Chevron Stayed In Venezuela Long After Rivals Quit

(Wall Street Journal, Kejal Vyas and Bradley Olson, 8.Nov.2018) — For nearly a century, Chevron Corp. has weathered dictatorships, coups and nationalization drives to keep pumping oil in Venezuela.

But recently, executives at the last U.S. oil major in the country have debated whether it may be time to get out, according to people familiar with their deliberations.

For now, Chevron hopes to hang on and outlast President Nicolás Maduro, as it did with his late mentor Hugo Chávez and other rulers.

“We’re committed to our position in Venezuela,” Clay Neff, Chevron’s president of exploration and production in Africa and Latin America, said in an interview Thursday following initial online publication of this story.

Chevron’s dilemma is both moral and commercial. The California-based giant long enjoyed close relations with the socialist regime that controls the world’s largest oil reserves, and has earned big money in Venezuela—about $2.8 billion between 2004 and 2014, according to cash-flow estimates by analytics firmGlobalData .

The company is aware a pullout could trigger a collapse of the government’s finances, because a significant chunk of its scarce hard currency comes from joint operations with Chevron.

Yet by staying in the country as its economic and humanitarian crises deepen, the company risks damage to its reputation by being seen as supporting an authoritarian regime sanctioned by the U.S. government. It also isn’t making much money here anymore.

Chevron has had to put up with many provocations in Venezuela, including late payments, requests for employees to attend political rallies and bickering over loans Venezuela sought because it couldn’t afford oil-field maintenance. Chevron’s joint ventures with the state oil company are regularly subjected to what Venezuelan prosecutors have labeled corrupt overcharging by vendors. Graft and the risk it will worsen have weighed on executives as they consider Chevron’s position in the country.

It has become harder to stomach since the big money disappeared from the Venezuela operations, say people familiar with the company. Chevron operations in Venezuela lost money from 2015 to 2017, according to GlobalData, then eked out a modest profit this year thanks to higher oil prices. Oil fields are aging, and unless more reserves are opened up, Chevron’s work in Venezuela will run out of steam in less than five years, GlobalData estimates.

A turning point for foreign companies operating in Venezuela came in 2006, when Mr. Chávez began nationalizing oil fields managed by foreign operators and sharply raising taxes.

Rewritten contracts made Petroleos de Venezuela SA, known as PdVSA, the operator and majority owner of most projects. Chevron’s top U.S. competitors, Exxon Mobil Corp. and ConocoPhillips ,balked at the changes, left, and filed suit. Exxon has yet to recover the full value of the billions in equipment and other assets it left behind. ConocoPhillips recently reached a $2 billion settlement.

Some European oil companies, such as Total SA and Equinor AS A (then called Statoil), remained but reduced their holdings.

Chevron decided to stay, and—led by a charismatic Iranian-American executive named Ali Moshiri—formed an array of partnerships with PdVSA. Mr. Moshiri, who was head of Chevron’s business in Latin America and Africa, sometimes appeared in public with Mr. Chávez, who called him a “dear friend” on one occasion.

Joint ventures Mr. Moshiri pioneered became a model for foreign companies doing business in Venezuela. A venture called Petropiar between Chevron and PdVSA is one of four so-called upgrader ventures between the state oil company and foreign operators to blend Venezuela’s tar-like heavy crude with lighter oil or other substances and make it transportable.

Though Chevron’s bet paid off financially for years, an oil-price crash beginning in late 2014 triggered a vicious cycle in which government revenue fell and then oil production did, too, as the country placed priority on debt payments over the heavy reinvestment oil fields need to stay healthy.

Since the end of 2017, Venezuela has defaulted on more than $6 billion in debt payments, according to Fitch Ratings, while its crude-oil industry has been reduced close to ruins by neglect and the departure of experienced engineers.

Oil production has fallen to 1.2 million barrels a day from 3.2 million daily in 2006, according to the Organization of the Petroleum Exporting Countries. A country with vast reserves now produces roughly as much oil as the U.S. state of North Dakota. As output has declined, and thus revenue, the country’s economic crisis has worsened.

With supermarket shelves nearly bare and prices soaring, two-thirds of Venezuelans reported losing 25 pounds of weight in 2017, according to a survey. Violence is rampant, including atrocities by police and soldiers. Hospitals lack medicine and clean water, yet the government rejects most humanitarian aid as a Trojan horse for foreign intervention. More than three million Venezuelans have fled, leaving those who remain to face crushing rates of murder, malnutrition and hyperinflation.

Venezuela’s energy enterprises are under pressure from expanding corruption probes in the U.S. and Europe. A U.S. investigation, centering on allegations that PdVSA officials solicited vendors for bribes, has netted 15 guilty pleas, including from a number of PdVSA honchos.

An investigation in the tiny European nation of Andorra has led to money-laundering charges against 28 people, including former Venezuelan deputy ministers, who allegedly took $2 billion through kickbacks-for-contracts schemes from 2007 through 2012.

Zair Mundaray, a former Venezuelan prosecutor now in exile, said his team uncovered an alleged scheme at the Petropiar joint venture in which PdVSA executives skipped formal contract bidding and handpicked the vendors of a wide range of supplies, from oil equipment to cafeteria coffee, at exorbitant prices. The profits were distributed among certain Petropiar managers, PdVSA higher-ups and the suppliers, the charging documents said.

PdVSA and Venezuela’s Information Ministry didn’t respond to calls and detailed emails seeking comment.

Venezuelan charging documents and purchasing invoices reviewed by The Wall Street Journal allege that contractors pilfered more than $200 million in two years from the joint venture through markups such as $156,000 for printer/copiers and $9,000 for ink-jet cartridges.

Among the accused was Manuel Sosa, a former soap-opera actor who once dated a daughter of Mr. Chávez, whose company supplied the costly printer/copiers. Mr. Sosa pleaded guilty in December and was sentenced to four years’ house arrest in return for his cooperation. He couldn’t be reached for comment.

“Where were the checks? Where was the accounting?” asked Mr. Mundaray. “There’s absolutely no way that [Chevron] did not know what was happening.” He said he has given the evidence he collected to the U.S. Justice Department, which declined to comment.

Pedro Burelli, a former PdVSA board member and a Maduro critic, said Chevron “turned a blind eye to what was going on.”

“When you’ve agreed to work with a majority partner that is derelict, you’re just setting yourself up for a huge risk. You get deeper and deeper, when you should be hitting the red button, to get yourself out,” said Mr. Burelli.

Chevron said it complies with all applicable laws wherever it operates and expects its partners to do so as well. It said it doesn’t control the procurement process in the joint venture, in which Chevron has a 30% nonoperating stake. In oil and gas joint ventures, the operator typically has primary authority over costs, though minority partners are generally consulted and sign off on certain expenses. Chevron said nothing in documents it was shown suggested any wrongdoing by the U.S. company.

Oversight of the investigation changed hands just as it was picking up steam. Mr. Mundaray and his team left Venezuela in August 2017 after their boss, former Attorney General Luisa Ortega, criticized Mr. Maduro for alleged human-rights abuses. The president called the prosecutors traitors.

A new attorney general, Tarek William Saab, provided a list of people accused that lacked some names on Mr. Mundaray’s list.

One missing name was that of former Petropiar chief Francisco Velasquez, who the former prosecutors said splurged on a pink Ferrari and a villa at the exclusive Casa de Campo resort in the Dominican Republic while the oil project suffered backlogs and delays. He couldn’t be reached for comment. Mr. Saab didn’t respond to comment requests.

In April, two Chevron employees working at the Petropiar joint venture were jailed by Venezuelan military intelligence when they refused to sign a contract for oil-processing equipment priced at what they considered well above market value. The employees were released after six weeks of tense negotiations, but not before a thinly veiled threat from Chevron: free them or we will leave, people familiar with the confrontation say.

Chevron confirmed two employees were arrested in April and released in June but said, “We have no further information to share on this matter.”

A dwindling number of foreign companies are still doing business with the Maduro administration, which is facing threats of tougher sanctions by Washington. The U.S. has sanctioned dozens of Venezuelans, including Mr. Maduro, for allegations varying from corruption to human-rights abuses to drug trafficking. The sanctions bar American citizens and companies from doing business with them.

Mr. Maduro has said he wants foreign oil partners to use a cryptocurrency called the petro his government designed to evade U.S. sanctions on Venezuelan debt. The U.S. in March barred Americans from using the petro.

By staying in Venezuela, Chevron risks exposing itself to legal penalties under U.S. anti-corruption laws, some analysts say. Chevron said it “abides by a strict code of business ethics under which the company complies with all applicable international, U.S. and Venezuelan laws.”

Its managers’ meetings with government and PdVSA officials “comply with all applicable laws and regulations, including the U.S. sanctions directed towards Venezuela,” Chevron said.

About 700,000 daily barrels of the country’s oil production comes from joint ventures between PdVSA and foreign companies, consultants say. That includes about 200,000 to 250,000 barrels a day from Chevron ventures.

Joint-venture output has generated far more cash for the government in recent years than oil pumped by PdVSA alone, because the state company’s production has gone to repay debts to allies such as China and Russia or to be processed into gasoline the government provides almost free. That means a Chevron withdrawal would take a big bite out of government’s revenue.

Another foreign company, Royal Dutch Shell PLC, is weighing an exit from most of its remaining operations in Venezuela through a sale of its stake in a joint venture, according to people familiar with its plans. A spokeswoman for Shell said such a deal wouldn’t amount to a total exit, as the company is working to develop Venezuelan gas assets offshore that would supply nearby Trinidad and Tobago.

Some analysts believe other Western companies operating in Venezuela, such as France’s Total or Norway’s Equinor, might feel pressure to follow a departure or partial exit by either Shell or Chevron. At the same time, according to GlobalData, those that stay might be able to gain access to new fields or renegotiate contracts for better terms. Chinese or Russian companies such as PAO Rosneftcould be beneficiaries of any such departures in the long run, analysts say.

Total, Equinor and Rosneft officials either declined to comment or didn’t respond to questions.

Signs of a troubled relationship between Chevron and the Venezuelan government emerged a year ago when Mr. Moshiri’s successor as head of Chevron’s Latin American and African operations, Mr. Neff, sat down for a meeting with Mr. Maduro and other Venezuelan officials.

Venezuelan officials snapped a photo without Chevron’s consent and publicized it. At Chevron headquarters in San Ramon, Calif., concerns grew that the company was being duped into making an appearance in Venezuelan propaganda, people familiar with the matter said.

While such photo ops had occurred before, the country’s worsening economic collapse, plus U.S. sanctions, are making them harder to tolerate, the people said. Chevron declined to discuss the Caracas meeting.

The company’s closeness with the government is generating rancor among PdVSA’s workers, who have been quitting in droves amid hyperinflation that has pummeled their salaries to the equivalent of less than $10 a month.

Jose Bodas, a union leader in eastern Venezuela where Petropiar is located, said photos of sports cars and European vacations posted on social media by managers angers workers who sometimes lack boots and hardhats.

