Missing parts and missed deadlines

In September 2012, at a drilling site in the Orinoco basin, Rosneft’s Sechin filled a jar with crude oil and lifted it into the air to mark the moment his firm joined the ranks of global oil majors. Rosneft was part of a Russian consortium that had acquired a 40 percent share in Venezuela’s Junin-6 oilfield. PDVSA held the other 60 percent.

Rosneft already pumped oil from its home fields in Siberia; now it had an overseas presence too, tapping into some of the world's biggest crude oil reserves on the banks of the Orinoco River. “Today is indeed an historic day,” Sechin told Russian state television at the ceremony to mark the start of production. “Russian companies have now proved their right to be among the leaders of the global oil sector.”

Yet soon after Sechin spoke, Rosneft's foray into the Orinoco basin was running into problems, the documents reviewed by Reuters show.

In November 2012, without asking its Russian partners, PDVSA shut down one of the four drilling rigs at Junin-6 and removed it, a report by the Russian consortium found that year. Local people staged protests that further blocked work. By the end of 2012, just six wells had been drilled, far short of the project’s target of 47.

“As of 15.08.2015, PDVSA is in technical default.”

Spare parts for drilling at Junin-6 were procured from a PDVSA unit called Bariven; but getting equipment from Bariven took 10 to 18 months, according to the documents. Drilling rigs were not operating 37 percent of the time. It took on average 49 days to drill a single well, instead of the anticipated 22 days. PDVSA did not respond to questions about the delays.

Junin-6 production forecasts were cut. Rosneft had said in September 2012 that the field would deliver 20,000 barrels per day by the end of the year. In fact, over the whole of 2012 it yielded only 21,400 barrels.

Three years on, there was little sign of improvement. A Rosneft report covering the first three quarters of 2015 cited well construction “of an unsatisfactory quality” and “non-optimal trajectories” of wells.

By the end of 2015, the forecast for peak oil output from Junin-6 had been slashed from 450,000 barrels per day to 250,000 barrels per day. Rosneft’s flagship project had lost its lustre.

Problems remain across the Orinoco Basin, according to union leaders who spoke to Reuters. They said that in fields east of Junin, only a handful of the dozens of drilling rigs are working at any one time. Workers complain they don’t have basic equipment such as boots, gloves and helmets. The situation in PDVSA offices is no better. Paper is in short supply. In a vain effort to stem a worker exodus, some HR departments display “No resignation” signs.

Nor is life in Venezuela easy for Rosneft staff. There is often no mains water in the high-end Caracas district where they live, said a Russian who knows families there. A couple of times a week, a water tanker arrives and fills up containers in each apartment.

Two of Rosneft's Russian partners in Junin-6 dropped out. The smaller Surgutneftegaz decided to quit the project in November 2012. In December 2014, Russia’s second biggest oil firm, Lukoil, announced it too was dropping out. “Looking back, a lot of people at Lukoil breathed a sigh of relief that they didn't have to pile billions into Venezuela,” said an executive in the Junin-6 consortium.

Surgutneftegaz did not respond to a request for comment. Lukoil declined to comment.

Rosneft bought out the Surgutneftegaz and Lukoil stakes for upward of $300 million, analysts estimated, deepening its exposure to Venezuela. It also acquired a stake belonging to TNK-BP when it purchased the Russian-British firm in a $55 billion deal in 2013. That left Gazpromneft, the oil unit of state-owned gas firm Gazprom, as Rosneft’s sole remaining Russian partner in Junin-6. Gazpromneft did not reply to Reuters’ questions.

Rosneft also had four smaller oil projects with PDVSA at that time. All were experiencing problems during this period, the Rosneft internal reports show. Two of the projects, Carabobo and Petromonagas, are in the Orinoco basin; Boqueron is in the east near the Atlantic coast; Petroperija is on the Caribbean coast.

Rosneft internal reports from 2015 concluded that crude flow rates envisaged in the contract for the Carabobo fields were “not achievable.” At Petromonagas, poor quality work caused drilling delays. At Petroperija, production was falling and the joint venture did not have the cash to buy essential pumping equipment. At the Boqueron field, a broken compressor, a device to raise gas pressure, could not be fixed because the joint venture’s bank account was empty.

Money troubles

If getting oil out of its projects was a struggle for Rosneft, so was extracting revenue, the documents show.

The Russian consortium’s report into operations at Junin-6 in 2012 found that PDVSA had taken $12 million from the Junin-6 budget, without Rosneft’s agreement, for social spending on local people. Only 350 people lived in the area covered by the concession - some 447 square kilometers of hilly scrubland on the northern bank of the Orinoco River.

In the second half of 2014, Rosneft ordered an audit of the Junin-6 project to check for “distortion of financial accounting” and “unjustified expenditures.” Reuters couldn’t determine that audit’s conclusions.

Rosneft managers ordered the company’s own auditors to investigate money flows between PDVSA and the Petromonagas, Petroperija and Boqueron joint ventures, internal documents relating to the audit show. The audit concluded that PDVSA had understated earnings from Petromonagas oil sales by some $700 million. PDVSA challenged this figure, another document shows, and it was revised to $500 million.

