Feature Issue 02 - 2021 MAGAZINE Oil and Gas

China’s import of Venezuelan crude continues despite US sanctions

Crude from PDVSA continues to reach China ports with the help of countries like Russia, Switzerland and Malaysia

Amidst the pre-existing rivalry between Washington and Beijing, China replaces the US to become the highest importer of oil from Venezuela. Targeting to overthrow Nicolas Maduro, the socialist president of Venezuela, the US imposed sanctions on the state-owned oil company. As a result, the US refineries restricted the purchase of crude oil from Venezuela.

China is considered Caracas’ ally and a major customer for a long time now. After the sanctions of the US, China found itself to be the top purchaser of Venezuelan crude. Data show that in the first half of 2019, the country had imported an average of 350,000 barrels per day from Venezuela. Further, into the year, Washington tightened its sanctions on Venezuela and warned that foreign entities who wished to continue business with the South American country may also find themselves subjected to sanctions.

After the warning from Washington, China’s state-owned China National Petroleum (CNPC) terminated importing oil from the ports of Venezuela in August 2019. Reports from the Asian country showed that purchase gradually declined and curbed in late 2019.

The US President Donald Trump’s threats seemed to have pressured customers from countries around the globe like China’s largest oil company. An in-depth reporting of Reuters brought into light that China did not stop buying oil from Venezuela. Crude from Venezuelan state-owned oil and natural gas company Petróleos de Venezuela SA (PDVSA) continued to reach the ports of China with the help of other countries. Firms that were involved include the Switzerland-based unit of Rosneft and Russia’s state-owned oil company. The dispatch has been made possible via a roundabout delivery method and it appears that the fuel’s origin was Malaysia.

From the start of July 2019 to the end of December about 18 shipments worth 19.7 million barrels of rebranded Venezuelan crude oil reached the Chinese ports in tanker ships. These data are supported by the study of ship-tracking data along with internal documents from PDVSA. Additionally, interviews with petroleum analysts that kept track of the flow of Venezuelan oil around the world also supported the data.

CNPC unit had chartered a minimum of one of these tankers which only implies that it was responsible for the crude aboard. The Adventure, a tanker vessel from Venezuela is tracked down to have loaded crude on July 18 and discharged it on September 4 in China. The 18 shipments that happened between July and December have factored to more than five percent of the South American country’s total exports in 2019. It is said to be worth $1 billion at Venezuela’s flagship crude grade – Merey according to figures presented by OPEC.

The said sales have provided crucial support to Maduro’s government. Despite the sales, there are minimal records about the status of it being added to the state’s coffers. It is a known fact that Venezuela often sells its crude at steep discounts and most sales of it are set to pay down debt rather than generate cash. Amidst the accusations, the Venezuelan opposition disclosed that the Maduro government has also been transporting gold to Mali through Russian planes. The metal is then refined there and sold to the UAE. It is estimated that the earned profits were at the least $1 billion.

The morphed shipments were found to have continued into the current year. The act was confirmed by the data collected from Refinitiv Eikon, a financial information provider along with satellite imagery and the Automatic Identification System (AIS) data transmitted by oil tankers. The Trump administration has been under scrutiny for months to figure out the shipping method that involves the transfer of crude oil from one tanker to another at the sea itself. After learning about the involvement of the Geneva-based subsidiary of Rosneft ROSN.MM, Rosneft Trading SA, Washington slammed sanctions in February. It stated that it has been helping PDVSA to export oil using ship-to-ship (STS) transfers in order to mask the real origin. Reports from the internal PDVSA documents did show that the Rosneft unit was involved in moving the oil. However, Rosneft denied any wrongdoing and stated that the company has always been and is conducting its business in full compliance with applicable international legislation.

Peter Harrell, a sanctions expert at the Center for a New American Security think tank in Washington commented that the import of crude from Venezuela to China falls under a grey zone. The sanctions by the US provide authority to Washington to chastise foreign companies that purchase crude from PDVSA via a middleman particularly when the company knows or is supposed to know its origin. Yet this does not permit the US government to act upon as these sanctions are fundamentally policy calls. The collected data is said to have no proof to verify if China was aware of the origin of the crude that reached its shores through Rosneft Trading.

Views on US Sanctions

Elliott Abrams, the US State Department’s special representative for Venezuela stated that the possible US sanctions against CNPC for purchasing masked crude oil from already sanctioned Venezuela was discussed. They are also said to have taken individual actions on STS transfers. However, China’s foreign ministry stated that the harsh US sanctions had severely affected the relationship of Venezuela with the rest of the world yet Beijing aspires to continue trading with the country.

Additionally, Venezuelan officials continue to express their comments on the US Sanctions as illegal and unilateral. Oil analysts around the world stated in 2020 that crude from Venezuela has been making its way to the ports of China through the way of Ship-to-Ship (STS) transfers. The shipment of Venezuelan oil to China is however unusual for various reasons. STS is said to have been a systematically executed tactic that is generally used for legitimate purposes like offloading oil from deep-water drilling ships or pumping oil from large tankers to smaller vessels that could be easily navigated in shallow or narrow waterways. This particular technique has not been implemented when importing oil from Venezuela to China up until mid-2020.

