Lev­er­ag­ing loans to Caracas, Moscow snaps up oil as­sets

SPE­CIAL RE­PORT

Kuwait Times - - BUSINESS -

Venezuela’s un­rav­el­ing so­cial­ist govern­ment is in­creas­ingly turn­ing to ally Rus­sia for the cash and credit it needs to sur­vive - and of­fer­ing prized state-owned oil as­sets in re­turn, sources fa­mil­iar with the ne­go­ti­a­tions told Reuters.

As Caracas strug­gles to con­tain an eco­nomic melt­down and vi­o­lent street protests, Moscow is us­ing its po­si­tion as Venezuela’s lender of last re­sort to gain more con­trol over the OPEC na­tion’s crude re­serves, the largest in the world. Venezuela’s sta­te­owned oil firm, Petroleos de Venezuela (PDVSA), has been se­cretly ne­go­ti­at­ing since at least early this year with Rus­sia’s big­gest state-owned oil com­pany, Ros­neft - of­fer­ing own­er­ship in­ter­ests in up to nine of Venezuela’s most pro­duc­tive pe­tro­leum projects, ac­cord­ing to a top Venezue­lan govern­ment of­fi­cial and two in­dus­try sources fa­mil­iar with the talks. Moscow has substantial lever­age in the ne­go­ti­a­tions: Cash from Rus­sia and Ros­neft has been cru­cial in help­ing the fi­nan­cially strapped govern­ment of Venezue­lan Pres­i­dent Ni­co­las Maduro avoid a sovereign debt de­fault or a po­lit­i­cal coup.

Ros­neft de­liv­ered Venezuela’s sta­te­owned firm more than $1 bil­lion in April alone in ex­change for a promise of oil ship­ments later. On at least two oc­ca­sions, the Venezue­lan govern­ment has used Rus­sian cash to avoid im­mi­nent de­faults on pay­ments to bond­hold­ers, a high-level PDVSA of­fi­cial told Reuters. Ros­neft has also po­si­tioned it­self as a mid­dle­man in sales of Venezue­lan oil to cus­tomers world­wide. Much of it ends up at re­finer­ies in the United States - de­spite US sanc­tions against Rus­sia - be­cause it is sold through in­ter­me­di­aries such as oil trad­ing firms, ac­cord­ing to in­ter­nal PDVSA trade re­ports seen by Reuters and a source at the firm. PDVSA and the govern­ment of Venezuela did not re­spond to re­quests for com­ment. The Rus­sian govern­ment de­clined to com­ment and re­ferred ques­tions to the for­eign min­istry and the min­istries of fi­nance and de­fense, which did not re­spond to ques­tions from Reuters. Ros­neft de­clined to com­ment. Rus­sia’s grow­ing con­trol over Venezue­lan crude gives it a stronger foothold in en­ergy mar­kets across the Amer­i­cas. Ros­neft now re­sells about 225,000 bar­rels per day (bpd) of Venezue­lan oil - about 13 per­cent of the na­tion’s to­tal ex­ports, ac­cord­ing to the PDVSA trade re­ports. That’s about enough to sat­isfy the daily de­mand of a country the size of Peru.

Venezuela gives Ros­neft most of that oil as pay­ment for bil­lions of dol­lars in cash loans that Maduro’s govern­ment has al­ready spent. His ad­min­is­tra­tion needs Rus­sia’s money to fi­nance ev­ery­thing from bond pay­ments to im­ports of food and medicine amid se­vere na­tional short­ages.

Venezuela’s op­po­si­tion law­mak­ers say Rus­sia is be­hav­ing more like a preda­tor than an ally. “Ros­neft is def­i­nitely tak­ing ad­van­tage of the sit­u­a­tion,” said Elias Matta, vice pres­i­dent of the en­ergy com­mis­sion at Venezuela’s elected Na­tional Assem­bly. “They know this is a weak govern­ment; that it’s des­per­ate for cash - and they’re sharks.”

