Diesel shortage could force White House to ease sanctions
Growing calls from US Democrats for humanitarian aid
Production prospects depend on US sanctions and Chinese tax
After Venezuelan President Nicolas Maduro survives maximum sanction pressure from the Trump administration, US President Joe Biden will have to decide whether to offer Venezuela limited sanctions relief or more, amid calls from the left to Congress for humanitarian aid.
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An easing of some sanctions would only reduce Venezuelan oil production to around 700,000 bpd by the end of 2022, while any major recovery would depend on the lifting of US sanctions against state-owned PDVSA, according to S&P Global Platts Analytics .
“The Biden administration hopes to address humanitarian concerns, so the reported fuel shortages affecting Venezuelan farmers increase the chances that crude oil swaps for diesel or other types of relief will eventually be allowed,” said Paul Sheldon, adviser. Chief Geopolitics of Platts Analytics.
PODCAST: Biden’s Venezuelan policies after Maduro survives maximum sanctions pressure from Trump
As Venezuela’s diesel production declined relative to its own refining sector, the country was forced to import supplies for power generation and agriculture. Refiners from India, Italy and Spain supplied shipments of diesel and were paid in exports of Venezuelan crude.
These diesel-for-crude trades were banned by the Trump administration in October 2020. The Biden administration was reportedly on the verge of allowing trading to resume, but ultimately decided to keep the ban in place.
In no hurry to decide
The US State Department has now signaled that it is in no rush to resume the deals, and it expects Venezuela to have at least six months of diesel supply, Fernando Ferreira said, Director of the Geopolitical Risks Department of Rapidan Energy Group.
But Ferreira predicts Venezuela will hit a critical diesel shortage long before that date, possibly by August, which will force the White House’s hand.
“Later this summer this is really going to become a bigger issue for the administration, and they are going to have to reconsider whether to issue these waivers again, and we expect them to do so,” Ferreira said. . “We are seeing pressure from Congress to move in that direction, and this is something the administration has mentioned it is prepared to consider.”
Ferreira said such waivers could also allow Venezuela to trade crude for gasoline imports and repay debt to international partners in the PDVSA joint venture.
Francisco Monaldi, an expert in the Venezuelan energy sector and a member of the Baker Institute for Public Policy at Rice University, said PDVSA still has a stock of diesel for power plants, but little for fuel.
“Once the Biden administration has some room to define Venezuelan policy, there should be a general movement towards humanitarian exceptions, including on crude-for-commodity swaps, possibly including diesel. and at one point gasoline and LPG, ”Monaldi said. “It will depend in part on Maduro’s behavior with regard to the elections and other negotiations.”
” Question of life or death “
On the issue of U.S. investments in Venezuela’s oil sector, the Biden administration essentially punted when Chevron’s last waiver to perform limited maintenance was due to expire in early June. The Treasury Department simply granted another six-month waiver without changing the conditions.
“They’re basically buying time to reassess the strategy,” Rapidan’s Ferreira said. “I think it is understood, however, that they cannot continue to do this indefinitely. There will be a point where they will have to decide whether to fully tighten the screws or start relaxing the restrictions, as the companies oil companies are not going to stay forever with these restrictions in place. “
While Biden’s Venezuelan policy remains stuck, his own party is calling for more than simply offering waivers for fuel trade.
Rep. Jim McGovern, Democrat-Massachusetts, on June 14 called on Biden to remove all Venezuelan sanctions and find other ways to pursue his foreign policy goals, such as sanctions that target the behavior of specific individuals, not sectoral or secondary sanctions that punish the whole country.
“As US officials debate the policy of sanctions in Washington, for the people of Venezuela the current crisis is a matter of life and death,” he said in a letter to the White House. “Sanctions should never be used to punish entire populations for the actions of their leaders or to bludgeon an adversary into submission.”
The outlook for the Venezuelan oil sector depends not only on the relief of US sanctions, but also on a new Chinese consumption tax of $ 30 / bbl on imports of bitumen mixture that went into effect on June 12.
Sheldon of Platts Analytics said that without sanctions relief, China’s tax change could reduce Venezuelan supply to around 300,000 bpd next year.
Monaldi said that aside from the uncertainty surrounding the Chinese tax, Venezuelan production could return to 650,000 bpd in the coming months if current high prices encourage illegal exports or if trade is allowed to restart.
“Going higher than that requires significant investment,” he said. “They have just signed service contracts, but they are unlikely to generate much investment if there is no easement of sanctions.”
OPEC’s latest Platts survey and the Energy Information Administration both estimate Venezuela’s May production at 540,000 bpd.
Venezuelan oil production began to fall by around 2.5 million barrels per day at the end of 2015 due to mismanagement of the country’s vast oil resources, widespread blackouts and US sanctions. The Trump administration sanctioned PDVSA in January 2019.