PdV considers force majeure on oil exports

Venezuela's state-owned PdV is considering a declaration of force majeure on some of its oil supply contracts in June unless its clients agree to accept volume reductions of up to 50pc, PdV officials tell Argus.

PdV's tumbling crude production, chronic breakdowns of its heavy crude upgraders and difficulty importing critical light crude and naphtha are progressively reducing the amount of oil available for export. The company was already taking advantage of flexibility in its supply contracts to shave off up to 10pc in export volumes.

But larger cuts are now looming.

PdV "in the best case only has about 695,000 b/d of crude supply available for export in June," a PdV marketing division executive said.

Because the distressed company's problems are structural, any force majeure declaration would set a commercial bar that the Opec country could not quickly overcome.

PdV is asking its principal clients that are collectively owed 1.5mn b/d of crude in June to accept smaller volumes and restructure existing supply contracts for up to one year.

Among the drivers behind PdV's supply deficit is ongoing maintenance at its PetroPiar upgrader in which Chevron owns a 30pc stake. The facility, which has been off line since early May, supplies about 160,000 b/d of synthetic crude to the country's export portfolio. Maintenance will last through the end of June at the earliest, PdV officials say. Chevron declined to comment.

Three other upgraders, all run by PdV, are in poorer operational condition.

PdV could invoke force majeure if new supply deals involving smaller volumes cannot be worked out with clients such as Chinese state-owned CNPC, India's Reliance and Russia's Lukoil.

The energy ministry likely would attribute a force majeure declaration to US financial sanctions and the effects of its debt-related dispute with US independent ConocoPhillips that severed PdV's Dutch Caribbean logistics last month. From the perspective of Venezuela's increasingly isolated government, the strategy would boost its international case against sanctions by adding pressure to the oil market.

The company's June obligations include 1.27mn b/d of 16°API Merey blend to eight clients, including Valero, Nynas and Tipco.

PdV clients that reject new deals with supply haircuts could see all of their Venezuelan supplies suspended until the circumstances obliging PdV to declare force majeure are resolved, one of the PdV officials said.

PdV does not expect to solve its crude supply shortfalls by next month. "PdV has a critical structural problem that cannot be fixed in a few weeks or even a few months, because the core problem is that Venezuela's crude production has dropped far beneath the volumes we are contracted to deliver," one executive said.

"We simply aren't producing enough crude, and we don't have the cash flow to compensate by purchasing crude from third parties to meet our supply commitments. Our greatest operational concern right now is that production continues to fall and our export supply volumes also will continue to decline as a result."

Any force majeure declaration would entail financial penalties that proponents are not taking into account, one detractor inside the firm said.

PdV's US clients have not commented on the proposed truncated supply contracts. Russian companies Rosneft and Lukoil and China's CNPC have not been formally notified of possible supply shortfalls during June, local Russian and Chinese officials said.

But Chinese refiners anticipate that PdV's supply difficulties likely will worsen in coming months and already are shopping for alternative supplies in Canada, Colombia and Mexico, a Chinese diplomat said.

Around half of PdV's exports go toward servicing oil-backed loans, mainly to China but also to Russia.

India's ONGC and Reliance likely will seek to offset falling supplies from PdV by increasing purchases from Rosneft and other suppliers in Latin America, Africa and the Middle East, an Indian diplomat said.