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Sanctions squeeze Venezuela's heavy crude output

Latin America's economically troubled oil giant faces the difficult task of significantly raising Asian crude grades

Venezuela's upgraders have been forced to stop upgrading extra-heavy crude and instead focus on blending light and heavy grades, as US sanctions limit exports of the South American country's most valuable oil.

US sanctions related to the country's political crisis have debilitated Venezuela's access to synthetic crude export markets, prompting Pdvsa, the state-owned oil company, to substitute it for greater volumes of the 16 ºAPI Merey blend preferred in Asia, which is now Venezuela’s key export market.

Pdvsa has begun the process by converting its Petropiar joint venture upgrader (Chevron 30pc) into a blender capable of processing extra-heavy Orinoco crude with light crude—outputting Merey blend. Extracted naphtha is then being sent back to the Orinoco belt for re-use.

Venezuela has four upgraders with nameplate capacity of over 600,000bl/d, all located in the José Antonio Anzoátegui complex, 40km west of Puerto La Cruz on the Caribbean coast. The Petrocedeno upgrade plant, which is operated by Pdvsa in partnership with France’s Total (30.33pc) and Norway’s Equinor (9.67pc), and the Petromonagas  joint venture—operated with Russia’s Rosneft (40pc)—have both been intermittently recirculating crude at the facilities since nationwide blackouts damaged key infrastructure. The recirculation has prevented any further deterioration of facilities but at the expense of upgrading. Pdvsa’s entirely owned San Felix upgrader has been out of service for more than a year.

Pdvsa also plans to lift output from existing blending facilities. Venezuela’s oil minister Manuel Quevado and CNPC America president Jia Yong announced nameplate capacity at the Petrolera Sinovensa joint venture (CNPC 49pc) blender will be increased from 105,000bl/d to 165,000bl/d to boost Asian exports. The facility had been running at below nameplate capacity for much of the year.

Shortage of supply

A problem with the plan, however, is the lack of available light crude. Venezuela has been using the eastern conventional domestic grades Mesa-30 and Santa Barbara 35, but both are in decline. Earlier in the year, Venezuela resorted to importing light sweet Agbami crude from Nigeria—the first time Venezuela had imported crude since it trialed Algerian crude five years ago. But shortage of funds and US sanctions are now limiting its potential options.

"Venezuela is in emergency mode every day," says Francisco Monaldi, fellow in Latin America energy policy at the Baker Institute for Public Policy. "The economic collapse is the worst seen outside a warzone. We've never seen anything like it in the history of Latin America."

In June, Opec reported crude production of 734,000bl/d according to secondary sources—a 45.8pc decline since the end of 2018. Russia and China have remained Venezuela's key allies in sustaining production but analysts say there is a limit to Beijing's generosity.

Source: ClipperData

"The Chinese government and its companies appear to be concerned about the ability to recoup their investment," says Andrew Stanley, associate fellow at the Center for Strategic and International Studies (CSIS). "The country has backed away significantly in terms of its financial exposure. China made most of its investments in the country primarily on security of oil supply concerns."

In contrast, Russia continues to maintain a central role in Venezuela's oil sector. "Russia and its companies are a completely different story," says Stanley. "They have seized upon the opportunity created by Venezuela's economic implosion following the oil price collapse in 2014 to increase its investments and to snap up assets and make deals on the cheap."

In June, Russian President Vladimir Putin and Pdvsa signed a proposal to develop the offshore Patao and Mejillones gas fields—Rosneft was granted a license to operate them in 2017. Under the terms of the agreement, Russia will gain tax concessions to produce from the fields, as well as export to European and Asian markets. The deal also included a fair market price in the event the fields are nationalised or seized.

Diluent drought

Another question hanging over the plan is how Pdvsa can keep sending Orinoco crude to the José refining terminal without adequate diluent. Before US sanctions, crude was diluted with imported naphtha from the US and then either upgraded or blended for export. In January, prior to the sanctions, the country was importing just over 200,000bl/d of light distillates.

Rosneft has been helping with the shortage. Earlier in the year the company sent two tankers, the Serengeti and Abliani, containing 1mn bl of heavy naphtha to Venezuela. India's Reliance Industries has also been sending naphtha, as well as China's CNPC, while Spanish company Repsol has been intermittently carrying out swap arrangements in exchange for Venezuelan crude.

But since the US restricted access, Venezuela has struggled to maintain adequate stocks and the shortage has damaged wells and pipelines. Joint ventures including Petrocarabobo (Repsol 11pc, ONGC Videsh 11pc, Indian Oil 7pc), Petroindependencia (main partner Chevron 34pc), Petrojunin (Eni 40pc) and Petromiranda (Rosneft 40pc) have all been affected by the lack of upgrading or blending capacity.

In jeopardy

The final unknown facing Venezuela's ailing oil sector is whether US President Donald Trump will grant US companies an extended waiver to remain in the country after the 27 July deadline.

"There are only five US companies that are permitted to deal with Pdvsa: Chevron, Halliburton, Schlumberger, Baker Hughes (a GE company) and Weatherford International," says Daniel Pilarski, partner at law firm Watson Farley & Williams. "But given the Trump administration's refusal to extend the Iran crude export waiver, and the vigorous enforcement of sanctions on Venezuela, I would certainly say there is a strong possibility that the waiver will not be extended."

"The economic collapse is the worst seen outside a warzone" — Monaldi, Baker Institute for Public Policy

The loss of Chevron would be a big blow to Venezuela's President Nicólas Maduro. The company is the leading US presence in the country and has a stake in four projects, including the Petropiar upgrader. Chevron holds a 39.2pc stake in the Petroboscan joint venture with Pdvsa at the Boscan field in Zulia state, a 25.2pc stake in Petroindependiente at Lake Maracaibo and a 34pc stake in Petroindependencia at the Carabobo region of the Orinoco belt.

Muhammed Ghulam, senior analyst at investment bank Raymond James, believes the departure of Chevron will impact Venezuela's already falling production.

"If Chevron is unsuccessful in securing an extension and is forced to leave the country, there is a very real possibility that Maduro will nationalise its assets," he says. "Overall the loss of the resources and personnel of the few international companies currently operating in the country would likely negatively impact its output."

Equally, though, the US is conscious of inflicting harm on US companies versus ramping up the pressure on Maduro. While Venezuelan rigs and crude production will likely be affected by the departure of US service companies, which provide key expertise and technology, the vacuum left could potentially be filled by Chinese and Russian firms. The exodus would also make it harder to support any oil recovery if there is regime change or sanctions lifted in the future—when President Carlos Andrés Pérez nationalised the industry in 1976 it took two decades before Chevron returned to Venezuela.

Orinoco belt oil fields and associated infrastructure Source: Petroleum Economist
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