‘Lower for longer’ leaves Venezuela’s regional oil trading alliance in limbo. But PetroCaribe’s success until now suggests there is still an important role for countertrade financing arrangements, writes Dentons trade and commodities finance lawyer David Williams.
The more influential oil-producing countries in the Middle East have, understandably, taken centre stage in the endless column inches and broadcast hours analysing the impact of the global oil price slide. But keep an eye on Venezuela, Latin America’s largest oil producer and prime mover of the PetroCaribe Energy Co-operation Initiative. Against the backdrop of a longer-than-expected downturn in world oil prices, PetroCaribe – Venezuela’s 10-year-old oil trading coalition with its Central American and Caribbean neighbours – faces an uncertain future. Whatever its eventual fate, the current issues surrounding PetroCaribe’s underlying financing arrangements should prove interesting, if not instructive, to the global commodity finance community. There are wider implications, too, for sub-regional and south-south trade.
Keeping the lights on
PetroCaribe is an oil purchase arrangement under which Venezuela offers preferential terms to its fossil fuel-dependent neighbours to help them meet their energy needs. The brainchild of the late firebrand President Hugo Chávez, PetroCaribe is as much a trade and financing arrangement as it is an instrument of slick petro-diplomacy. The original 2005 accord describes its main goal as contributing “to the energy security, social and economical development, and to the integration of the Caribbean countries”. Venezuelan officials invariably speak about PetroCaribe in terms of “oil sovereignty”, “brotherhood and solidarity”, and “a new geopolitics of oil”. And they are always keen to highlight the programme’s many social and developmental initiatives which have helped extend Venezuela’s political influence across the Caribbean Basin.
Under the arrangement, the state-owned energy company, Petróleos de Venezuela (PDVSA), supplies oil products on concessionary terms to 17 Central American and Caribbean states. The main features of the financing arrangements are:
- partial upfront payments (within the first 90 days);
- partial deferred payments (17 or 25 years, depending on whether global oil prices are below or above US$40 per barrel, respectively) treated as low-interest loans (either 1 or 2%); and
- since 2008, a “compensatory exchange mechanism” through which Venezuela accepts part payment in goods or services rather than in cash.
Oil for beans?
To the cynical, the part compensation arrangement is a throwback to less enlightened times, with more than a hint of Jack and the Beanstalk about it. Indeed, the Dominican Republic shipped 10,000 tonnes of beans to Venezuela in 2012 in part settlement of its oil debts (though, by all accounts just ordinary black beans with no purported magic qualities). Similarly, in December 2013, Jamaica sent an initial shipment of 20,000 tonnes of clinker (a raw material used in cement production) to Caracas under the PetroCaribe arrangements.
For PetroCaribe member states these countertrade arrangements are something of a debt management tool with a valuable foreign exchange saving feature. They can pay for their oil imports with goods (and, in some cases, services) rather than dipping into their scarce foreign exchange reserves to settle bills. This is critical for oil-dependent countries like those in the PetroCaribe group, who are especially vulnerable to oil price shocks, and for whom oil imports account for a sizeable portion of their national debt.
The part compensation arrangement and a ready market in Venezuela have provided impetus for expanding production and export of commodities and other externally tradeable goods.
Figures from the Guyana Rice Development Board show, for example, that Venezuela is now the leading importer of rice from Guyana. In 2014, Caracas took 37.5% of Georgetown’s total rice exports, more than three times the amount bought by the second-highest importer, Panama. Between July 2011 and January 2014, Guyana settled over US$300mn of its oil debts to Venezuela through shipments of rice and paddy.
The payments-in-kind arrangements also bring clear benefits for Venezuela. Cuba, which receives most of the PetroCaribe oil exports, meets its payments obligations partly through the work of thousands of its doctors and other healthcare workers. They offer free medical services to the most deprived Venezuelan patients. Cuban sports coaches also offer their services in Venezuela as part of the deal. Arguably, there is no better poster child than Cuba, Venezuela’s closest political ally in the region, to help underscore the PetroCaribe theme of region-wide socialist solidarity.
Rhetoric versus reality
Foreign policy rhetoric aside, the reality for oil-producing nations is that their earnings from oil exports have fallen significantly since oil prices plunged in the second half of 2014. Nearly 18 months on, the prospect of an oil price recovery is anyone’s guess – prices dipped below US$40 a barrel for the first time since 2009 last December – and the global market seems increasingly resigned to “lower for longer”. With the oil and gas sector accounting for around 25% of its GDP, Venezuela is paying a heavy price for cheap oil. Foreign reserves are declining, and there have been shortages of basic imported goods – paid for out of oil revenues – stoking social unrest. There are concerns, too, that Caracas may default on its debts.
It is therefore increasingly difficult for the Nicolás Maduro administration to justify selling subsidised oil in the name of regional “brotherhood”, instead of selling it on the open market on more profitable terms and for hard currency. For some analysts, it is now more a question of when and how – not if – Venezuela will have to dilute the generous repayment terms of its energy co-operation agreements with individual PetroCaribe members. It can vary the terms with just 30 days’ notice. Among other things, the options could entail:
- increasing the percentage of upfront payments on oil bills;
- raising interest rates on long-term deferred payments;
- shortening maturity dates; or
- reducing, if not ending, payments in kind to boost hard currency receipts.
Ultimately, there is the prospect that Venezuela may simply pull the plug on PetroCaribe. This is not altogether improbable after the political black eye inflicted on the government in December’s parliamentary elections, as the coalition of opposition parties which now holds the balance of power in the National Assembly has heavily criticised the loss of oil earnings under Petrocaribe.
Turning off the tap?
There had already been concerns about quiet, creeping changes to the PetroCaribe arrangements over the past few months. A 2015 report by Barclays noted that Venezuela has reduced its oil exports to PetroCaribe member states by half, down from 400,000 barrels at PetroCaribe’s peak in 2012.
In Nicaragua – one of the most economically vulnerable countries in the alliance – it is reported that since the onset of the oil price plunge Venezuela has nudged that country’s PetroCaribe interest rates upward.
PetroCaribe’s detractors will likely feel vindicated amid the mounting speculation about the programme’s sustainability. From the outset, there were misgivings about creating an over-reliance on Venezuelan oil.
Instead, they argued, the region ought to have been aiming for energy security by shifting from fossil fuels to alternative energy sources – most obviously solar energy, given the plentiful supply of sunshine. From a balance of payments perspective, the International Monetary Fund (IMF) has warned that any sudden end to PetroCaribe could throw some member states, most notably Haiti and Nicaragua, into an economic tailspin.
But despite these drawbacks, there have been mutual benefits for Venezuela and the other countries in the alliance over the years. And, on the whole, PetroCaribe has functioned reasonably well thus far. That PetroCaribe – with its vital part-compensation arrangement – has survived for so long, suggests there is still an important place for countertrade financing arrangements in the 21st century world of commodity finance.
Regrettably, countertrade structures have long been left forgotten and unused at the bottom of many a commodity financier’s toolkit.
For proponents of south-south trade, PetroCaribe also points to wider possibilities for trade co-operation in the sub-region, even in a potential post-PetroCaribe scenario. Indeed, regional analyst Asa Cusack, makes the telling observation: “If barter trade can function for Venezuela when importing from Nicaragua, Guyana and the Dominican Republic, why not in other PetroCaribe trade relations where Venezuela is not involved?”