Venezuela This Week – SAT 10, 2016

Getty Images / BBC Amid bianknotes shortage, Venezuelans line up at ATMs trying to withdraw some money

* December 4 to December 9, 2016. These are the Editor’s picks. Every week, Claudio Sandoval (@Claudiopedia) presents his selection of  Top News about Venezuela -comments included.


This week I cover the following matters (If you do not have time to read the whole edition, just go to the topic of your interest):

  • Venezuelan Oil & Gas Brief
  • Venezuela’s Central Bank issues bigger notes after inflation went out of control
  • Russia strengthens military ties with Venezuela
  • Dialogue’s updates: Venezuela’s opposition did not attend a general meeting with the government


  • Venezuelan Oil & Gas Brief

1. Under this deal, Trinidad is expected to purchase gas coming from Venezuela’s offshore Dragon field, located in the neighboring state of Sucre. Until the agreement is disclosed, it is difficult to make concrete assessments.

2. However, there are some issues to consider. As a result of Venezuela’s economic mismanagement, the government is desperate trying to find cash anywhere. This could represent a cheaper deal for Trinidad, which might have taken advantage of the situation.

3. Trinidad has a significant gas supply deficit, affecting the Atlantic LNG complex, where Shell is shareholder (Trinidad´s Prime Minister Keith Rowley would have offered Shell the ownership of the gas pipeline and platform infrastructure in his country). In case Trinidad is relying on this opportunity to solve its problems, the question is whether it should bet on Venezuela to secure its energy needs for the domestic petrochemical industries. On the other hand, is this deal profitable and favorable to Venezuela’s interests?

4. Political instability in Venezuela means from now until the year 2018 (when the presidential election is “expected” to take place), anything can happen, including regime change. A new government could audit the agreement and conclude it was a bad deal or request modifications. The Maduro administration could use it to manipulate Trinidad on diplomatic matters, as Chavismo has done in the past with their petrodollar strategy at Petrocaribe.

5. Moreover, BP’s 2016 Statistical Review of World Energy states Venezuela has 198.4 trillion ft3 proved gas reserves (page 20), one of the world’s largest and equivalent to more than 173 years of production. In the future, the country might need the Dragon field to boost its gas industry.

6. This is positive. Flared gas could be captured and used to satisfy Venezuela’s gas supply deficit. Shell would invest in Petroregional de Lago, a firm operating in the Venezuelan state of Zulia. This would help develop the sector and create local jobs in areas that have been affected by current economic crisis.

7. “Fitch Ratings has affirmed Petroleos de Venezuela S.A.’s (PDVSA) Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) at ‘CC’ and the company’s National Scale long-term rating at ‘CCC(ven)’. Fitch has also affirmed the approximately USD30 billion of senior unsecured debt outstanding at ‘CC/RR4’ and the company’s recent senior secured notes issuance of approximately USD3.4 billion at ‘CC/RR4’.” (Press Release).

8. One of the key rating drivers is PDVSA’s “weakening liquidity position as a result of low oil prices and near-term debt service payments and transfers to the central government…”

9. Fitch is assuming Venezuela’s oil basket price will be around US$45/bbl in 2017, while West Texas Intermediate crude prices would “slowly recover to approximately USD65 per bbl in the long term.” This is consistent with Citi’s projection of crude prices (USD$60 by August, 2017) as much as PDVSA’s calculations.

10. Moreover, “PDVSA’s cash flow generation has historically been significantly affected by the large funds transfers to the central government… PDVSA is fully owned by the government and its transfers have historically represented around 45% of the government’s revenues… The Venezuelan government does not have cross-border principal payments until 2018 and interest expenses average approximately USD3 billion per year.

11. PDVSA’s cash on hand as of March 31, 2016 amounted to approximately USD5.5 billion.  Venezuela’s gross international reserves have declined by more than USD4 billion to” USD11,726 billion between January and November 2016, of which a substantial amount presumably is in gold.

12. The rating firm believes PDVSA will have a stable production, remaining “relatively flat or decline only marginally over the rating horizon.

