Venezuela?s PDVSA misses debt payments

By Devangi Narang

Venezuelan state-owned oil and natural gas company Petróleos de Venezuela, S.A., popularly known as PDVSA, has not made a single debt payment to India’s top oil producer Oil and National Gas Corporation (ONGC) since April. PDVSA owes $540 million in terms of dividends to ONGC for an investment that the Indian firm had made in an energy project in Venezuela.

Defaults in payments

PDVSA is involved in exploration, production, refining and exporting oil and natural gas. Since its founding on 1 January 1976 with the nationalisation of the Venezuelan oil industry, PDVSA has dominated the oil industry of Venezuela, the world’s fifth-largest oil exporter.

ONGC Videsh, the overseas investment arm of ONGC, has confirmed that PDVSA had fallen behind on the payments. Shares of ONGC fell as much as 3.5 percent to Rs 185.85 after the six-month default news came in. This has been the biggest intraday percentage drop for ONGC since 5 May. Moody’s lowered PDVSA’s rating to ‘Ca’, its second-lowest level, on 6 November, citing the overdue payment and the expectation that the company will default on other debt in the near term.

Economic crisis in Venezuela

Venezuela is staring down at social upheaval, political unrest and bordering on economic collapse. It is experiencing the worst economic crisis in its history with an inflation rate of over 400 percent and a volatile exchange rate.

Venezuela’s current crisis started long before the current President Nicolas Maduro and his predecessor Hugo Chavez. While in power, Chavez focussed all of the country’s resources only on one thing – producing oil.  This meant that all the other things that the country consumed, besides oil, had to be imported. While oil prices were high, it worked. However, in 2013, the first domino fell and Chavez died. Maduro took over Chavez and in 2014, the second domino fell. The price of oil started to crumble. Revenue from oil accounted for 95 percent of Venezuela’s export earnings and when prices of the commodity began to plummet, Venezuela suddenly saw itself short of cash. The government responded by slashing imports like basic groceries and medical supplies to avoid default on its foreign debt. It also started printing money leading to inflation which has surged into triple digits without an end in sight. The economic freefall exacerbated social problems like riots and protests over food shortages.

Venezuela’s economy has collapsed since global oil prices plummeted in 2014. The country sits on the world’s largest oil reserves. However, over the past decade, it has been the region’s poorest performer in terms of growth of GDP per capita. International banks and suppliers have reduced or halted credit to PDVSA since cash flow problems led the firm to start delaying payments to creditors in 2014. US sanctions against Venezuelan officials including PDVSA executives have also deterred banks from offering credit.

Road ahead for PDVSA and ONGC

Nicolas Maduro’s government has increasingly turned to ally Russia for the cash and credit it needs to survive. It previously used Russian state bank Gazprombank and Reliance Industries Ltd. as intermediaries to make payments. In January, Russia’s state-run Gazprombank cleared a payment of $19.75 million of Venezuela’s pending dues to ONGC. India’s Reliance Industries Ltd., the owner of the world’s biggest refining complex and one of PDVSA’s biggest oil buyers, paid $68.66 million to ONGC on behalf of PDVSA in April.

PDVSA and ONGC Videsh Ltd. last year signed a deal for PDVSA to pay the debt by assigning the Indian firm 17,000 barrels per day of oil. Under the agreement, PDVSA sells the oil on behalf of ONGC and sends the cash to the Indian company. 

Venezuela has often used oil to repay the debt; it owes billions of dollars to both Russia and China and is paying both with oil. Many multinational firms have written off their Venezuelan operations and investments, but ONGC is aiming to expand in the South American country. The Indian firm is seeking to raise funding for Venezuela’s San Cristobal oil project, in which it has a 40 percent stake. PDVSA and ONGC aim to raise oil output from the project to about 27,000 barrel per day from 18,000 barrel per day.

Photo Credit: simbiosc via Visual Hunt / CC BY-SA