The Up-Is-Down Venezuelan Oil Sector

A prime example of the Chavez government’s economic mismanagement (according to ratings agency Standard & Poors) is Petroleos de Venezuela’s ability to meet its debt obligations to foreign investors in a consistent and timely manner. For shame! PdVSA, as the state-oil company is called, recently bought back $2.5 billion of debt from foreign owners, leaving less than $1 billion in foreign hands.

It was a move that prompted S&P – an important credit rating agency which effectively determines the economic soundness of a company – to lower its view of PdVSA. Usually, when a company displays monetary strength, S&P is quick to upgrade its rating, thus opening the financial floodgates for more investment to come pouring in. In Venezuela’s case, such monetary strength poses a “threat” to global corporate influence. In addition to foreign owners having less hold of PdVSA, the S&P downgrade was possibly the result of Venezuela’s cooperation with Cuba and the company’s ideological communion with Chavez. One need only read the S&P’s rather cryptic press release for the reasons given:

S&P cited “decreased transparency with respect to PDVSA’s physical and financial operations….and the general trend toward greater political interference in the operations of PDVSA by the government. In particular, the enhanced ability of PDVSA to sell its oil exports to buyers who are not designated customers…” as reasons for the downgrade.

Why should this technical nonsense matter to those of us intently watching the political and social scene in Venezuela? Aside from the up-is-down phenomena of news coverage about Venezuela – this could be the first in a series of bullying moves to rein PdVSA in. Beyond the referendum, which even the corporate sector thinks will be won by Chavez, pressure on PdVSA (and therefore the government) will quickly mount. As the price of oil continues to skyrocket, the U.S. will tighten its fist and stomp its feet at global oil exporters (of which Venezuela is the fifth-largest) to act on the U.S.’s behalf. The threat of capital flight and further company and country downgrades would be a fairly easy trump card to play in exchange for lower royalty rates for oil sector investment and more spending on production and exploration – and who knows what else. One can never underestimate the corporate world’s forward-looking worldview.

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