“I’m not opposed to people having Ferraris and mansions, but this is all corruption,” Mr. Bodas said. “I don’t mind saying it—if you’re a multinational working with this government, you’re an accomplice to what’s going on.”

—Ginette Gonzalez and Samuel Rubenfeld contributed to this article.

Write to Kejal Vyas at kejal.vyas@wsj.com and Bradley Olson at Bradley.Olson@wsj.com

Appeared in the November 9, 2018, print edition as ‘Venezuela Tests Chevron Staying Power.’

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Rosneft Says Venezuela’s Bill Falls To $3.1 Billion

(Reuters, 6.Nov.2018) — Rosneft was owed $3.1 billion by Venezuela as of September 30, down from $3.6 billion on June 30, Russia’s largest oil producer said on Tuesday.

It also said it owes $26.8 billion to traders under prepayment deals for its oil as of Sept. 30, down from $29.3 billion as of June 30.

(Reporting by Vladimir Soldatkin; editing by Jason Neely)

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PDVSA Bewilders Bond Analysts By Making $949 Million Payment

(Bloomberg, Davide Scigliuzzo, 31.Oct.2018) — Venezuela just forked over almost $1 billion to stay current on a bond backed by shares of its U.S. refiner Citgo.

The question is why.

Yes, the payment ensures that Venezuela’s state-run oil company PDVSA gets to hold onto Citgo Holding Inc. for now, but many analysts think it’s just a matter of time before it has to forfeit the company.

“It is hard to visualize a scenario in which Venezuela does not sooner or later lose Citgo to one of its defaulted creditors,” Francisco Rodriguez, chief economist at brokerage Torino Capital, wrote in a note on Monday.

With the country starved for cash and already in default on many of its foreign bonds, the line of creditors that could lay their hands on Citgo is very, very long: Russia (from collateral for loans from state-run Rosneft); Canadian miner Crystallex International Corp. and U.S. oil giant ConocoPhillips (both of which won international arbitration cases against Venezuela); Citgo’s own bondholders (from collateral on debt); and the PDVSA bondholders who were paid Monday.

Given this backdrop, most analysts have struggled to come up with a clear-cut explanation for why the payment was made. Here are a handful of the most plausible theories that they put forward:

— Citgo’s strategic value for the Venezuelan government is so great that the payment may be worth it even if the company will be lost to creditors in coming months. Citgo is a reliable buyer of PDVSA crude abroad and also provides the company with additives that make Venezuela’s heavy crude easier to export.

— Venezuela is appealing a U.S. ruling that awarded Crystallex the right to collect on an arbitration award by taking shares of PDV Holding, the Delaware corporation through which PDVSA controls Citgo. By staying current on the collateralized PDVSA bonds, Venezuela can buy time as it awaits a verdict. Attempts by PDVSA to stop a sale of Citgo have so far failed. A key hearing is scheduled for Dec. 20.

— A default on the collateralized PDVSA bonds could complicate Venezuela’s relations with Russia. If holders of the bonds foreclose on the 50.1 stake in Citgo that represents their collateral and force a sale of the company, Rosneft, that has a claim to the remaining 49.9 percent, could be sidelined in that process.

— Citgo may have achieved symbolic value for President Nicolas Maduro even if the socialist regime has considered getting rid of the unit in the past. Losing Venezuela’s most valuable asset abroad could be seen as a defeat for a government that is already deeply unpopular at home and has made of standing up to hostile foreign powers a key part of its rhetoric.

— For now the 2020 bond is trading over 91 cents on the dollar with investors eyeing the next payment in April.

— With assistance by Patricia Laya, Fabiola Zerpa, Ben Bartenstein, and Jose Enrique Arrioja

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Bondholders Raise Hopes Venezuela Will Pay Up On Due Debt

(Ft.com, Gideon Long, 25.Oct.2018) — In a month in which emerging market government bonds have been hammered by the prospect of US rate increases, geopolitical risk and fears of a US-China trade spat, one bond — in crisis-racked Venezuela of all places — has rallied to record highs.

The 2020 bond issued by the state oil company PDVSA has rallied 14 per cent in six weeks to trade at over 91 cents, up from a year low of 80 cents in early September. By contrast, most PDVSA bonds trade at around 20 cents.

The reason for this unusual outperformance is that investors are increasingly convinced that the cash-strapped oil company will come up with an $842m principal payment due this weekend to avoid default and potentially lose a key asset, US-based refiner Citgo.

“I believe that they [Venezuela and PDVSA] are willing to pay,” said Siobhan Morden, head of Latin America fixed income strategy at Nomura. “Their track record suggests willingness to pay to protect strategic assets.”

Payment in itself would be remarkable: Venezuela and PDVSA have defaulted on all their other commitments to bondholders over the past year and are now $7bn in arrears on their combined traded debt of about $60bn.

But this bond is different. If PDVSA fails to service it, the company risks losing its prized US asset Citgo, a Houston-based group with three refineries in the Gulf of Mexico and the Midwest that process about a third of Venezuela’s oil exports to the US.

PDVSA has pledged half of Citgo as collateral on the $2.5bn 2020 bond, and the other half as security on a loan from the Russian oil company Rosneft. If it fails to pay, bondholders could in theory go after their half. There is no grace period on the amortisation payment, although the company has an additional 30 days to make an interest payment of $107m, also due this weekend.

Even so, 2020 bondholders would have a fight on their hands because everyone, it seems, wants a bit of Citgo. Having largely given up on ever being paid by Venezuela or PDVSA, creditors are increasingly going after their assets abroad, Citgo being the jewel in the crown.

The Canadian mining company Crystallex is trying to seize Citgo to compensate it for $1.4bn owed by the Venezuelan state. The US oil company ConocoPhillips is in a similar position, seeking payback for money owed by PDVSA. It has previously seized assets in the Caribbean, where PDVSA processes much of its oil exports.

As for bondholders, in what has become a complex multi-directional legal battle, the world’s largest asset manager BlackRock and New York-based Contrarian Capital Management have waded in on behalf of US and UK investment managers who hold some 60 per cent of the 2020 bonds.

For now, Rosneft is watching from the sidelines but if PDVSA were to default on its separate loan from the Russian company, it too would be eligible to claim almost half of Citgo. In theory, that could leave the Russians in the novel position of having a major holding in a US refiner, something US President Donald Trump would want to avoid.

Even if PDVSA makes this payment, Venezuela faces a daunting debt mountain. The sovereign must pay a final $1bn on its 2018 bonds in December, and alongside PDVSA must find $9.3bn for bondholders in 2019 and more than $10bn in 2020, although no one expects it to do so.

Faced with these desultory figures, Venezuela is rumoured to be considering a complete overhaul of PDVSA. This week the specialist energy reporting agency Argus said Caracas was thinking of replacing PDVSA with a new national energy company that would inherit PDVSA’S physical assets, including Citgo, but not its debts. That could pave the way for PDVSA to be formally declared bankrupt.

In addition to its traded debt, Venezuela owes billions of dollars to China and Russia. Meanwhile, oil production has plummeted to its lowest level since the 1940s, the economy has halved in size in five years and inflation is running at almost 500,000 per cent. Central bank reserves stand at $8.8bn, close to their lowest level for 30 years.

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PDVSA Prepares To Make $949 Mln Payment On Citgo-Backed Bond

(Bloomberg, 24.Oct.2018) — Petroleos de Venezuela SA’s plan to make a $949 million bond payment would mark a rare exception for Nicolas Maduro’s regime as it tries to hold on to the crown jewel of its U.S. assets.

Venezuela’s state-run oil company is preparing to make the coupon and partial principal repayment that’s due Oct. 29 on the 2020 notes, according to a person with direct knowledge of the matter. The socialist state is behind on almost $7 billion in debt payments owed to investors, but this bond is backed by a majority stake in Citgo Holding Inc., meaning a non-payment would allow holders to lay claim to that asset.

The payment has been anticipated by investors. The $2.5 billion of notes traded as high as 92.75 cents on the dollar this week, far above most Venezuelan bonds, which hover near 25 cents. Analysts from JPMorgan Chase & Co (NYSE:JPM)., Torino Capital and Eurasia Group have also said the Maduro government would pay because of its desire to hold on to Citgo, although there are doubts about how much longer PDVSA can service the debt.

“The government’s strategy with regards to various creditor obligations seems to be to avoid or delay paying wherever possible but pay or settle when valuable external assets are in jeopardy,” Risa Grais-Targow, a senior analyst at Eurasia Group, wrote in a note Monday. “There are limits to this strategy, as the government still faces meaningful cashflow constraints owing to declining cash-generating oil exports.”

Calls and emails seeking comment from PDVSA’s vice president of finance, Iris Medina Fernandez, weren’t returned. A representative for Venezuela’s oil ministry declined to comment. The person with knowledge of the situation asked not to be named because the matter is private.

Even with the payment, Citgo’s fate remains in flux. The 2020 notes fell by the most in nearly two months on Wednesday amid a broader sell-off across risky assets. Here are some of the other hurdles that Venezuela needs to navigate to maintain ownership of the company:

— Citgo Petroleum and its parent Citgo Holding have more than $3 billion of their own debt outstanding. At least some of that might need to be repaid if the company changes ownership through a foreclosure or a sale.

— PDVSA pledged a 49.9 percent stake in Citgo Holding as collateral for loans it received from Rosneft in 2016. If it defaults on those loans, the Russian state-controlled oil company could seek to seize the shares.

— A small Canadian mining company, Crystallex International Corp., was awarded the right to collect on an arbitration award by taking shares of PDV Holding (the U.S. parent of Citgo Holding), a verdict Venezuela is appealing.

— PDVSA is due to pay $500 million to ConocoPhillips (NYSE:COP) in November as the first installment of a $2 billion settlement the two companies reached this summer. If it misses the payment, Conoco could seek to attach PDVSA assets, including Citgo.

— Separately, an $8 billion bondholder group advised by Guggenheim Securities has said it’s “exploring options” to ensure that the nation’s overseas assets are available to satisfy its claims.

So far, PDVSA has shown it is determined to hold on to Citgo, even as U.S. sanctions prevent the refiner from distributing dividends back to Venezuela. Citgo plays a key role in facilitating the export of Venezuelan crude — the country’s main source of foreign exchange — and also provides Venezuela with much-needed refined products.

“It is not about the value of the equity, which may not be much,” said Richard Cooper, a partner at law firm Cleary Gottlieb Steen & Hamilton LLC, who has advised holders of Venezuela’s debt. “Citgo remains an incredibly important asset for PDVSA.”

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Foreign Oil And Gas Firms Look To Play Crucial Role In Venezuela

(Energy Global, David Bizley, 19.Oct.2018) — The majority of foreign companies are not making any profit or losing money in their partnerships with PDVSA to develop and produce hydrocarbons due to inadequate investment, shattered infrastructure and US sanctions.

However, in the long term, having access to the vast hydrocarbon reserves of Venezuela compensates the current country risks and current negative cash flows in joint ventures (JVs), says GlobalData.