Matta echoed many oth­ers in the op­po­si­tion-ma­jor­ity congress who have blasted cor­po­rate deals they say are un­der­pin­ning Maduro’s ef­forts to es­tab­lish a dic­ta­tor­ship. The Venezue­lan govern­ment has said pre­vi­ously that Rus­sia’s in­vest­ment in its oil in­dus­try shows con­fi­dence in PDVSA’s fi­nan­cial sta­bil­ity and the na­tion’s busi­ness op­por­tu­ni­ties. Maduro’s ad­min­is­tra­tion has grown in­creas­ingly de­pen­dent on Moscow in the past two years as China has cur­tailed credit to Venezuela be­cause of pay­ment de­lays and the cor­rup­tion and crime faced by Chi­nese firms op­er­at­ing there, ac­cord­ing to Venezue­lan debt an­a­lysts and two oil in­dus­try sources.

Many multi­na­tional firms world­wide, mean­while, have all but writ­ten off their Venezue­lan op­er­a­tions amid the na­tion’s tanking econ­omy and chronic short­ages of raw ma­te­ri­als. Ros­neft is mak­ing the op­po­site play - us­ing Venezuela’s hard times as a buy­ing op­por­tu­nity for oil as­sets with po­ten­tially high long-term value. “The Rus­sians are catch­ing Venezuela at rock bot­tom,” said one Western diplo­mat who has worked on is­sues in­volv­ing Venezuela’s oil in­dus­try in re­cent years. As other com­pa­nies shut­ter op­er­a­tions here, Ros­neft has ex­panded to an ad­di­tional floor of its of­fice tower and added staff. The Rus­sian firm has poached PDVSA pro­fes­sion­als and brought in more Rus­sian ex­ec­u­tives, two sources close to Ros­neft told Reuters.

The cor­po­rate ex­pan­sion pro­vides a strik­ing con­trast to the scene on the streets be­low th­ese days, in the once-thriv­ing busi­ness dis­trict of Caracas.

As Ros­neft staffers work in swanky of­fices along­side posters of Rus­sian Pres­i­dent Vladimir Putin and a bust of Hugo Chavez the late Venezue­lan leader and so­cial­ist icon - crowds of young men out­side of­ten throw rocks and Molo­tov cock­tails in escalating protests of Chavez’ suc­ces­sor. Ros­neft cur­rently owns substantial por­tions of five major Venezue­lan oil projects. The ad­di­tional projects PDVSA is now of­fer­ing the Rus­sian firm in­clude five in the Orinoco Venezuela’s largest oil pro­duc­ing re­gion along with three in Mara­caibo Lake, its sec­ond-largest and old­est pro­duc­ing area, and a shal­low-wa­ter oil project in the Paria Gulf, the two in­dus­try sources told Reuters.

In a separate pro­posal first re­ported by Reuters last month, Ros­neft would swap its col­lat­eral on 49.9 per­cent of Citgo - the Venezue­lan owned, U.S.-based re­finer - for stakes in three ad­di­tional PDVSA oil fields, two nat­u­ral gas fields and a lu­cra­tive fuel sup­ply con­tract, ac­cord­ing to two sources with knowl­edge of the ne­go­ti­a­tions.

Un­der the pro­posal, Ros­neft would also take in­creased man­age­ment con­trol over all the joint oil projects be­tween the two firms. Ros­neft se­cured the col­lat­eral late last year on a loan of $1.5 bil­lion to PDVSA.

The ne­go­ti­a­tions over a col­lat­eral swap are driven in part by a re­cent threat from US Pres­i­dent Don­ald Trump to sanc­tion Venezuela’s oil sec­tor as pun­ish­ment for Maduro’s ef­forts to un­der­mine the na­tion’s elected congress. Ros­neft has al­ready been sanc­tioned by the United States over Rus­sia’s an­nex­a­tion of Crimea from Ukraine in 2014. Such ac­tions re­quire US firms to end busi­ness re­la­tions with sanc­tioned en­ti­ties.Maduro’s need for Rus­sian cash played a key role in a move by his po­lit­i­cal al­lies ear­lier this year that desta­bi­lized Venezuela’s al­ready tee­ter­ing democ­racy, the top Venezue­lan govern­ment of­fi­cial told Reuters. In March, the na­tion’s Supreme Court whose mem­bers are loyal to Maduro - took over the pow­ers of the op­po­si­tion-con­trolled Na­tional Assem­bly. A ma­jor­ity of elected Assem­bly mem­bers op­posed any new oil deals with Rus­sia and in­sisted on re­tain­ing power to veto them. —Reuters

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