All Eyes Are Off Venezuela

The drone attacks on Saudi Arabia's Abqaiq processing plant and Khurais oil field have upended the lethargic stupor that held sway as we have been coming out of the summer season. Saudi Arabia blames Iran for the attacks, the United States is torn between expressions of solidarity and an unwillingness to participate in another Middle Eastern crusade, the European Union is asking for maximum restraint - the imbroglio is as complicated as one can get. Yet some parts of the Trump Administration (dealing with Latin America) might actually be rather relieved to see the Saudi-Iranian flareup in the Middle East, for it sidetracks public attention from the issue of Venezuela. The people of Venezuela are confronted with a unique choice - they can pick between bad, bad and worst.

Paramilitaries play a large role in the brusque stance taken up by the Colombian authorities vis-à-vis Nicolás Maduro. In the last days of August, several former leaders of the Marxist guerilla movement FARC have called to arms to resist the Colombian government which allegedly does not comply with the 2016 Peace Agreements. Colombian President Iván Duque claimed that Venezuela shelters runaway FARC members, among others it was in Venezuela that Iván Márquez, formerly the top FARC negotiator who played a major role in the Santos-led talks, announced his return to arms. Colombian dignitaries claiming that FARC is hiding in Venezuela is nothing new, yet implicating President Maduro in the FARC revival and lobbying Washington to take a more resolute stance against what it perceives as a terrorist-sheltering activity.

Cognizant of Colombia's past military attacks on foreign soil (in Ecuador, with the declared intent to catch a FARC leader), Venezuela has placed an air defense missile system along the Colombian border and intends to hold military drills there in late September. The Maduro regime also stepped up its game by publishing photos of Guaidó with extreme-right Colombian paramilitaries that have apparently aided his breakout to Colombia this February. Widespread implications of embezzlement among high-ranking Guaidó officials (money earmarked for the financing of would-be-deserting soldiers actually spent on private dining and hotels), coupled with a misplaced hope that change might be finally coming along in Venezuela, have driven the opposition leader's approval rating down (now only a third of Venezuelans sees Guaidó as the legitimate President).

Though reluctant to externalize it yet the US seems to be giving up on Guaidó, with special envoy Elliott Abrams claiming that the United States does not seek vengeance vis-a-vis Nicolas Maduro but rather wants a transitional government that would get Venezuela on the road to democracy. The Barbados talks mediated by the Norwegian Foreign Ministry could have been such an opportunity, had they not ended disastrously after the opposition did not back up its claims of President Maduro stepping down with guarantees of personal safety and lifting of all regime-relevant sanctions. Thus, all-around fatigue with politics and no viable prospects of getting out of the economical quagmire anytime soon.

Venezuelan crude exports in general paints a rather ambivalent picture. In a somewhat novel setup, PDVSA now has problems with a massive export backlog and despite production averaging 0.75mbpd in August-September 2019 (which is a third of what it was a mere 4 years ago), exports in August stood at a meager 0.48mbpd. September is looking better for PDVSA, it has restarted exports to Cuba, Curacao (its Bullen Bay terminal) and Trinidad and Tobago, palpably intensified its supplies to the REPSOL refinery system in Spain, bringing them to a monthly total of 2.1 MMbbl spread between 4 vessels. No wonder Repsol is looking to boost its US portfolio by purchasing some of ExxonMobil's deepwater Gulf of Mexico assets (cognizant that Qatar's investment into American LNG has tangibly improved the Trump Administration's attitude towards it).

PDVSA has opened its Moscow office last week (or rather relocated it from Lisbon under the pressure of US sanctions), further testifying to its increasing dependence on Russian political support. Rosneft has emerged from the chaos of the past months as the leading offtaker of Venezuelan crude, allegedly lifting two-thirds of all August 2019 loaders at the José terminal. Special envoy Abrams tried to go for a long shot and drive a wedge between PDVSA and Rosneft by stating (wishing to be heard primarily by the Venezuelan populace) that Rosneft is "really squeezing" Venezuela, effectively using the oil-backed loan instrument for ripping off the Latin American country. Yet absent any other political alliance than the one Maduro maintains with China and Russia (and more importantly, absent any other safe marketing outlet), such words fall flat as the current Maduro administration does not really have the required space to maneuver.

Overall, one has to ascertain three important trends in relation to Venezuelan crude exports:

1. Chinese state oil companies seem to be rather reluctant to deal with PDVSA directly and tend to resort to the usage of intermediaries (i.e. Rosneft);

2. The Malaysian blending spree of August has largely fizzled out - Chinese refiners have used Malaysia as a blending hub where they comingled Merey with local Southeast Asian crudes so that nominally (from the customs perspective) they were to receive Malaysian blends;

3. Rosneft might be at risk of becoming the only supplier of Venezuelan crude to India - the last time an India-bound vessel loaded at the José Terminal not managed by Rosneft was in late June 2019, since then Reliance was not seen active in Venezuela.

For obvious reasons Rosneft also has natural limitations of its own and cannot take all of Venezuela's crude, bringing about implications for PDVSA's upstream activities, too. Because of exports not leaving swiftly enough and storage capacity already filled to the brink, PDVSA suspended this week the PetroPiar blending facility it operates jointly with Chevron. Despite Chevron getting a sanctions waiver until October 27, 2019 PetroPiar was not working at its maximum capacity of 210kbpd - throughout the past weeks, its blending (heavy 10-12° API Orinoco crude with light Santa Barbara and Mesa grades) output hovered around the 120-130kbpd.

All in all, Venezuela's best prospect is more of the sluggish swamp that Latin America's erstwhile energy powerhouse has been mired in. Luckily for Maduro, the upcoming months are rather unlikely to bring about any escalation of tensions (as long as he keeps his jailing of opposition politicians on a small scale). The firing of national security advisor John Bolton widens the scope for the United States in terms of how they react to Venezuelan developments - Bolton advocated a more aggressive stance towards the Latin American country and its allies, wanting to slap sanctions on all foreign buyers of PDVSA crude. Yet a wider political playing field for the United States also means a potential easing for Venezuela - 2020 Presidential elections, US-China trade wars and the Iran-Saudi Arabia conflict flareup render Maduro a relatively non-urgent issue.