In this way, foreign companies have formally or informally also gained operatorship in key upstream fields located mainly in the Orinoco Belt. Indeed, Rosneft gained operatorship in the Mejillones and Patao blocks and exporting rights for 30 years with an in-kind 20% royalty rate.

Chinese and Russian companies have invested the most in the Venezuelan oil and gas sector during recent years. China, through its Development Bank, has provided more than US$60 billion in loans to Venezuela. In 2018, it has given an additional US$5 billion loan to support oil developments in the country, on top of the US$6.3 billion in loans since 2014 from Rosneft.

David Bautista, Oil and Gas Analyst at GlobalData, comments: “In other important basins such as Maracaibo or East Venezuela, most companies have recovered their initial investments. Thus foreign participants will likely be able to improve their JV terms and conditions in exchange for capital injection in the sector if the critical situation ends when PDVSA is finally able to boost production.”

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Venezuela’s Oil Exports Are Falling Even Faster Than Expected

(OilPrice.com, Irina Slav, 3.Oct.2018) — A delay in port repairs following a tanker collision is putting additional pressure on already pressured Venezuelan crude oil exports, Reuters quoted anonymous sources close to PDVSA as saying this week. It seems that Venezuela’s woes are only multiplying as time goes by, although news from official Caracas sources seems more upbeat. Oil, however, appears at the forefront of Venezuela’s plight.

A dock at Venezuela’s biggest oil port, Jose, was closed in late August after a tanker collided with it. At the time, Reuters reported that the repairs would delay the delivery of 5 million barrels of crude, destined for Rosneft, which, according to the news outlet, could put a strain on relations between the Russian company and PDVSA, which have a money-for-oil agreement. This is only the latest in PDVSA’s troubles with its oil exports.

Besides a steady decline in production, Venezuela’s state-run oil company earlier this year ran into problems with its storage capacity and export terminals in the Caribbean as U.S.-based ConocoPhillips took an aggressive approach to enforcing a court ruling that awarded it US$2 billion in compensation for the forced nationalization of two projects in Venezuela. The company this summer seized several of PDVSA’s assets on Caribbean islands, which made it difficult for the Venezuelan state company to meet its export obligations. Having few options, PDVSA eventually caved, settling with Conoco.

Dock repairs are further complicating matters. PDVSA is supposed to deliver to Rosneft some 4 million bpd of crude under the latest bilateral agreement signed this April. On top of that, it normally exports crude for U.S. Valero Energy and Chevron from the same dock, the South dock of the Jose port, which is responsible for processing processes as much as 70 percent of the country’s crude oil exports.

Not to anyone’s surprise, the delay in resuming shipments is largely a result of insufficient funds, partially thanks to U.S. sanctions, which have essentially closed nearly completely the door to foreign funding. China, not bound by these restrictions, recently agreed to a US$5-billion lifeline for the Venezuelan government and its oil industry, but these billions will take time to become available. Given the multitude of problems that PDVSA is having, it would be a tough job to allocate these funds so that there is enough for everything.

Caracas is still not giving up. Just this week the government announced the official launch of the petro on international markets in hopes of offsetting the effects of U.S. sanctions by using this oil-and gold-backed cryptocurrency. President Nicolas Maduro said at the launch that the petro would be legal tender for everything in Venezuela, including as a substitute for the dollar.

“All Venezuelans will have access to the Petro and through it to make international purchases,” Maduro said.

Venezuela also plans to boost its oil exports to China as part of plans to transform its economy and get back on its feet. To this end, it will work with Chinese oil companies to improve production. Maduro said in July that PDVSA would boost oil production by 1 million bpd from June levels by the end of the year, although he admitted that this goal would be difficult to achieve. Venezuela pumped 1.45 million bpd in August, and the year-to-date average stands at 1.544 million bpd. This is a far cry from the figure from five years ago, when its daily average was 2.9 million bpd. It’s a matter of a short time to see if the petro and Chinese money will be enough to reverse the decline in production and exports.

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Venezuelan Oil Port Repairs Delayed, Crude Exports Fall: Sources

(Reuters, Marianna Parraga, 2.Oct.2018) — Repairs to a dock at Venezuela’s main oil export port will take at least another month to complete following a tanker collision more than a month ago, further restraining the OPEC member nation’s crude exports, according to sources and shipping data.

A minor incident in late August forced state-run oil company PDVSA to shut the Jose port’s South dock, one of three used to ship heavy and upgraded oil to customers including Russia’s Rosneft and U.S.-based Chevron Corp, and to receive diluents needed for the exports.

Jose port typically handles about 70 percent of Venezuela’s total crude exports, which in September declined 14 percent compared with the previous month to 1.105 million barrels per day (bpd), according to Refinitiv Eikon data.

Oil exports are the financial backbone of Venezuela’s economy, which is struggling to overcome hyperinflation, a long-standing recession and scarcity of basic goods.

PDVSA had estimated the berth would reopen by the end of September, but needed parts have not been obtained as PDVSA continues facing problems to pay foreign providers due to financial sanctions imposed by the United States, sources close to its operations said.

PDVSA’s crews completed the removal of the damaged fences last week, but replacements have not arrived in the country.

“The fences were bought, but funds to pay the provider were retained due to the U.S. sanctions. A new deal to buy them through a third party will take at least another month,” one of the people familiar with the matter said.

PDVSA was not immediately available for comment.

U.S. President Donald Trump’s administration last year imposed financial sanctions on Venezuela and PDVSA, affecting their ability to make transfers in dollars and complete payments through the U.S. banking system.

PDVSA has neither resumed shipments from most of its Caribbean terminals, which remain frozen after U.S. producer ConocoPhillips’ legal actions earlier this year to satisfy a $2 billion arbitration award, according to the data.

Conoco and PDVSA in August struck a payment agreement, but the Venezuelan oil firm has yet to complete a $500 million installment due by the end of November to unlock its Caribbean operations.

Venezuela’s crude output fell again in August to 1.448 million bpd according to official figures, putting its annual average at 1.544 million bpd, the lowest in over six decades.

Economic measures recently announced by President Nicolas Maduro’s government, including a steep salary increase, have fallen short for Venezuela to regain access to sufficient foreign credit and reverse the downturn.

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Venezuela Oil Production Continues to Collapse

(Energy Analytics Institute, Jared Yamin, 12.Sep.2018) — The decline is consistent and constant as well as consistently and constantly bad, writes Caracas Capital Market in a research note emailed to clients.

Summary details from the research note follow:

OPEC released the production counts for its member states today and while overall OPEC production was up 278,000 barrels per day (bpd) during the month, Venezuela’s production continued to collapse.

According to OPEC’s August calculations, Venezuela production fell another 36,000 barrels per day (bpd) to 1.235 million bpd. (Venezuela production actually fell 43,000 bpd from the original OPEC July count of 1.278, but OPEC revises their numbers as new data comes in later in the month and moved Venezuela’s July production count down to 1.272 million bpd from the original 1.278 bpd), according to the research note.

“The decline is consistent and constant.”

OPEC calculated that July’s Venezuelan production fall was 42,000 bpd and that June’s fall was 48,000 bpd. In May, Venezuela production fell 43,000; in April, -42,000 bpd; in March, -55,000 bpd; in February -52,000 bpd; in January, -47,000 bpd. Consistently and constantly bad.

In the one year period from August 2017 — when PDVSA was producing 1.918 million bpd — Venezuela has lost 683,000 bpd of production. At the current year average price, that is lost income of $47 million a day and $17.5 billion in a year.

Making this situation worse is that Venezuela’s current 1.235 million bpd production is just a shade more than a third of what the country was producing 20 years ago before Chavez came to power. Hundreds of billions of dollars lost through communism, corruption and incompetence in a country that can ill afford it.

“By the way, we are seeing just one example of how that corruption works in a case playing out before the U.S. Federal District Court in Miami that sucked $1.2 billion from PDVSA in what I label a ‘perpetual money machine for bad guys’ in today’s Miami Herald and El Nuevo Herald, writes Caracas Capital Markets Managing Partner Russ Dallen. “The cast of characters reaches all the way to the top and includes the Derwick boys (especially Francisco Convit), the Boligarch Raul Gorrin (who bought Globovision), the Maduro family (especially the stepsons ‘los chamos’ but also mentions mother Celia Flores and Nicholas Maduro), and a Swiss banker who has copped a deal to tell all (but still had to put up a $5 million bond yesterday).”

Drilling Rigs Fall

Meanwhile, Venezuela’s drilling rig count dropped by one in August, continues the Caracas Capital Market report.

Baker Hughes reports that the number of active drills operating in Venezuela fell to 27 last month, after popping up 2 in July off June’s thirty year low of 26. One of the two drills that was added in July was drilling for gas – the first in over a year. It was still deployed in August.

Having failed to capitalize on its natural gas (much less build the Mariscal Sucre LNG plant) for decades, Venezuela signed a deal last week to link into an already existing gas pipeline at a Shell platform in bordering Trinidad waters and through that pipeline pump gas to Trinidad’s Atlantic LNG plant where it will be converted into LNG for export.

Long time readers will also recall that Rosneft was given a 30 year totally wide-open lease on a gas field in that area last year.

Maduro Goes to China

Finally, as we predicted in our “China Promises Venezuela More Money” Report yesterday and correctly forecast in a Report and Wall Street Journal column in July, Venezuela seems to be making headway in getting help from the Chinese, writes Dallen.

“No one else seems to have been able to accurately uncover and read these Chinese tea leaves, so I am especially proud of our Caracas Capital team. We continue to knock the ball out of the park for our clients,” writes Dallen.

Maduro has just announced that he is going to China to sign some big new deals.

Minister of Oil and PDVSA head Manuel Quevedo is also in Beijing meeting with CNPC and is offering to expand natural gas agreements as well. Yesterday, Venezuela’s oil ministry released a statement touting that the Sinovensa joint venture had increased oil production from 70,000 bpd to 110,000 bpd.

Aside from oil, gas and drilling, we are anticipating some other upcoming ventures in gold mining, coltan and diamond mining, concludes the Caracas Capital Market note.

***

Tanker Backlog Builds Again in Venezuela

(Reuters, Marianna Parraga, 6.Sep.2018) — Crude exports by Venezuela’s PDVSA have slowed after a tanker collision at its main port last month disrupted operations, adding to a backlog of vessels waiting to load, according to shipping sources and Reuters data.

Oil is the financial lifeline for the embattled socialist government of President Nicolas Maduro, but his cash-strapped administration has failed to invest enough in the industry to prevent its decline. Venezuela has sought to increase exports after asset seizures and declining output earlier this year raised the prospect of temporary suspension of contracts.

PDVSA has not said how long it will take to repair damage from the collision and resume normal loading and discharging operations. The company did not immediately reply to a request for comment.

Last week, PDVSA offered loadings at an alternative port to crude customers whose shipments were affected by the collision, but only a few have accepted so far, the sources said. That alternative, the Puerto la Cruz terminal, is limited to loading 500,000 barrels of crude per tanker, far less than the 2 million barrels PDVSA’s main port of Jose can handle.

