Venezuela's state-owned oil company PDVSA is facing cash flow problems as it struggles to pay for its imports of crude and oil products and its debt obligations balloon due to demurrage costs, Latin America traders and shipping sources said.
"It is happening with everything, crude, gasoline, diesel, heavy naphtha, etc.," a Latin America refined products trader said.
The company is importing products as usual but as they near Venezuela's ports, cargoes have to wait 10-14 days to discharge, incurring demurrage charges, according to a trading source.
Demurrage is the cost paid by a company for keeping ships at sea after failing to load or discharge them within the time agreed. PDVSA's costs of demurrage increased 50.8% in dollar terms in 2015 from 2014 as a consequence of the increased cost of daily freightage, said a source close to PDVSA. Most of the costs, 81.5%, came from crude oil ships and the rest from oil products.
"This situation persists in 2016," the source said, indicating that most of the demurrage claims have occurred in Venezuela's main crude oil port and storage facility, San Jose, as well as in the ports of Puerto la Cruz and Petrosandelix.
The company pays first for the cargoes it immediately needs, be it products for the local markets, such as natural gas, gasoline or diesel, or diluents for its heavy crude oil that will later be exported.
The other cargoes have to wait and are placed on financial hold, according to the Latin America trading source.
For political reasons, the government gives priority to products vital to Venezuela's domestic consumption, although domestic demand for products, such as gasoline, has fallen substantially in the last three years due to the country's recession and problems with its power supply, said Francisco J. Monaldi, fellow in Latin American energy policy at the Baker Institute at Rice University.
CONSTANT TALKS
PDVSA is in constant negotiations with providers, which have now demanded agreements for prepaid shipments. These negotiations could end up on accords of payment with product or where Chinese and Russian oil companies might intervene as guarantors, a shipping source said.
Meanwhile, PDVSA's debt increases due to demurrage charges, the source added. The demurrage cost for oil products is around $15,000-$18,000/day and around $25,000-$28,000/day for crude tankers, said the source, adding that these demurrage cost estimates might be a little lower due to the depressed freight market.
"I had heard they were racking up serious demurrage, but I had not heard they were basically treating it as floating storage," a US refined products trader said. "From what I understand, companies that will supply them with naphtha for diluent are also buying (oil) from them. The demurrage risk is significant, and so is the credit risk."
One notorious case is a PDVSA tender issued in March to buy almost 8 million barrels of light crude oil from BP and China Oil under an agreement of several prepaid shipments. As the company faced cash problems to pay for the cargoes, the delivery windows were pushed back, and ships anchored in the terminal of Curacao were kept waiting.
All these delays resulted in higher prices for PDVSA due to demurrage costs and repricing the oil that couldn't be delivered on time due to lack of payment.
"In order to guarantee operational continuity with supplying commitments reached for 2016, priority has been given to hire ships with companies of allied countries, especially China and Russia," the source close to PDVSA said as a possible way to face the increased demurrage costs.
BEARISH OUTLOOK
PDVSA faces a gloomy outlook. Along with its increased debt with service providers, its profits are shrinking and its upstream investments are falling, curtailing production.
The company's revenues slumped 41% in 2015 to $72 billion, down from $134 billion and $122 billion in 2013 and 2014, when the price of the oil export basket averaged $98/b and $88/b respectively.
The country's crude oil production has been falling steadily since January 2015 and was down 4.8% to 2.328 million b/d in August from 2.447 million b/d in July, according to official statistics which are widely viewed as overly-optimistic.
On September 19, PDVSA said it was looking to refinance $7.1 billion in debt in the face of falling revenue and oil production. The swap includes as collateral 50.1% of Citgo Holding's stock. Citgo is PDVSA's US subsidiary.
Some economists warn the bond swap is no panacea for PDVSA's financial troubles.
"PDVSA doesn't have any financial benefit with this transaction, on the contrary, it gives Citgo as a guarantee so as not to take the risk of 23-24% that belongs to PDVSA right now. If someone exchanges a bond due in 2017 for one due in 2020, he won't have a guarantee that PDVSA's problems will be solved in three years, because the company's outlook in short, medium and long term are bad,", said Alexander Guerrero, an independent economist based in Caracas.
Monalid, from the Baker Institute, agrees on the dire outlook. "Venezuela's cash flow problems are very serious. It is very difficult to overcome bad reputation," he said, adding if lagging payments persist "it might happen that nobody will want to unload anything (for PDVSA)."
