Sanctions relief will change trade flows
On Wednesday, 18 October, the U.S. Treasury Department announced that it would ease sanctions against companies that trade in Venezuelan oil or invest in the country. Sanctions on exports of crude oil, refined petroleum products as well as gold will be lifted for six months. In exchange, Venezuelan president Maduro will allow independent candidates to run in the presidential election next year. International media and election experts will be allowed to monitor the elections. If Mr. Maduro reneges on his promise, the sanctions will snap back.
While few people expect a major increase in Venezuela’s production and exports in such a short time frame, the implications for shipping could be more meaningful.
Venezuela has faced some form of U.S. sanctions since 2008, when then-president Chavez started expropriating assets from international oil companies, including U.S. oil majors. President Trump added economic sanctions in 2017 and tightened them in 2019, after Mr. Maduro, who came to power after Chavez’s death in 2013, was re-elected as president. These elections were widely regarded as rigged, but the sanctions have been unsuccessful in dislodging Mr. Maduro from power. Now, the Biden administration is trying a new approach. Time will tell if this will be more effective in bringing free elections back to Venezuela.
Venezuela used to be an important player in the oil markets. It holds one of the largest crude oil reserves in the world. In 2009, average daily production was still above 3 Mb/d and Venezuela used to compete with Mexico and Canada for the title of largest crude oil supplier to the United States. However, years of mismanagement, rampant corruption and – in recent years –ever tightening sanctions have taken their toll. Venezuela currently produces about 780,000 b/d according to the IEA. This is about 70,000 b/d more than last year, primarily due to the return of Chevron. In late 2022, Chevron received permission from the U.S. government to restart operations at four joint ventures where it is a minority partner. Their first export voyage started in January of this year. In 2023 to date, Chevron has done a total of 81 voyages, predominantly using Aframaxes/LR2s (12 trips were done on Panamax/LR1 tonnage). All Chevron cargoes ended up in the United States.
For many years, India and China had been one of the largest customers of Venezuelan crude oil. When President Trump tightened sanctions in 2020, India stopped importing Venezuelan crude (September) and China became the dominant buyer. From October 2020 to date, China has bought about two thirds of all Venezuelan exports. Some of these moves are done directly to China on dedicated Chinese tankers, while other barrels are transported on vessels in the dark fleet, sometimes via Ship-To-Ship transfers offshore third countries.
What will happen now that Venezuela has a six-month window without sanctions? Oil production will unlikely go up significantly since Venezuela’s oil infrastructure needs a lot of time and money before it can resume growth.
However, we may see a material shift in where the current exports are directed and what vessels will be utilized. PDVSA, Venezuela’s state oil company, has already started to approach customers with existing crude supply contracts to resume cash sales to global refiners. The lifting of sanctions has multiple benefits for PDVSA. For at least the next six months, they can sell directly to clients at full price without involving the customary middlemen that required large discounts. Many of these clients are probably located in the United States and Europe. China will remain an important destination, but PDVSA will likely divert volumes toward more profitable markets in the Atlantic Basin.A shift from the Pacific to the Atlantic will probably mean that Venezuela will use more Aframaxes and Suezmaxes and less VLCCs. More importantly, the lifting of sanctions will allow PDVSA to use mainstream tankers rather than rely on the (expensive and unreliable) dark fleet. The combination of higher revenues and lower costs will provide Venezuela with the foreign exchange needed to upgrade their oil infrastructure and improve the lives of their citizens.
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Source : Capital link