Large tankers including three Suezmaxes and seven Very Large Crude Carriers (VLCCs) are lined up off Jose waiting to load at the available docks and monobuoys systems.

The vessel backlog around PDVSA’s ports has been increasing since late August, following the collision. As of Sept. 6, more than 20 tankers were waiting to load 26 million barrels of Venezuelan crude, according to Reuters Trade Flows and vessel tracking data.

PDVSA’s crude exports rose in July to 1.39 million barrels per day (bpd), the most since November, but last month they slipped almost 8 percent to 1.29 million bpd on Jose port’s partial operations, falling oil output and Caribbean terminal seizure attempts by creditors including U.S. producer ConocoPhillips, according to the Reuters data.

One of PDVSA’s main customers, Russia’s state-run Rosneft, loaded a 925,000-barrel cargo of diluted crude oil (DCO) during the weekend at one of Jose’s monobuoys after being diverted from the South dock, still closed because of the collision.

Rosneft-chartered Nordic Moon set sail to Malta on Sunday after waiting to load in Venezuela since early August. But the Russian company still has other four vessels waiting to load up to 6 million barrels of heavy crude at Jose, according to the data.

Jose’s South dock, which suffered damage from the collision last month, is mainly used for shipping Orinoco Belt crude and discharging imported naphtha used to dilute the country’s extra heavy oil and make it exportable.

Reporting by Marianna Parraga; Editing by Steve Orlofsky

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The Latest Episode in the Crystallex-Venezuela Saga

(Mining.com, Valentina Ruiz Leotaud, 29.Aug.2018) — State-owned Petróleos de Venezuela SA or PDVSA announced on Twitter that it filed an appeal requesting that a Delaware court vacate a decision made public on August 23 granting Canadian miner Crystallex the right to seize its U.S. assets.

In its statement, the oil company said it had filed a petition on Friday, August 24, 2018, to the 3rd U.S. Circuit Court of Appeals. The petition is to direct the Delaware District Court to acknowledge it had been “divested of jurisdiction with respect to PDVSA and its property.”

The petition refers to a decision made on August 9, 2018, by U.S. District Judge Leonard Stark in the eastern U.S. state. Stark approved a request by Crystallex to attach shares in PDV Holdings, a U.S. subsidiary of PDVSA that indirectly controls refiner Citgo.

Citgo owns three refineries in Louisiana, Texas and Illinois, as well as other assets that have been valued between $8 billion and $10 billion.

With this move, Crystallex is aiming at collecting a $1.4-billion-award in compensation following a decade-long dispute over Venezuela’s 2008 nationalization of its gold mine in the southern Bolívar state. The amount is comprised of $1.2 billion plus $200 million of interest awarded by a World Bank arbitration tribunal in 2016.

If PDVSA’s appeal does not proceed, the Nicolás Maduro government could be forced to comply to Crystallex’s demands.

The Canadian firm has accused the Nicolás Maduro government of performing “fraudulent transfers” to avoid paying what it owes. Among those transactions, Crystallex has cited the payment of dividends from PDV Holding to PDVSA for $2.2 billion and the issuance of 49.9% of Citgo’s shares to secure a $1.5 billion loan granted by Russian giant Rosneft in 2016.

A lawsuit introduced by the miner against such asset transfers by Citgo was initially dismissed in January 2018, but the Toronto-based company requested a new hearing.

Nevertheless, PDVSA’s lawyers have argued that Crystallex cannot seize the holding company’s shares because it doesn’t have proper grounds for suing in the U.S. and because it couldn’t show the unit was the Venezuelan company’s “alter ego.”

In November 2017, Crystallex and Venezuela agreed to settle the dispute before Ontario Superior Court Justice Glenn Hainey. However, the deal did not resolve the fight over the $1.2 billion award because the cash-strapped South American country did not honour its payments.

With files from Reuters, Bloomberg, El Universal.

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Rosneft May Challenge Crystallex Claim To Citgo Shares

(Oilprice.com, Irina Slav, 23.Aug.2018) — Rosneft has asked a U.S. federal court to establish “a robust appraisal and sale process” of Citgo shares following Canadian miner Crystallex’ win at court against the parent company of Citgo, PDVSA, Argus Media reports citing documents submitted by Rosneft to court.

“Such a course of action is particularly appropriate under the circumstances given the multitude of parties and interests potentially affected by a sale of PdVH,” the documents said.

Crystallex was ruled the winner in a long-running case against Venezuela, which it has sued over the forced nationalization of its assets by the Hugo Chavez government. A U.S. federal judge last week awarded the miner the right to approach Venezuela’s U.S. oil unit, Citgo, to seek its compensation of US$1.4 billion.

Yet the Russian state company has priority rights over 49.9 percent in Citgo. PDVSA used the stake as collateral for a US$1.5-billion loan provided by Rosneft in 2016. The move at the time sparked a lot of negative comments in the United States, with some legislators worried that Rosneft could at some point take control over the U.S. company. The rest of the Citgo stock has been pledged as collateral to a PDVSA bond issue that matures in two years, Argus Media notes.

Now Crystallex wants to take control over the refiner, which operates a refinery network with a daily capacity of 750,000 bpd, and then sell the stock on to another investor or investors to get its US$1.4 billion. The sum was awarded to the Canadian miner as compensation for the forced nationalization of its operations in Venezuela by the Hugo Chavez government.

At the time, the Associated Press noted that the ruling by Chief Judge Leonard P. Stark is unique: government assets such as Citgo’s parent, PDVSA, are as a rule protected from lawsuits targeting a state. Yet in Stark’s ruling, the judge said that Venezuela had blurred the lines between the government and the state oil firm, with a military official at the helm of PDVSA.

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Venezuelan Oil Assets to be Seized by Creditors

(Express, Simon Osborne, 16.Aug.2018) – Venezuela’s oil assets are being targeted by angry creditors after a US court granted a Canadian mining company permission to send in the bailiffs.

Firms owed billions by the beleaguered South American country and its state-owned oil firm PDVSA are now lining up to make sure they get a pay-out.

The Venezuelan economy is crippled by hyperinflation and the discredited regime of President Nicolás Maduro faces trade sanctions from the US, EU, Canada and Latin America’s biggest countries.

The country is essentially bankrupt and creditors see its oil assets as their best bet with the biggest target being Citgo, a Texas-based oil refiner that processes Venezuelan crude oil and is estimated to be worth roughly £3.15bn.

Oil tankers could also be targeted as US hedge fund Elliott Management did with an Argentine ship in 2012 after it won a US court ruling to collect on unpaid debts.

Venezuela, which is overdue on about £4.5bn in debt payments, is reportedly transferring oil cargoes to safe harbours including Cuba to avoid such risks.

Canadian mining company Crystallex won a key battle in its attempts to force Venezuela to pay £1.1bn in compensation for expropriation of a mining project when a US judge accepted its argument that PDVSA was an “alter ego” of the Venezuelan state and gave it the right to seize PDVSA assets in the US.

Francisco Rodriguez, chief economist of Torino Capital said the ruling could serve as a precedent.

He said: “This judgment is unambiguously negative for Venezuela, given its loss of an asset of significant value. In all likelihood the ruling will spur creditors to attempt to pursue PDVSA assets.”

ConocoPhillips has already won a £1.57bn arbitration award against PDVSA from the International Chamber of Commerce, the US oil major seized the company’s assets in the Caribbean.

The seizures left PDVSA without access to facilities that process almost a quarter of Venezuela’s oil exports.

To avoid the risk of other assets being taken, PDVSA asked its customers to load oil from its anchored vessels acting as floating storage units.

Citgo’s complicated ownership – half the company is security against more than £2.36bn of PDVSA bonds and half is collateral for a £1.18bn loan from Russian oil giant Rosneft – means any immediate plundering of its assets is extremely unlikely.

Robert Kahn, a professor at the American University and a former International Monetary Fund official, said: “The ruling is a win for Crystallex, no doubt. But I’m not convinced that it immediately marks a tipping point.”

Richard Cooper, senior partner at New York law firm Cleary Gottlieb Steen & Hamilton, said: “The Crystallex ruling doesn’t mean that every Republic of Venezuela bondholder can automatically assume that PDVSA assets are available to them.”

Venezuela also owes tens of billions of dollars to China and Russia but its sole foreign-exchange generating industry is in steep decline with oil output dropping below the 1947 levels of 1.3m barrels per day.

***

Crystallex Cuts Others In Line for Citgo Assets

(Energy Analytics Institute, Jared Yamin, 11.Aug.2018) – Crystallex seems to have cut in line while there are many others already in line for CITGO assets and value.

What follows are comments published by Venezuelan oil analyst Francisco Monaldi in a series of tweets related to the legal battle over CITGO:

1) The value of CITGO is much higher than the claim by Crystallex, which by the way was an outrageously high amount for that expropriation,

2) This is the beginning of a shark fest of claims and lawsuits. There are many others in line for CITGO assets and value, CITGO bond holders, CITGO creditors, PDVSA 2020 bondholders, Rosneft, Conoco, other PDVSA and Venezuela creditors and ICSID claimants. It seems to me that Crystallex should not be ahead in this line,

3) In the short term this would be a blow for PDVSA making it harder to get diluents from the US and to earn cash from its heavy exports, but it is just the last in a long list of troubles including default and sanctions,

4) In the long term it would be a big blow to Venezuela, losing a strategic asset to access the USGC market in competition with Canadian heavy, particularly after Keystone is completed,

5) Outside of CITGO, Venezuela has only a few much less valuable assets, what claimants will try is to seize or disrupt PDVSA’s flows of oil and receivables, and force them to negotiate something, and

6) This is a tragic story of recklessness and incompetence by the chavismo, increasing the debt without investment, expropriating and destroying value, in the middle of an oil boom. The consequences, collapsed oil production and now the final reckoning with their claimants…

***

PDVSA Cut Debt to Rosneft $400 Mln in Q2

(Neftegaz.RU, 10.Aug.2018) – According to Platts, Venezuela’s state oil and gas company PDVSA cut its debt to Russia’s top crude producer Rosneft by $400 million in the 2nd quarter to $3.6 billion as of the end of June, Rosneft’s 2nd-quarter results presentation showed this week.

Rosneft agreed prepayment deals for crude and products deliveries with Venezuela between 2014 and 2016, the last of which is due to expire at the end of 2020. The company gave Venezuela a total of $6.5 billion in pre-payments, a Rosneft official said earlier this year.

Venezuela’s debt to the Russian major thus shrank by $1 billion in the 6 months since the end-2017 figure, according to the presentation.

Rosneft reported in May that Venezuela had paid off $600 million of debt in the Q1. The Russian company also said it reduced crude purchases from the Latin American country in the first 3 months of the year.

