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Special Report: How China got shipments of Venezuelan oil despite U.S. sanctions

FILE PHOTO: Supporters of Venezuela's President Nicolas Maduro hold anti-trump banners during a rally against the U.S. sanctions on Venezuela, in Caracas. Photo: Reuters
Read more at https://www.todayonline.com/world/special-report-vast-amounts-venezuelan-oil-are-hidden-en-route-china-bypassing-us-sanctions-1

https://www.reuters.com/article/us-venezuela-oil-deals-specialreport/special-report-how-china-got-shipments-of-venezuelan-oil-despite-us-sanctions-idUSKBN23J1N1

CARACAS/MEXICO CITY (Reuters) - Last year, China replaced the United States as the No. 1 importer of oil from Venezuela, yet another front in the heated rivalry between Washington and Beijing. 

The United States had imposed sanctions on Venezuela’s state-owned oil company as part of a bid to topple that country’s socialist president, Nicolas Maduro. U.S. refineries stopped buying Venezuelan crude. Caracas’ ally China, long a major customer, suddenly found itself the top purchaser. Through the first six months of 2019, it imported an average of 350,000 barrels per day of crude from Venezuela.

But in August, Washington tightened its sanctions on Venezuela, warning that any foreign entity that continued to do business with the South American country’s government could find itself subject to sanctions. State-owned China National Petroleum Corp, known as CNPC, stopped loading oil at Venezuelan ports that month. China’s import data showed purchases started to slow, and by late 2019, abruptly stopped. 

China’s largest oil company, like customers in some other countries, seemed to be knuckling under to U.S. President Donald Trump’s threats, despite Chinese President Xi Jinping’s professed support for Maduro. 

But China never stopped buying. Crude from Petroleos de Venezuela SA, or PDVSA, kept arriving at Chinese ports with the help of a Switzerland-based unit of Rosneft, Russia’s state-owned oil company, and a roundabout delivery method that made it appear as if the oil’s origin was Malaysia, Reuters has found.  

Between July 1 and Dec. 31, tanker ships delivered at least 18 shipments totaling 19.7 million barrels of rebranded Venezuelan crude to Chinese ports, Reuters determined. That finding is based on a review of ship-tracking data, internal PDVSA documents and interviews with four petroleum analysts who have tracked flows of Venezuelan oil around the globe. 

A unit of CNPC chartered at least one of those tankers, meaning it was responsible for the oil aboard, the ship-tracking data show. That vessel, called the Adventure, took on Venezuelan crude on July 18 and discharged it in China on Sept. 4, the data show. No charter information was available for the other ships that offloaded crude in China. 

CNPC did not respond to requests for comment. 

Those 18 shipments represented more than 5% of Venezuela’s total exports in 2019, worth around $1 billion at market prices for the country’s flagship crude grade, known as Merey, based on OPEC figures. The sales provided much-needed support to Maduro’s government, though Reuters could not determine how much was added to state coffers; PDVSA often sells its crude at steep discounts, and some of its sales go to pay down debt rather than generate cash. 

The mislabeled shipments have continued into this year, Reuters found. The review used data available on financial information provider Refinitiv Eikon, photos culled from satellite imagery and Automatic Identification System (AIS) data transmitted by oil tankers. New York-based Refinitiv is part-owned by Reuters’ parent company, Thomson Reuters. 

The shipping method - involving the transfer of oil between tanker ships at sea – has for months been under scrutiny by the Trump administration. Washington in February slapped sanctions on Rosneft Trading SA, the Geneva-based subsidiary of Rosneft (ROSN.MM), which it alleges was helping Venezuela to export its oil using so-called ship-to-ship (STS) transfers to mask the true origin of the crude. Rosneft denied wrongdoing.

“The Company has always been conducting and is conducting its business in full compliance with applicable international legislation,” Rosneft said in a June 5 statement in response to questions for this article. 

Russia’s energy ministry did not reply to a request for comment. 

China’s indirect imports of Venezuelan crude fall into something of a gray zone, according to Peter Harrell, a sanctions expert at the Center for a New American Security think tank in Washington. 

