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Rosneft lends $1.02 billion to Venezuela oil company PDVSA

Sources: Thomas W. O'Donnell: PDVSA,Gazprom, Global Business Consultans, Bloomberg

Russia's Rosneft standing by investment plans in Venezuela.

By Elena Mazneva and Stephen Bierman

Petroleumworld 08 07 2017

Russia's largest oil company disclosed another advance payment to Venezuela's state producer after the U.S. sanctioned President Nicolas Maduro on Monday.

Rosneft PJSC  paid $1.02 billion to Petroleos de Venezuela SA in April for future crude supplies, the state-run Russian producer said in an earnings statement on Friday. That follows advance payments of about $1.5 billion in 2016 and comes a day after Rosneft Chief Executive Officer Igor Sechin pledged to stick with investment plans in the crisis-torn Latin American nation.

The South American country became Rosneft's largest source of crude outside Russia through deals with late President Hugo Chavez and after it acquired shares in Venezuelan producers, led by PDVSA, as part of its purchase of TNK-BP in 2013. Bets on a Venezuela default are climbing as political turmoil in the oil-dependent nation compounds a crude price crash and declining production.

“This is an indirect way of providing some financial aid to PDVSA,” according to Ovanes Oganisian, a strategist at MidLincoln Research, a consulting firm in Moscow. “PDVSA bonds are trading now with yields indicating a very solid possibility of default.”

The U.S., the biggest buyer of Venezuelan crude, sanctioned Maduro after he held elections on the weekend for a new assembly that will rewrite the constitution. The socialist state is said to be working on a Plan B to find markets for its oil if the White House ratchets up the punitive measures and bans imports. 

Debt Challenge

Rosneft holds a 49.9 percent stake in PDVSA's U.S. subsidiary, Citgo, as collateral for the $1.5 billion loan last year. Several U.S. lawmakers have asked the Treasury Department to investigate the matter, saying it could have national security implications if Rosneft gains control over Citgo.

The prepayment by Rosneft probably won't resolve the challenge PDVSA faces in repaying its debt, according to Alexander Griaznov, a Moscow-based credit analyst at S&P Global Ratings.

“There is no immediate impact on PDVSA, as the company still faces very material liquidity challenges under current oil prices,” Griaznov said. “PDVSA already did a distressed exchange last year, which constitutes a default under our criteria, and we think there is a high likelihood of similar transaction going forward.”

Fitch Ratings Ltd. has said a default of PDVSA's debt is "probable," citing lower output, limp oil prices and weak liquidity. The state oil company sent a letter dated July 31 asking bond investors for a temporary waiver from financial reporting requirements because it can't complete the documents on time.

Still, Rosneft sees Venezuela's heavy oil as a feedstock for the Indian refinery it's acquiring. The Russian producer plans to boost output from Venezuela almost fivefold to 12.5 million metric tons within a decade. Rosneft and PDVSA completed feasibility studies for three fields off Venezuela in July.

Sechin, a close ally of Russian President Vladimir Putin, has denied any involvement by Rosneft in Venezuelan politics, pointing to the nation's world-leading oil reserves as the company's motivation.

Russian Support

Venezuela's opposition-controlled congress earlier this year voted to reject a $500 million deal in which Rosneft increased its stake in the PetroMonagas venture with PDVSA. The country's Supreme Court later invalidated the congressional ruling.

While the U.S. has sanctioned Maduro and other senior Venezuelan officials, Russia expressed its support following the elections.

“The recent vote gave a clear signal about the long overdue need to overcome the crisis experienced by the country through political means, through dialog, in line with the current legislation, on the basis of popular will and without outside interference,” Russia's Foreign Ministry said on July 31.

Rosneft's interests in Venezuela are strictly business-related, according to Chris Weafer, a partner at Macro Advisory in Moscow.

“Rosneft does have to be careful to show that its financial assistance is strictly for PDVSA and not intended to support the regime,” Weafer said. “Right now it is one of the few partners PDVSA can rely on and, over the longer term, that is going to be a big positive for Rosneft.”

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