed money by PDVSA expressed doubts the money would be collected. What is the likelihood these debts will be repaid? Can PDVSA get its finances in order? How will the recent nationalizations and the outstanding debts affect Venezuela’s new push for foreign investment in its oil sector?

Juan Pablo Fuentes, economist at Moody's Economy.com: The abrupt expropriations reflect the precarious financial state of PDVSA. PDVSA's finances deteriorated rapidly in recent months, following the collapse of oil prices in the second half of 2008. To continue supporting the central government's fiscal needs, PDVSA has been forced to delay payments to contractors. As a result, PDVSA's debts to service companies soared above $10 billion. Understandably, some creditors had no option but to stop or slow work until they were paid. By seizing service companies, PDVSA obtains short-term financial relief, as it can keep operations going while reducing costs. This action provides no long-term relief, however, and will create more headaches for PDVSA. The company has grown inefficient and overstaffed as it acquired multiple responsibilities outside its core oil business. As a result, its financial performance has deteriorated and output has fallen, even during the recent oil boom. PDVSA reportedly plans to sell $3 billion in dollar-denominated bonds, payable in local Venezuelan currency. This could be attractive for local investors looking to bypass strict foreign exchange controls. PDVSA would use the proceeds to finance operations and perhaps pay off some of its debts to local contractors. Such a bond sale would provide little financial relief, however, and foreign contractors are likely to still face payment delays. This month's expropriations suggest PDVSA and the government do not plan to ever honor those obligations. The government recently announced plans to develop the Orinoco energy region, and claims several international oil companies have shown interest in joint ventures. Yet given the Venezuelan government's past record honoring its contracts, it is hard to imagine private oil companies agreeing to participate. Other countries' state-owned oil companies might be the only ones willing to take the risk.

Gustavo Coronel, former member of the board of directors of PDVSA (1976–79) and served as Venezuela's representative to Transparency International (1996–2000): The Hugo Chavez regime officially seized 39 oil service companies, all related to marine and Maracaibo lake transport of oil industry personnel. In addition, PDVSA took over two gas injection plants and one gas compression plant operated by Tulsa's Williams Co. The reason given by the regime for these actions is its need to control all activities related to oil production and the savings that would presumably be obtained. Savings are out of the question, as PDVSA's labor costs are much higher. PDVSA will now have to absorb some 8,000 new workers and assume the burden of maintaining the equipment. The real reason is that PDVSA owes these companies and others not yet taken over, such as Helmerich and Payne (drilling rigs), Halliburton (oil well cementing) and Schlumberger (electric logging) up to $12 billion and has no money to pay them. By taking them over, PDVSA would pay them back, if at all, in government bonds. PDVSA has recently obtained $8 billion in loans from China and Japan, to be repaid with future oil production and will issue new bonds but the amounts owed to the contractors and the still pending payments to ExxonMobil and ConocoPhillips far exceed this new debt. The managerial and financial situation of PDVSA is now critical. As a result, the companies originally interested in bidding for the Orinoco heavy oil blocks are having strong second thoughts, as the rules of the game have been dramatically altered.

Andy Webb-Vidal, CEO of Latin-IQ Corporation, a business risk and intelligence consultancy specializing in Latin America: Chavez's move to nationalize dozens of oil service operations might appear to be a continuation of his radical agenda, but it is principally a pragmatic measure designed to deal with a serious cash-flow problem. PDVSA's debt of several billions of dollars with service companies is a consequence of the steep decline in oil prices since last year. Chavez's position is not that service companies should not be paid, but that they must charge less—and this is the message to the remaining service companies, such as drill rig providers. As was the case after the nationalizations in 2007, compensation most likely will be paid—to those that do not make a fuss. Past due debts are also likely to be settled, eventually, but perhaps at a discount. However, unlike after the previous nationalizations, affected parties this time round are likely to be offered bonds, not cash. It is unclear what type of bond Venezuela would offer, but settling for a bond likely would make more sense than other options, such as seeking international arbitration. While the nationalization of these oil services will benefit PDVSA in the short term by saving it costs, the flipside is that it will impinge on PDVSA's ability to maintain its oil wells and to continue pumping crude at current output volumes. Furthermore, the increased risk to service providers operating in Venezuela will be noted by those companies preparing to bid in the coming months for exploration blocs in Orinoco River Belt.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.


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