Russia squeezing embattled Venezuela for tax-free gas expansion

CARACAS and RIO DE JANEIRO (Bloomberg) -- Russia’s state-controlled oil giant, Rosneft PJSC, is extracting concessions from crisis-ridden Venezuela to enter the offshore natural gas market on the cheap, a potential headache for the U.S. and Europe.

An accord signed by both Russia and Venezuela earlier this month will give Rosneft tax breaks to produce and export gas from Patao and Mejillones fields off Venezuela’s east coast. The document, which also includes a “fair market price” in the event of an expropriation, makes changes to a bilateral agreement reached in 2009, according to a filing by the Russian government.

The deal underscores how Russia is both propping up and gaining from the Nicolas Maduro regime at a time when the U.S. is sanctioning Maduro and China has cut its support. Venezuelan gas could eventually offer Russia new entry points into both Asia and Europe.

“China is backing away in terms of its financial exposure,” Andrew Stanley, an associate fellow at the Center for Strategic and International Studies, said in a telephone interview. “Whereas the Russians, over the past few years, they’ve gone in the opposite direction, they’ve kind of doubled down and seen this as an opportunistic plan.”

Since 2014, Rosneft has loaned about $6.5 billion to Venezuela in exchange for oil, according to data compiled by Bloomberg. Petroleos de Venezuela SA, or PDVSA, has been repaying the loans by delivering barrels to Rosneft, and had an outstanding debt of about $1.8 billion in the first quarter, according to a company presentation.

As a result of the changes signed by Russian President Vladimir Putin, Rosneft and its suppliers will be exempt from value added and import taxes to develop the two gas fields, which are near to where Exxon Mobil Corp. is rushing to extract oil in neighboring Guyana. The agreement was filed online by the Russian legal information website, which publishes orders by the president and applied international treaties.

The accord comes as top U.S. officials, including National Security Adviser John Bolton, have repeatedly accused Russia, as well as Cuba, of propping up the Maduro regime.

Rosneft is also considering entering another natural gas block, known as Deltana 5, that’s much closer to a border that’s been hotly contested, according to two people familiar with the plan. Maduro has vowed to block Exxon from exploring in the contested area.

Trinidad and Tobago

The fields are estimated to hold 6.4 Tcf of natural gas, twice the proven gas reserves in all of neighboring Colombia. The fields are less than 100 km (62 mi) from Trinidad and Tobago, where declining domestic output has left export facilities with spare capacity that could be filled by output from Venezuela.

Spokesman for both PDVSA and Rosneft in Venezuela declined to comment.

Rosneft would have two options to export the gas. It could build a liquefied natural gas plant in Venezuela, or it could pipe the gas to Trinidad where there are LNG trains with spare capacity.

The changes show the Venezuelan government is pragmatic, realizing that oil fields have to be negotiated on favorable terms to be competitive, according to Antero Alvarado at the consulting firm Gas Energy Latin America. But he expressed doubt on how Rosneft will monetize the gas.

Venezuela doesn’t have LNG facilities, Alvarado said, and Russia doesn’t have strong commercial ties to nearby Trinidad, the obvious place to initially sell it. The deal suggests Russia may push to have a bigger presence in Trinidad in the future.

Deepened involvement

“Deepened Russian involvement with regional energy producer Trinidad is a cause for concern,” Caracas Capital Markets, a brokerage, said in a note to clients. “The Russians already dominate gas production in Asia and Europe and are developing massive further capacity in Siberia and the Arctic.”

Russia has a history of propping up politically-aligned allies like Maduro to challenge the U.S.’s influence in foreign affairs. Rosneft has been picking up PDVSA assets since 2011 when it bought the Venezuela oil company’s stake the Ruhr Oel GmbH refining company in Germany. It went on to take stakes in three heavy oil project in the Orinoco basin, as well as two joint ventures in the Lake Maracaibo region.

Toughed it out

Not all of the Russians in Venezuela’s oil industry have toughed it out like Rosneft. Lukoil sold its stake in a Venezuelan heavy oil project to Rosneft in 2014. Earlier this year Gazprombank sold its remaining stake in the Petrozamora joint venture in western Venezuela to an undisclosed buyer.

Still, the close ties Rosneft has built with Maduro give it an incentive to stay the course.

“Initially it was the Chinese who were making all the loans to the Venezuelans, and then the Russians took over and have exposure to some of the big oil projects in Venezuela, and there’s something there for the Russians to protect and look after,’’ said Ruaraidh Montgomery, a director at Houston-based energy research firm Welligence Energy Analytics.