US control of Venezuela oil risks debt clash with China

American oversight of Venezuelan petroleum exports has trapped oil cargoes that Beijing was using to service debt, potentially creating a superpower confrontation that could complicate the South American nation's path out of default, Reuters reported.

Approximately 10% of Venezuela's $150bn foreign debt represents Chinese loans that the OPEC member was repaying through oil shipments—until the United States seized Venezuelan President Nicolás Maduro on January 3.

Debt experts said that ramifications from China's claim on the cargoes and any clash with Washington could make Venezuelan debt restructuring harder following its 2017 default and could risk Beijing's cooperation in restructuring deals for other developing nations.

"Even under the best circumstances, this was going to be very messy - trying to disentangle where all these creditors stand in the credit hierarchy," said Christopher Hodge, chief economist with Natixis and a former US Treasury official.

"The fact that now America is controlling all the finances into and out of the country...this seems unprecedented to me, that we're going to have such entanglements, such opacity about the finances of a government," Hodge said. 

Whilst Washington currently controls only oil sale proceeds, Hodge noted that these represent Venezuela's main revenue source.

Documents and sources from Venezuelan state oil firm PDVSA show three super-tankers have shuttled between Venezuela and China over the past five years carrying oil for interest payments under terms of a temporary 2019 deal. However, these shipments represent only a fraction of Venezuela's total crude exports to China.

AidData, a research lab at the US university William & Mary that tracks lending, said some cash proceeds from oil sent to China went into a Beijing-controlled account and then on to service debt—even as sanctions and default blocked payments to many of Venezuela's other creditors.

The Trump administration has said proceeds from Venezuelan oil sales will flow into a Qatar-based account controlled by Washington, potentially giving the US president substantial leverage over which creditors receive payment and when.

Beijing condemned the redirection of Venezuelan oil exports during a January 7 news conference, with officials adding that "legitimate rights and interests of China and other countries in Venezuela must be protected".

White House spokeswoman Taylor Rogers told Reuters that Trump brokered an oil deal with Venezuela that "will benefit the American and Venezuelan people".

The Trump administration is allowing China to purchase Venezuelan oil but not at the "unfair, undercut" prices at which Caracas previously sold the crude, a US official said recently.

US Energy Secretary Chris Wright stated recently that Washington receives around $45 per barrel for Venezuelan oil compared with the roughly $31 Venezuela obtained before Maduro's capture—a 45% increase.

Traders managing Venezuelan oil sales have offered some to Chinese refiners, but these are private-market transactions, not intended as debt payments.

"The people of Venezuela will collect a fair price for their oil from China and other nations," the US official said. 

The Trump administration requires the majority of Venezuelan crude be sold to the United States, though some will reach global markets, an official told the South China Morning Post (SCMP) anonymously.

China's Venezuelan oil imports are expected to decline sharply from February as fewer tankers depart following US control claims over the OPEC member's sales, traders and analysts told SCMP.

The final shipments loaded under Maduro's administration before American intervention are currently approaching China. Two vessels carrying 3.8mn barrels departed Venezuela before Maduro's removal and are sailing east of southern Africa's Cape of Good Hope. These represent the last ultra-cheap Venezuelan crude available to China's independent refiners.

Approximately 24mn barrels of Venezuelan crude sit in floating storage vessels off Malaysia and Singapore. Combined with approaching shipments, these constitute the final deeply discounted supplies to Chinese buyers before facing international pricing.

Trump could yet make a deal with China. However, the planned US takeover of Venezuela's oil sector and revenue control could upend the creditor hierarchy, warn restructuring advisers. 

"All of these things will have the practical effect of subordinating the claims of legacy debt-holders," said global sovereign debt expert Lee Buchheit, adding that it remained unclear if Trump had the legal right to determine who receives payment first.

Some $60bn of Venezuela's bonds tipped into default in 2017, and a restructuring agreement is seen as essential to enable it to borrow again and attract new investment.

If Washington pushes China to accept significant debt write-downs and Beijing resists, it could slow a restructuring and hinder Venezuela's economic recovery.

China has little immediate leverage. Countries typically do not take other nations to court or arbitration over lending claims and would need to settle "on a government-to-government basis", restructuring adviser Mark Walker told Reuters. 

However, ramifications are possible: China is the largest bilateral lender to the developing world and its cooperation with the Paris Club has been crucial over the past decade.

The Paris Club is an informal group of major creditor governments that helps debt restructuring for developing countries facing payment difficulties.

Beijing has also agreed restructuring terms for several African countries via a platform called the Common Framework. 

"China's obvious leverage is to refuse to cooperate in future Common Framework sovereign debt workouts until it feels it has been treated fairly in Venezuela," Buchheit stated. "And that threat would have some force."