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Nuclear option against the Maduro regime

25 Jan 2019 16:49|Marcin Lipka

"Hundreds of thousands of people protesting and the recognition of Juan Guido as the interim leader of Venezuela by many countries did not result in the downfall of the Maduro regime. However, this may change if the United States uses the nuclear option - a ban on the export of US coal oil to Venezuela," writes Marcin Lipka, Conotoxia Senior Analyst.

The Venezuelan regime exists only thanks to oil exports. Contrary to appearances, the sale of this raw material is not as easy as the case of other countries. This is not just about the sanction or the fact that the lack of investment in the upstream sector has significantly reduced the country's oil potential. The main problem with Caracas, and at the same time Washington's chance to help the opposition, is the rather specific conditions of transport and extraction of Venezuelan oil.

Solvent needed

The largest deposits of Venezuelan oil are in the Orinoco Delta. The main drawback of this oil is its extreme density and viscosity, which makes it impossible to transport and, of course, export. For oil to be suitable for processing and sale abroad, it is necessary to reduce stickiness and density. Coal oil (kerosene) is used for this purpose.

Venezuela, on the other hand, buys its kerosene mainly from US refineries. Recent EIA (American Energy Agency) data shows that in 10 months of 2018, imports of crude oil and its products from the USA to Venezuela averaged 120,000 barrels per day (b/d). Where does the regime of President Nicolas Maduro export recyclable oil?

According to EIA information and the entire procedure described, e.g. in last year's Financial Times study ("A Venezuelan oil embargo would wipe out Maduro & Co"), Venezuelan oil goes largely to the US refineries located on the coast of the Gulf of Mexico. Official EIA data show that for 10 months of 2018 Americans bought about 580,000 barrels of oil a day in Venezuela, i.e. about as much as Poland uses on a daily basis.

However, there is also another interesting point. According to OPEC data, Venezuela's average oil production over the past 10 months was approximately 1.4 million b/d. About 300-400,000 b/d were consumed in the country, which means that more than half of the one million barrels of exports went to the USA. As a result, despite the strong conflicts between Caracas and Washington, the US is one of the main sources of revenue for the Maduro regime. How is this possible?

US oil industry's reluctance to sanctions

Quite surprisingly raw material relations between the USA and Venezuela are based on several factors. Some US refineries need precisely the kind of oil that Venezuela offers. Replacing it with another type of oil would be difficult (costs of delivery or technological changes). Theoretically, Venezuelan oil can be sent anywhere in the world, but transport costs make it uncompetitive and, also, few refineries have a need for it.

Venezuela, on the other hand, could find another supplier of kerosene, but it would also be expensive. As a result, this rather bizarre symbiosis works despite geopolitical differences. This is probably also supported by the lobbying of the oil industry, which sees the additional costs of disrupting the supply chain and the need for new investments.

It is worth noting that the past few days may seriously disrupt this cooperation. The United States and their allies on the continent (Canada and most countries in Latin America) supported the takeover of power by the opposition and recognised Juan Guido as the interim leader of Venezuela. If Maduro's regime does not surrender, an embargo (on both oil exports to Venezuela and oil imports from Venezuela) must be introduced.

Nuclear option against the Maduro regime

Prohibition of oil imports from Venezuela through US refineries and the lack of solvents would inevitably reduce the revenue of the Maduro regime. However, apart from the costs to the oil industry, it also generates other risks.

Venezuelan PDVSA owns Citgo, an oil company operating in the United States with refineries, pipelines and a network of service stations. The company's assets were pledged under a loan financed by Russian Rosneft, as Reuters reported in 2016.

However, given the US administration's involvement in recent events and the building of a coalition against Maduro, naturally, the next step will be to try to drastically reduce the regime's revenue and thus force the dictator to yield power despite the risks associated with this process.

25 Jan 2019 16:49|Marcin Lipka

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