President Biden’s assumption of power has instilled a new sense of hope in Venezuela’s political leadership, with Nicolas Maduro stating that his country was willing to “walk a new path with Biden’s government”, provided that this path is based on mutual respect and understanding. Donald Trump’s tenure brought about an unprecedented decline in US-Venezuelan relations, even in his last day in presidential office Trump had a string of oil traders and 6 oil tankers added onto OFAC’s relevant sanctions list. Heretofore the new path has failed to materialize, Biden has reaffirmed the White House’s support for Juan Guaido and has renounced on the idea of meeting Chavez’s successor. However, the media hullabaloo surrounding the US elections has greatly helped PDVSA to rebuild some of its long-damaged refining infrastructure.
Venezuela’s official production data for January 2021 shows a healthy increase to 520kbpd, up almost 100kbpd from December. This, according to internal reports seen by S&P Global Platts, is almost 15% higher than PDVSA itself has expected. Much of the output ramp-up originated in the Orinoco Belt (70kbpd hike month-on-month) where the temporary lull created by the US presidential transition ideal conditions for PDVSA to tacitly repair oil wells damaged by the constant power supply disruptions. This creates opportunities for higher exports in the upcoming months as concurrently to the production increase Venezuela seems to have eased its complete lack of available storage on the back of increased refinery runs.
Graph 1. Venezuela Monthly Crude Production in 2020-2021.
However, Venezuela would not be Venezuela if its upstream success would not be counteracted by the umpteenth setback, in this case refinery runs dropping, caused by a subsea rupture on the Ule pipeline system. The 230km long Ule subsea pipeline is connecting the Orinoco Belt with the Cardon Refinery on the other side of Lake Maracaibo and has been prone to crippling leakages and ruptures, the latest episode marks the third such incident in the past 12 months. With the help of divers, PDVSA has managed to patch the oil pipeline (no media report has elucidated whether the parallel gas pipeline was damaged, too) by the first days of February, limiting the shortage period to less than 2 weeks. All this has led to the 950kbpd Paraguana Refinery hub (Cardon, Amuay and Bajo Grande) operating at a mere 11% of its nominal capacity in the third decade of January.
Recurring power disruptions and the overwhelming lack of refinery equipment have frequently hindered Venezuela’s revival. Just when it seems that PDVSA has finally got its act together and with the help of political allies (most recently Iran has taken the lead in lending a helping hand to Caracas) could finally supply its market with transportation fuels, another unfortunate incident pares down its expectations. As of early February 2021, only 1 of five distillation units at the Amuay Refinery and again only 1 out of four distillation units at the Cardon Refinery are operating. Moreover, considering that Amuay does not have a fluid catalytic cracking unit, it is only Cardon’s 88kbpd FCC unit that supplies all of Venezuela with gasoline.
Concurrently to the travails of the Paraguana complex, PDVSA was forced to shut down the 190kbpd Puerto La Cruz Refinery, following another pipeline rupture (reportedly around the power management plant). With much of Amuay and Cardon shattered - the two have a combined HS diesel capacity of 23kbpd - Puerto la Cruz with its 15kbpd production capacity of high-sulphur diesel could have provided some relief for PDVSA’s diesel output, however due to the above-mentioned pipeline dysfunction it is now temporarily shut and undergoing repair works. Against this background, Venezuela will be compelled to seek alternative sources of fuel, especially its 100kbpd diesel demand looks remarkably fragile.
The Biden Administration has signaled that it might reserve the Trump-era ban on Venezuela’s crude-for-diesel barter deals on humanitarian grounds. Throughout 2018-2020 Venezuela’s implosion was largely aided by the existence of the diesel swaps – thanks to supplies first from Russia’s Rosneft, then from European majors like Repsol and ENI and subsequently from the Indian Reliance Caracas managed to muddle along. Diesel is the default replacement fuel in case Venezuela experiences another electricity blackout, not to speak of its importance in agriculture and public transportation, therefore the sooner the White House allows diesel swaps the higher the probability that Caracas could avoid another nationwide collapse. Related: Is This Oil Rally The Start Of Something Much Bigger?
Though Venezuela’s gasoline balance looks more robust then its diesel one, the fuel’s provision to customers in the country has been greatly aided by Iranian exports. As difficult as it is to track Iran-flagged vessels with their transponders off, at least 2 cargoes were delivered this year with an assumed load of gasoline/alkylates. Importing Iranian gasoline serves a double purpose. On the one hand any additional supply of gasoline can be used to satiate domestic fuel demand, considering the comeback of refinery capacity is and will remain relatively slow. On the other hand, gasoline can also be a diluent for the ultra-heavy Orinoco barrels and there’s a high probability that some of it actually was (in this, Venezuela is not unique – Canadian producers used to do the same throughout 2010s).
Increasing the import flows from Iran will be a head scratcher for PDVSA. The prospect of the United States arbitrarily seizing any vessels sailing towards Venezuela carries substantial risks for both the buyer and the seller – the 4 tankers seized in 2020 (totaling 1.16 million barrels) were sold to the US domestic market, effectively resulting in a net loss of tens of millions dollars. Thus, overdoing the fuel supplies to the Bolivarian republic might result in a more aggressive US stance. For Venezuela, the survival strategy of the Maduro administration has undergone another modification – this time the upstream might be capable of producing even more than it does, however the faltering of the downstream sector constrains PDVSA’s maneuvering space.
By Viktor Katona for Oilprice.com
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