It was proven that the loaded tankers that leave PDVSA did not travel directly to China like in the past. Rather, about 15 loaded tankers with PDVSA crude were found to be first headed to the coast of Malaysia. In the Malacca Strait, a few miles offshore, each of the tankers met with another empty tanker that had already pulled alongside. The full tankers then pump their load into the waiting vessel or multiple smaller vessels. After the STS transfer, 18 of these tankers headed to the ports of China where the crude originally from Venezuela was unloaded and recorded as an issue from Malaysia. As the imports continued from Venezuela, China’s total imports for the year 2019 averaged 280,000 barrels a day while the customs of China reported 229,000 barrels a day, this was 24 percent less according to the estimated calculations with the collected data.

Effect on Venezuela

The amount of transhipped crude is said to be not sufficient to offset the impact of the US sanctions had on PDVSA. In January 2019, when the sanction was imposed, US refiners were importing 500,000 barrels of crude on average. This helped Venezuela oil industry to stay alive when the demand from foreign buyers dropped creating a superabundance onshore that forced PDVSA to nearly stop the production in its key oil fields.

Due to the US sanctions, crude has been stored in various floating facilities on the Venezuela coast. In early April, operations were carried out to remove the stored crude from Nabarima floating storage, an offloading facility (FSO). It was anchored in the eastern Gulf of Paria near the maritime border of Trinidad and Tobago. The crude has been in store since 2019 when the US imposed sanctions on the country. The facility is a part of the Petrosucre joint venture between PDVSA and Italy’s Eni that operated the offshore oil field in Corocoro. Both the firms were selling crude produced by Petrosucre to Citgo, the Venezuelan-owned refining company. The sanctions halted the contract with the firm and left the project inactive and crude stranded in Nabarima.

Iran is yet another country that is under US sanctions that had previously used STS transfers to ship oil to China under the name of its neighbouring country Iraq. In 2019, one of the Chinese terminal operator’s representative however denied Iran as the origin of the oil. The spokesman of Iran’s mission to the UN in New York then stated how the country decides to export or sell its oil is no one’s business and the US sanctions on the export of the same is illegal. With the exception of Iran, the changing of the identity of the crude is considered to be highly uncommon. China for all the STS transfers it has done in the past from Brazil and Russia holds recorded statements of the true origin of the product the country received.

Malaysia’s vital role

Malaysia is a mid-sized producer of oil that so far has not shipped crude to China in volumes recorded by the customs in China in 2020. China also said that in 2019 the crude imports from the country were 400 percent more than the figures recorded three years earlier. This morphed trade involving the three countries has put Venezuela in a difficult position during the Trump administration.

Reports identified that it was Rosneft Trading that lifted the oil from PDVSA for shipping to China. It has deployed one ship to draw oil out of the country and another to reach the ports of China, trading in an attempt to blur the true origin and morph the crude’s root. Towards the end of March 2020, Rosneft terminated its ties with Venezuela and all operations along with it. Later it sold all its assets in the country to an unnamed Russian state-owned firm.

Malaysia is considered a popular location for STS transfers because of its proximity to Singapore, one of the largest oil trading and storage hubs in the world. The media stated that one such transfer with regards to the Venezuelan crude reaching China happened close to Malaysia’s Kuala Linggi port and the rest took place in exteriors of Tanjung Bruas port of the country. The draft is calculated as the gap from the waterline and the bottom of the vessel hull. This indicates the weight of the load it is carrying. Refinitiv Eikon’s ship-tracking data gives the location of ships and indicates how full they are. It helped to reveal that the draft of each ship modified drastically while in the same location off Malaysia’s coast at the same time.

On a similar report, it was stated that the draft measurements indicated that the Delta Aigaion, a Liberia-flagged vessel arrived full in Malaysia left empty unlike Lipari, a Malta-flagged vessel. This states that the oil transfer has taken place between the two because the crude it carried is known as Merey 16, a heavy blend that is quite unique to PDVSA and the documents also support the fact that it was Rosneft Trading addressed as its customer. Later with an STS transfer near the port of Tanjung Bruas, it reached Zhanjiang port in China.

When this transhipped crude reached China the customs officials of the country labelled the oil as Sigma Blend which is said to be a grade of crude oil that did not exist until 2019. It also labelled it to be originated from Malaysia.

The rivalry between Bejing and Washington

China is seen as undermining the US foreign policy by continuing its trade of buying oil from Venezuela, thereby violating the US sanctions. After the Trump administration, under US President Biden, China still continues the trading via phantom companies. These are Chinese entities that do not have a track record of oil trading. In February 2021, China had bought about three-quarters of the oil exported by Venezuela. This resulted in PDVSA’s oil export increasing to 700,000 barrels per day in that month which is the highest in the current year and bifold of the figures from June 2020. It is also to note that the state-owned oil industry, China Petroleum has reported zero purchase from Venezuela as the purchase was all executed under phantom companies that serve as an intermediary for trading with sanctioned companies.

China’s act of lawbreaking against the US sanctions imposed on Venezuela has also seemed to have reached Iran where a media report stated that the country is importing oil from China. Iran is one of the heavily sanctioned nations around the globe where China has so far imported 900,000 barrels of oil. Yet Biden’s administration is reluctant to take action against China for violations of its sanctions on Venezuela and Iran is because the country might retaliate if being hit hard. Recently, China had agreed to invest about $400 billion in Iran over the next quarter decade in exchange for oil from the country. The investment is said to cover various sectors like banking, telecommunications, ports, railways, healthcare and information technology.

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