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Are Gulf Oil Producers Falling Into The ‘Venezuela Trap’?


Oman has struck a deal with several banks for a $4 billion loan to be repaid in future oil deliveries. Abu Dhabi signed a contract with commodity trading giant Vitol to supply it with over half a million tons of liquefied petroleum gas annually over the next decade in exchange for an upfront payment. According to the Wall Street Journal, other Middle Eastern producers are also considering oil-for-loan schemes, desperate for cash as oil prices stubbornly refuse to go up to the levels they need.

Will these producers fall into the trap that has already claimed Venezuela?

The South American country that is home to the largest oil reserves in the world owes China and Russia around $50 billion. The loans were provided in exchange for crude oil deliveries that Venezuela is now struggling to make.

The problem with loan-for-oil schemes is that it can cost the supplier market share in other countries. For Venezuela, this was India. After years of consistently building its presence in the Indian market – one of the top three in terms of oil consumption – PDVSA was forced to start reducing shipments to Indian refineries in order to meet its oil obligations to China and Russia.

Kazakhstan is another country that has turned to loan-for-oil schemes in difficult times. State-owned Kazmunaigaz closed a $3-billion deal with Vitol in 2015 to repay debts. In exchange for the advance payment, the company undertook to transfer to the trader supplies from its 20-percent stake in the Tengiz oil field. The field yields about a third of Kazakshtan’s oil output.

Now Oman and Abu Dhabi are stripped of alternatives: it appears that they need cash and they need it fast, having resorted to this far from mutually beneficial option. Other producers in the region may also have to consider such deals as oil prices show no signs of improving – not nearly enough for the Middle Eastern economies with their expansive public service sectors, which are eating up a large part of oil revenues, and with their lavish spending programs.

While it’s a fact that local governments have implemented some cost-cutting measures, it is also a fact that reversing a decades-old spending habit is difficult, and the effects will not be felt overnight unless the governments want riots on their hands.

Loan-for-oil deals were made popular by Rosneft – the company has enough cash because it has access to the state coffers. Rosneft spent over $40 billion in such deals over the last three years to ensure crude oil supply at competitive rates and to spread risk among more producers.

Rosneft’s two latest such deals illustrate clearly why loan-for-oil deals are a last resort: one was a $3-billion prepayment contract with the autonomous region of Kurdistan – another oil producer that is suffering a major cash shortage. The other was a preliminary deal with Libya’s NOC, which is having serious headaches with various armed groups, preventing it from expanding production at the rate it would have liked.

The problem for the oil suppliers is that sometimes there is just no alternative: it’s either loss of market share and future oil revenues, or no cash for investing in further oil production to ensure future oil revenues. Oil producers in such a situation are truly between a rock and a hard place.

By Irina Slav for

5 Comments on "Are Gulf Oil Producers Falling Into The ‘Venezuela Trap’?"

  1. Davy on Fri, 31st Mar 2017 6:29 am 

    Well, you can look at this from a geopolitical oil perspective or you can see what is going on with globalism et al. We have unrepayable debt and unfunded liabilities across the board in every country and all sectors. It is called systematic risk and contagions. Its end result is hyperinflationary loss of global confidence. This almost happened in 08 but was averted by more of what got us here and that is a Ponzi policy attitudes with bubble economics.

    How would we expect the oil industry to behave any differently? They are part of the same financial system and the same prevailing business model of using low cost debt in the pursuit of high yields. What could be a higher yield than money for nothing? You pledge future production for current benefits. The time value of money is wonderful and easy in today’s world but the moral hazard of this is systematic risk and contagions for all.

    Anyone who thinks a systematically very important country like a failing Venezuela is not going to cause shock waves is living in denial. Venezuela is not alone with Libya and Nigeria following suit. A little further down the line is the rest of OPEC falling into a trap it will never get ahead of and one the ETP and other peak oil dynamics describe well. 50BIL debt to China and Russia alone is very dangerous. China and Russia are too big to fail nations. Eventually our global extend and pretend and Ponzi economics will meet and end in tears. All Ponzi’s end in tears they always have and always will.

  2. observerbrb on Fri, 31st Mar 2017 7:43 am 

    BW Hill right again

  3. Midnight Oil on Fri, 31st Mar 2017 8:03 am 

    Maybe Bensen, Burton, Bozo and Buster can give them consulting on what the future holds
    Shortonoil previous posts….
    now requires a minimum of $57 to do that. 28 million starving people sitting on a 135° sand dune, aren’t going to pump much oil. It is more likely that they will be killing each other over scraps of bread. No imperial big brother is going to be coming to their rescue. He will be far too busy handling his own riots of the masses.
    The end of the oil age appears to be a reality that you seem to be having a hard time getting your head wrapped around. Don’t worry, you will soon have first hand experience. Just think of it as on the job training!

    shortonoil on Tue, 30th Aug 2016 2:32 pm

    “But I think that we still have a fair amount of time to burn through this glut and the increased production from many OPEC countries like Saudi Arabia and Iran.”
    Another $15 down and the Middle East will burn. They will turn on each other like a pack of starving dogs. Each one blaming the other for over producing. That is about three years from now

  4. Jan on Fri, 31st Mar 2017 8:48 am 

    And where is all this money going. To the few.

  5. AFDF on Fri, 31st Mar 2017 10:52 pm 

    finally, someone who doesn’t look at oil production through the false lenses of political paradigms.

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