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Deals and prayers in Venezuela

A bond swap has staved off the immediate threat of default, but the downward spiral continues

Venezuela's financial and political crisis continues to smoulder. Low oil prices have exposed the gutted shell of an economy left in a destructive deadlock.

President Nicolás Maduro and oil chief Eulogio del Pino had been riding their hopes on an Opec agreement in Vienna. Following the deal's announcement, against which Venezuela's January production quota will be 1.972m barrels a day-compared with an October base-line of 2.067m b/d-del Pino spoke of $60-$70 oil. For a country that has seen output drop by nearly 20% since the end of 2014, it's more than just wishful thinking: times are getting desperate.

The global oil price and domestic output drop has left state oil company PdV's finances in tatters, though the company did get a small reprieve in late October in the form of a bond swap deal that staved off the threat of imminent default. PdV pressured holders of its April and November 2017 bonds to swap for debt due to mature in 2020. After a contentious back and forth that saw PdV make a thinly veiled threat that it would default if there was no deal, investors holding $2.8bn of the firm's 2017 bonds-far less than the more than $5bn initially wanted by PdV-loosened the noose.

But it was an expensive deal for PdV. The $2.8bn in 2017 debt turned into $3.4bn in 2020 debt. It will, according to Nomura analysts, save it around $2bn in debt payments in 2016 and 2017, but cost it an extra $1bn a year from 2018 to 2020-a net loss for PdV of $1bn. It can only be hoping that del Pino's prophesy comes true, and that oil prices have risen enough by then to make the payments more manageable. PdV also had to put up a majority stake in Citgo, its US refining and marketing arm, as collateral to get enough investors on board. For PdV, being broke is getting expensive.

Del Pino lauded the swap deal, lashing out at the media and credit-rating agencies that he said were trying to sink it. "This is heroic because there was not a day when the media did not report negative information. We were discredited by ratings agencies," he said. "They even sneaked into our teleconferences with investors, where they presented manipulated information and ill-intended questions to frighten bondholders."

While the deal helped PdV kick the can on its debt burden down the road, it didn't hoof it very far. And even if del Pino's price predictions come true, the company will still be far from out of the woods. It still faces more than $6bn in debt payments in 2017-twice what it had to pay in 2016-and another $6bn-plus over 2018 and 2020. To put the figures in perspective, the company reported earnings of $7.3bn in 2015-when oil prices averaged around $45 a barrel-and ended the year with $5.8bn in cash on hand.

Action plan

In parallel, the company has tried to push several financing agreements to lift its oil output. The centrepiece is a string of contracts, announced in September, worth $3.2bn awarded to oilfield-service companies-including Schlumberger, Horizontal Well Drillers, and local firm Y&V - to drill around 480 wells in the Orinoco Belt over the next 30 months.

Schlumberger and Y&V won a contract to drill 200 wells at the Petrovictoria projects, where PdV is working with Rosneft, according to a Reuters report. The contract implies around 100,000 b/d of new production would be added, assuming typical Orinoco production rates of around 500 b/d per well. Horizontal Well Drillers won a $1.29bn contract to drill 191 wells at the Chevron-PdV Petroindependencia projects. Y&V reportedly won a contract worth $0.647bn to drill 100 wells at the PdV-Repsol-ONGC Videsh Petrocarabobo project. The companies are reportedly to be paid not in cash but in the oil pumped from the new wells.

But be sceptical of this programme. For one, PdV has a long track record of not following through on these sorts of plans, making grand announcements only to scale back, or abandon them altogether. The contracts also appear to be a costly way to drill the Orinoco. The implied cost per well is between $6.5m and $7m, far above the $3m-4m a well operators in the area have previously told Petroleum Economist it costs.

Even if the programme is carried out, it represents a sizable scaling back of PdV's ambitions in the Orinoco and would only partially offset natural declines from older oilfields over the time period. That will fit into the Opec agenda. But it might not be enough to save Venezuela's faltering oil sector.

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