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INSIGHT-Oil-for-loan debts cost Venezuela's PDVSA hard-won India market share

| CARACAS/HOUSTON/NEW DELHI, March 8

CARACAS/HOUSTON/NEW DELHI, March 8 Venezuela's state-run oil company, PDVSA, has spent at least a decade trying to build business ties and boost shipments to refineries in India, where crowds once welcomed the late socialist leader Hugo Chavez with cries of "Viva!"

Now, the ailing firm is being forced to slash sales to its crucial trade partner.

Venezuela has given up the fight for coveted market share in India because of a combination of declining crude production and heavy obligations under oil-for-loan deals with China and Russia, according to internal PDVSA data and two people familiar with the company's strategy and operations.

Caracas needs the oil to pay debts to China and Russia, key political allies that have together lent Venezuela at least $50 billion in exchange for promised crude and fuel deliveries.

PDVSA and the Venezuelan Oil Ministry did not respond to requests for comment.

In 2013, when Venezuela exports and oil prices were high, PDVSA raked in nearly $14 billion from India, the world's fastest growing large economy. By last year, after an oil price crash, that figure had plummeted to $2.7 billion, according to a Reuters analysis of the PDVSA data.

That means less cash income for the isolated South American economy, deepening a recession that has left many citizens skipping meals amid food shortages and soaring inflation.

Oil accounts for almost all of Venezuela's export revenue, and many of Venezuela's customers pay for oil in kind - with food or medical supplies, for example. India is among the few trading partners that buy large volumes of PDVSA oil with cash.

So lower sales to India's refineries are further eroding the company's cash flow - and its ability to pay mounting debts to suppliers and service providers, which have caused delivery delays and cancellations around the globe.

SLIPPING SHARE

The shift stems from a crude production decline of 10 percent last year, to 2.38 million barrels per day (bpd), due to a lack of investment and payment delays to providers.

The falling output means PDVSA could increasingly lose business in India to Iranian, Iraqi and Brazilian companies.

The internal PDVSA data also show that Venezuela - which sits on the world's largest crude reserves - managed to maintain its place as No. 3 crude supplier to India last year. It delivered about 413,000 bpd, behind only Saudi Arabia and Iraq.

But PDVSA expects shipments to India to drop to 360,000 bpd this year, according to an internal PDVSA report reviewed by Reuters.

Those cuts are already happening: Venezuelan crude exports to India plunged 16 percent in January compared to a year earlier, according to Thomson Reuters trade-flows data.

India has made up the gap with supplies from the Middle East, including imports from Iran that have surged since the lifting of U.S. sanctions last year.

Venezuelan crude is heavy and harder to refine. In a market that is still oversupplied after a two-year glut, higher-quality crude is plentiful and not much more expensive.

"The current quality of Venezuelan crude could incentivize the partner to seek other providers," PDVSA said in an internal report, in a section on India labeled "threats."

While India is tapping new sources of crude, the country continues to view Venezuela as an important part of its diversified supply, India's Oil Minister Dharmendra Pradhan told Reuters.

"We are depending on Venezuela. We have some investments in Venezuela's exploration and production," Pradhan said in an interview. "They are going through a temporary crisis, but I'm hopeful they will still be a good partner to our supply chain."

PASSAGE TO INDIA - VIA CHINA, RUSSIA

Venezuela still has some cards to play in India - the world's fourth-largest refiner and a country that imports nearly three quarters of its crude.

India wants to diversify oil imports to protect its economy against external shocks, meaning South American shipments can help mitigate the risk of supply disruption from Middle Eastern suppliers.

But India doesn't necessarily have to buy the Venezuelan oil it wants from PDVSA - it can buy it from Chinese and Russian firms that receive Venezuelan crude as payment for loans.

That means China and Russia can use Venezuelan crude to increase their market share in India at the expense of PDVSA's declining share.

Chinese firms are already taking some of the Venezuelan crude and selling it to the same Indian refineries that were previously buying the oil directly from PDVSA. Russia is poised to start doing the same.

Such arrangements have been in place for some time but are now accelerating as PDVSA's production falls. In 2014, for instance, state-run China National Petroleum Corporation started sending Venezuelan crude to India's Reliance Industries, operator of the world's largest refinery, according to the PDVSA data.

While CNPC gained a foothold in the Indian market by sending more than 180,000 bpd of Venezuelan crude last year, PDVSA's direct shipments to Reliance fell by 61 percent between 2013 and 2016.

Russia's Rosneft, which also receives Venezuelan oil in return for loans, stands to gain, too. Rosneft last year bought a 49 percent share of Indian refiner Essar Oil and is set to replace PDVSA as a supplier of Venezuelan oil to the Vadinar refinery.

VENEZUELA'S "UNION OF THE SOUTH" FALTERS

The loss of Indian sales is a bitter reversal for socialist Venezuela, which pushed hard to open up the distant market as a way to decrease trade ties with the United States - a closer buyer but an ideological foe.

PDVSA's U.S. shipments have fallen but they remain the biggest chunk of the company's exports, with the majority going to its U.S. refining unit, Citgo Petroleum.

During his 2005 visit to India, late president Chavez said Venezuela's oil had been flowing north for too long. Instead, he promised a thriving exchange among developing nations.

"We must launch a new strategy to unite the South!" Chavez, an Indian shawl draped over his shoulders, told cheering university students in New Delhi in 2005.

It took at least two years of negotiations and frequent trips to India by PDVSA's top executives, but state-run Indian firms finally invested in oil fields and projects in Venezuela.

But Venezuela's downward spiral has hurt Indian oil companies and frayed bilateral relations, along other PDVSA business partners across the globe.

State-owned ONGC Videsh, for instance, is owed about $600 million in late dividends for the joint crude project San Cristobal with PDVSA.

Under pressure, Venezuela recently began settling those debts by giving ONGC the money it collects from 17,000 barrels per day of crude exports - meaning even more oil is being used to finance debt payments.

But ONGC has also seen production at its San Cristobal field cut in half amid an exodus of talent, shortage of equipment, and theft in Venezuela's vast Orinoco Belt.

"We have accumulated a very large amount of dividends pending," Narendra Verma, chief executive officer of ONGC Videsh, told Reuters. "But we have been patiently negotiating with PDVSA."

If all goes well, the company expects it can recoup the delinquent payments in about three years, Verma said in an interview.

Meanwhile, Venezuela's efforts to stop the bleeding at PDVSA have yet to show results.

A recent PDVSA board shake-up ushered in political and military figures; Venezuela's economy is entering its fourth year of recession; and salaries are so low that some PDVSA workers are even selling their uniforms to buy food.

"The relationship with India has hit a ceiling," said Kenneth Ramirez, a geopolitical oil analyst in Caracas. "That won't change unless Venezuela's oil industry undergoes big change."

(Writing by Alexandra Ulmer and Marianna Parraga; additional reporting by Simon Webb in Houston; Editing by Simon Webb and Brian Thevenot)

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