From Iraq to Canada: Venezuela vacuum intensifies India's heavy crude search

Singapore — The decision by US to impose sanctions on Rosneft Trading will dry up Venezuelan crude flows to India, as main buyers are expected to comply with the policy and instead aim to boost heavy crude imports from as far as Canada and other Latin America suppliers.

As Reliance Industries and Nayara Energy -- the two leading buyers of Venezuelan crude -- are capable of processing a wide range of grades, sourcing alternative supplies won't be a challenge, although it will intensify competition for heavier crude grades, potentially pushing up differentials, analysts told S&P Global Platts.

While both refiners are also actively considering stepping up purchases of US crudes, some trade sources said even some Middle Eastern grades, such as Basrah Heavy, would partly fill the vacuum.

"With the sanction of Venezuelan crude, similar crudes from the Middle East would come as a natural alternative due to their proximity to India. But the two Indian buyers may have to seek crude from origins further away due to potential OPEC and non-OPEC production cuts," said Lim Jit Yang, advisor for oil markets at S&P Global Platts Analytics.

OPEC on Thursday announced a plan to slash another 1 million b/d of its own crude oil production, and to ask Russia and nine other non-OPEC countries to cut 500,000 b/d of their output through the end of the year, to combat the demand destruction caused by the coronavirus outbreak.

The deal and its total 1.5 million b/d in new supply curbs -- on top of the coalition's existing 1.7 million b/d cuts -- is fully contingent on Russia's approval, ministers said.

"It is important to note that both Reliance and Nayara are capable of handling a diverse range of crudes, so they do have some flexibility in terms of their choices on crude slates," Lim added.

SANCTIONS SQUEEZE SUPPLIES

The US announced sanctions on Rosneft Trading on February 18 for moving a large part of Venezuelan crude exports in 2019, giving companies 90 days to wind down activities with the company. It's the latest step in the Trump administration's efforts to starve the Nicolas Maduro regime of oil revenue.

Rosneft has previously claimed its Venezuelan crude trades were repayments of a $6.5 billion loan to PDVSA, Venezuela's state oil company.

"The alternatives are very few given the tightness in heavy crude oil. Iraq will be the nearest best alternative, in addition to Canadian and Mexican heavies. Given all complex refiners want the same heavy barrel, competition will be fierce. So differentials of heavy crudes will go up," said Amrita Sen, chief oil analyst at Energy Aspects.

Venezuela was the fifth-largest crude supplier to India in 2019, supplying 15.4 million mt, down from 16.7 million mt in 2018, according to shipping sources.

According to Facts Global Energy, Reliance and Nayara were the only importers of Venezuelan crude in India in 2019, together shipping in around 337,000 b/d, and Rosneft Trading handled the bulk of the Venezuelan crude imports to India.

"While both refiners will comply with the new US sanctions and cut back on imports from Venezuela, they will find it challenging to replace these heavy barrels. We expect to see higher inflows from Kazakhstan, the Middle East, Canada and Latin America," said Senthil Kumaran, consultant at FGE.

Canada's Cold Lake crude and Mexico's Maya crude would be able to partly fill the vacuum as they are comparable with Venezuela's Merey crude, FGE said.

After a five-year gap, Nayara started importing Canadian grades in August 2019. The refiner imported an average 35,000 b/d from Canada in the second half of 2019, primarily driven by economics, FGE added.

THE MIDDLE EAST OPTION

The restart of oil production in the Saudi and Kuwaiti Partitioned Neutral Zone will help offset some lost Venezuelan barrels. Indian crude imports from the Neutral Zone averaged 150,000 b/d in 2013, before sharply declining to zero in 2015 due to the suspension of production there, FGE said.

"Crude oil produced from Khafji and Wafra fields is also comparable with the Venezuela grade. We expect output from the PNZ to ramp up to reach 260,000 b/d by the year end, with the bulk of these grades going into China and India," Kumaran said.

Some regional crude traders said Indian buyers would be first looking to source some quick spot heavy barrels from the Middle East

"It will depend on the value," one trader said. "Indian refiners looking to purchase alternative barrels could potentially support the price of these crude oil grades going forward."

Basrah Heavy, which has an API of around 24, is a possible alternative crude for Venezuela's Merey grade, traders said.