Via Financial Times

Venezuela is being forced into selling cut-price oil as US sanctions against President Nicolás Maduro’s government start to bite into its most important source of revenue.

Sanctions have left the country struggling to buy vital supplies for its oil industry, according to analysts, who said that as a result Caracas was having to offer cheaper blends of oil at a steep discount.

With oil accounting for well over 90 per cent of Venezuela’s legal exports, the country’s ability to sell it abroad is critical for Mr Maduro’s survival as president. The US has been trying to oust him since the start of the year and replace him on an interim basis with Juan Guaidó, the leader of the opposition and president of the democratically elected congress.

While that effort has so far failed, Venezuela’s oil output has continued to dwindle under sanctions and is at its lowest level since the 1940s.

Igor Hernández, adjunct professor of the Center of Energy and Environment at the IESA, a business school in Caracas, estimates that exports are bringing in just $250m net each month, compared with an average of $5.3bn per month between 2005 and 2014, during a sustained commodities boom.

Before Washington imposed sanctions on the oil industry in January, Venezuela was importing naphtha, much of it from the US, and mixing it with heavy crude, which was then shipped to refineries in the Gulf of Mexico. That upgraded oil sold at a discount to Brent of only about $7 a barrel. But analysts consulted by the Financial Times said Venezuela’s increasing lack of access to supplies of naphtha — which is used to dilute heavy oil and move it through pipelines — meant it was now selling a different, less profitable domestically produced blend of oil.

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The local blend, known as Merey 16, was selling at between $15 and $17 per barrel below the price of Brent, which currently trades at about $60, they said. “The Merey blend generates lower revenue [than upgraded heavy crude] but is easier to place in Russia and in Asian markets such as China, India and Thailand,” the Economist Intelligence Unit noted recently.

A lack of access to naphtha has been exacerbated by a dearth of ships. As nations turn their back on Venezuela — either out of a desire to isolate Mr Maduro or fear of breaching US sanctions — the number of tankers calling at Venezuelan ports has dropped.

Last month, maritime intelligence agency Lloyd’s List reported that ExxonMobil and Chinese state shipping company Unipec had stopped chartering vessels that had any business links with Venezuela in the previous year, including port calls.

Other freight companies have also shunned Venezuela and some tankers have reportedly turned off their transponders as they enter the country’s waters to avoid detection. “Few tankers are willing to take that risk [of breaking US sanctions],” said Antero Alvarado, Venezuela director at Gas Energy Latin America, a consultancy.

Washington’s punitive measures mean Venezuela has lost access not only to its biggest market — the US, which bought about 40 per cent of the country’s oil exports until this year — but also other markets. Even China National Petroleum Corp, a leading buyer of Venezuelan oil, says it has stopped buying the country’s crude.

Faced with a dwindling number of customers, Venezuela is increasingly reliant on Russian state oil company Rosneft, which is helping it circumvent US sanctions by shipping oil to buyers in China and India. But Venezuela’s state-owned PDVSA is not making money from these transactions, which are being used to pay off its outstanding debt to Moscow.

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“There is no interest from Russia in leaving this business,” Mr Alvarado said. “That way they collect a debt that otherwise could not be paid.”

In an interview with the Financial Times last month, Elliott Abrams, the Trump administration’s special representative for Venezuela, described Rosneft as “really central to the regime’s survival. “It is buying the oil that is produced, it is helping sell that oil, it is helping them arrange financing. Rosneft is really key here.”

Unable to export its oil easily, Venezuela has been forced to store it, meaning some storage units have been filled to capacity and the company has had to resort to using ships as floating storage tankers.

All of this has had a knock-on effect at production sites, where PDVSA has been forced to reduce output to a minimum. “The consequence is that PDVSA has closed wells. That’s why production has fallen so much,” Iván Freites, a PDVSA union leader, said. “Production levels are so low at some oilfields that at any moment we’ll have to shut them down.”