Venezuela’s unsold offshore oil

Tankers loaded with 8.36 million barrels of crude are reportedly floating off the Venezuelan coast as the sanction-hit country struggles to find buyers for its oil.

Background 

The Bolivarian Republic of Venezuela is located in northwest South America. In 2017, the UN estimated that the country is home to over 31 million people. The country stretches across over 900,000 square kilometres. It is bordered by the Caribbean Sea in the north, and Columbia, Guyana, and Brazil in the west, east, and south respectively. Venezuela was colonised by Spain in 1522 and became the first Spanish territory to declare independence from the empire in 1811

Despite having the world’s largest oil deposits, many Venezuelans live in abject poverty. The former President Hugo Chavez, was in office from 1999 to 2013, during which time billions of dollars were spent on generous social programs. However, since his successor Nicolas Maduro took office, there has been a rise in inflation and a shortage of basic goods. A drop in oil price has added to the administration’s problems.

Venezuela is one of the world's largest exporters of oil and has the world's largest proven oil reserves at an estimated 296.5 billion barrels (20% of global reserves) as of 2012.

In 2008, crude oil production in Venezuela was the tenth-highest in the world at 2,394,020 barrels per day (380,619 m3/d) and the country was also the eighth-largest net oil exporter in the world. Venezuela is a founding member of the Organization of the Petroleum Exporting Countries (OPEC).

By 2017, PDVSA could not even afford to export oil through international water, which requires safety inspections and cleaning under maritime law, with a fleet of tankers stranded in the Caribbean Sea due to the issue. In July 2017, this arrangement was extended from just the first half of 2017 to continue until March 2018. This continued depression in income from oil has led Maduro to pressure the OPEC to raise the falling oil prices to help the Venezuelan economy.

Analysis 

The crude is worth upwards of half-a-billion dollars, according to shipping reports and ship-tracking data compiled by Bloomberg. An armada of 16 ships holds cargoes belonging to state oil company Petroleos de Venezuela SA (PDVSA), Chevron, Valero Energy and Rosneft Oil.

Oil ventures owned by PDVSA with Rosneft, Chevron, Total SA and Equinor ASA, whose upgraders convert tar-like Venezuelan crude into oil that refineries can process, reduced rates this week because they ran out of space to store crude. PDVSA had to put some of that oil onto tankers to clear space and continue to operate at lower rates.

Shipments to the United States, once Venezuela’s largest customer, have dried up, so that the South American nation had to turn its focus to other consumers, including China and India. Imports of Venezuela’s oil by India surged 66 per cent in the first half of February to 620,000 barrels a day.

A person with knowledge of the situation said the PDVSA-Rosneft joint-venture, Petromonagas upgrader, isn’t processing oil after running out of space to store their production.

PDVSA-Chevron’s Petropiar venture has reduced output for the same reason, according to sources. They also said that Petrocedeno, a PDVSA-Total-Equinor venture, is running out of oil to process as a ban on sales of heavy naphtha to PDVSA has made it difficult to ship the heavy oil through pipelines from inland fields to the upgrader.

Venezuelan daily crude exports plunged to 1.12 million barrels in the first half of February, down 9.2 per cent compared with the same period in January. According to Refinitiv Eikon data, the nation which is sitting on the world’s largest crude oil resources was exporting about 1.4 million bpd in the months before sanctions.

On January 28, US President Donald Trump ratcheted up sanctions which were designed to undercut financial support for the Venezuelan government and President Nicolas Maduro.

Assessment 

Our assessment is that the sanctions have cleverly targeted Venezuela’s only reliable source of foreign exchange and has denied the Maduro government crucial access to foreign markets. We believe that this has also contributed to both the falling standard of living in the country and also limited Maduro’s grasp on power. 

India Watch

India could greatly benefit from the unused oil in those tankers as Venezuela is desperate for a buyer and India could negotiate to pay in Rupees at a substantial markdown from the market price. This will bring relief to the Indian consumers who have been burdened with higher fuel prices over the past few months while also drastically reducing the foreign oil import costs.