Venezuela's diesel imports through a crude-backed humanitarian channel permitted by US sanctions are starting to recover following a June lull, but they remain far short of demand.
Among incoming diesel supplies are three cargoes carrying a total of 1.3mn bl that are scheduled to arrive in Venezuela between 15 August and 25 September, industry participants tell Argus. The cargoes are coming from India's Reliance Industries, which resumed diesel-for-crude swaps in July after a June pause to ensure sanctions compliance during a period of uncertainty over US policy.
In addition to the three Indian cargoes loading at Sikka, Venezuela is scheduled to receive at least three more from Spain's Repsol and Italy's Eni, which regularly supply diesel to Venezuela under debt and swap arrangements partially tied to payment for their offshore natural gas production from Venezuela's Perla field, for which state-owned PdV is the sole offtaker.
Previous swaps conducted by Russia's Rosneft dried up in March after the US sanctioned two of its trading units.
For PdV and its upstream joint venture partners in Venezuela, the diesel swaps help to alleviate storage bottlenecks that have forced the Opec country to shut in crude production in recent months, after the escalating sanctions drove away most buyers. June crude output was only around 400,000 b/d, compared with 550,000 b/d in May and 750,000 b/d a year earlier, according to Argus estimates.
Beyond Venezuela's choppy crude liftings, the imported diesel — equivalent to around 30,000-40,000 b/d or only about 15pc-20pc of pre-sanctions consumption of 200,000 b/d — is playing a quiet role of mitigating the humanitarian impact of the sanctions that the US has been otherwise ratcheting up in recent months.
Topped off with sporadic and low-quality domestic diesel production from PdV's refining system, the imports are allowed under the sanctions in order to ensure that Venezuela has fuel to run power generators, produce and distribute food, operate water pumps and keep buses on the road, among other uses.
About 25,000 b/d of the overall diesel availability goes toward power generation, especially in western Venezuela which is most prone to blackouts. Argus is told that pent-up generation demand has the potential to absorb double that volume in the face of chronic grid outages, a particular danger for hospitals during the current Covid-19 pandemic.
Fine print
The US sanctions, first imposed in January 2019, banned US companies from buying Venezuelan crude and from supplying the country with naphtha used to dilute the country's extra-heavy crude, and with gasoline and vital gasoline components.
In the weeks after the sanctions were put in place, the US government added fine print, including an explicit distinction for diesel that was laid out in March 2019 State Department overseas guidance seen by Argus.
The US administration is starting to convey some discomfort with the diesel exception for what some see as a backdoor to helping the government of President Nicolas Maduro that it wants to force out. But for now, the focus of Washington's "maximum pressure" campaign remains gasoline, as well as tankers and shipowners that it is increasingly targeting for trading Venezuelan oil outside the sanctions framework.
PdV has run out of gasoline imported from Iran in late May and early June, and production from its Cardon and El Palito refineries is volatile at best. In a bid to support rationing, the government raised pump prices for gasoline in June, instituting a two-tier system with limits on subsidized supply. Diesel is still sold at giveaway prices.
