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PdV's Asia-Pacific export focus eroded by Iran

09 May 2016 15:47 (+01:00 GMT)
PdV's Asia-Pacific export focus eroded by Iran

Caracas, 9 May (Argus) — Iran's return to oil markets has cooled a decade-old strategic alliance with Venezuela and undercut state-owned oil firm PdV's export diversification strategy in Asia-Pacific.

The deterioration coincided with the lifting of EU and US nuclear-related sanctions on Tehran in January. Since then, Tehran's push to restore its oil exports to pre-sanction levels of about 2.5mn b/d from less than 1.5mn b/d during sanctions has opened a rift in the Venezuela-Iran alliance.

Among some foreign ministry officials, the view is that Venezuela cannot count on Iran's support within Opec for co-ordinated measures to freeze and, ideally, reduce production.

The distancing in bilateral relations, rooted in a common legacy of anti-US sentiment, started in the months leading up to a 17 April meeting in Doha, when Caracas was fiercely lobbying oil producers to adopt a production freeze to stabilise oil prices. Tehran rebuffed the idea of freezing its own production from the start, and at the meeting itself its Middle Eastern rival Saudi Arabia unexpectedly said it would not agree a freeze in the absence of Iran's participation.

Iranian officials have told their Venezuelan counterparts in meetings over recent months that Iran needs higher production and exports, and greater market share in Europe and Asia-Pacific, particularly, to strengthen its negotiating position with other producers such as Saudi Arabia and Russia. It has not been lost on Venezuelan officials that countries with lower oil production, exports and market share have less influence than the large producers.

But, as officials in Caracas privately see it, Iran's rejection of repeated invitations from the government of Venezuelan president Nicolas Maduro since the fourth quarter of 2015 to join it, Russia and other Opec and non-Opec producers in proposed co-ordinated measures to freeze global crude output hurt Venezuela economically by ensuring that weak oil prices would persist during the remainder of 2016.

The Maduro government maintains publicly that relations with Iran are robust. Foreign minister Delcy Rodriguez said in Tehran as recently as 16 April, on the eve of the ill-fated Doha meeting, that the two countries remain committed to expanding bilateral oil and non-oil joint investments in Venezuela.

"Iran is an important and valued ally of Venezuela in the economic war the US has launched to force President Maduro's resignation and help US oil companies seize control of Venezuela's oil resources," the foreign ministry said.

But with Iran back in the oil market, the political impetus behind the countries' bilateral relationship seems to have evaporated, exposing the commercial challenge of PdV's decade-old pivot toward Chinese and Indian markets and away from its traditional US market. Even non-oil joint ventures such as Veniran tractors, founded in 2005 at the height of late Venezuelan president Hugo Chavez's long presidency, never got off the ground.

In recent years, PdV has focused production on Merey 16, a blend of extra-heavy Orinoco and light crude, to satisfy Asia-Pacific buyers. But those buyers now have another supply option — Iran.

Heading into a 2 June Opec meeting in Vienna, Venezuela will press members to revisit the freeze proposal that was dropped at a broader producers' meeting last month. For Caracas, a deal that would accelerate an oil price recovery is critical.

PdV needs an average price of over $40/bl to cover all production costs associated with crude output including imports of light crudes, heavy naphtha and other refinery components required to manufacture gasoline and Merey 16.

Oil minister and PdV chief executive Eulogio Del Pino has argued since January that $60/bl is the market's "equilibrium price", and president Maduro last month reiterated Venezuela's longstanding position that $100/bl is the "fair price" Opec and non-Opec producers should aim to reach through co-ordinated production cuts.

Del Pino blamed Saudi Arabia for Doha's failure. But one view from the foreign ministry is that what killed any chance of an agreement at Doha was the Iranian government's rejection of President Maduro's eleventh-hour appeal for Iran to embrace the output freeze proposal at Doha. In this narrative, Tehran's refusal to join an expanded production freeze pact gave Riyadh a timely excuse to baulk and sink the agreement.

Caracas officials are worried that Iran's aggressive return to European and Asia-Pacific oil markets with a marketing strategy that includes offering clients better prices than other producers including PdV is already making inroads in India and to a lesser extent in China. PdV cannot match Iranian state-owned NIOC on prices in India.

PdV is concerned that Iran's drive to regain market share with Indian clients Reliance Industries and Essar could reduce PdV's exports to India in 2016 compared with the roughly 400,000 b/d shipped in 2014-15.

Iran is also targeting Chinese buyers, the main focus of PdV's Asia-Pacific strategy based in part on more than $50bn in oil-backed loans since the late 2000s.