Diluted crude fading from PdV export basket

Venezuela´s national oil company PdV is shifting crude exports away from diluted crude oil (DCO) in favor of higher-value Merey blend to cope with an abrupt naphtha shortage caused by US sanctions.

PdV will dedicate most of its domestic light crude toward blending operations, allowing it to maintain oil-backed debt payments with fewer cargoes of the more valuable crude.

"Around 300,000 b/d of DCO will be gone in March," a PdV official predicts.

A bit of the diluent is still trickling in. Shipping data indicates that the Serengeti, operated by Dynacom Tanker Management, will load 60,000t of Mediterranean naphtha by ship-to-ship transfer off Cyprus on 20 February, with the cargo bound for Venezuela. But the shipment is a fraction of Venezuela´s needs. And part of what PdV and its partners already have in stock is of poor quality, with sediment that clogs processing equipment and interrupts operations.

The sanctions announced by Washington on 28 January immediately banned US sales of diluent to PdV, part of a wider strategy to force out Nicolas Maduro whom the US and scores of other countries no longer recognize as president.

PdV and its joint venture partners normally use naphtha — almost all imported from the US — to blend with extra-heavy crude at the Orinoco oil belt to make DCO for transport by pipeline to the Jose industrial complex on the coast. There the DCO is processed at three operational upgraders into light synthetic grades such as Zuata, and a heavy-light crude blending plant to produce Merey. These plants strip out the naphtha for reuse at the oil belt.

In recent years, the overflow of DCO production that exceeded the processing capacity of the Jose plants was exported directly into the market, taking the naphtha with it.

Without fresh naphtha supply, PdV is now allocating most of its domestic light crude led by 30°API Mesa and more recently 42°API Santa Barbara — both produced in northern Monagas state — to making more 16°API Merey at the Sinovensa blending plant, a joint venture with China's state-owned CNPC.

Three of PdV´s four upgraders are currently operating: PetroMonagas with Russia´s state-controlled Rosneft, PetroPiar with Chevron, and PetroCedeño with partners Total and Equinor, which resumed operations yesterday following equipment repairs. PdV's wholly owned Petro San Felix has been down since last year.

Sinovensa produces around 120,000 b/d of Orinoco extra-heavy crude which is blended with 50,000 b/d of naphtha to make 170,000 b/d of DCO. Around 100,000 b/d of the DCO, minus the naphtha, is blended with Mesa to produce 120,000 b/d of Merey. Prior to the sanctions, the remaining 70,000 b/d of DCO was exported to China, but this is now blended with domestic light crude to produce more Merey, effectively erasing DCO export barrels.

Santa Barbara production that is increasingly allocated to the blending pool was previously earmarked for servicing Asian commercial debt and to run through PdV's refineries which are currently operating at only around 15pc of capacity.

The strategy has a commercial payoff for PdV. In the international market, Merey fetches a premium of roughly 40pc to DCO, meaning the company will have to supply fewer cargoes to service the same amount of oil-backed debt to China, Russia and other creditors.

But while more Merey maximizes the value of PdV´s exports, it comes at the expense of fuel production in its dilapidated domestic refining system. Gasoline and diesel were already in short supply before the sanctions, and the deficit is growing more acute. Gasoline will run out by the end of February unless PdV can import more.

The strategy is also limited by the availability of light crude from mature fields such as Furrial. Venezuelan production, currently around 1mn b/d, has been declining for years because of a lack of investment, sparse oil services, labor flight and erratic power supply. The naphtha shortage is accelerating the trend.

Sinovensa capacity is limited as well. The plant was never expanded to 330,000 b/d as originally conceived.