Venezuela gas at stake in debate over diesel swaps

A proposed tightening of US sanctions on Venezuela by cutting off diesel swaps could have unintended consequences for natural gas supply, particularly in blackout-prone western Venezuela.

Unlike gasoline that is a main sanctions target, Venezuela is drawing in a stream of diesel in US-authorized transactions conducted by Spain's Repsol, Italy's Eni and India's Reliance.

The latest cargo came in yesterday aboard the Bahamas-flagged Atlas, which docked at El Palito refinery after departing from the Sardinian port of Sarroch, Italy, on 9 July. Two other cargoes en route to Venezuela loaded in Cartagena, Spain. The Happy Lady completed loading on 22 June, and the Chance on 16 July. The three vessels are believed to be carrying a total of up to 925,000 bl of diesel. Three more diesel cargoes totaling 1.3mn bl are coming from India in late August and September.

The US government is currently reviewing the diesel exception, which critics argue was well-intentioned but has helped to prop up President Nicolas Maduro instead.

According to the Venezuelan electrical and mechanical engineers association (Aviem), about 300MW of baseload power generation relies on diesel, in addition to around 100MW of back-up generators, including units that supply hospitals. In all, the diesel-based power requires about 15,000 b/d of supply.

State-owned PdV produces some diesel from its decayed refining system, probably enough to meet the country's modest generation needs, according to Aviem. Other market participants are less sanguine. They say Venezuela needs diesel imports to ensure stable supply for electricity as well as public transport and food distribution. But Aviem is more concerned that a US cutoff of diesel swaps would end up driving down critical gas supply.

Pearl principle

For Repsol and Eni, the swap transactions are partly tied to their gas production from the Perla field, a 16.3 trillion cf offshore deposit which they operate under the Cardon 4 joint venture. PdV, the sole offtaker, pays the producers in kind with crude, which the EU companies balance out with diesel supply in return.

Depending on demand, Perla production fluctuates around 300mn-500mn cf/d, far from the 1.2bn cf/d that it was supposed to have reached in 2020 when operations kicked off in 2015.

If the US ends the diesel exemption, Repsol and Eni would have less incentive to maintain their gas production because there would be no clear way for Venezuela to pay for it, Aviem told Argus.

Repsol and Eni did not immediately respond to multiple requests for comment on the swaps or the implications for their gas production.

Currently consuming about 80mn cf/d of Perla gas is TermoZulia, a combined-cycle generation complex in the western state of Zulia that is dispatching 300MW, compared with its intended design capacity of 1.3GW. Even if state-owned utility Corpoelec managed to bring TermoZulia up to its full potential, the gas pipeline from the coast has insufficient capacity to supply it, Aviem says.

Aside from electricity, the Perla gas is absorbed by residential consumers in Maracaibo and by PdV's CRP refining complex, which is functioning at very low levels.

The wider market for the gas was intended to encompass petrochemical and fertilizer plants in western Venezuela, but these are all off line. Pipeline sales to neighboring Colombia originally offered another avenue to monetize the gas, but without a political breakthrough that possibility remains remote.