Venezuela softens tone on oil cutoff threat

By Frank Jack Daniel

CARACAS (Reuters) - Venezuela softened its tone on Tuesday over a threat to stop oil sales to America, with a top official saying a supply cut would be undesirable a day after world oil prices rose due to President Hugo Chavez's warning.

While the OPEC nation maintained its conditional threat and vowed to get tough with Exxon Mobil (XOM.N) in a dispute that sparked Chavez's anger, the official's pragmatism reinforced analysts' views the anti-U,S. president is unlikely to follow through.

Still, the threat from the No. 4 oil exporter to the United States -- reiterated by Oil Minister Rafael Ramirez -- remained a concern in the world oil market where prices steadied after earlier declines on Tuesday.

Curtailing supplies is "feasible" but would hurt both nations' economies, said Bernard Mommer, a senior official 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 for Venezuela to cut off supplies, Mommer replied, "No. It would cost us money and would cost the other side money too."

Chavez threatened to halt oil to the United States over a legal offensive by U.S. giant Exxon, which has won court rulings freezing $12 billion in Venezuelan assets in a fight over compensation for a nationalized project.

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 newspaper 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.

Venezuela's benchmark 2027-issue bonds were pounded to 5-1/2 month lows after news of the freeze emerged last week.

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," he said.

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.

(Reporting by Frank Jack Daniel; Editing by Marguerita Choy)