Trading houses beat US majors to first deals for Venezuelan oil

Venezuelan Oil Trade Dynamics

By Dmitry Zhdannikov, Marianna Parraga and Shariq Khan

Role of Global Trading Houses

LONDON, Jan 12 (Reuters) - Global oil trading houses have emerged as early winners in the race to control Venezuelan crude flows, getting ahead of U.S. energy majors wary of credit and legal risks and securing a potentially lucrative business opportunity in the country with the world's largest crude reserves.

U.S. Companies' Reluctance

U.S. President Donald Trump said U.S. majors would invest billions of dollars in Venezuela to quickly rebuild its dilapidated oil sector following the U.S. capture of President Nicolas Maduro earlier in January. Trump met top oil executives at the White House on Friday as his administration outlines a long-term plan to raise $100 billion to boost Venezuelan oil output.

Government Involvement and Legal Concerns

The first companies to secure any business in the wake of the U.S. military action in Caracas, however, were Dutch-based trader Vitol and Singapore-headquartered peer Trafigura, rather than U.S. majors.

The U.S. government tapped the giant merchant houses because they were better suited to quickly get Venezuelan oil exports flowing again, four industry sources familiar with the negotiations said. That is the first order of business for Washington before reconstruction can begin, so that revenue from exports under U.S. supervision can fund the government of interim President Delcy Rodriguez in Caracas.

"Securing and marketing the initial barrels of Venezuelan crude oil was done at record speed to benefit both the American and Venezuelan people," a White House official told Reuters.

Venezuela relies on oil exports for revenue, and has been starved of those proceeds for about a month under a blockade Trump imposed as he raised pressure on Maduro. 

Washington and Caracas are finalizing a $2 billion deal to sell up to 50 million barrels of crude to U.S. refiners and other buyers - oil that had been stuck on ships in Venezuelan waters and in storage tanks because of the blockade.

Facilitating the initial oil sales was critical to ensure funds could flow back into Venezuela for everyday services and a process is in place to maintain the steady flow of production, sales, and refining of Venezuelan crude oil, the White House official said.

Trafigura and Vitol have secured preliminary special licenses to negotiate and export the Venezuelan crude, and Trafigura is set to load its first cargo this week, Chief Executive Richard Holtum said at the White House meeting with Trump.

GLOBAL NETWORK ADDED TO TRADERS' APPEAL

The trading houses competed with Chevron to secure the supply deals. Chevron is the only U.S. oil major that operates in Venezuela, as a minority partner in joint ventures with Venezuelan state oil firm PDVSA. Chevron has a license from U.S. authorities, which exempts it from the sanctions the United States had imposed to choke off oil revenues to Maduro.

Trafigura is among the very few companies that can execute a deal of this size and complexity thanks to its scale, global shipping fleet and logistics network, Trafigura said.

Vitol said it has a long history of working on complex transactions requiring agile logistics, operations and finance. 

The traders also won the Venezuelan oil export deals because they have a higher risk tolerance and are more nimble than major publicly traded oil companies, said three participants at the White House meetings.

Legal teams and advisors have discouraged some big U.S. oil producers from getting involved in the initial oil shipments due to the potential for Venezuelan creditors to seize the revenue, one of the sources said.

"How can it be guaranteed that creditors will not resort to legal action in the U.S. or elsewhere?," said one advisor to a U.S. oil company on Venezuelan affairs.

The U.S. government told the trading companies it would provide protection by controlling the bank accounts linked to the sales and shielding proceeds from creditors, three sources familiar with the matter said.

Trump moved quickly on Friday to do that. He issued an executive order blocking courts and creditors from impounding revenue from the sale of Venezuelan oil held in U.S. Treasury-controlled accounts, the White House said on Saturday.

Venezuela owes more than $150 billion in foreign debt. Among creditors are the same oil companies that Trump wants to help rebuild Venezuela's industry. ConocoPhillips and Exxon Mobil are still trying to recover almost $14 billion related to asset expropriations 20 years ago.

INVEST AND REBUILD  

Trump and his team have told the oil companies they need to invest and rebuild the sector first, and that any debt repayment would come later.

U.S. oil companies would also be more reluctant to take the compliance risk involved in selling oil from tankers that have been blacklisted by Washington for their involvement in sanctioned oil trade, three shipping sources said.

Many vessels in the shadow fleet that ship sanctioned oil are old and have unknown or outdated insurance arrangements and safety certifications, which are required for entry into many ports. They do not meet the stringent chartering requirements of big U.S. oil companies, two of the sources said.

Another factor that may have contributed to U.S. majors' reluctance for more involvement in short-term oil trade is their investment in China, one source said. The majors have tens of billions of dollars invested in China.

Beijing has condemned the U.S. action in Venezuela. China is among Venezuela's largest creditors, and PDVSA has been servicing that debt by paying with oil shipments.

Most of the $2 billion of oil in the deal being finalized was initially set for shipment to Chinese refiners. Chinese independent refiners have been the top buyers of Venezuelan crude since the U.S. imposed sanctions on the country's main traders in 2020.

Big U.S. oil companies want to see the U.S. lift sanctions on oil trade and for Venezuela to enact the legal framework that would make it attractive for them to work with Venezuelan entities and invest in the country.

EXXON CEO CALLS VENEZUELA 'UNINVESTABLE'

At the White House meeting with Trump, Exxon CEO Darren Woods called Venezuela "uninvestable" and said security guarantees and a reform of its hydrocarbon law were needed before Exxon could return to the country. Venezuela had twice expropriated Exxon's assets in the past, Woods said. 

Trump on Sunday said he might block Exxon from investing in Venezuela. "I didn't like Exxon's response," he said.

Conoco CEO Ryan Lance said at the same meeting that his company was the largest non-sovereign creditor, with some $12 billion in pending compensation for expropriation of assets. Trump told Lance the U.S. would not look back at what had previously been lost in the country.

Under the framework of their new deals, the trading houses would also supply lighter oil to Venezuela that it needs to dilute its heavy oil for exports, two sources said. Vitol were set to load the first cargo of that fuel this past weekend, oil industry sources said on Saturday.

(Reporting by Dmitry Zhdannikov and Jonathan Saul in London, Marianna Párraga and Arathy Somasekhar in Houston, Shariq Khan in New York and Jarrett Renshaw in Washington DC; writing by Liz Hampton; editing by Simon Webb, Diane Craft and Jason Neely)