The role of Venezuela in the world oil market

Venezuela, whose economy is heavily dependent on oil exports, has lost not only access to many foreign markets, but also the ability to dilute its heavy oil due to US sanctions. Therefore, the regime of President Nicolas Maduro is forced to sell it at prices far below market prices.

Oil makes up over 90% of Venezuelan exports.

Previously, the country supplied almost half of its oil to the United States, which was the main source of foreign exchange earnings, since part of the export to China and Russia goes to repay loans. In addition, the US was the main supplier of solvents for thinning Venezuelan oil.

But earlier in the year, Washington backed National Assembly President Juan Guaidó as he declared himself president of Venezuela and imposed sanctions on the country’s oil sector in an attempt to help Guaidó oust Maduro.

These sanctions prevented US individuals from buying oil from the state-owned Petroleos de Venezuela (PDVSA) and supplying it with solvents, and forced companies from many other countries to stop working with Caracas.

Deficit and sanctions

As a result of the economic crisis and sanctions, Venezuelan oil production has fallen to its lowest level since the 1940s. Now it is less than 700,000 barrels per day, although before Hugo Chavez, Maduro’s predecessor, came to power in 1998, it exceeded 3 million barrels per day.

The decline in production is partly due to the fact that due to the reduction in exports, Venezuela does not have enough storage space.

Due to a shortage of solvents, Venezuela is forced to sell heavier and more viscous Merey 16 oil for $15-17 a barrel cheaper than Brent, analysts asked by the newspaper to estimate the country’s losses told the FT.

Brent has been trading above $60 a barrel in recent weeks. Previously, the discount of Venezuelan oil to Brent was about $7 per barrel.

Where to go Venezuelan oil?

Until January 2019, the United States, India and China were the main buyers of Venezuelan oil. Last year, the South American country exported to the United States about 37% of the total volume of oil supplied abroad. After the suspension of purchases by its North American neighbor, Venezuela had to look for new markets.

Unjustified optimism

Traditionally, Venezuela exported its heavy oil to the United States, but the importance of these supplies for the North American neighbor has steadily decreased: if in the 90s.

While the country provided almost 20% of US oil imports, by the end of 2018 it was only 6%. The US imported an average of 500,000 barrels a day of oil from Venezuela last year, according to the EIA.

However, after a ban on the purchase of Venezuelan oil by American refineries introduced earlier this year, the figures were gradually reduced to zero.

If in January the United States bought more than 600,000 barrels of oil from Venezuela per day, then in May it was already a symbolic 11,000 barrels per day, and in June, purchases were completely stopped and have not been resumed to this day.

Can’t ramp up production

The situation was aggravated by large-scale power outages in the country in the spring and summer, which led to the shutdown of oil refineries, the Amuay and Cardon complexes, as well as the port of José.

Do not forget about the multiple accidents, explosions, which the authorities attribute to terrorism, magnetic attacks and sabotage, and non-governmental experts – the decline of the industry, lack of investment, the departure of qualified employees and robberies.

Nevertheless, Venezuela cheered up: President Nicolas Maduro, recognizing that a complete ban on imports would lead to dire consequences, meanwhile stated that Venezuelan oil would find its market in any case.

The country’s oil minister, Manuel Quevedo, once again announced in September that Venezuela would be able to restore hydrocarbon production by the end of the year.

However, almost all analysts agree on one thing: Venezuela, in the current political and economic conditions, will not be able to significantly and quickly increase production in the near future.

In April, it became known that Venezuela imported oil for the first time in 5 years: according to Bloomberg, PDVSA bought a cargo of 1 million barrels in Nigeria. The last time the country bought oil from abroad was in 2014.

Asian markets prefer the lighter oil Merey, so the Maduro government is trying to reorient the available heavy oil upgraders, which US refineries are focused on, to Merey preparation facilities.

More is worse

In early September, Venezuelan media reported that Chinese company HuanQiu Contracting and Engineering was halting an expansion project for Sinovensa’s Sinovensa oil treatment joint venture due to payment delays. Sinovensa is 51% owned by PDVSA, the remaining 49% by CNPC.

The plant, whose capacity was planned to be expanded from 105 thousand to 165 thousand barrels per day, was one of the enterprises that continued to work against the backdrop of a deep crisis.

The agreement to expand capacity by mid-2020 was announced by the Venezuelan authorities in July, although the initial agreements were reached 5 years ago.