With the Venezuelan economy moving downhill and its oil industry crumbling in recent years, PDVSA told customers earlier this year it was not able to fully meet its supply requirements. Due to provide Rosneft with 222,000 b/d of diluted crude oil, or DCO, PDVSA only had 116,000 b/d available in June, a PDVSA source said earlier.

With economic hardship, Russia and Rosneft have provided extensive economic support to Venezuela and PDVSA in recent years. Late last year, Russia’s finance ministry agreed to refinance Venezuela’s $3.15 billion loan, extending the payment period to 2026 and introducing more favorable conditions on servicing the loan.

Rosneft also has stakes in upstream projects in Venezuela, including 5 oil projects: Petromonagas, Petrovictoria, Petroperija, Boqueron and Petromiranda, which together account for around 4% of Venezuela’s overall production, according to the Russian company.

Crude reserves at the projects are estimated at over 20.5 billion mt. Late last year, Rosneft also agreed to develop 2 offshore gas licenses in the country.

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Crystallex Court Win Against Venezuela Aided by Finding

(Reuters, Brian Ellsworth, 10.Aug.2018) – Crystallex’s victory in a legal battle with Venezuela that paves the way for it to collect a $1.4 billion award hinged on a finding that state oil company PDVSA is not separate from the Venezuelan government, court documents showed on Friday.

The U.S. District Court for the District of Delaware granted Crystallex’s request to take ownership of shares in PDVSA subsidiary of PDVH, which owns U.S.-based refiner Citgo, as part of a decade-long dispute over the 2008 nationalization of Crystallex assets.

“Crystallex has met its burden to rebut the presumption of separateness between PDVSA and Venezuela and proven that PDVSA is the alter ego of Venezuela,” wrote Judge Leonard P. Stark in the decision.

The issue has been closely watched by investors holding billions of dollars in Venezuelan bonds, which are almost all in default as the OPEC nation struggles under the collapse of its socialist economy.

Legal experts had generally believed that creditors of Venezuela, which has few foreign assets available to be seized by creditors, would have a difficult time pursuing claims against PDVSA because the two were considered separate.

Venezuela two years ago put up 49.9 percent of Citgo shares as collateral for a $1.5 billion loan from Russian oil major Rosneft. The remaining 50.1 percent was set aside as collateral for PDVSA’s 2020 bond.

Judge Stark said the court had not yet determined when it would issue a writ allowing Crystallex to assume ownership of the shares of PDV Holding Inc, or what mechanism should be used to sell those shares.

“The decision could make it more complicated if other courts ignore the boundary between the government and PDVSA,” said Mark Weidemaier, a professor at the University of North Carolina School of Law. “It expands the pool of creditors that could go after PDVSA and casts a shadow over its ability to keep its oil receivables safe.”

PDVSA did not immediately respond to a request for comment.

Information Minister Jorge Rodriguez, asked by a reporter about the decision during a press conference on Friday, declined to comment on it.

Legal counsel for Crystallex declined to comment.

PDVSA’s 2020 bond dropped 4.500 points in price to 85.500 on Friday

Bonds issued by PDVSA and Venezuela were down slightly, in line with a broad selloff in global markets on Friday.

( Additional reporting by Jonathan Stempel in New York, Editing by Paul Simao and Cynthia Osterman)

***

PdV, Joint Ventures Miss Oil Targets

(Argus, 9.Aug.2018) – Venezuela’s state-owned PdV and its joint ventures fell short of officially targeted crude production by more than 125,000 b/d in July, according to an internal PdV upstream report obtained by Argus.

The steepest shortfalls were registered in the Orinoco heavy oil belt — long touted by the Opec country as the driver of ambitious growth plans — and PdV’s western division around Lake Maracaibo.

The monthly report indicates that July production averaged 1,526,600 b/d, compared with a target of 1,651,700 b/d, with operations by PdV and its joint ventures both explicitly missing their targets.

The report data does not include annual or monthly comparisons. Venezuela’s official June production, according to Opec’s latest Monthly Oil Market Report, was 1.531mn b/d. The average of secondary sources, including Argus, was 1.340mn b/d.

PdV officials tell Argus that the production data in the monthly internal report are systematically inflated, mainly by the company’s eastern and western divisions. “They play with the storage tanks and what they report is not reality,” one senior executive says. Actual July national production was around 1.25mn b/d, the officials say.

Despite its shortcomings, the report sheds light on field-by-field and divisional performance trends, acknowledging that neither PdV nor its joint ventures with foreign companies has been able to check Venezuela’s precipitous decline in output. Among the factors fueling the trend are scant maintenance, reservoir mismanagement, skilled labor flight and a lack of critical naphtha and light crude for transport and blending.

The Orinoco oil belt produced 843,200 b/d of crude in July, compared with a targeted 908,200 b/d, the report indicates. Of the belt’s four producing blocks, Carabobo accounted for 375,000 b/d, 23,500 b/d short of its target. PetroMonagas, a PdV joint venture with Russia’s state-controlled Rosneft, accounted for 119,700 b/d or 32pc of the block’s total reported output. That’s followed by Sinovensa, a PdV joint venture with China’s state-owned CNPC, with 91,800 b/d or 24pc.

In the Orinoco’s Junin block, July output averaged 191,800 b/d, off target by 16,500 b/d. The top producer with 71,600 b/d was PetroCedeno, in which France´s Total and Norway´s Equinor are PdV´s minority partners. The joint venture´s production missed its target by 12,200 b/d, well in excess of any other project in the block, the report indicates. PetroCedeno has an official capacity in excess of 200,000 b/d.

Other Junin block projects, including PetroMiranda with Rosneft and PetroJunin with Italy´s Eni, also missed their July goals. PetroUrica and PetroMacareo, PdV nominal joint ventures with CNPC and PetroVietnam, respectively, showed zero real and targeted output.

In the Ayacucho block, PdV´s PetroPiar joint venture with Chevron produced 123,300 b/d, off target by 12,400 b/d, the report says. The project has official capacity of 190,000 b/d.

In PdV´s eastern division, which hosts the legacy Furrial complex, July production averaged 326,300 b/d, just 9,500 b/d short of its target.

The western division, in contrast, produced 319,200 b/d, missing its target by 44,600 b/d. The shortfall came mainly from shallow-water operations in Lake Maracaibo and on its eastern coast.

The report indicates that 1,191 wells stopped producing in July, accounting for 333,200 b/d of lost output. The western division accounted for more than two-thirds of the number of deactivated wells, but the Orinoco accounted for some 80pc of the lost output, reflecting its higher well productivity.

The western division also accounted for 70pc of 1,114 well reactivations in July. These added a total of 183,300 b/d of production, mostly from the Orinoco.

PdV is reactivating the western division wells on its own and with small contractors, unrelated to the company’s vaunted plan to reactivate more than 23,000 wells nationwide, a PdV official says.

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Venezuela Is Oil Market’s Bizarro World

(S&P Global Platts, Nastassia Astrasheuskaya, 7.Aug.2018) – Venezuela’s state oil and gas company PDVSA cut its debt to Russia’s top crude producer Rosneft by $400 million in the second quarter to $3.6 billion as of the end of June, Rosneft’s second-quarter results presentation showed Tuesday.

Rosneft agreed prepayment deals for crude and products deliveries with Venezuela between 2014 and 2016, the last of which is due to expire at the end of 2020. The company gave Venezuela a total of $6.5 billion in pre-payments, a Rosneft official said earlier this year.

Venezuela’s debt to the Russian major thus shrank by $1 billion in the six months since the end-2017 figure, according to the presentation.

Rosneft reported in May that Venezuela had paid off $600 million of debt in the first quarter. The Russian company also said it reduced crude purchases from the Latin American country in the first three months of the year.

With the Venezuelan economy moving downhill and its oil industry crumbling in recent years, PDVSA told customers earlier this year it was not able to fully meet its supply requirements. Due to provide Rosneft with 222,000 b/d of diluted crude oil, or DCO, PDVSA only had 116,000 b/d available in June, a PDVSA source said earlier.

In the face of crushing debt, crumbling infrastructure, worker unrest, hyperinflation and US sanctions, Venezuelan oil output dropped by 670,000 b/d in a year to 1.24 million b/d in July, according to S&P Global Platts OPEC survey. This is the lowest level in the 30-year history of the Platts OPEC survey, except a debilitating worker strike in late 2002 and early 2003.

With economic hardship, Russia and Rosneft have provided extensive economic support to Venezuela and PDVSA in recent years.

Late last year, Russia’s finance ministry agreed to refinance Venezuela’s $3.15 billion loan, extending the payment period to 2026 and introducing more favorable conditions on servicing the loan.

Rosneft also has stakes in upstream projects in Venezuela, including five oil projects: Petromonagas, Petrovictoria, Petroperija, Boqueron and Petromiranda, which together account for around 4% of Venezuela’s overall production, according to the Russian company.

Crude reserves at the projects are estimated at over 20.5 billion mt. Late last year, Rosneft also agreed to develop two offshore gas licenses in the country.

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The Weirdest Oil Lawsuit Of 2018

(OilPrice.com, Viktor Katona, 6.Aug.2018) – Rosneft has been rocking the Russian oil sector for quite some time already – first it acquired several domestic assets, in some cases bordering on hostile takeover, then it took on a couple of international commitments in Iraqi Kurdistan and Venezuela and secured hefty tax concessions. This has led to a sense of satiation, fortified by CEO Igor Sechin opining recently that the oil giant will focus on organic growth from now on. In a somewhat dubious manifestation of Rosneft’s new policy, it is now suing its partners in the Sakhalin-I project for an unprecedented 89 billion roubles ($1.4 billion). The reason, coded with great deliberation in legal gobbledygook, seems remarkably humdrum at first sight, yet there is more to it.

Rosneft claims that the Sakhalin-I shareholders have gained 81.7 billion roubles by means of unjust enrichment, whilst another 7.3 billion roubles are to be paid back as interest gained having used third party funds between 2015 and 2018. The basis of the unjust enrichment claim is Rosneft’s allegation that the exploitation of Sakhalin-I has led to oil crossing over from its Northern Chayvo field to the consortium’s Chayvo deposits. Oil migration is a regular feature of any upstream specialist’s life and so far there were only few examples of taking similar issues to court, especially to such a noteworthy sum required. Further complicating matters, two Rosneft subsidiaries, Rosneft-Astra and Sakhalinmorneftegaz-Shelf, are also present in the Sakhalin-I shareholder structure (20 percent) and Rosneft is claiming money from them, too (17.5 billion roubles in total).

Before we start looking at the political underpinning of Rosneft’s claim, it would be expedient to compare the two projects as they are incomparable in size, importance and scale. Sakhalin-I consists of three oil fields that were deemed commercially attractive in 2000 – Chayvo, Odoptu and Arkutun-Dagi – production at which has started in 2005. The three field’s reserves boast an aggregate of 310 million tons of oil and 485 BCm of natural gas (17 TCf), making it Russia’s biggest project in the Pacific Ocean. By comparison, the Northern Tip of the Chayvo field (also called Chayvo North Dome) contains a “mere” 15 million tons of oil and 13 BCm of gas. It also started production significantly later than Sakhalin-I, with the first producing well of the presumed five having been drilled in September 2014.

