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Venezuela’s state-owned oil company, PDVSA, has struggled with declining production for years, as revenues have been diverted for funding the government and social programs and not for reinvestment in company operations. Venezuela’s oil production fell by 10 percent in 2016.

Eroding production has hurt state finances, which have already been suffering from years of mismanagement. Venezuela has the largest oil reserves in the world at 298 billion, but much of those reserves are extra-heavy crude that requires a considerable amount of refining and upgrading. As conventional fields decline, PDVSA has become more reliant on more costly heavy oil, further cutting into its revenue base.

But the collapse of oil prices in 2014 thrust the country into a full-blown economic crisis that has steadily grown worse in the ensuing years. The calamity is having a ripple effect on Venezuela and the oil market, altering long-standing trade flows and hollowing out the country’s oil-producing assets.

Major exporter now now needs to import

Because of a shortage of funds, PDVSA has struggled to invest in the necessary upgrading and refining facilities needed to process its heavy oil from the Orinoco Belt. The situation became so dire that it began importing oil in 2014 as a result of the inability to process its oil, using the imported light fuels to dilute its heavy oil.

After the U.S. lifted its crude oil export ban in late 2015, Venezuela began purchasing light oil from the U.S., upending a relationship that has long seen oil moving only in the opposite direction.

After the U.S. lifted its crude oil export ban in late 2015, Venezuela began purchasing light oil from the U.S., upending a relationship that has long seen oil moving only in the opposite direction. The U.S. still imports crude from Venezuela, but in the first five months of 2016, the U.S. slowly increased exports to other nations, with the top destination a curious buyer. The small island nation of Curacao purchased more U.S. crude than any other country, buying an average of 54,000 barrels per day (b/d) between January and May 2016. The actual buyer was PDVSA, which operates a large 330,000 b/d refinery on Curacao. PDVSA has been using the imports as diluent to blend with its heavy oil.

Refining troubles have caused Venezuela to increase its imports of refined products from the U.S. for some time now. Refined product exports to Venezuela from negligible levels before 2012 to an average of between 70,000-80,000 b/d for each of the past four years.

PDVSA–and Venezuela–running out of cash

Importing diluent from abroad creates another problem for PDVSA. It has to pay market prices for the imports, but sell some of the refined product at a loss domestically because of price controls. Against this backdrop, the financial screws have tightened on PDVSA over the past year.

By mid-2016, news reports showed the company struggling to come up with the cash needed to pay for imports, leading to an involuntary decline in purchases. Oil tankers sat off Venezuela’s coast, refusing to unload cargoes because of missed payments. “We have no more access to purchases under any type of credit. We are importing under two mechanisms: prepayment and swaps,” an unnamed PDVSA source told Reuters last summer. Companies selling Venezuela oil would no longer accept payment after delivery.

Venezuela’s refineries are in a decrepit state, suffering from lack of maintenance and increasingly a shortage of crude oil to process. Refineries routinely operate below capacity.

Last month, the problems for PDVSA grew worse. Fuel shortages, which are not uncommon in many parts of the country, spread to the capital. Venezuelan citizens, who have grown accustomed to lining up for basic food items, are now finding it more difficult to obtain fuel. Venezuela’s refineries are in a decrepit state, suffering from lack of maintenance and increasingly a shortage of crude oil to process. Refineries routinely operate below capacity. PDVSA is also increasingly suffering a brain drain due to a purging from the Maduro government, frozen salaries, and a broader exodus of educated Venezuelans from the country.

But without the money to pay for imported fuel, the shortages could persist. As of late March, about a dozen tankers idled near Venezuelan ports awaiting payment from PDVSA.

Looming debt payments spark political crisis

The cash crunch has PDVSA reportedly offering Russian state-owned oil company Rosneft a 10 percent stake in a heavy oil project in the Orinoco Belt called Petropiar, a desperate offer intended to raise the funds needed to keep operations going and to pay off creditors. But the National Assembly accused the government of President Nicolas Maduro of trying to furtively sell off state assets without legislative approval. “Any deal of national interest must be approved by the National Assembly,” Jose Guerra, a member of the opposition in the Assembly, tweeted in March.

The injection of cash from Rosneft could be crucial for PDVSA to meet nearly $3 billion in debt payments that fall due in April. “PDVSA is counting on help from Russia for the bond payments,” a Venezuelan government source told Reuters in late March.

The battle for the right to enter into oil deals has become the crux of the latest twist in Venezuela’s spiraling crisis.

The battle for the right to enter into oil deals has become the crux of the latest twist in Venezuela’s spiraling crisis. The Supreme Court, which is under the thumb of President Maduro, attempted to take power away from the National Assembly, issuing a ruling on March 29 that all but dissolved the legislature. Presumably President Maduro’s government could sell national oil assets, such as the deal under negotiation with Rosneft. The dissolving of the legislature was widely denounced as an attempted “self-inflicted coup” both domestically and abroad because the Assembly is one of the few remaining institutions not under control of the President. The Supreme Court backed off the pronouncement days later due to the outcry. Still, it provoked national protests, which are ongoing, deepening the country’s political crisis.

The series of events also led to a selloff in both PDVSA’s and the nation’s sovereign bonds, as fears over a pending default spiked. The oil deal with Rosneft could be crucial for Venezuela, and without it, meeting debt payments could prove more difficult.

The latest estimates put Venezuela’s cash reserves at $10 billion, likely enough to meet immediate debt payments this month. Some analysts expect the payments to be honored, as the government has always prioritized meeting debt obligations, even during the unfolding economic meltdown. In November 2016, Venezuela struck a deal with creditors to delay coupon payments to avoid a default. But the government’s “ability to service its debt is under severe strain,” according to S&P Global, with a real risk of default this year. PDVSA has another $3.5 billion due in October.