China's independent refineries to face competition as Venezuela gets partial sanctions relief

China's independent refineries are bracing for intense competition for limited Venezuelan crude supplies as the partial easing of sanctions on oil and mining sectors by Washington is expected to whet the appetite of importers across the globe, trading and refining sources told S&P Global Commodity Insights on Oct. 19.

In addition, China's state-run oil giant PetroChina is expected to return to the market to supply the barrels to China on the back of its joint venture's investment in the Latin American country.

The independent refineries, especially those located in Shandong province, have been key buyers of Venezuelan barrels, taking about 360,000 b/d of crude and 110,000 b/d of fuel oil from the Latin American country in September, the month when Venezuela's crude production averaged 770,000 b/d, S&P Global data showed. The output was expected to hold steady roughly through the end of 2024, according to S&P Global.

"Once Venezuelan crudes are allowed to trade freely, buyers from other countries will emerge to push up the prices, leading to a reduction in flow to China until Venezuelan production rises," a Shandong-based trader said.

Trade sources also added that some potential buyers could also emerge from the US, Europe and India.

Independent refineries mainly import Venezuelan crudes as bitumen blend for producing asphalt for road-paving and use Venezuelan 380 CST fuel oil as feedstock for oil products.

Refining and trading sources in Shandong said suppliers either suspended offering Venezuelan barrels on Oct. 19 after the announcement of lifting of the sanctions came or have raised their offers.

Bitumen blend had been offered at a discount of around $22/b against the ICE Brent Futures on a DES Shandong basis for few weeks until Oct. 18, according to trading sources.

Some trading sources and analysts added that weak feedstock demand from independent refineries could also keep their buying interest for Venezuelan barrels subdued.

"The core question for China is whether Venezuela will boost, maintain or redirect its exports to China as a result of the incoming sanctions relief. Our view is that prices of those crudes will fluctuate as Venezuela's overall exports recover," said Sijia Sun, China oil analyst at S&P Global. "Both National oil companies in China and non-state enterprises will keep a close eye on prices before deciding on any buying strategy. In a short term, we don't see a big impact on China's crude flows as a result of the policy change on Venezuela."

The Biden administration on Oct. 18 partially eased sanctions on Venezuela's oil and mining sector, in response to the electoral agreement signed between the government of Nicolas Maduro and the Venezuelan opposition. The general license temporarily authorizes transactions related to the oil and gas sector in Venezuela for six months, until April 18, 2024. The license will be renewed only if Venezuela fulfills its commitments under the election roadmap, as well as other commitments with respect to unjustly detained individuals, according to the statement by treasury department's Office of Foreign Assets Control, or OFAC.

PetroChina to return

Meanwhile, a source close to PetroChina said on Oct. 19 that the state-run company is preparing to return to the market to import and trade Venezuelan crude oil and fuel oil. The move may narrow the room for independent trading houses which supply the barrels to China.

Prior to 2019, when the US enhanced its sanction measures against Venezuela, PetroChina was the main supplier of the Latin American barrels to China as CNPC Exploration and Development Co. Ltd was the leading Chinese investor in Venezuela's oil sector. CNPC E&D is a joint venture established in 2008, evenly owned by the listed PetroChina and its parent company state-owned oil giant CNPC.

After PetroChina suspended the flows due to the sanctions, it left the market open to small private trading houses run by local traders in Shandong.

The latest sanction relief could also boost China's oil-related investments in Venezuelan and eventually lift production, as Beijing and Caracas expanded strategic partnerships in September, industrial sources said.

"More investment, especially cash flows, is needed to boost the output," an industrial source said.

Sources in China believe it would take time to boost Venezuela's crude output given outdated upstream equipment and aging oil wells.