Venezuela softens tone on U.S. oil cutoff threat

CARACAS (Reuters) - Venezuela softened its tone on Tuesday over a threat by President Hugo Chavez to stop oil sales to America, with crude prices coming off a spike after a top official said a supply cut would be undesirable.

The deputy oil minister's pragmatism reinforced analysts' views the anti-U.S. president is likely to keep shipping oil, even as the OPEC nation repeated its conditional threat and vowed to get tough with Exxon Mobil (XOM.N) in a dispute that sparked Chavez's anger.

Oil prices fell as fears eased of Venezuelan action and on forecasts for an increase in U.S. crude inventories.

Washington played down Chavez's threat, which he has delivered in different forms for years but never carried out.

Other major oil producers have assured the United States they would make up for any interruption to Venezuelan supplies, a U.S. official who declined to be named said, adding a cutoff would hurt ordinary Venezuelans.

Chavez said he could halt oil exports to the United States over a legal offensive by U.S. giant Exxon, which has won temporary court rulings freezing up to $12 billion in Venezuelan assets in a fight over payment for a nationalized heavy crude project.

Curtailing supplies is "feasible" but would hurt both nations' economies, said Bernard Mommer, deputy minister at state-oil company PDVSA and top strategist in Chavez's drive to bring Venezuela's energy resources under government control.

Asked on state television if it was desirable to cut off supplies, Mommer replied, "No. It would cost us money and would cost the other side money too."

Despite its legal attack, Exxon said on Tuesday it was interested in holding substantive talks with Venezuela to negotiate fair compensation for the seizure of the project that is based in one of the world's largest oil deposits.

BATTLE ESCALATION

Exxon is a proxy in Washington's economic war against Venezuela, according to the self-styled socialist revolutionary who clashes with the Bush administration over everything from oil prices to democracy.

"We are ready" to stop supplies if these actions continue, Oil Minister Rafael Ramirez said in an interview with local newspaper Ultimas Noticias published on Tuesday.

He also warned Venezuela was willing to fight tough against Exxon, saying the state oil company PDVSA was considering suing one of the world's largest oil companies for damages.

Ramirez and Mommer have led the South American country's takeover of foreign-run oil projects. Most companies have reached deals over the seizures while Exxon has consistently been the most tenacious in seeking compensation.

"Only Exxon maintains this aggressive and hostile attitude," Ramirez told the paper. "If they want this to escalate, it will escalate."

Exxon's legal move helps ensure Venezuela will pay if the oil major wins arbitration over its lost project. Industry analysts also said it was a tactic to pressure the state oil company, which has shown signs of cash flow problems, to seek a deal.

"We do remain interested in getting into substantive conversations with the Venezuelan government and with PDVSA around the fair market value of the assets that have been expropriated," said Mark Albers, senior vice president at Exxon.

Venezuela says compensation would be less than $6 billion.

James Mulva, chief executive of ConocoPhillips (COP.N), another oil major forced out of Venezuela, said his company's talks with PDVSA over compensation were moving forward.

With two thirds of its oil exports going to the United States, industry analysts believe Chavez is unlikely to carry out his supply threat because it would slash revenue he uses to fund the social programs that underpin his popularity.

"Venezuela cannot easily find alternative destinations to refine its peculiarly heavy type of crude," said Goldman Sachs economist Alberto Ramos.

PDVSA says the Exxon case has no impact on its operations.

(Additional reporting by Anna Driver, Bernie Woodall, Chris Baltimore in Houston and Matt Daily in New York; Writing by Saul Hudson; editing by Jim Marshall)