An illustration of the severe problems that Venezuela is facing was the recent widespread blackout.
Not surprisingly, there was no consensus on what caused the blackout. The Maduro government blamed sabotage by right-wing ‘criminals’, while the opposition said the current regime’s incompetence was the root cause of the problem.
US sanctions introduced on 28th January, which ban US companies and individuals from dealing with Venezuela’s state-run oil company Petroleos de Venezuela (PDVSA), have hit the country hard, Poten & Partners said in an industry note.
While the Maduro regime continues to hang on to power, the crude oil and product trades around the country are in turmoil. US sanctions have had a particularly detrimental effect on Venezuela’s heavy oil production from the Orinoco Belt in central Venezuela.
Output from the Orinoco region, which has been suffering for years, due to mismanagement and a lack of maintenance, will likely decline significantly by up to 400,000 barrels per day, due to the US embargo on diluent exports to PDVSA, Poten said.
Diluent, in particular naphtha, is needed for the production and transport of heavy oil out of the Orinoco Belt. However, some replacement naphtha cargoes from Russia have thrown Venezuela a lifeline after the US cut off its diluent supplies. The Rosneft naphtha cargoes, which are expected to arrive later this month, will help PDVSA maintain a minimum level of exports.
Mexico is filling some of the void left by the reduction in exports of heavy Venezuelan crudes by exporting more of its heavier grades, such as Maya, Talam and Altamira to the US, as well as long-haul destinations in Asia (India, Japan) and Europe (Spain, the Netherlands).
For Asian customers in particular, Maya is competitively priced. For example, February/March, Maya was priced at around $8 below Saudi Arabian heavy.
Canada is another potential source of heavy crude oil. Although there is limited flexibility to increase pipeline flows from that country, there is significant additional crude by rail capacity available.
For the right price, another 200,000-300,000 barrels per day of Canadian crude can be shipped to US refiners on the Gulf Coast on unit trains.
Venezuela’s problems have crippled its ability to transport and export crude. Production has slowed to a fraction of the country’s potential and lack of maintenance in ports and terminals has further complicated exports.
Due to the sanctions, Venezuela has also experienced trouble finding customers. The US is off-limits, and many other countries have also limited their purchases.
The only country that has increased imports since the sanctions were announced was India. China, historically another big customer, has reduced its Venezuelan crude purchases.
For the tanker markets, the implications are clear, Poten said. The Caribbean Aframax market has suffered from the lack of Venezuelan cargoes bound for the US. The VLCC market has not been affected in the same way, as US crude oil exports have been strong, compensating for the reduced flows from Venezuela.
The short-term outlook for Venezuela is highly uncertain. The country’s refineries are operating at very low utilisation rates, necessitating imports of refined products.
Sanctions and a lack of foreign exchange have also made companies reluctant to do business with Venezuela.
Until the political situation is resolved, most charterers and shipowners will likely avoid Venezuela and the domestic oil industry will continue to deteriorate. Even with the support of Russia, this situation seems unsustainable, Poten & Partners said.