Venezuela’s State Oil Company Officially Switches Operations To China Citic Bank

As of this week, PDVSA, Venezuela’s state-run oil and natural gas company,  has officially moved its accounts from Portugul’s Banco Espirito Santo to China’s Citic Bank, according documents supplied to Reuters, last Friday (August 8).  Going forward, all of PDVSA’s payments on fuel products and crude oil will be deposited with Citic.

The move comes as China officially surpasses the U.S. as Venezuela’s main importer and purchaser of fuel products and crude oil.  The PDVSA has been increasingly been feeling the pull to the far east during the first half of 2014—and the movement of the company’s accounts further cements China’s increasing primacy position in trade negotiations the Venezuelan state-run oil industry.

Earlier this month, Rafael Ramirez, Venezuela’s Petroleum Minister, announced the PDVSA would consider selling Citgo Petroleum Corp.,  the company’s U.S. subsidiary for the right the price (which Ramirez reportedly pegs at about $10 billion)

Some analysts believe the U.S. sell off comes at the PVDSA is looking to reinvest in China and develop its on-hand cash reserves. That would be a rather complicated sale of assets.  For one thing, the refineries and petroleum infrastructure owned by CITGO are all likely to be attractive to different buyers.  More interestingly,  parts of the sale could be blocked by Exxon and Phillips 66— two companies still seeking billions of dollars in compensation from the PVDSA over the small matter their former assets that they claim Venezuela illegally seized when the government nationalized the oil industry in 2007.

While Venezuela’s B2B relations in the United States are somewhat complicated by the recent history of the national petroleum markets, China has no such difficulties.  The two nations have been  intensifying their relationship through an oil-for-loan deals, which has netted the petroleum exporter nation more than $40 billion in credits since the program began in 2007. China also holds some Venezuelan money through accounts created jointly by the nations for debt service payments.  The next phase of the trade relationship between China and nationalized Venezuelan oil could see nearly 1 million barrel of oil a day flowing from South American to Southeast Asia.

While China has is becoming a primary trade partner for the PDVSA, the nation offers a somewhat more stable banking option for PDVSA than its previous EU-based partner Banco Espirito.

Espirito is Portugal’s largest bank and, as of early August 2014, it the single largest recipient of bank re-capitalization bail-out funds awarded to Portugal by the EU and IMF, reports The Guardian.  The bank recently saw its share price plummet by 75 percent and its capital buffers completely wiped-out when after posting an unexpected ~$4.67 billion (€3.5 billion) in losses—mostly due to shady investments made by the Espírito Santo family.  To stave a cataclysmic bank failure, Portugal agreed to bail the bank out, to the tune of ~$6.6 billion (€5 billion).

Citic Bank, on the other hand, other than scattered reports of irregularities endemic to international banking, is widely rated stable.  And despite its location, PDVSA buyers used to paying in dollars or Euros will be able to continue to do so, though every such transfer must use Deutsche Bank as intermediary.

“If there is any outstanding balance due to PDVSA, please … make your payment according to (these new) instructions,” said the letter, sent to trading companies and clients.

While the benefits to Venezuela and China’s burgeoning trade relationship are obvious, with an almost equally nice bonus of getting their payments out of he hands of a clearly troubled European bank, moving their banking from Europe to China is not without issue.

Buyers requiring letters of credit to meet PDVSA guidelines to guarantee payment for purchase may find that feat more difficult to accomplish now that their supplier’s banking is no longer centralized in the EU.

“To use a Chinese bank instead of a European bank can bring complications,” a trader close to PDVSA’s sales told Reuters.

PDVSA, mostly based on their crude oil exports, reported $114 billion in sales in 2013