Venezuela's diesel suppliers urge US not to block shipments crucial to power supply

Suppliers of Venezuela's diesel imports are working to head off any attempts by the Trump administration to block their diesel-for-crude swaps, arguing the still-allowed shipments are crucial for humanitarian purposes like power generation and agriculture.

Since January, PDVSA has received 1.35 million barrels of diesel imported in nine shipments, including four from Italy's Eni, three from Spain's Repsol and two from India's Reliance, according to a PDVSA tank movement report.

The suppliers are paid in Venezuelan crude exports.

"The impact of a suspension of diesel imports would be fatal for heavy transport and electricity," said engineer José Aguilar, a specialist in the Venezuelan electricity sector.

The Trump administration has continued to tighten enforcement of US sanctions first leveled against Venezuela in January 2019. Recent measures have targeted gasoline shipments to the country from Iran, a Mexico City-based network facilitating Venezuela's crude exports, and shippers carrying those cargoes.

While the diesel-for-crude swaps have been allowed by the US government since March 2019, the suppliers are concerned that the shipments will be seen as a sanctions loophole that other parts of the Trump administration move to close based on the push for maximum sanctions pressure.

Diesel makes up about 20% of Venezuelan refiners' output, but the sector is reeling from operational issues and shutdowns.

The key 140,000 b/d El Palito refinery shut July 21 because of leaking distiller pipes, said Ivan Freites, an oil sector union leader. Before the shutdown, it was operating at less than 60% of capacity and producing about 16,000 b/d of diesel, which was insufficient to cover domestic demand.

Industry sources familiar with the diesel-for-crude swaps argue that they should be allowed to continue because, unlike gasoline, diesel is distributed free of charge, no money goes to the Maduro regime, and military vehicles cannot run on it.

"So in effect, diesel imports are completely a humanitarian good," said an industry source familiar with the trades. "Diesel is health care, diesel is food production, diesel is food refrigeration, diesel is power for the grid."

Plunging domestic output

Venezuela's diesel production fell to 28,000 b/d in December 2019, meeting roughly 40% of demand, according to PDVSA data. Domestic diesel output has fallen from 80,000 b/d in December 2018 and from 260,000 b/d about 15 years ago.

In 2019, the country used 33,000 b/d of diesel for heavy-duty vehicle demand, 25,000 b/d for electricity generation and 11,000 b/d for industrial in 2019, according to PDVSA.

Venezuelan demand for both gasoline and diesel have fallen sharply as a result of the mounting economic crisis.

Aguilar, the power sector expert, said Venezuela's Andes region would take the biggest hit from a suspension of diesel imports, with 957 MW of thermal power there at stake. The region is farthest from the Guri hydroelectric dam, and natural gas is not an option.

"There is no gas alternative, the transmission system from Guri is insufficient and the hydrostatic systems of the Andes are having problems in their reservoirs," he said.

The country has seen waves of widespread electricity blackouts and localized power outages since March 2019, when hospitals and other critical facilities depend on back-up diesel power.

Venezuela's National Electric Cooperation started power rationing in Caracas in May, which has left millions without power at times.