Lyondell to Sue PDVSA for Breach of Contract

Lyondell is seeking $90 million in compensation for a 30-million barrel shortfall in crude oil supply from PDVSA between April 1998 and September 2000, and is trying to avert another reduction that it says PDVSA is planning in March.

"The fact that the refinery has not received the crude agreed under the contract has had a significant negative impact," including forced production cuts at the plant and lost money on the open market, said Lyondell spokeswoman Anne Knisely. Lyondell's joint venture refinery with Citgo, PDVSA's U.S. refining arm, has a capacity to produce 268,000 barrels per day (bpd) of gasoline and other distillates like heating oil, diesel and jet fuel. Under its supply contract with PDVSA, the Lyondell-Citgo refinery was promised 230,000 bpd of Venezuelan heavy crude oil, one of a select few types of crude oil that the plant was designed to process.

"We're seeking the $90 million to compensate for our losses and we're attempting to make sure the planned cut in March doesn't happen. According to Lyondell, PDVSA recently sent a letter indicating that it plans to reduce its crude oil supplies to the refinery by up to 20.5 percent starting in March, as part of Venezuela's attempt to meet production quotas set by OPEC. Venezuela is a member of the OPEC oil cartel, which has cut its production levels four times in 12 months to support flagging oil prices -- in effect pulling five million barrels of crude oil per day from the world market.

PDVSA invoked a "Force Majeure" clause in its supply cuts to the Lyondell-Citgo refinery and plans to do it again for the March cut, Lyondell said. Force Majeure is a legal term that allows a party to a contract to break an obligation, but is normally only used in times of unforeseen emergency, like after a hurricane, earthquake or fire that damages equipment. Lyondell does not believe PDVSA's use of the force majeure clause is valid. The lawsuit was filed this past Friday in U.S. District Court for the Southern District of New York.