What the two projects do have in common, however, is their relatively swift peaking out – Sakhalin-I peaked in 2007, roughly one and a half year after production started (11.2 mtpa or 225 kbpd) and has failed to regain that level ever since, even though two additional fields were brought online in 2010 and 2015 – Odoptu and Arkutun-Dagi, respectively. Currently the Sakhalin-I oil output stands at So did the Northern Tip of the Chayvo field – having reached a 50 kbpd peak in 2016, it fell by some 60 percent in the past two years since. From Rosneft’s standpoint, this is mostly due to oil migrating from the northern dome to the southern and central parts of the field.

With the abovementioned facts in mind, one gets a clear picture of why Sakhalin-I is more important from a federal point of view – moreover, interestingly enough, it is the last project on Russian soil to be operated by a foreign company (ExxonMobil, holding the largest stake of 30 percent). Rosneft is demanding payment of 26.7 billion roubles from both ExxonMobil and the Japanese consortium SODECO (consisting of Marubeni, Japan Petroleum Exploration, ITOCHU, INPEX and JOGMEC), whilst the Indian ONGC Videsh should pay 17.8 billion roubles and its subsidiaries 17.5 billion roubles. The amounts in question are indubitably far-fetched – even though oil migration has been an issue for Rosneft for several years already, the required sum is equivalent to 18-19 million barrels of oil under current circumstances, almost a quarter of Sakhalin-I’s total annual production and 17-18 percent of Northern Chayvo’s reserves.

Herein lies the main tenet of the claim – it is less to establish truth and compensate for real losses, rather to exert pressure on shareholders. Rosneft’s ultimate goal is unclear as the Russian state has so far refrained from any sanctions against oil majors operating in the country, be it in an operator or non-operator status, and any deterioration would be deemed inopportune now that the post-World Cup period has brought in a semblance of a thaw. It is clear, however, that the once very powerful Rosneft-Exxon Mobil link is getting weaker following the departure of Rex Tillerson (whose good personal relationship with Igor Sechin helped to forge effective deals) – even though Exxon’s recent abandonment of upstream ventures with Rosneft did not allegedly close the door for any future cooperation, the contours of anything similar happening in the future are increasingly dim.

More than ten years ago, Gazprom has managed to push out then-operator Shell out of the Sakhalin-II venture, using environmental violations as a pretext. Although environmental breaches have been brought up once again this month – a significant herring die off off the Sakhalin coast aroused suspicion that it might have been caused by oil production – it is highly unlikely that Rosneft would follow the same path. Rumours are circulating that the state-owned oil giant is seeking an out-of-court settlement and does not want to take the issue all the way through the Paris arbitration, from the point of view of placating fears about another takeover it would be politic to state that Rosneft does not intend to reshuffle the ownership structure. Yet so far, Rosneft has been highly reluctant to show its cards.

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PetroVictoria Producing 10,000 b/d

(Energy Analytics Institute, Ian Silverman, 5.Jul.2018) – The heavy oil project is currently producing 10,000 barrels per day, according to PDVSA.

PetroVictoria, is a joint venture comprised of Venezuela’s PDVSA and Russia’s Rosneft to develop heavy oil reserves in Venezuela as part of the Carabobo-2/4 project.

In May 2013, Rosneft and Venezuelan Corporacion Venezolana del Petroleo (CVP), a subsidiary of Caracas-based PDVSA, signed an agreement to establish the PetroVictoria joint venture. PDVSA holds a 60% interest in the venture, while Rosneft holds the remaining 40%

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PDVSA Installs Two Heavy Oil Desalters

Heavy oil desalters. Source: PDVSA

(Energy Analytics Institute, Ian Silverman, 5.Jul.2018) – The land transfer of two from Bolívar to Anzoátegui states, for oil crude desalination has successfully been completed.

The main function of both desalination plants is the subtraction of water and salt contained in heavy oil crude.

The two mega-structures were constructed with local Venezuelan talent in VHICOA workshops, a joint venture of the subsidiary PDVSA Industrial, with aim to boost productive capabilities, announced Petróleos de Venezuela, S.A. in an official statement.

The two identical containers, weighing 149 tons and spanning 25 meters long and 6.5 meters high, where built in a period of time of 11 months. The containers aim to guarantee processing of 52,000 barrels per day (b/d) of crude oil, in addition to the current production of the Petromonagas Operational Center (COPEM), presently estimated at 130,000 b/d, according to PDVSA.

Both desalters were certified by inspectors from the American Society of the Mechanical Engineers (ASME). Inspectors from Colombia, Mexico, Brazil and the USA certified the work on the structures, which have 22 millimeters thick steel sheet joints with a capability to withstand very high pressures and temperatures.

The VHICOA teams will be an important part of the PetroMonagas (PDVSA/Rosneft) Early Production Facility Center. The project, with has a registered process report of 65 percent, is located in the Carabobo Division of the Hugo Chávez Orinoco Oil Belt, also known as the Faja, and includes the participation of oil field service giant Schlumberger.

The oil crude processing modular center will be added to COPEM, once Schlumberger, the main contractor, ends the Engineering, Procurement and Construction (EPC), in February 2019. PDVSA aims to leverage early production from PetroVictoria, a joint venture comprised of PDVSA and Rosneft, which is currently producing 10,000 b/d.

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Venezuela’s Declining Crude Exports Squeeze India’s Refiners

(Reuters, Marianna Parraga, 3.Jul.2018) – Venezuela’s crude shipments to India, its third largest export market, fell 21 percent in the first half of the year, according to internal documents from state-run PDVSA, adding to supply troubles for Indian refiners as they are increasingly pressed to diversify oil imports.

Venezuela’s production decline to a 30-year low and export woes stemming from mismanagement, lack of investment and payment delays are affecting almost all of the OPEC-nation’s customers.

But the impact on India is notable and comes as its refiners are now preparing for a “drastic reduction to zero” of oil imports from U.S.-sanctioned Iran.

Last week, PDVSA officials met with executives from India’s Reliance Industries and Russia’s Rosneft, which owns a majority stake in India-based Nayara Energy, to discuss trade issues, the state-run company said.

The talks focused on how to remedy export delays, according to a person familiar with the matter.

Venezuela sent almost 280,000 barrels per day (bpd) of heavy crude to India in the first half of the year, a 21 percent drop versus the 355,500 bpd shipped in the same period of 2017, according to PDVSA trade documents.

The decline is the second steepest after the United States, which has suffered a drop of about 30 percent in crude imports from Venezuela this year, the documents seen by Reuters show.

If crude supplies from Iran and Venezuela, two of India’s top five oil suppliers, cannot be secured in coming months, some of the nation’s refiners would have to rely almost entirely on sourcing the heavy barrels they need from Iraq, according to analysts.

“Indian refiners are very worried about supply from Iran, but also from Venezuela,” said Robert Campbell from consultancy Energy Aspects.

Saudi Arabia is expected to boost supply to India in the short term, but those barrels would not match the quality of the missing Venezuelan crude, he added. “The lack of heavy barrels is not a problem only in the Atlantic Basin but in Asia as well,” he added.

PDVSA and Nayara did not reply to requests for comment. India’s Reliance declined to comment.

India is the world’s fourth largest refiner after the United States, China and Russia. While Chinese and Russian firms resell a large portion of the Venezuelan crude and fuel they receive to monetize oil-for-loan agreements, Indian refiners need the barrels they get through crude supply contracts with PDVSA.

FEWER BARRELS FOR EVERYBODY

Venezuela’s crude output is declining faster than expected amid insufficient investment, attempts to seize its overseas assets over payment disputes and skilled workers leaving its oil industry due to low salaries and an extended corruption probe within PDVSA.

The country’s oil production averaged 1.58 million bpd in the first five months of 2018, according to figures reported to OPEC, its lowest annual level since 1985. The fall, which is putting pressure on global supply and contributing to growing oil prices, has also taken a toll on exports.

PDVSA last month requested customers not send tankers to its main port of Jose to alleviate congestion. But vessels have continued arriving mainly for Chinese, Indian and U.S. clients, according to Thomson Reuters vessel tracking data.

The tanker bottleneck has worsened since May, when ConocoPhillips started legal actions to seize PDVSA’s assets to satisfy a $2-billion arbitration award, blocking the state-run firm from using its Caribbean terminals.

In June, PDVSA shipped to India 268,300 bpd after servicing some vessels that had waited for up to a month to load. The Venezuelan firm plans to deliver some 240,000 bpd in July, according to Reuters and PDVSA data.

The unstable crude supply from Venezuela to India in recent months has mainly benefited Iraq, India’s largest crude source, and United Arab Emirates, which in May replaced Venezuela as India’s fourth biggest crude supplier.

Reporting by Marianna Parraga in Houston, additional reporting by Promit Mukherjee in Mumbai; Editing by Tom Brown and Marguerita Choy

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PDVSA, Rosneft Officials Discuss Projects

(Energy Analytics Institute, Piero Stewart, 28.Jun.2018) – Officials from both oil companies held meetings in Caracas to discuss partnerships.

PDVSA President Manuel Quevedo, who also serves as Venezuela’s Oil Minister, conducted a meeting with Rosneft Vice President Didier Casimiro to discuss joint projects between the Venezuelan and Russian companies, respectively, and consider new opportunities to strengthen strategic relationships, announced PDVSA in an official statement.

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Venezuela’s Petropiar Upgrader Begins Restart

(Reuters, 26.Jun.2018) – Venezuela’s PDVSA and Chevron have begun to restart their 210,000-barrel-per-day (bpd) Petropiar heavy crude upgrader after a nearly month-long, repair-related shutdown and a fire, according to the state-run company and two sources close to the facility.

Venezuela’s crude upgraders, which can convert near 700,000 bpd of extra-heavy crude from the country’s Orinoco Belt into exportable grades, have been mostly out of service in recent weeks while PDVSA focused on easing a tanker backlog that has delayed exports.

The country’s oil production fell to 1.39 million bpd in May, according to secondary sources cited by OPEC, the lowest level since the 1950s. Oil is Venezuela’s main export and the decline has only served to deepen an already severe economic crisis.

Workers attempted to restart Petropiar earlier in June, but quality issues that were ultimately solved delayed the process, one of the sources said. The restart typically takes several days to be completed while the upgrader’s performance is evaluated.

A fire early on Tuesday at one of the upgrader’s furnaces left one worker injured, but had no material impact on operations, PDVSA said in a statement.

“The event was immediately controlled,” the company said in the statement, adding that crude production and upgrading were not directly affected by the fire.

If Petropiar fully restarts in the coming days, the neighboring 190,000-bpd Petrocedeno facility would be the only upgrader completely shut for maintenance while the 160,000-bpd Petro San Felix complex works intermittently, according to the sources.

But the 150,000-bpd Petromonagas, operated by PDVSA and Russia’s Rosneft, is expected to be out of service later this month due to a planned major maintenance project.

