The decision by ConocoPhillips to seize the Caribbean assets of PDVSA, Venezuela's state-owned oil company, has established a dangerous legal precedent that could swamp the South American country's already impoverished oil monopoly under a wave of similar claims and cut deeply into its ability to operate, experts said.
The decision, which came amid the accelerating deterioration of Petroleos de Venezuela S.A.'s production capacity, could lead creditors to try to seize other Venezuelan assets abroad, including oil exports, to recover the more than $40 billion they claim they are owed.
“Creditors are now saying to themselves, 'Look, we now have confirmation that you can go out and embargo PDVSA,' and many of them are going to rush into court to ask for their own seizures,” said Antonio De La Cruz, executive director of Inter American Trends in Washington, D.C.
“We are at the start of a snowball” rolling downhill, added Russ Dallen, managing partner of Caracas Capital Markets, an investment bank in Miami. “Now that people have started to file lawsuits, we are going to see a run because no one wants to be the last in line.”
The U.S. oil company was able to obtain injunctions freezing the assets after winning its case against PDVSA at the World Bank's International Center for Settlement of Investment Disputes (ICSID), which ruled that the state-run company had to pay ConocoPhillips $2 billion for the government's 2007 nationalization of its projects in Venezuela. The country has been suffering under shortages of food and medicine as the economy has continued to spiral.
Until recently, many creditors had been turning a blind eye to the fact that Venezuela was technically in default on its debts because the regime of President Nicolás Maduro was hinting that he meant to pay, even if late.
But the game changed with ConocoPhillips.
“Because it will be so difficult for all these people to be paid what they are owed — especially because there are so many creditors, a huge debt and few assets available — I fear this is going to set off a domino effect, a great nervousness in the markets, and that overnight we will see a significant increase in this type of legal action,” said Diego Moya-Ocampo, London-based Americas analyst for IHS Markit.
The Canadian mining company Rusoro filed a lawsuit this week in Houston seeking to seize the assets of Citgo, the U.S. branch of PDVSA, which, if approved, would be a devastating blow to Venezuela's oil future, Dallen said.
The key factor in that case will be a ruling on whether Citgo and PDVSA are legally the same as the Venezuelan government, which would open the doors to lawsuits by holders of expired Venezuelan government bonds.
“I think Rusoro probably decided to act when it saw how ConocoPhillips jumped in line, ahead of other creditors, and started to embargo assets in the Caribbean, taking control of [oil] terminals and storage facilities,” said Dallen.
Rusoro is seeking $1.3 billion as payment for the expropriation of its gold mining operations in Venezuela.
In another hint of what may be coming, a former PDVSA supplier, White Beech SNC LLC, filed a lawsuit Monday in the U.S. District Court for the Southern District of New York against PDVSA for the company's failure to meet payment obligations on a PDVSA $25 million bond issue.
Court documents allege the state oil monopoly defaulted on the 6.5 percent bond on Jan. 4, when it failed to pay $3.5 million due for interest and capital amortization.
The possibility that PDVSA could soon face a wave of creditors filing seizure lawsuits around the world could significantly impact the company's ability to export crude.
Venezuela, where oil production already has fallen from 3.4 million to 1.4 million barrels per day since the late Hugo Chávez was first elected president in 1999, could see its sales plummet by up to 700,000 barrels per day if multiple creditors file lawsuits, dealing a powerful blow to the Maduro regime's revenues, according to experts.
“The situation is rapidly becoming more complicated. It's getting increasingly difficult,” said Miami oil expert Horacio Medina, explaining the risks that PDVSA could face if creditors start to seize its oil shipments to other countries such as the United States.
That could also impact PDVSA's use of its own tankers — which could be seized — and force the company to contract with other shippers, already reluctant to work in Venezuela because of the country's inability to pay its debts.
The ConocoPhillips seizure also signals a problem for the company because it puts at risk the heavy crude it stores in the Caribbean in order to mix it with light crude imported from other countries. The mix has been critical to improving the quality of Venezuelan oil so it can be exported.
The seizure means PDVSA can no longer use those plants to mix the crude.
The Reuters news agency has reported PDVSA last year sold more than 400,000 barrels per day of crude and refined products from five plants it owns or leases on the islands of Aruba, Bonaire, Curacao and St. Eustatius. That amounted to about 24 percent of PDVSA's overall exports.
But the biggest blow would come if creditors are allowed to seize Citgo assets, Medina warned.
“An eventual loss of Citgo would be devastating for the country's oil future, even after Maduro's departure,” he said. “Citgo is the industry's biggest hope because the company guarantees access to the U.S. market, which is fundamental to the eventual economic reactivation of Venezuela.”