Cheap Venezuela crude oil to complement discounted Russian grades

India’s thirst for cheap oil got a legup this week after the US lifted sanctions on exports of Venezuelan crudes, which, until a few years ago, accounted for a tenth of India’s crude oil imports.
 

These grades are available at discounts of over 20 per cent to the average of the Indian crude oil basket, according to government and industry officials and the ship-tracking data.
 

India is studying options to resume imports of oil from Venezuela after purchases stopped in late 2020. But the volumes will depend on the extent of discounts offered and on Venezuela’s ability to meet Indian demand over a sustained period, a top government official said. Caracas is yet to make any offers to India, which may have to compete with China for supplies. 
 

The availability of cheap Venezuelan grades, which are discounted because of the poor quality of crudes, is a source of comfort for the government, which is reeling from surging crude oil rates but compelled to keep fuel prices stable and affordable amid the impending state elections and the Lok Sabha polls.
 

Venezuelan oil also helps Indian refiners negotiate bigger discounts with Russian oil suppliers, an oil industry official said. Discounts on Russian crude oil supplies, which account for 40 per cent of India’s crude oil basket, have shrunk by half from the $10-13 per barrel levels seen at the beginning of 2023. Washington has only given a six-month window for Venezuelan oil sales, and will consider exte­nding it if Caracas meets US conditions.

 

Indian officials find six months very short and doubt if Venezuela can rejuvenate its decaying oil areas and infrastructure in such a short period unless it secures extensions. It may take two years to boost production to 1.4 million barrels per day, over twice the current levels, a Mumbai-based refiner said.
 

India bought a record 419,000 barrels of Venezuelan oil a day in 2016. Volumes crashed to 167,000 barrels a day (b/d) in calendar 2020 as against 307,000 b/d in 2019 because of US sanctions, compared to the ship-tracking data by Paris-based market intelligence agency Kpler.
 

Prospects of cheap Venezuelan oil come in addition to discounted Russian benchmark Urals, which was made available to Indian refiners after the Ukraine war started in February 2022.
 

Discounts offered on Urals, a grade much superior to Merey and Hamaca, are comparable to Venezuelan crudes. For instance, the discount on Venezuelan oil to the Indian crude oil basket — a cocktail of sour and sweet grades — varied annually in the $9-15/barrel range in the four years to 2020, according to calculations based on the Indian Customs data. Russian oil cost less than the Indian crude basket by $9/barrel, on average, in the April-June quarter — Russian oil averaged $69/barrel and the Indian crude basket was $78/barrel. But the gains in Venezuelan oil will largely accrue to private-sector refiners and not government oil companies.
 

Reliance Industries and Rosneft-run Nayara Energy were the only two buyers of Venezuelan oil in the past, according to the Kpler data. Reliance accounted for 79 per cent of Venezuelan oil in 2020.
 

In 2016, the two companies imported a combined 419,000 b/d of Venezuelan crude grade. Other popular grades include the country’s main export blend Merey, a heavy sour crude oil blend, carrying high sulphur, DCO, Hamaca and Leona.
 

Reliance stopped buying Venezuelan oil from December 2020 and Nayara from April 2020, according to the loading data from KPler. India bought a record 2.16 million b/d of Russian oil in May, with October loading volumes at 1.57 million b/d, the Kpler data show.
 

Indian state-run refineries are not designed for heavy, acidic Venezuelan grades but primarily configured for Arab Mix from West Asia, according to R Ramachandran, former refinery director, Bharat Petroleum, and now an industry consultant. Venezuelan grades like Merey and Hamaca are costly, complex, and carbon-intensive to refine into fuels, and very few refineries globally are designed for such oil, Ramachandran said, a reason for the big discounts on tap. 
 

Reliance and Nayara also blend grades like Merey with lighter crudes to enable processing, industry officials said. Blending requires space and tankages, Ramachandran said. Reliance and Nayara hire tankages in the Gulf and elsewhere to blend Venezuelan oil, before bringing it to India, industry sources said. State-run refiners lack such facilities. Moreover, Venezuelan crudes require a residue upgrade unit to improve yields, and barring Hindustan Petroleum’s refinery in Visakhapatnam, no other Indian refiner has that provision.
 

Venezuela has been shipping crude oil unofficially, violating US sanctions, according to the ship-tracking data by Kpler. Venezuela shipped between 324,000 b/d and 676,000 b/d since January 2021. It shipped 503,000 b/d in September. Most of the Venezuelan oil lands in China, either directly or routed through Malaysia, according to US market intelligence firm Energy Intelligence estimates. The country pumped over 2 million b/d in 2017.