US prepares to cut off diesel to Venezuela

Oil companies supplying diesel to Venezuela are poised to halt shipments around the end of October, as the US moves to end an informal exception to its oil sanctions targeting the Opec producer.

The controversial cut-off is likely to result in more power outages and fuel shortages in Venezuela, where state-owned PdV's refineries are barely operating.

Spain's Repsol, Italy's Eni and India's Reliance have been supplying diesel in exchange for crude from Venezuela's state-owned PdV in debt-related and swap transactions on humanitarian grounds, with grudging clearance from the US Treasury Department's Office of Foreign Assets Control. which administers the sanctions.

The US State Department in recent weeks has been discussing with the suppliers an informal wind-down of the diesel exemption. The change is scheduled to occur right before US presidential and congressional elections on 3 November, highlighting the domestic political imperatives that have long driven White House policy on Venezuela.

US vice president Mike Pence is planning a campaign stop in Florida in coming weeks to highlight the administration's tough policy toward Venezuela and its close ally Cuba.

In contrast to its increasingly byzantine formal sanctions regime on Venezuela, Washington has tolerated an informal exception regarding diesel supply. But the US has been loath to stipulate a formal exemption, for fear that other non-US companies would pursue similar arrangements on the fuzzy margins of the US policy.

In one of the latest transactions, the Malta-flagged Gemma delivered a cargo of ultra-low sulfur diesel this week at PdV's El Palito terminal, after loading at Milazzo, where Eni and Kuwait's state-owned KPC run a 235,000 b/d refinery.

Unlike Reliance, which has no operations inside Venezuela, Repsol and Eni have been utilizing the diesel exemption to recover debt from PdV related to their Venezuelan upstream operations, mainly the Perla offshore natural gas field in which they each hold 50pc stakes.

"Eni is lifting Venezuelan crude within a credit recovery scheme originated by the sales of natural gas production to PDVSA. The company is operating, and it will operate, in full compliance with (the) US sanctions framework and in continuous dialogue with all US relevant authorities," the Italian company said in a statement echoed by other non-US oil companies that remain commercially engaged with Venezuela.

Venezuelan President Nicolas Maduro's government, so far, has succeeded in resisting the US campaign to unseat him, dashing predictions that he would not withstand sanctions on the oil industry that traditionally accounted for nearly all of the country's revenue.

No more options on the table

The US this year has ratcheted up the oil sanctions first imposed in January 2019 to include individual tankers and shipowners, while leaving diesel open as a channel to supply power stations, agricultural activity and food distribution. Now that channel is closing as US "maximum pressure" options short of military action start to run out.

Hardliners in the US administration and Venezuela's US-backed opposition mostly run by exiles maintain that the diesel exemption has helped Maduro to stay in power. But some rank-and-file US and Venezuelan opposition officials inside the country acknowledge that the fuel is critical to keeping the lights on and tractors running. Without a way to recoup payment from PdV for their gas, Repsol and Eni would likely reduce production, starving thermal power stations. And by making diesel more scarce, the fuel would go the way of gasoline, which is now sold for up to $4/l to desperate Venezuelan motorists.

Inside Venezuela, PdV has been working to restart gasoline-producing units at its 305,000 b/d Cardon and El Palito refineries, but operations remain intermittent at best following years of mismanagement, neglect and sanctions-related shortages of spare parts.