Venezuela forced to buy oil from Russia

By Andy Webb-Vidal in Caracas
Published: April 28 2006 03:00 | Last updated: April 28 2006 03:00

Venezuela, the world's fifth-largest oil exporter, has struck a $2bn deal to
buy about 100,000 barrels a day of crude oil from Russia until the end of
the year. Venezuela has been forced to turn to an outside source to avoid
defaulting on contracts with "clients" and "third parties" as it faces a
shortfall in production, according to a person familiar with the deal.
Venezuela could incur penalties if it fails to meet its supply contracts.

Documentation obtained by the Financial Times shows that the state-owned
Petróleos de Venezuela (PDVSA) made a financing arrangement this month with
investment bank ABN Amro to facilitate the purchases of oil from Russia via
Rotterdam.

PDVSA is believed to have dropped the Dutch bank after the Russian
government agreed to provide Venezuela with an "open account" facility to
buy the oil.

The Ruhr Oel refinery in Germany, in which PDVSA has a50 per cent stake, may
be among the clients that are being supplied with the Russian oil.

PDVSA would not confirm yesterday that it was buying oil from Russia but
said a statement would be issued today. The company said it would be
"logical" that the Ruhr refinery was sourcing some of its oil from Russia
because it would be cheaper than transporting it from Venezuela.

One US trader who deals in Venezuelan oil agreed, saying: "We have been
expecting PDVSA to start buying [oil from the] Urals for the Veba system for
some time. It is possible that they are trying to buy directly from Russian
producers."

The move suggests a growing gap between Venezuela's declining domestic
output and its expanding contractual obligations to international customers.

Luis Pacheco, a former planning director of PDVSA, said: "Why would
Venezuela be buying crude oil from Russia? I would imagine it would be to
meet obligations for light oil deliveries, but they are relatively small.
Most of PDVSA's obligations are for heavy oil."

Under President Hugo Chávez, PDVSA's oil output has declined by about 60 per
cent, a trend analysts say has accelerated in the past year because of poor
technical management.

Mr Chávez's push to extend his influence throughout Latin America and the
Caribbean with promises of cheap oil for friends and allies may be
overstretching PDVSA's finances, however.

Venezuela currently supplies about 300,000 barrels per day of oil and
products to Cuba, Nicaragua and others under favourable long-term financing
arrangements.

This week, Venezuela signed a deal to send oil to town mayors in Nicaragua
aligned with the leftwing Sandinista party.


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