Venezuela's energy woes spread to its closest ally: Cuba

Venezuela's energy woes spread to its closest ally: Cuba
HOUSTON/CARACAS | BY MARIANNA PARRAGA AND ALEXANDRA ULMER

Venezuela's falling crude output and financial woes have left it
struggling to maintain a 15-year-old oil assistance program to its
closest ally, Cuba.

State-run oil firm PDVSA has slashed its exports to Communist-run Cuba
this year, according to the company's internal trade data, seen
exclusively by Reuters.

The shift signals an unraveling of the oil diplomacy pioneered by
Venezuela's late socialist leader Hugo Chavez and helps explain why
Cuba, which generates electricity from fuels, recently ordered some
joint ventures and state-owned firms to reduce power usage.

It also comes as Cuba improves its relations with the United States
after decades of antagonism and a U.S. economic embargo while Venezuela,
mired in triple-digit inflation and acute product shortages, is in a
prolonged standoff with Washington.

Cuba, long reliant on Venezuela as its top energy supplier, has received
some 53,500 barrels per day (bpd) of crude from PDVSA this year, a 40
percent decline from the first half of 2015, according to the company's
data.

When it was flush with cash from oil exports, Venezuela's socialist
government won political support in Latin America and the Caribbean by
sending oil on advantageous terms to allies.

Cuba, which receives some 4 percent of Venezuela's total oil exports,
has been the biggest beneficiary of the program and until this year was
spared the fallout from PDVSA's growing cash flow problems, which
already undermined oil supplies to Uruguay, Jamaica, Dominican Republic
and Curacao.

Venezuela has partially offset the smaller crude shipments to Cuba by
boosting exports of refined products such as fuel oil, diesel and
liquefied petroleum gas (LPG).

But overall shipments to Cuba, including both crude and products, still
declined 19.5 percent to 83,130 bpd in the first half of this year.
[Link to graphic on Venezuela's monthly oil exports to Cuba:
tmsnrt.rs/29kux9r]

It is unclear if Cuba is looking to secure new sources of supply amid
the shortfalls. The barter arrangement for Venezuelan oil has been a
huge boost to Cuba's economy and it would have to pay much more in the
open market.

Meanwhile, PDVSA has been scrambling to limit its own purchases of
expensive light crude and naphtha needed to dilute its extra heavy
Orinoco crude, and is opting to keep more of a medium crude known as
Mesa 30 at home to use as a diluent.

Mesa 30 has for long been the main crude received by Cuba. The oil now
arriving is heavier, making it harder for Cuban refineries to produce
the ideal mix of fuels for its economy, according to a source with the
Cuba-Venezuela commission that oversees their treaties.

Venezuela has the world's largest crude reserves though output has
declined in recent years because of underinvestment. Given a slump in
oil prices and a mounting economic crisis at home, PDVSA is straining to
keep up investment and production.

Numerous oil analysts believe the OPEC country's oil output this year
will fall to its lowest level since a devastating strike at PDVSA in
2002 and 2003.

FALLING REVENUE

PDVSA said this month its sales revenue fell more than 45 percent in
2015. Despite Venezuela's long track record of paying its foreign debts,
there are growing concerns among Wall Street investors over whether it
will be able to pay PDVSA's and the country's bondholders.

Oil Minister Eulogio Del Pino said there is no significant decline in
production, but output is already well off a peak of 3.24 million bpd in
2008. In May, it reported output of 2.37 million bpd, almost 460,000 bpd
less than two years ago, according to publicly-available OPEC data.

PDVSA did not respond to requests for comment.

Heavy oil makes up a growing portion of Venezuela's ailing production
while the output of lighter crudes that can be used as diluents to turn
extra heavy crude into exportable blends is falling sharply.

Production of Mesa 30 crude and other grades used as diluents has fallen
by 40,000 bpd so far this year to some 395,000 bpd, according to a
source at PDVSA and companies monitoring Venezuela's output.

That has forced it to drastically cut exports of lighter grades and
import expensive diluents.

Some of the medium and light foreign crudes PDVSA imports at its
Bullenbay terminal in the Caribbean have instead been redirected to
Cuba, according to PDVSA's internal data.

In 2015, PDVSA sent 2.6 million barrels of Angola's Girassol and
Russia's Urals crudes to Cuba. This year, the firm has opted to send
Cuba heavier Venezuelan grades, such as Leona and diluted crude oil (DCO).

Less Venezuelan supply means Cuba will have little or no surplus oil or
fuel to export, as it has done in the past.

"Cuba has been able to produce a surplus of gasoline and jet fuel, which
it can export to the international market to generate hard currency,"
said Jorge Pinon, director of the Latin America and Caribbean Program at
University of Texas at Austin.

"It would not have that luxury once it has to pay hard cash for the
crude oil."

(This version of the story adds the dropped word 'percent' in paragraph 5)

(Reporting by Marianna Parraga in Houston and Alexandra Ulmer in
Caracas; with additional reporting by Sarah Marsh in Havana; Editing by
Terry Wade and Kieran Murray)

Source: Venezuela's energy woes spread to its closest ally: Cuba |
Reuters - http://www.reuters.com/article/us-venezuela-cuba-oil-idUSKCN0ZO0DI