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Russia plans to defend interests in Venezuela, including in oil

Highlights

Russia estimates Caracas' outstanding debt at over $3 billion

PDVSA owed Rosneft $3.1 billion as of November

Analysts see potential loss of assets 'biting but not critical'

Moscow — The Kremlin will defend Russian interests in Venezuela using "all available" legal mechanisms, with Russia's top oil producer Rosneft facing heightened risks to its major investments in the troubled Latin American country.

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The US on Monday announced sanctions against PDVSA, Venezuela's state-owned oil company and Rosneft's partner, in a move aimed at cutting off the regime of President Nicolas Maduro from oil revenues and diverting those revenues to the fledgling alternative government of opposition leader Juan Guaido, who the US formally recognized last week as the legitimate president.

Russia, however, does not recognize the opposition leader, claiming the US sanctions against Venezuela are illegal.

"We do not consider this to be correct. We consider this... a sign of unfair competition, in this case it is open interference in the internal affairs of Venezuela," Russian President Vladimir Putin's spokesman, Dmitry Peskov, said Tuesday, as quoted by Prime news agency.

"We will defend [Russia's interests] within the framework of existing international law, using all mechanisms available to us," he said.

Russia has built close ties with Venezuela's President Maduro, investing billions of dollars into the country's economy, including in its oil sector.

Caracas could face problems with servicing its debt to Moscow, Russian deputy finance minister Sergei Storchak admitted, estimating current debt at over $3 billion. Venezuela is due to pay more than $100 million in two months under the debt redemption schedule, he said, as reported by local media.

This debt does not include prepayment deals between Rosneft and PDVSA reached between 2014 and 2016. Under those deals, the Venezuelan company received $6 billion to be fully redeemed by the end of 2019. PDVSA's 49.9% stake in US refiner Citgo is collateral on part of this loan. Other creditors, though, have laid claims to the company over unpaid debts as well.

The latest sanctions by the US further highlighted difficulties for Rosneft should it try to claim the Citgo stake. The US administration said PDVSA-owned Citgo assets in the US, which include refineries in Louisiana, Texas and Illinois and three pipeline systems, will be allowed to continue to operate at least for three months, although revenues also will be required to be held in blocked accounts.

ROSNEFT INTERESTS IN VENEZUELA

Whatever the outcome of the current political turmoil, which heightens political risk for companies involved in the country, Venezuela's authorities are unlikely to take any action that threatens Rosneft, analysts believe.

"Venezuela's economy depends heavily on oil revenues, up to 90%," said Ekaterina Grushevenko from the Skolkovo Energy Center. "The new government will need petrodollars to restore the economy and its oil sector... In this respect, the authorities are likely to welcome the presence of Russian companies in the country."

Rosneft and PDVSA are jointly developing five upstream oil projects in Venezuela -- PetroVictoria, Petromiranda, Petromonagas, Boqueron and Petroperija. Combined production amounted to around 234,000 b/d on average in 2018, Patricia Ventura Nicolas, senior analyst with IPD Latin America, estimated in December.

Those barrels are used for supplies under the prepayment deal and the deliveries are likely to continue as it is hard to see the projects being shut down any time this year, a Moscow-based oil analyst said.

Rosneft did not reply to a request by S&P Global Platts to comment but analysts believe the Russian company is unlikely to see major disruptions if PDVSA defaults.

"The worst-case scenario -- which is unlikely to materialize -- under which Rosneft loses all the money it invested in Venezuela, would be biting but not critical for the company, with quarterly free cash flow at over $4 billion," an oil analyst with Western bank said.

He estimated Rosneft's assets in Venezuela at around $2 billion-$2.5 billion, with an additional $2.5 billion of prepayment loan that is yet to be covered with oil supplies. In November, Rosneft said that Venezuela was meeting its obligations and that it expected that to continue.

Venezuela cleared $1.5 billion of prepayments in the first nine months of 2018, and a total of $3.1 billion remained outstanding, according to the company's presentation at the time.

In December, Russia and Venezuela also inked a number of contracts to the tune of $6 billion during a visit by Maduro to Moscow, including in the telecommunications sphere. At the time, Maduro said Russia would invest $5 billion to raise Venezuela's oil production by 1 million b/d but no further details on the deal were provided.

Venezuela's crude output fell to 1.17 million b/d in December, according to the latest S&P Global Platts OPEC survey. The country's output is forecast to decline by 350,000 b/d through 2019, but, depending on sanctions and other risk factors, could fall by as much as 800,000 b/d by late this year, according to Barclays.

-- Nadia Rodova, nadia.rodova@spglobal.com

-- Edited by Alisdair Bowles, newsdesk@spglobal.com