Potential U.S. oil sanctions increase risk of Venezuelan default

By Lucia Kassai, Laura Blewitt and Nathan Crooks on 7/31/2017

HOUSTON (Bloomberg) -- The specter of tighter U.S. sanctions is pushing up the perception that Venezuela is getting closer to defaulting on its bonds.

Venezuela is awaiting possible further restrictions from the U.S., its largest trading partner, after President Nicolas Maduro held elections Sunday for a new assembly that will rewrite the constitution.

The implied probability of Venezuela missing a payment over the next 12 months rose to 62% Monday, according to credit-default swaps data compiled by Bloomberg. That’s the highest level since March 2016. The odds of a credit event over the next five years increased to 95%.

Further sanctions “would increase the probability of default given PDVSA’s already dire liquidity situation and because it would give Maduro a potential scapegoat to blame for the government’s inability to pay,” said Risa Grais-Targow, a senior analyst at Eurasia Group in Washington. "If the U.S. bans exports of crude and products, it would have a mild impact on PDVSA, as their import costs would go up on increased transportation costs as they source lighter crudes and products from farther afield.”

More imports

Venezuela, home to the world’s largest oil reserves, has increased imports of oil and products from the U.S. in recent years amid low oil prices and lack of maintenance at its refineries. Oil output fell to a 14-year low of 1.97 MMbpd in June, according to data compiled by Bloomberg. Petroleos de Venezuela SA’s refineries were operating at 43% of their capacity in June amid lack of oil and equipment breakdowns, according to Bloomberg calculations based on data from a person familiar with operations.

The U.S. is a net importer of Venezuelan crude, bringing in 741,000 bpd in 2016, according to data from the U.S. Energy Information Administration. It exported 105,000 bpd of crude and fuel in the same period to Venezuela and Curacao, where PDVSA’s 335,000 bpd Isla refinery is located.

PDVSA buys U.S. oil for the Isla refinery to make up for falling domestic output of lighter, or lower-density, grades of crude oil, said Andy Lipow, president of consultant Lipow Oil Associates LLC in Houston. If Venezuela can’t buy from the U.S., it will need to pay up to get supplies from other countries.

“If Venezuela is able to find suppliers willing to extend credit to them, they will certainly need to pay more for those supplies,” he said in a telephone interview. “The supplies would come from Africa, in the case of oil, or Europe, in the case of products, all located farther away compared with the U.S.”

Debt payment

PDVSA has an upcoming debt payment of $3.2 billion that is mostly due in October and November, the Eurasia Group’s Targow said. The expected softer sanctions would turn up the heat on PDVSA’s ability to make those repayments.

A move to ban U.S. exports and not imports would still be a halfway measure, said Antoine Halff, a senior research scholar at Columbia University’s Center on Global Energy Policy in New York.

“It would make life more difficult for Venezuela, making operations more difficult on a daily basis and will increase costs,” he said by phone. “All of that is a negative for that repayment, but that’s the idea. The idea is to make life difficult.”

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