Reduced crude upgrading means PDVSA and its partners in the Orinoco Belt, the country’s largest producing region, have to mix Diluted Crude Oil (DCO) for export, but the volume of the replacement grade is typically lower.

That could help to ease a bottleneck of tankers waiting to transport oil exports. As of June 26, there were more than 75 tankers anchored off Venezuelan ports waiting to load some 24 million barrels of crude and refined products, according to Thomson Reuters vessel tracking data, near flat from earlier this month.

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PetroChina, Rosneft Leave Venezuela Refining Projects

(Kallanish Energy, 28.Mar.2018) – Chinese and Russian state oil companies PetroChina and Rosneft will not pay the costs of repairing and modernizing Venezuela’s Cardón and Amuay refineries for PDVSA, according to union sources.

Ivan Freites, senior official of the Venezuelan Unions Federation of Oil Workers, told local newspaper El Nacional the foreign partners decided after lengthy negotiations with PDVSA the projected $10 billion cost was too high.

Under proposed lease agreements, the firms would solely cover the costs of upgrading both refineries and use each for 10 years. After that period, the refineries, still owned by the Venezuela government, would be returned to PDVSA, Kallanish Energy learns.

“That agreement did not prosper because these refineries are in a deplorable state and they realized that the investments they had to make are extremely high,” said Freites.

Rosneft would manage the Amuay refinery — which has the capacity to process roughly 640,000 barrels per day (BPD) of crude — and PetroChina would take over the Cardón refinery – which can process 305,000 BPD.

Located in Falcón state, they are both part of the Paraguaná refining complex, which has a capacity of roughly 940,000 BPD, including the Bajo Grande refinery.

Freites said that without foreign investment, Venezuela is likely to shut three of its major refineries in coming weeks, as a shortage of crude and lack of personnel will add further pressure and prevent the facilities from operating.

The refineries pending “indefinite closure” are Cardon, El Palito (140,000 BPD) and Puerto La Cruz (190,000 BPD), the union leader said. Together, they account for nearly half of PDVSA’s 1.3 MMBPD of domestic refining capacity.

Currently, only four refineries are said to be operating in Venezuela, at roughly 30% of their combined nominal capacity – reportedly at about 390,000 BPD.

None of the companies responded to request for comments.
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Venezuela Output to Fall 100-150 Mb/d in 2017

(Energy Analytics Institute, Piero Stewart, 26.Mar.2017) – An inability to boost foreign and domestic investments in Venezuela’s oil sector in 2017 will result in further declines in the Caribbean nation’s production of crude oil, according to IESA Professor Richard Obuchi.

Producing petroleum requires investments, and if they do not materialize, oil production is expected to fall an additional 100,000 to 150,000 barrels per day, announced Obuchi during the conference titled “Economic Perspectives 2017” held at the Instituto de Estudios Superiores de Administración (IESA) in Caracas. “Economic activity is expected to fall between 4 and 6 percent of GDP,” he added.

“PDVSA’s capacity to maintain production fell in 2016 due to, [but not limited to], a lack of investments and obligations related to financial debts,” said the Full Professor of Political Economy and Governance at the IESA Business and Public Policy School Michael Penfold during the conference. As a result, in 2016, PDVSA experienced a 12 percent decline in production, he said.

“When someone compares PDVSA’s investments levels with other state oil companies such as Pemex and Ecopetrol they will see the companies have been reducing investments. PDVSA has reduced investments much more than Pemex, Ecopetrol and even Rosneft, and we’re talking about investment reductions at PDVSA that not only prevents it from maintaining production but fundamentally explains why production has been declining so much in recent years,” concluded Penfold.

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PDVSA, Rosneft Hold Conference on EHCO

(PDVSA, 23.Feb.2017) – PDVSA and the Russian company Rosneft held a technical conference on strategy, innovation and technology for a sustainable future, February 22-23, 2017 at PDVSA Intevep’s headquarters in Los Teques, Miranda state.

The event brought together 150 PDVSA and Rosneft specialists from various fields to strengthen cooperation, exchange and technological integration between the People’s Power Ministry of Petroleum, PDVSA, Intevep, joint ventures and Rosneft.

At the opening event, President of PDVSA Intevep Omar Uzcátegui spoke about the potential of this PDVSA subsidiary for the development of technologies and providing specialized technical assistance services. He also spoke about the participation of PDVSA Intevep in the Hydrocarbons Economic Driver to facilitate the massification and implementation of its technologies.

Technical Director of Rosneft in Venezuela Kim Gobert, spoke about the importance of the Hugo Chávez Orinoco Oil Belt, the worl’s largest proven hydrocarbon reserve base. He said that it was necessary to make progress in the strengthening of relations between the two companies to accelerate research projects on the development of heavy and extra heavy crude oil.

The conference brought together specialists from PDVSA and Rosneft, who spoke on diluent management, enhanced hydrocarbon recovery technologies for heavy and extra heavy crude, infrastructure and transportation of crude oil, electricity demand in oil and gas areas, gas management and handling, innovative technological solutions in oil and gas areas including offshore, and a new vision in the improvement and management of solids, effluents and gases.

There are technical round tables for the discussion of four priority issues, such as: integrated gas management, reservoir development and enhanced hydrocarbon recovery, crude oil upgrading and diluent management, and infrastructure and transportation.

The conference aimed to boost the development of PDVSA and Rosneft joint ventures, such as Petromonagas, Petromiranda and Petrovictoria in the Hugo Chávez Orinoco Oil Belt for extra heavy crude oil, and Petroperija and Boquerón in traditional areas.

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PDVSA Says It Maintains Full Ownership of Citgo

(Energy Analytics Institute, Ian Silverman, 25.Dec.2016) – PDVSA maintains full ownership and control over its Houston-based subsidiary Citgo Petroleum Corporation.

PDVSA, in an official statement, also downplayed media versions and comments emitted by persons it claims are only interested in generating political instability in Venezuela based on speculation, rumors and biased information in an attempt to discredit the company.

In October, PDVSA used a 50.1 percent interest in Citgo as a guarantee for bond swap operations and the remaining 49.9 percent interest in its U.S.-based refining subsidiary as a guarantee to raise new financing, according to the statement.

Redd Intelligence, on November 30, uncovered a Delaware Uniform Commercial Code (UCC) filing and broke initial news regarding the filing against Citgo parent PDV Holding, Inc. that revealed Venezuela had secretly mortgaged its Citgo refineries in the U.S. to Russia’s state-controlled oil company Rosneft.

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Rosneft to Partner with PDVSA in Mariscal Sucre

(Energy Analytics Institute, Piero Stewart, 1.Apr.2016) – Russia’s Rosneft OAO and PDVSA signed an agreement for joint development of production, treatment and the sale of natural gas from the Mariscal Sucre project offshore.

Rosneft and PDVSA will each hold a 50 percent interest in the venture which includes the fields Patao, Mejillones and potentially Rio Caribe, according to the Rosneft statement.

The three fields comprise part of the Mariscal Sucre natural gas project off the eastern coast of Venezuela. Another offshore field, Dragon, is also part of Mariscal Sucre but apparently not covered by the agreement. Activities at the Mariscal Sucre project are just 20 percent complete, announced PDVSA, as the Caracas-based company is known, in a statement on its website.

Rosneft has announced production from the three fields could potentially reach 25 million cubic meters (883 million cubic feet) per day, which could be shipped by pipeline or as liquefied natural gas, also known as LNG.

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Rosneft Drills Record Well in Venezuela

(Rosneft, 8.Oct.2015) – Rosneft, as part of a PetroMiranda JV including PDVSA and Gazprom Neft, has drilled an unprecedented horizontal well GG1-14 at the Junin-6 block.

The well is unique for the shallow depth, only 1,140 feet or about 347 meters, of the reservoir interval and the length of horizontal section 4,920 ft or 1,500 meters. The total length of the well is 6,059 ft (some 1,847 meters).

The increasing of technological implementation in field development is a top priority for Rosneft’s longterm development strategy in the upstream area, which allows maintaining cost-efficient production at brownfields, and increasing production at greenfields.

This is the first of such wells to be drilled in Venezuela using conventional vertical drilling units. Complex directional work was performed to build up an angle with simultaneous azimuthal turn of well direction in the limited boundaries of the reservoir interval, thus solving the challenging task of strict following of geological targets, which is often a problem on such wells. This result was achieved due to the use of an advanced rotary steerable system (RSS), which had been introduced at the Junin-6 block with the support from Rosneft specialists.

According to the generally accepted system of ERD (Extended Reach Drilling) wells complexity evaluation, the GG1-14 is classified as the most difficult, with a Directional Difficulty Index (DDI) index of 6.63 and an ERD index of 4.44, which is a record for wells in Venezuela today. In order to meet geological objectives and place the well exactly in the reservoir interval, such projects require technologically competent planning and outstanding delivery in terms of construction.

Drilling of such shallow wells opens up new prospects for the development of hydrocarbon reserves in the Venezuelan Orinoco Heavy Oil Belt. According to the geological analysis made by Rosneft and PDVSA, significant oil reserves are located in shallow formations. The company intends to further expand the use of advanced solutions to drill more efficient wells and access significant hydrocarbon reserves.

Currently Rosneft and PDVSA cooperate in the realization of 5 JV in the upstream sphere in Venezuela:

— Project Carabobo-2 (Petrovictoria JV): PDVSA via CVP, WI 60%; Rosneft, WI 40%

— PetroMonagas JV: PDVSA via CVP, WI 83.3%; Rosneftm WI 16.7%

— Project Junin-6 (PetroMiranda JV): PDVSA via CVP, WI 60%; NOC, WI 40% (Rosneft, WI 80% and Gazprom Neft, WI 20%)

— Boqueron JV: PDVSA via CVP, WI 60%; Rosneft, WI 40%

— Petroperija JV: PDVSA via CVP, WI 60%; Rosneft, WI 40%.

Total geological oil resources of these projects are estimated at more than 20.5 bln t.

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Rafael Ramirez Speech in Caracas

(Energy Analytics Institute, Piero Stewart, 7.Oct.2013) – PDVSA President Rafael Ramirez spoke with journalist in Puerto La Cruz, Venezuela.

What follows are excerpts from the discussion.

Rafael Ramirez regarding shipments to China:

Ramirez: We are currently exporting 640,000 b/d to China and 430,000 b/d to India.

We are supplying oil to China but we are arriving to a point that we need to build new refineries in the country so that they can process our heavy oil. That is why we are working with CNPC on a refinery project in Jieyang. In contrast, India has installed refining capacity, so India is another natural market for our heavy oil.

Regarding Lukoil pulling out of Carababo project in the Faja:

Ramirez: The Russian companies are looking for one primary company and not so many small companies in Venezuela. As a result, Rosneft has been looking to increase its participation in projects.

The situation regarding Lukoil and Rosneft in the Carabobo project is between Russians. We have given Rosneft authorization to move forward with the assumption of Lukoil’s stake and we do not have a problem with this.