In a document dated April 30, 2015, Sechin, Rosneft’s chief executive, approved the findings of the audit, and a plan to protect Rosneft’s investments with a series of measures to be implemented by the end of May that year.

The measures included installing metering stations to monitor how much oil was being pumped to customers, and therefore how much money the ventures should be earning. Rosneft wanted an independent assessor to track how the joint ventures spent money. And it wanted PDVSA to stop hiring its own subsidiaries without signing a contract. Reuters couldn’t determine whether the measures were put into action.

A few months later, in October 2015, Rosneft First Vice President Eric Liron reported to Sechin that there was still disagreement with PDVSA on settling accounts with the joint ventures. Liron wrote in a memo to Sechin: “As of 15.08.2015, PDVSA is in technical default.”

Months of efforts to get the money – in which Rosneft’s Venezuela office and senior executives at headquarters engaged in negotiations with PDVSA officials – went nowhere. The Rosneft internal auditor stated in the November 2015 email to his colleague that the problem was “unresolved because of the poor financial health of our partner” - a reference to PDVSA.

Discussing a proposal to push the internal deadline for fixing the problem to a later date, the auditor asked sardonically what would be the point. “Will it (PDVSA) return to health by then, or will it die and the question will no longer be relevant?” he wrote in the same email.

The auditor left Rosneft in 2016, according to his LinkedIn profile. He did not respond to a message seeking comment.

Rosneft was supposed to receive its share of the revenue from oil sales in the form of dividends. As of the fourth quarter of 2015, Rosneft internal presentations showed that the company was owed dividends from three of its joint ventures. The total shortfall was $337 million. The presentations listed among the strategic aims of each of the three projects: “Receiving unpaid dividends” from PDVSA.

Since the period covered by the documents, Rosneft has acted to take greater control of its investments, for example by bringing in its own contractors. Rosneft says PDVSA has paid off much of its debt. In a financial report released on Feb. 5, 2019, Rosneft said the loans it extended to PDVSA, which had totalled about $6.5 billion, were now down to $2.3 billion.

But serious challenges remain.

Rosneft’s own reports and assessments by energy analysts show the company’s projects in Venezuela are today still producing less oil than originally anticipated, with development plans either shelved or behind schedule.

Rosneft’s flagship joint venture in Venezuela, the Junin-6 field, is still stuck in the exploration and test production phase, Rosneft wrote in its 2017 annual report. An executive at Russian partner Gazpromneft went further, saying the project is now “commercially pointless.” The executive did not elaborate. Rosneft did not reply to Reuters questions about the commercial viability of the project.

Additional reporting by Oksana Kobzeva, Anton Zverev, Olesya Astakhova, Katya Golubkova, Olga Yagova, Gabrielle Tetrault-Farber, Vladimir Soldatkin, Alexander Ershov, Gleb Gorodyankin, Tatiana Ustinova and Margarita Popova in Moscow; Dmitry Zhdannikov in London; Marianna Parraga in Mexico City; Brian Ellsworth, Vivian Sequera, Alexandra Ulmer and Luc Cohen in Caracas.

Billions spent, little to show Reuters estimates that after sinking more than $9 billion into Venezuela in loans, acquisitions and project spending since 2010, Rosneft, which is majority owned by the Russian state, has yet to show a profit. At the end of 2018, Rosneft had spent approximately $1.5 billion more in Venezuela than it had earned in the form of oil allocated to it as dividends, according to Reuters’ calculations. This figure is reached by calculating the value of oil Rosneft received from its joint venture projects and subtracting from that outstanding loans Rosneft issued to PDVSA, official payments Rosneft made to Venezuela for access to oil fields, Rosneft capital expenditure on the ventures, and the cost of extracting Rosneft’s share of the oil. The cost figures are based on a benchmark for operational expenditure in Venezuela of $15 per barrel. Rosneft did not respond to a request for comment. The Reuters estimate of Rosneft’s financial shortfall in Venezuela could be conservative because it does not take into account tax Rosneft had to pay in Venezuela. This tax rate is not publicly disclosed, but Caracas normally takes at least 50 percent of the value of each barrel of oil. The estimate also does not include instances where PDVSA, according to documents reviewed by Reuters, failed to give Rosneft the share of oil production at joint projects that the Russian company believed it was due. Nor does it include cases where Rosneft had to sink extra capital expenditure into fields and plug unexpected holes in the joint ventures’ balance sheets. In April last year, energy consultancy Wood Mackenzie said its forecast for peak production at the Junin-6 field was now 120,000 barrels per day - half as much as Rosneft’s internal documents forecast back in 2015, and just over a quarter of the 450,000 barrels initially predicted. The Boqueron field and Petroperija joint ventures were loss-making, Rosneft said in its financial report for 2018. At the Patao, Mejillones and Rio Caribe offshore gas prospects, which Venezuela signed over to Rosneft in 2017, there was no development plan or infrastructure plan in place, Wood Mackenzie said last year. The Petromonagas project – where Rosneft had planned to increase output - has also been falling short of hopes, internal PDVSA documents show. As of last July, it was pumping less oil per day than it had in 2015.

Orinoco swamp By Christian Lowe and Rinat Sagdiev Photo editing: Simon Newman Design: Catherine Tai Edited by Janet McBride, Mike Collett-White and Richard Woods