Caracas hopes to shrink oil debt to Rosneft: Update

Adds details on US-Russian interactions over Venezuela.

Venezuela plans to finish paying off oil-backed debt to Russia's state-controlled Rosneft by March 2020, opening the way to generate cash revenue and appeal for upstream investment from Moscow.

In contrast to its commercial debt, Venezuela has been steadily servicing the Russian oil debt despite US sanctions that have created export bottlenecks.

State-owned PdV serviced $300mn in equivalent oil shipments owed to Rosneft in the third quarter, leaving $800mn outstanding, according to the Russian company's latest quarterly earnings. At the end of the second quarter, the outstanding balance was $1.1bn.

PdV expects to cancel the remaining debt "during the fourth quarter of the current year and first quarter of the new year," a Venezuelan oil ministry official said.

Since the US imposed oil sanctions on Venezuela in late January 2019, Rosneft has emerged as the main lifter of Venezuelan cargoes, with much of the volume going to the company's 400,000 b/d Nayara Energy refining system in India.

PdV export revenues and commercial flexibility will improve once its debt to Rosneft is paid off in full, the oil ministry official said. But Rosneft likely will remain the top lifter of Venezuelan crude at least until the US removes the sanctions against PdV.

Even after PdV pays the Rosneft debt, the government still would owe Russia about $3bn on loans for arms sales contracted by late president Hugo Chavez over 10 years ago. Venezuela's government has defaulted twice on weapons-related debt payments, but those obligations are treated separately from the debt PdV owes Rosneft.

PdV's debt to Rosneft is at least partially secured by 49.9pc of the shares in PdV's US refining subsidiary Citgo. The balance of the shares is collateral on the controversial PdV 2020 bond that is the subject of an acrimonious dispute between investors and Venezuela's political opposition.

The US government says escalating sanctions will force Venezuela's president Nicolas Maduro out of power. Maduro is no longer recognized as president by the US and more than 50 other Western countries, but he is still backed by Russia, China, Turkey and Cuba, among others.

The Russian diplomat and a Rosneft official told Argus that Moscow's relations with PdV and the government have improved this year as PdV has serviced the loans.

But Rosneft is holding off on any upstream investment in Venezuela until after the Opec country completes the oil-backed payments.

"Rosneft is pleased with the efforts PdV has made to cancel its debt quickly despite difficult operating conditions created by the American government," the Russian diplomat said.

Rosneft has multiple oil assets inside Venezuela, led by the PetroMonagas project originally built as a heavy crude upgrader by ExxonMobil in the 1990s. The plant is currently blending about 80,000 b/d of crude, a PdV Orinoco division official said.

The Russian company's future investment is likely to focus initially on its 30-year concession to develop the Patao and Mejillones offshore natural gas fields, which hold combined reserves of over nine trillion cubic feet.

Venezuela's government-controlled National Constituent Assembly (ANC) issued a decree in late October approving an agreement signed in July exempting Rosneft and Russian suppliers from all value-added and import tax liabilities related to the gas development.

Rosneft is seeking more tax incentives and stronger legal safeguards, as well as more control over procurement and labor, stable electricity supply and tighter security around its operations.

Sanctions hint

Rosneft's activities in Venezuela "occupy our attention on a daily basis," US deputy assistant secretary of state Carrie Filipetti says. Washington since March has hinted at the possibility of imposing sanctions on Rosneft over Venezuela, but without following through.

Moscow in March sent 100 military personnel to Venezuela ostensibly to preempt a military invasion of that country by the US. "The Russians at this particular juncture were signaling very strongly that they wanted to somehow make some very strange swap arrangements between Venezuela and Ukraine," according to former White House national security council's Europe and Europe senior director Fiona Hill.

Moscow has proposed dialing back its support for the Maduro government in exchange for the US taking a less confrontational stance against Russian involvement in eastern Ukraine, Hill told the House of Representatives' Intelligence Committee in a testimony last month that was released today.

Hill testified that the White House sent her to Moscow in May "to basically tell the Russians to knock this off." The House committee questioned Hill in relation to the impeachment probe into President Donald Trump's apparent request that Ukraine investigate top Democratic presidential rival Joe Biden.