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Sep 11, 2018 | 17:59 GMT

3 mins read

Venezuela: The Maduro Government Makes a Grab for Oil Revenue

(Stratfor)
The Big Picture

In its 2018 Fourth-Quarter Forecast, Stratfor noted that Caracas would focus on shipping crude to the United States and repaying Chinese and Russian lenders amid declining oil production. Now, as the country's economic crisis worsens, the government of President Nicolas Maduro is desperately searching for alternative sources of revenue. It is tapping the state oil company for additional government income, but the move will further affect the company's long-term stability.

What Happened

Strapped for cash to pay for essentials, embattled Venezuelan President Nicolas Maduro has ordered a restructuring of state oil and gas company Petroleos de Venezuela (PDVSA), according to a Sept. 10 report. As part of the restructuring, PDVSA will have to deliver all revenue from its operations to the Central Bank of Venezuela. This leaves no revenue directly in the hands of PDVSA for reinvestment into essential activities, such as maintenance, exploration and procurement.

Why This Matters

The move is designed to give the government as much revenue as possible from PDVSA so it can continue paying debts to creditors, settling arbitration awards and funding shrinking imports of food, medicine and other essential products. Over the next few years, the decision will likely allow the government to meet some of its obligations, such as paying arbitration awards and funding additional imports of food and fuel to forestall wider unrest in the country.

However, the president's decision is all about achieving a short-term objective at the expense of long-term stability. Giving PDVSA no direct authority to fund exploration or maintenance will affect the company's day-to-day operations, reducing investment in essential business activities such as refining, and leave the company's finances and infrastructure in an even worse situation. Maduro's move will make it more difficult to stabilize and eventually increase production, even if the ruling United Socialist Party of Venezuela leaves power within the next few years, and will contribute to the economic collapse fueling the country's emigration crisis, which is now affecting the rest of Latin America. And as a result of this decision, which will leave the PDVSA devoid of much-needed investments, the company will have less ability to pay back creditors or make arbitration payments, raising the risk that some of its assets abroad will be seized under foreign court orders.

Background

Already under economic strain from more than a decade of mismanagement by government authorities, PDVSA's budget for exploration and production shrank dramatically after the 2014 oil price collapse. The collapse in oil export revenue — which accounts for 95 percent of Venezuela's exports by value — caused crude production to plummet from an average of about 2.1 million barrels per day in 2016 to 1.2 million by July 2018. The oil price collapse exposed Venezuela's underlying economic and fiscal weaknesses, but it was the related crises of hyperinflation and severe scarcity since 2015 — compounded by low oil prices — that have turned Venezuela's collapse from a national crisis into a regional one. Millions of Venezuelans have left the country in recent years, straining the ability of governments in the region to cope with them. And with few other avenues to effect change, the prospects are growing that elements within the armed forces could issue a challenge to Maduro's rule, raising the likelihood of a violent and sudden change of political power.

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