CARACAS/HOUSTON (Reuters) - Venezuela’s state-run oil firm, PDVSA, is increasingly delivering poor quality crude oil to major refiners in the United States, India and China, causing repeated complaints, canceled orders and demands for discounts, according to internal PDVSA documents and interviews with a dozen oil executives, workers, traders and inspectors.

FILE PHOTO: The logo of the Venezuelan state oil company PDVSA is seen next to a mural depicting Venezuela's late President Hugo Chavez at a gas station in Caracas, Venezuela March 2, 2017. REUTERS/Carlos Garcia Rawlins/File Photo

The disputes involve cargoes soiled with high levels of water, salt or metals that can cause problems for refineries, according to the sources and internal PDVSA trade documents seen by Reuters.

The quality issues stem from shortages of chemicals and equipment to properly treat and store the oil, resulting in shutdowns and slowdowns at PDVSA production facilities, along with hurried transporting to avoid late deliveries, the sources said.

U.S. refiner Phillips 66 PSX.N canceled at least eight crude cargoes because of poor oil quality in the first half of the year and demanded discounts on other deliveries, according to the PDVSA documents and employees from both firms. The canceled shipments - amounting to 4.4 million barrels of oil - had a market value of nearly $200 million.

Another key buyer of Venezuelan crude - India's Reliance Industries Ltd RELI.NS, operator of the world's largest refinery - has repeatedly complained about oil quality, a PDVSA employee told Reuters. State-run firm China National Petroleum Corp (CNPC) also complained earlier this year about excessive water levels in oil cargoes, a former PDVSA employee said.

The deterioration of PDVSA crude is the latest symptom of the firm’s ill-maintained production infrastructure, and it threatens to accelerate an already severe cash crisis at a time when Venezuela is hoarding dollars to pay some $3.4 billion to bondholders in the next few weeks. PDVSA’s financial woes radiate through the country’s recession-racked economy, which depends on oil for more than 90 percent of its export revenue.

Venezuela’s Oil Ministry and PDVSA did not respond to requests for comment.

An official at PetroChina Co 601857.SS, CNPC's listed subsidiary, said he was not aware of complaints about Venezuela oil. A CNPC spokesman also said he had no knowledge of the issue.

Phillips 66 declined to comment. Reliance did not respond to requests for comment.

One of the PDVSA employees said quality started to drop about two years ago, and the deterioration has accelerated recently.

“We’re refitting chemical injection points, recouping pumps and storage tanks,” the worker told Reuters. “But without chemicals, we can’t do anything.”

OIL AND WATER

Venezuela’s crude output has already plummeted to its lowest level in almost three decades because of crime at oil fields, underinvestment, mismanagement at PDVSA, and a fourth straight year of economic contraction.

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The oil firm also faces sanctions imposed by the administration of U.S. President Donald Trump, which have caused many banks to refuse to extend the letters of credit needed to complete some oil sales and purchases, leading to contract suspensions and disputes.

For graphic of Venezuela's falling exports, see: tmsnrt.rs/2xD0l5r

The full scale and severity of PDVSA’s oil-quality problems are unclear, although industry sources reported issues in major oil-producing regions including the western state of Zulia and the Orinoco Belt in the southeast.

PDVSA has halted output at some Zulia production facilities because it does not have enough functioning storage tanks and chemicals to process the crude being pumped up, according to two workers with knowledge of the operation.

“This is becoming a big problem. We’re trying to get production up, but now they’re saying, ‘You have to stop pumping because I can’t handle it’,” said a PDVSA employee, adding that chemicals were scarce and many storage tanks were full.

Compounding the problem, a growing number of PDVSA maintenance workers have fled the country amid food shortages, skyrocketing inflation and sometimes violent clashes between political protesters and the nation’s socialist government.

Venezuela is a key source of heavy sour crude supplies for export to the United States, China, India and Europe. But in a world awash in cheap oil, customers in those regions can easily find crude elsewhere.

“There are plenty of crude inventories available on the market, and they can switch to other providers,” one buyer of Venezuelan oil told Reuters.

More troubling for PDVSA is that the quality issues are cutting into its ability to sell crude for cash; the firm already delivers about 40 percent of its oil to Chinese and Russian firms as payment on more than $50 billion in loans from those nations.

Both Reliance and Phillips 66 are among PDVSA’s biggest cash-paying customers.

The U.S. refiner has demanded discounts due to the high salt content in the heavy blend that PDVSA sent the firm from its Orinoco Belt facilities this year, according to internal PDVSA documents seen by Reuters. It was not immediately clear whether PDVSA granted those discounts.

PDVSA documents detail the company’s struggle to meet the supply quotas of desalted crude to Phillips 66 because of low output at its Puerto la Cruz refinery, the facility charged with desalting crude for exports.

PDVSA said this week on state TV that it had received two new desalting units for Puerto la Cruz, with joint capacity of 80,000 barrels-per-day. The firm did not detail when they would be operational.

High salt content can lead to corrosion in distillation towers and other refinery equipment, so many customers reject cargoes with high salt content rather than accept them at a discount.

India’s Reliance has complained about high water and sediment content in its crude - up to 5 percent in recent months, according to the PDVSA employee, when the supply contract between the two firms says it should be limited to less than 2 percent.

“Reliance’s executives in charge of the supply contract are angry,” the employee said. “They have complained several times, and the issue has not been solved.”

“PHANTOM” CHEMICAL PURCHASES

Oil workers in Venezuela describe several layers of problems that are hurting crude quality.

Deferred maintenance, a shortage of spare parts and equipment theft have shut down some storage tanks, where crude is left to separate from water that needs to be removed.

PDVSA has also rushed deliveries - before the crude is properly processed, and water and sediments removed – because the firm is behind on promised deliveries to customers, two PDVSA sources told Reuters.

PDVSA has also run short on cash to import the chemicals it needs to process crude.

In one case, employees of the firm were caught in a scheme to steal money they had falsely claimed was used to buy chemicals, according to an internal PDVSA incident report seen by Reuters.

Authorities recently arrested four PDVSA employees in Zulia state, according to the report, for “illicit enrichment due to phantom purchases of chemicals.”

GRAPHIC: Venezuelan crude exports fall amid production, quality problems tmsnrt.rs/2xD0l5r