Easing of Venezuelan Sanctions
Oct. 20, 2023
Weekly Highlight: Easing of Venezuelan Sanctions – 10.20.2023
On Wednesday, US officials announced the removal of sanctions against Venezuela’s oil and gas sector in response to a deal between Venezuela’s President Maduro and the country’s opposition in the 2024 presidential election. Under the new guidelines, which extend for a 6-month period, American and foreign companies will be allowed to produce and export Venezuelan oil and gas and conduct business with state-energy company Petróleos de Venezuela (PDVSA).
From a historical perspective, between 2010 and 2016 (pre-US sanctions), Venezuelan crude oil production ranged between 2.0 and 2.5 million b/d, according to secondary source information (direct communication from Venezuela to OPEC suggested a level closer to 3.0 million b/d). In parallel, crude exports averaged approximately 1.5 million b/d, with near 50% of the volume destined for US Gulf refiners (Figure 1), as the crude quality differentials of Venezuelan crude are among the most attractive for complex refiners.
Figure 1: Venezuelan Crude Exports by Destination
Source: McQuilling Services
For our research clients, the easing of sanctions should not come as a surprise, as we posited the OPEC+ cuts of distillates and crude, the potential fall in Mexican heavy availability due to the Olmeca refinery coming online, and the upcoming Trans Mountain pipeline developments would significantly reduce access to medium and heavy crudes. With the sanctions relief now reality, we refocus our attention on the impacts, although due to the 6-month period, it is unlikely we will see outsized change in overall production volumes, instead the impact will be primarily felt in flow changes and vessel supply factors.
Prior to the new round of sanctions relief, Chevron’s 2024 stated goal was to increase crude exports from Venezuela to the US Gulf by another 50,000 b/d from their current amount of approximately 135,000-150,000 b/d. In light of the additional easing, McQuilling now forecasts an additional 50,000 b/d of additional exports from Venezuela to the US Gulf on top of Chevron’s stated 2024 goal, for a total of 250,000 b/d exported to the US in the near term 6-month period. According to McQuilling’s Vessel Demand Equivalent calculations, our new base-case scenario would require 8.8 Aframaxes to accommodate the Venezuelan exports to the USG compared to 5.3 Aframax vessels required in the current state (Figure 2).
This will be partly attributable to the fact that with the eased sanctions, Venezuela will now have access to dirty naphtha and condensate from the US. This will help them to dilute the heavy crude produced in the Orinoco belt. One reason hindering a faster production scale-up is underinvestment in the infrastructure during the past two decades. Drilling rigs, refineries, flow stations and crude upgraders would need to be upgraded in addition to a reliable flow of power used for operations.
Figure 2: Venezuelan Exports to US Gulf
Source: McQuilling Services
These developments have multiple implications for the re-routing of current cargo flows from Venezuela. As the sanctions are relieved, conventional tonnage will now be allowed to resume activity, causing “ghost ships” (Figure 1) operating out of Venezuela to become obsolete in time, although some may continue to be utilized. This impact may be more gradual, as current Venezuela flows are not subject to crude import quotas, and direct crude volumes from Venezuela to China would need to be synthesized with the latter’s crude import quotas. As a base case, we presume 50% of current volumes to Malaysia are shifted to conventional tonnage for Asian refiners, supporting VLCC earnings.
Further assessing the trade flow impact, we note Wednesday’s sanction roll-back has caused the price of Venezuelan crude to rise, narrowing the discount to Brent by US $7/barrel (at time of writing), likely the logistical surcharge attached to the current “ghost fleet” and subsequent operations. As a result, profit margins for current Asian buyers would be impacted, shifting some of the existing flows to Malaysia into Europe and the US. This will support Suezmax and Aframax demand, with approximately 100,000 b/d of the current Malaysian volumes shifting to the West. As a result of this shift and particularly for the US, our calculation of US net balances will be positively impacted by these additional barrels. This could potentially increase the amount of light/sweet volumes exported from the US to the international markets.
Next week’s Short-Term Outlook will expound upon this topic as well as our updated scenario analysis related to the Middle East conflict.
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