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Venezuela state oil firm's credit woes spread to U.S. unit Citgo


By Marianna Parraga and Catherine Ngai

HOUSTON/NEW YORK (Reuters) - Washington's recent sanctions against Venezuelan state-run company PDVSA have started to ensnare its U.S. unit, Petroleum, making it harder for the refiner to obtain the it needs to purchase crude, according to six traders and sources.

Fewer providers are willing to sell cargoes to on open credit, instead requiring prepayment or bank letters of to supply its 749,000-barrel-per-day refining network, the sources said.

Two sources at Canadian suppliers said their companies are no longer allowed to trade with directly, and have begun selling cargoes through third parties to avoid the risk.

Citgo's three U.S. refineries in Illinois, Texas and Louisiana account for about 4 percent of domestic fuel capacity, and are major suppliers of gasoline, diesel and jet fuel. If financial troubles raise the cost of obtaining crude, its profits would be squeezed, making the company less competitive.

had remained immune from its parent's straits until this year. But U.S. sanctions levied in recent months against Venezuelan officials, PDVSA executives and the country's debt issuance have deterred banks and suppliers from extending even routine credit, the sources said.

Citgo's main crude supplier is Venezuela, but the company also buys U.S. and foreign It has told some providers they can charge more to reflect the added risk.

"We are now more conservative when dealing with PDVSA or any of its units," said an executive from a trading firm with a long term business relationship with PDVSA.

"Banks that have refused to provide have a very rational thinking, they don't want to be exposed to sanctions. It does not take too much to have banks nervous," he added.

The U.S. government did not intend sanctions to affect existing private agreements at or PDVSA. Treasury Secretary Steven Mnuchin in August said "short-term financing for most commercial trade" between the United States and Venezuela, including the petroleum flow, was exempted.

declined to comment.

Venezuela's Economy Vice President Ramon Lobo on Thursday said the government is facing "a series of difficulties" as result of sanctions, which he considered an attempt to push the country to insolvency with a "financial blockade."


While was not directly sanctioned in August, it was barred by name from transferring dividends or distributing profits to PDVSA or the Venezuelan government. has provided nearly $2.5 billion in dividends to its parent company since 2015, according to Fitch Ratings.

That restriction raised alarms among its longterm and trading partners in the United States.

As a result, is "trying to renegotiate its supply terms," said a trader from a firm that is requiring to prepay for purchases. The company is worried about a higher debt default risk as well as the sanctions.

also has other problems. Its Gulf Coast refineries are being forced to buy more crude on the open market to offset a declining flow of from PDVSA.

From June through August, PDVSA supplied only half the volume of Venezuelan crude it was to send under a 220,000-bpd supply contract, according to trade flows data. At the same time, Venezuela increased deliveries to Russia's Rosneft to pay for loans.

Even Citgo's 167,000-bpd Lemont refinery in Illinois, which largely processes Canadian oil, is having trouble retaining arrangements with its traditional providers, according to three traders from crude suppliers that are no longer allowed to sell directly to

In August, executives traveled to Canada, as they typically do once a year, but this time sought to assure marketers in Calgary that the firm was financially stable. "I don't think anyone was very convinced," a source involved in the talks said.


has a long standing agreement to buy on preferential terms from Switzerland-based trader Mercuria Energy, without obtaining letters of credit, according to four of the traders.

But when Mercuria is unable to provide crude to Citgo, the refiner goes to the spot market, where many of its providers demand prepayment or letters of to secure payment within 30 days of every cargo discharge.

The sources said traders, refiners and firms have been rebuffed in recent weeks after seeking letters of from a list of banks suggested by PDVSA and Citgo, which includes Citibank, JP Morgan, Suisse, BNP Paribas, ABN Amro, and Deutsche Bank.

"This is not a issue, nobody thinks is unwilling to pay. But banks have to protect themselves from fines, so they typically go beyond what the sanctions require," said a banker who has been dealing with Venezuela for years.

The banks declined to comment on specific clients.

Citgo's attempt to address the problems has been to suggest suppliers mark up their prices, three traders said. But that "only transfers the risk from the bank to the provider," one of them said.

A similar tack was used by PDVSA last year before intermediaries began requiring prepayment. In most cases, cargoes that arrive in Venezuelan ports now wait for weeks before a bank transfer is received.

Minister Lobo and traders said PDVSA has started talks to change its preferred currency to euros from dollars for some business relationships, an idea that has failed in previous years. President Nicolas Maduro last week said the OPEC-member could also use China's yuan, India's rupees, Russia's ruble and Japan's yen.

(Reporting by Marianna Parraga in Houston and Catherine Ngai in New York; additional reporting by Nia Williams in Calgary and Corina Pons in Caracas; Editing by David Gregorio)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Fri, September 15 2017. 10:38 IST