13. The Venezuelan government displays limited transparency in the administration and use of government-managed funds, as well as in fiscal operations, which poses challenges to accurately assessing its fiscal state and the full financial strength of the sovereign. PDVSA displays similar characteristics, which reinforces the linkage of its ratings to the sovereign.”

14. For those reasons, “PDVSA’s ‘CC’ rating suggests that default of some kind appears probable. If a default or restructuring occurs, Fitch anticipates average recovery for PDVSA’s bondholders of 31%-50%, and likely closer to the lower end of the range. While Fitch’s recovery analysis yields a high recovery, the willingness of Venezuela’s government to extend concessions to investors will likely move actual recovery closer to the lower end of the 31%-50% range.”

15. Although default is probable, PDVSA’s debt service payment is priority number one at the government level (the company represents its only source of foreign currencies). PDVSA’s assets and Venezuela’s huge crude oil reserves usually facilitate Chinese loans and other funds that help the State undertake payments. At this moment, I do not see why this trend will change in the near future.

16. The Venezuelan government understands the Organization of the Petroleum Exporting Countries (OPEC) is controled by Saudi Arabia, a country that has been using OPEC for its own local and geopolitical interests.

17. But recent cuts and oil prices might have made president Maduro think that a 10 year-pact was reasonable. This week Venezuela’s oil basket price gained US$3,54, closing at 44,01. The average price in 2016 is 34,52, lower than US$44,65 in 2015 and the peak of US$88,42 reached in 2014.

18. Nonetheless, the news could be important, in case it reveals the additional years Mr. Maduro would like to rule Venezuela. US$60 per barrel can help him pay basic bills but Venezuela may need some extra USD60 billion -that PDVSA cannot generate under current production levels- for its reconstruction and massive foreign investment to grow and develop sustainably.

  •   Venezuela’s Central Bank issues bigger notes after inflation went out of control

19. Venezuela might have the highest inflation rate in the world. “The International Monetary Fund (IMF) estimates that next year’s prices will rise by more than 2,000%.” Whatever the exact digit is, the government ended up doing the right thing. I talked to some officials about this in 2014 and they were already planning the expansion of the monetary cone but did not want to implement it until they had no choice. Why? It is a huge political defeat. The government officially implied the situation went out of its hands and inflation in 2017 will be so high that people would not handle it without new notes. In my post Why Venezuela has a Black Market for Toilet Paper? I explain what the main problems are and why the government cannot fix them.

20. Keller y Asociados Q4 poll shows  76 percent of Venezuelans blame the government for the economic, political and social crisis, 77 percent do not like president Maduro, 63 percent think he is a dictator, and 67 percent of the population would protest without fear.





  • Russia strengthens military ties with Venezuela 

21. Russian Deputy Prime Minister Dmitry Rogozin had a four-day working visit to Latin America. In Venezuela Mr. Rogozin might have secured some good deals in several areas, including agriculture and security.

22. Concerning the Kalashnikov plant, expected to start producing AK-103 assault rifles and munitions in 2019, there are some questions one could make: What is the economic and geopolitical scope of this agreement? Is it meant for local or regional supply? Is it an offshore operation that just sell products to Venezuela or a joint venture between Russian and the hosting country? What is the real amount of the project and the projected revenues?

23. On the security side, this is another step linked to Russia’s vision to expand his level of influence in the Americas.

  • Dialogue’s updates: Venezuela’s opposition did not attend a general meeting with the government

24. Last week, Venezuela’s opposition declared it would leave the talks if the government did not fullfil its commitments by December 6, 2016. But it looks they changed their minds, as recent declarations suggest the dialogue is not over yet. The Democratic Unity Roundtable (MUD) also announced that it will resume anti-Maduro street protests. However, it is not clear whether the MUD is just bluffing. Street demonstrations may not be convenient for the MUD -If you need some context, I recommend you to check my post When will Venezuela’s Maduro exit the presidency?

By Claudio Sandoval, Venezuela Political Analyst and Commentator. You can follow him on Twitter, Facebook and the hashtag #claudiopedia


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