China has announced that it will impose taxes on heavy sour crude, a move that could hit Venezuela hard as it continues to struggle with U.S. sanctions and a dilapidated oil industry. Media reports suggest as many as 400,000 bpd of Venezuelan oil could be orphaned as new Chinese tax laws make it impossible for the country to export its crude to Asia. New regulations expected to come into place on June 12 would make the profit margins on Venezuelan oil too low to warrant its current export route.
Venezuela has not been exporting oil directly to China since 2019, largely due to the U.S. sanctions that continue to restrict the country’s oil exportation. However, China has been importing Venezuelan oil via Malaysian refineries, where it is mixed with fuel oil or bitumen before continuing on to China. China’s new rules could add around $30 per barrel to this "diluted bitumen", making it economically inviable. Light cycle oil (LCO) and mixed aromatics will also be taxed under the new scheme.
Chinese customs data suggests that around 380,000 bpd of diluted bitumen were coming into the country via Malaysia between January and March, much of which originated in Venezuela.
While non-U.S. companies are not explicitly prevented by the sanctions from buying Venezuelan oil, it has been highly discouraged. However, due to China’s growing oil demand, many of these alternative routes of access have been largely overlooked by the U.S.
The Chinese Ministry of Finance stated of the background for the new tax introduction, "A small number of companies have imported record amounts of these fuels and processed them into sub-quality fuels which were then funneled into illicit distribution channels, threatening fair market play and also causing pollution".
New taxes are expected to pave way for opportunities for China’s domestic refiners to increase supply as well as boosting prices as the country’s fuel demand continues to increase. This comes as Chinese oil refiners hit higher production levels in April, signaling a sustained recovery in crude processing.
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While Venezuela is facing huge changes in its export outlook due to Chinese taxes, it seems as if the U.S. will continue to waive sanctions for several international companies based in Venezuela, allowing several firms to continue existing in the country within limits.
Previously permitted waivers are expected to continue for oil major Chevron and services companies Schlumberger, Halliburton, Baker Hughes, and Weatherford. This will allow the firms to preserve their assets so long as they don’t carry out maintenance activities or pay local employees.
The waivers are expected to be renewed for at least six months in June, after which it could be possible for Chevron to lift Venezuelan oil, as stated in an early waiver. However, for now, Venezuela does not seem to be a key foreign policy focus for Biden, making this possible but unlikely.
It seems as though Venezuela is trapped in somewhat of a stalemate, unable to progress with U.S. allies due to heavy sanctions on its oil sector and unable to export to major importer China due to heavy taxes. While there is the potential for wiggle room in the coming year, as Biden creates a clearer foreign policy strategy, the future is still unknown for the untapped potential of the Latin American oil giant.
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By Felicity Bradstock for Oilprice.com
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China has never ever been deterred by US sanctions from importing Venezuelan crude oil or Iranian crude for that matter. The proof is that China has been importing up to 1.0 million barrels a day (mbd) of Iranian crude accounting for 67% of Iranian oil exports of 1.5 mbd under the sanctions.
China has never stopped buying Venezuelan crude as an oil payment for the billions of US dollars it lent it and also as a means of helping Venezuela’s economy remain afloat.
And while it is true that Venezuela’s crude oil is extra-heavy, China’s tax is to be imposed on heavy sour crude of which a huge percentage of the Arab Gulf’s oil exports is. This means that both Arab Gulf’s heavy crude exports and Venezuela’s could be subject to the tax. So the claim that it will sound the death knell for Venezuela’s oil industry is simply false.
Venezuela’s extra-heavy crude is highly valued by US refineries. That is why US imports of Russian Urals crude have been replacing Venezuela’s crude in US refineries and now account for 5% of US total crude imports.
It is probable that China’s new tax is part of an environmental programme to reduce emissions as manifested by a planned reduction in coal consumption and a huge rise in investments in renewables with the aim of achieving net-zero emissions by 2060.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London