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Rosneft and PDVSA Evaluate Gas Projects

(Energy Analytics Institute, Ian Silverman, 15.Aug.2013) – Rosneft and PDVSA are reviewing plans to extract gas in Sucre state and in the Gulf of Venezuela, according to a PDVSA official.

“We are looking at areas with gas and condensate reserves,” PDVSA President Rafael Ramirez told Energy Analytics Institute.

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Rosneft to Use Russian Technology at PetroMonagas

(Energy Analytics Institute, Ian Silverman, 14.Aug.2013) – Rosneft President Igor Sechon said his company would utilize Russian technology at the Petromonagas heavy oil project to increase production to 160,000 b/d from 140,000 b/d.

Rosneft and PDVSA participate as partners in the following JVs in Venezuela: Petroperija, Boqueron, Petromonagas, Petrozamora, Petrovictoria and Petromiranda.

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Journalist Round Table with Rafael Ramirez

(Energy Analytics Institute, Piero Stewart, 31.Jul.2013) – PDVSA President Rafael Ramirez held a small round table with journalist in Caracas, Venezuela.

What follows are excerpts from the discussion.

Rafael Ramirez on the petroleum sector and the current government administration under Venezuelan President Nicolas Maduro:

Rafael Ramirez: We have firmly established our political strategy related to the oil sector.

We are currently entering a stage of production expansion and will concentrate all of our work and energies on reaching our goals and increasing production capacity in Venezuela.

If we look back, we received the petroleum sector (in late 1999) during a phase of privatization in the downstream, midstream, and upstream sectors, especially PDVSA.

But Venezuela has entered a new expansion stage of petroleum sector policies and PDVSA is entering into the Expansion Phase of the Faja development.

In terms of the sabotage that our oil industry has seen, we continue to feel the effects of these actions and damage mostly in Western Venezuela where we have experienced a drastic drop in production.

After the oil sector strike in 2002-2003, we established our petroleum sector plan. We oversaw the migration of operating contracts (of 33 companies with contracts we saw 31 of the companies migrate to the new contracts without problems, only ExxonMobil and ConocoPhillips decided to exit the migration process and eventually exit Venezuela altogether). We also oversaw changes and modifications to laws, fiscal changes such as reestablishing royalties and taxes.

The year 2010 marked the beginning of the new expansion stage for the Venezuelan oil sector. From 2004-2010 we worked on nationalization, migration process to new contracts, and PDVSA regaining control of the oil sector by increasing its participation from an average 49% in JVs to a minimum of 60%. We are now in the stage of increasing the production of oil.

In all, we spent ten years (2000-2010) recuperating PDVSA, under the watch of late-President Hugo Chavez Frias.

Ramirez: We are employing many engineers from public schools here in Venezuela for various jobs, including rig operations.

On the petroleum sector expansion process:

Ramirez: In 2013, we have been concentrating our efforts on recuperating production capacity of 4 MMb/d by year end 2014 and 6 MMb/d by year end 2019 (of which 4 MMb/d will come from the Faja). For this to happen, it is fundamental that we move two elements: development of the Faja and development of an industrial base. [See also information on industrial meetings with private sectors across the country].

We need to construct a production capacity of 3 MMb/d in the Faja. This runs parallel with work we have been conducting in the Faja related to the industrial meetings with the private sector.

The government is working hard with the private sector for the second phase of the Faja development. Hence the Six National Productive Meetings we had to gauge interest in the private sector to participate in projects with the government and PDVSA.

We are working with private (transnationals) companies as well as the Venezuelan Hydrocarbon Association or AVHI but I must reiterate: “The companies that do not want to help PDVSA increase its production capacity can simply leave the country.”

We have received positive feedback from CNPC and Chevron and we are awaiting response from other companies such as Repsol, among others, in terms of new financing deals related to petroleum sector projects.

We plan to create investment funds for all the Faja JVs whereby “the Venezuelan citizens” will participate.

The government will create four investment districts in the Faja. In Sep.2013 the government will announce plans and create development schemes, special fiscal schemes for the four districts that are located in each of the four Faja blocks.

Ciudad Bolivar will be the main city that Venezuela will use for the development of the Faja since it already has an airport and universities.

Development of the Faja will be the most important prospect for Venezuela in this Century.

The government is working with private companies regarding funding and the use of money solely to increase production.

The government realizes that a number of private companies that have converted to JVs have had problems increasing production (operating costs around $12/bbl, including G&A). Regardless, the government wants the companies to maintain operations in Venezuela and increase production. However, private companies that cannot maintain these operating costs should be operated by PDVSA. We are looking to drastically reduce overhead costs. Again, we don’t want small operators to leave, but we want them to merge their operations to reduce overhead so that they can focus on increasing production.

We are starting a push for reduction of costs and more efficiency in our production. In the Western region of the country we have had a lot of success implementing this strategy and we have stopped the production declines in the region.

The government wants companies in Zulia in Falcon state to be more efficient and is trying to help them reduce their overhead.

On the Faja reservoir spanning into Colombia:

Ramirez: The Faja does not extend to Colombia, only to Guarico state in Venezuela in its most western extension. There are individuals in Colombia that are trying to convince investors that Colombia shares the same geology as Venezuela, which is not true. Pacific Rubiales has sold a lot of stock selling this story to investors. The Faja formation in Venezuela is different than the one in Colombia.

On the Chinese Fund and other financing issues:

Ramirez: Close to 94% of foreign income that Venezuela generates comes from the petroleum sector.

Venezuela will sign a $5 bln funding (Fondo Chino or Chinese Fund) in Sep.2013 in the presence of President Nicolas Maduro in China.

The amount of barrels that are sent to China to repay loans varies each month due to changes in oil prices. When oil prices are high, the barrels that need to be sent to China decline, while any excesses are returned to PDVSA.

We sold $21.9 bln to the Venezuelan Central Bank or BCV during 2001-Jun.2013. In 2013, we plan to sell $47 bln to the BCV.

In 2012, PDVSA paid down debt by about $4 bln, this figure stood at $34.4 bln at YE:12

Money on our Balance Sheet as of June 30, 2013 ($12 bln) includes investments (commercial credit) from Rosneft, CNPC, Gazprom, Chevron. Money from new JVs could be used in the SICAD weekly auctions when the companies need access to Bolivars. This will also reduce the companies’ needs to participate in illegal activities to obtain Bolivars.

PDVSA will not issue more debt in USA dollars but instead in Bolivars as it is easier to pay back this debt in the local market than in dollars.

On Venezuelan windfall tax scheme:

Ramirez: The following table (See Table 1) lays out Venezuela’s windfall tax scheme.

Table 1: Venezuela windfall tax payment to Fonden

Price of oil ——- Payment % to FONDEN

$80/bbl ——— 20%

$80-$100/bbl —- 80% of the difference

$100-$110/bbl —- 90% of the difference

>$110/bbl ——– 95% of the difference

Source: PDVSA

FONDEN is a national development fund which is similar to a fund that is run by the Norwegians. “I don’t see anybody criticizing the Norwegians,” but this government is overly criticized.

On oil exports, shale developments worldwide and other issues:

Ramirez: PDVSA is an operational company. We are constantly balancing things out. We have debts but we have revenues. We have financing but we have capitalization.

Increases in interest rates under the Petrocaribe initiative were not called for by PDVSA. The conditions remain unchanged.

Venezuelan oil exports are down due to increased use of diesel in the domestic market to generate electricity.

Shale oil developments do not affect Venezuela. We are not worried about shale oil developments going on worldwide. However, most of the shale resources in Venezuela are located in Maracaibo Lake area where they amount to about 13,000-19,000 MMbbls.

We are evaluating to what depths we have shale in the Urdaneta field. Venezuela has shale resources in Lake Maracaibo which are four times as much as those claimed by Colombia. We need to drive to deeper horizons where there are larger concentrations of oil. Although we have shale resources in Falcon state we will continue to look for convention oil and gas. There is tremendous liquids potential offshore Falcon state.

A $100/bbl oil price does not permit the development of shale oil. So we need a good oil price and $100/bbl is a good price, not just for Venezuela.

Oil price sensitivity: For each $1/bbl decline/rise in oil prices, Venezuela losses/gains $700 mln per year in revenues.

As a result of the Perla 3x offshore gas discovery which also unveiled large condensate potential, we have decided to drill offshore Falcon state in search of additional condensate potential.

Oil production at the Sinovensa JV is around 140,000 b/d but we expect this production to reach 165,300 b/d by year end 2013 and ultimately 330,000 b/d.

During 1992-1999, Venezuela’s 4th Republic reported fiscal revenues of just $23.5 bln, while the Revolutionary Government (under former Venezuelan President Hugo Chavez and now President Nicolas Maduro) has reported fiscal revenues of $448.8 bln during 2000-Aug.2013 (as of 1.Aug.2013), of which $310.3 bln came from changes in new laws (i.e. increasing taxes and royalties and increasing PDVSA’s participation in oil projects).

Venezuela’s oil production declines on average 700,000 b/d a year or around 20-25% per year. However, Venezuela adds an average 700,000 b/d of production to make up for the short fall and maintain production around 3,000 Mb/d.

In the Faja the production declines are not as pronounced since it is a newly developed area, but in Zulia state in Lake Maracaibo the declines are more pronounced.

On gasoline issues:

Ramirez: The government is working to install an automatic chip system and even GPS systems in Tachira state as there are reported cases of cars in Colombia with Venezuelan license plates that are crossing the Colombian/Venezuelan border each day to buy cheap gasoline in Venezuela to later sell it in Colombia.

The government is looking to implement the export of Venezuelan gasoline to Colombia to reduce the demand for gasoline in Colombia.

On refineries:

Ramirez: El Palito refinery will receive heavy oil from the Faja in the future while the Puerto la Cruz refinery will also process oil from the Faja. We will continue to use light oils for mixtures or for export.

Changes/upgrades at existing refineries are being done to increase the heavy oil processing capacity.

Plans to build three new refineries in Venezuela have not changed.

The government has proposed that companies convert upgraders into refineries or upgrade the oils to 42 degrees API so that it can be exported or mixed with other oils and thus avoiding potential bottlenecks in Venezuela.

Our agreements with Eni are to build a refinery and not an upgrader. The majority of the finished products from this refinery will be diesel with specifications established for European markets. The 300,000 b/d capacity refinery with Eni is a move by the Italian company to pay lower taxes.

On Ecuador:

Ramirez: PDVSA has reduced its interest in Ecuador’s Pacific Coast Refinery to 19% from 49% to allow entrance of CNPC with a 30% interest. Petroecuador will continue to hold a 51% interest in the project. Nonetheless, PDVSA still plans to send 100,000 b/d to the refinery for processing.

On the USA and potential divestment of CITGO refineries:

Ramirez: The US market has a large processing capacity for heavy oils. In regards to divesting of our interest in CITGO; it is not viable to sell individual refineries in the USA. It would only be interesting if they (the CITGO refineries) could be sold as a packaged deal.

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