Venezuela expanding military influence over oil and mining

By NATHAN CROOKS | Bloomberg | Published: February 12, 2016

Venezuela's President Nicolas Maduro moved to increase the military's involvement in the country's oil and mining industries with the creation of a new state company that will report to the Defense Ministry.

The military company was authorized to participate in a range of oil services and mining activities including the maintenance of wells and drilling rigs, transport and the commercialization of chemicals, according the official gazette dated Feb. 10 and distributed Friday. It didn't specify how it would work with state driller Petroleos de Venezuela. The Oil Ministry declined to comment.

The decree fueled speculation that the armed forces are increasing their activity in the economy as Maduro battles an opposition-controlled Congress and the oil-dependent country heads closer to defaulting on its foreign debt amid near 12- year-low crude prices. Venezuela's benchmark dollar bond fell to a record low on Friday, even as oil surged the most in three weeks.

"In 2016, one of the scenarios we're expecting is the increased militarization of the country," Rocio San Miguel, director of Caracas-based, non-profit security researcher Citizens' Control said. "It's a means to satisfy the military sector. Without doubt, it's a gesture of loyalty to the revolution."

In recent weeks, Venezuelan authorities have said they want to increase mining activities to generate additional foreign currency earnings. The new military company may help the government protect its oil revenue if it or PDVSA, as the state oil company is called, were to default, according to Russ Dallen, a managing partner at Latinvest in Miami.

"I think that they are setting up a vehicle in case they have to strip PDVSA of its assets in a default or bankruptcy," he said in an emailed response to questions. "The state can take away the rights to the oil, gas and resources of PDVSA at any time, leaving it largely worthless to creditors and protecting Venezuela's ongoing cash generation from oil sales from PDVSA creditors."

The new company -- called Cia. Anonima Militar de Industrias Mineras, Petroliferas y de Gas, or Camimpeg -- could also help the government maintain operations if unpaid bills to joint-venture partners and oil service providers start to impact output, Dallen said, adding that the company could also be used as a bargaining chip in any deal with China to subcontract many of the tasks and rights specified in the decree.

Venezuela's dollar bonds have slumped for five straight days amid concern the South American nation is close to defaulting after a local newspaper said a government official had proposed stopping payments on foreign debt.

The yield on the country's benchmark dollar bonds due in 2027 rose to 30.75 percent at 1:57 p.m. in New York. The price on the notes has fallen 6 cents in the past five trading days to 32.6 cents on the dollar, the lowest since the bonds were first sold in 1997.

"While some might read the news as an attempt to strip PDVSA of its assets, we believe it is related to the new initiative regarding the mining sector and the certification of gold reserves," Jorge Piedrahita, chief executive officer of broker-dealer Torino Capital in New York, said in an emailed note. "If anything, it is positive as the government is moving forward to expand its dollar generating capabilities."

Venezuela currently is certifying precious metal resources and is interested in producing diamonds, Oil and Mining Minister Eulogio Del Pino said on Jan. 29.

Del Pino and central bank President Nelson Merentes met with Ahmed Bin Sulayem, chairman of the Kimberley Process organization that monitors the sale of so-called conflict diamonds, to start studies for certification, PDVSA said in a statement on Thursday.

The Defense Ministry will appoint Camimpeg's board and president.

"It's the duty of the national government to promote the creation of state companies that adjust to the new mode of management," the decree reads. "The state must guarantee a model of productive eco-socialism, based on a harmonious relation between man and nature."


With assistance from Andrew Rosati.

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