US rethinking Venezuela diesel swaps

The US government is reassessing diesel-for-crude swaps that up to now have been exempt from Venezuela oil sanctions on humanitarian grounds.

Spain's Repsol, Italy's Eni and India's Reliance have been engaging in these transactions with Venezuela's state-owned PdV, with quiet clearance from the US Treasury's Office of Foreign Assets Control (Ofac).

But senior officials in the State Department and the White House National Security Council (NSC) are now reconsidering the exemption on concerns that it is helping President Nicolas Maduro to remain in power, with a wind-down period under review, Argus has learned.

The US first imposed oil sanctions on Venezuela in January 2019, but 18 months later, the "maximum pressure" campaign to topple Maduro is running out of new options. While the US has been building on the sanctions by targeting more oil tankers and individual Venezuelan officials, the basic framework remains static and largely bereft of robust multilateral support.

Under the swap arrangements, Repsol and Eni lift Venezuelan crude as payment for PdV's exclusive offtake of natural gas from their Perla offshore field and other debts, with diesel sent back to settle their books. Reliance, which was Venezuela's top diesel supplier in the second quarter, recently resumed the swaps after a June pause to ensure sanctions compliance.

Among European diesel supplies approaching Venezuela are Malta-flagged Chance and Greece-flagged Happy Lady, both medium-range tankers carrying a combined maximum of 650,000 bl that loaded in Cartagena, and the Bahamas-flagged handysize Atlas with a maximum 275,000 bl that loaded in Sardinian port Sarroch, according to shipping sources. From India, three Reliance cargoes carrying a total of 1.3mn bl scheduled to arrive in Venezuela in late August and September.

Drawing a contrast with more widely used and scarce gasoline, swaps proponents maintain that Venezuela needs diesel for power generation, agricultural activity, water pumps and public transport. PdV produces some diesel in its mostly inoperative refining system, but not enough to meet demand,which once reached around 200,000 b/d.

Baseload and back-up power generation is the most sensitive application for diesel, especially in western states far from the 10GW Guri hydroelectric complex that traditionally supplies most of the country. With the Covid-19 pandemic raging, diesel power is seen as a vital alternative to the unreliable grid.

As for the crude that is allocated for the diesel, the proponents add that without the swaps, more Venezuelan crude will be directed to obscure intermediaries with no benefit to the Venezuelan people.

Ambivalent stance

Venezuela's US-supported opposition, frustrated over Maduro's endurance, supports a swaps ban in line with hawkish inclinations in the White House, but quietly recognizes the risk of saying so publicly. A senior official in Venezuela's US-supported opposition privately describes the debate over diesel swaps as a "false dilemma" because the origins of the electricity crisis lie in Maduro's neglect of the grid, not a diesel shortage.

"Probably some diesel will help, some will go to Cuba or the black market. It is a murky situation," the official said.

In an event today with Washington Diplomat, Carlos Vecchio, the opposition's US envoy, avoided a direct response to a question over the swaps, pointing instead to corrupt oil-for-food transactions spearheaded by Venezuelan government agent Alex Saab whom the US is seeking to extradite from Cabo Verde.

In a separate press conference, Vecchio described Venezuela's oil shipments to its close ally Cuba as an example of resources that should be used to address the country's humanitarian crisis instead.