Sovereign Risks
• Venezuela's historical
macroeconomic and political
instability posed significant
concerns
• The bolivar's dramatic depreciation
and rampant inflation were key
indicators of economic instability.
• Venezuela experienced over a
decade of political turmoil,
including failed military coups,
presidential impeachment, and a
banking crisis.
Sovereign Risks
• Venezuela's credit
ratings, such as B by
S&P and Ba2 by
Moody's, highlighted
significant concerns
• PDVSA, as a stateowned company rating
was capped at
sovereign B rating.
Risk Allocation and Mitigation
Mitigating Exchange rate risks:
• Keeping oil revenues out of the Venezuela was a key strategy
• Conoco, as the purchaser, deposited U.S. dollar proceeds with a trustee in New
York, ensuring disbursement according to a predetermined "waterfall"
structure.
• This structure effectively eliminated exchange rate risk as revenues and debt
service were both denominated in dollars.
Risk Allocation and Mitigation
Expropriation Concerns:
• Projects are vulnerable to expropriation such as increased royalty rates.
• The government, represented by PDVSA and Maraven, sponsored the project,
recognizing its significant influence over political and economic factors.
• Failure to mitigate sovereign risks would lead to loss of tax revenues, royalties,
dividends, and other economic benefits, including job creation and access to refining
technology.
• Petrozuata strategic importance to Venezuela's $65 billion oil-field development
initiative highlighted the potential loss of foreign investment for up to 20 years.
Financial Risks