Venezuela cuts oil supply to Citgo as Russia's Rosneft gets more

HOUSTON - 3 August 2017: Venezuela's state-run PDVSA has reduced crude sales to its U.S. refining unit Citgo Petroleum while increasing supply to Russia's Rosneft (ROSN.MM), following a plan signed in May to catch up on overdue deliveries, according to PDVSA documents, sources from the company and its joint ventures.

Venezuela's oil output has declined since 2012 with the fall accelerating this year amid a lack of investment and payment delays to suppliers. Almost all of Petróleos de Venezuela's customers are receiving reduced volumes. That includes the United States, which has received less Venezuelan crude oil this year.

PDVSA agreed in the catch-up plan to compensate Rosneft for the delayed cargoes, since the oil is being sent in lieu of payment for loans.

Venezuela's Oil Minister Nelson Martinez at a forum in St Petersburg in June said Rosneft would receive some 70,000 barrels per day (bpd) as payment for a $1.5 billion loan extended to PDVSA in 2016. He did not disclose the reason for the supply agreement.

Days later, Russia publicly released a renegotiation of bilateral loans with Venezuela, an OPEC-member. The Russian Audit Chamber said it would slash projected state revenue by nearly $1 billion this year to reflect expectations that Venezuela may not make timely payments.

Since May, the "remediation agreement" with Rosneft has implied an extra supply of between 63,000 bpd and 105,000 bpd of Venezuela's diluted crude oil (DCO), according to a PDVSA document.

"The agreement is linked to the debt refinancing. The idea is to catch up by reducing the number of pending cargoes (to repay debt)," a PDVSA source said.

Rosneft and Citgo were not immediately available for comment.

Rosneft has loaned between $4 billion and $5 billion to Venezuela in recent years, mostly to be repaid with oil. Terms of most agreements have not been disclosed, but renegotiations have taken place in recent months, including on the possible return of a collateral on a 49.9 percent stake in Citgo offered to Rosneft last year.

Collateral Damage

Because PDVSA will allocate more of its shrunken oil supplies to Rosneft, fewer barrels will be available to ship to other customers.

Citgo's Gulf Coast refineries - in Corpus Christi, Texas, and Lake Charles, Louisiana - have combined processing capacity of 582,000 bpd. The two typically refine a high percentage of Venezuela's heavy crude.

Since the remediation plan with Rosneft started, Citgo has been knocking on the doors of PDVSA's joint-venture partners for supplies of upgraded crude, one of the sources said.

Some PDVSA joint ventures in the Orinoco Belt, Venezuela's main producing region, have agreed to allocate as much oil as possible to Citgo after supplying their regular clients, but PDVSA expects total exports of Venezuelan crude to Citgo will remain below 120,000 bpd versus some 230,000 bpd stipulated in the supply contracts, the sources said.

Recent difficulties in finding Venezuelan crude supplies have increased prices for many heavy grades in the Atlantic Basin, which includes the Gulf Coast.

Citgo last year started sending gasoline and other fuels to Venezuela in exchange for a portion of its crude supply. But Citgo has increased the volume of U.S. oil it refines, and has also has also expanded its crude import sources.

Its 167,000-bpd Lemont, Illinois, refinery mostly processes Canadian oil, while Corpus Christi and Lake Charles this year have imported crude from Africa, Ecuador, Colombia, Brazil and Azerbaijan, according to the U.S. Energy Information Administration.

U.S. President Donald Trump's administration has promised strong economic sanctions against Venezuela's government after a Constituent Assembly was elected last week in what United States called a "sham" vote. The new body will have power to rewrite the constitution and abolish the opposition-led Congress.

If those sanctions were to constrain Venezuela's oil shipments to the United States, Citgo could be ahead of its competitors in finding new supply sources