Harrell believes U.S. sanctions give Washington authority to punish foreign companies that purchase PDVSA oil through a middleman - particularly if the company “knows or should have known it was Venezuelan crude.” But that does not obligate the U.S. government to act. 

“At the end of the day, these sanctions are fundamentally policy calls,” Harrell said. 

Reuters could not independently verify if China knew the oil that reached its shores via Rosneft Trading came from Venezuela. 

The U.S. Treasury Department, which enforces trade sanctions, declined to comment.

Asked about the Reuters findings, Elliott Abrams, the U.S. State Department’s special representative for Venezuela, said in an interview that potential U.S. sanctions against Chinese companies purchasing transshipped crude were “on the table.”  

“We will be taking individual actions with respect to STS transfers,” Abrams said. 

China’s General Administration of Customs did not respond to requests for comment. The Foreign Ministry told Reuters there was nothing improper about China’s dealings with Venezuela. The ministry said U.S. sanctions had “severely affected” relations between Venezuela and the rest of the world, but said Beijing intends to continue trading with the country. 

Neither PDVSA, Venezuela’s Oil Ministry, nor the Information Ministry - which responds to media inquiries on the government’s behalf - responded to requests for comment. Venezuelan officials have repeatedly described U.S. sanctions on their country as illegal and unilateral. 

Oil analysts since last year have said Venezuelan oil was making its way to China by way of STS transfers. This account is the first to reveal the extent of those shipments and demonstrate how systematic the tactic has been. Reuters also reviewed internal PDVSA documents that showed the Rosneft unit was involved in moving the oil. 

So much PDVSA oil was shipped to China this way that the country’s total 2019 imports of Venezuelan oil averaged 283,000 barrels a day. That’s 24% higher than the 228,700 barrels a day reported by Chinese customs, according to Reuters calculations based on comparisons of the Refinitiv Eikon data to official Chinese customs data. 

That was not enough to offset entirely the impact that U.S. sanctions had on PDVSA; U.S. refiners were importing an average of 500,000 barrels per day when the sanctions were imposed in January 2019. But it helped Venezuela keep its oil industry alive at a time when the drop in demand from foreign buyers was creating a glut onshore, nearly forcing PDVSA to halt production in key oil fields.

The STS maneuvers mirror tactics that Iran, whose oil industry is also under U.S. sanctions, has used to ship its oil to China for years. As Reuters documented in reports in 2019 and 2015, Iranian oil often is labeled as coming from neighboring Iraq. 

A representative of the operator of a Chinese terminal where one such shipment unloaded in 2019 denied that the origin of the oil was Iranian. 

Alireza Miryousefi, spokesman for Iran’s mission to the United Nations in New York, said in a statement “how we sell or export our oil is no one’s business.” He said U.S. sanctions on Iran’s oil exports are “illegal.” 

The Chinese shipments of Venezuelan crude were unusual for a variety of reasons, oil analysts said. 

STS transfers typically are used for legitimate purposes - such as offloading oil from deep-water drilling ships or pumping oil from large tankers onto smaller vessels that can navigate narrow or shallow waterways. The use of this technique to transport oil from Venezuela to China was not seen until the middle of last year, the oil analysts said. 

Tankers leaving Venezuela loaded with PDVSA crude did not travel straight to China as they had in the past. Instead, 15 tankers whose routes were reviewed by Reuters left Venezuela and first headed for the coast of Malaysia, tracking data show. A few miles offshore, in the Malacca Strait, each rendezvoused with a second, empty tanker that had pulled alongside.  

The full tanker then pumped its load into the waiting vessel, and in some cases into multiple smaller vessels. Eighteen of those receiving ships then headed to China, where the Venezuelan crude was offloaded and recorded as a product of Malaysia, Chinese customs records show. 

Reuters could not ascertain who changed the crude’s labeled origin before it reached Chinese customs, nor whether doing so expressly violated any maritime laws or local laws in any applicable jurisdictions. 

Michelle Bockmann, markets editor and analyst at Lloyd’s List, a shipping trade publication, said the relabeling was highly uncommon. With the exception of Iran, Bockmann said she could not recall any other instance of crude changing identities in this way. 

The imports were a break from China’s past practice. China routinely has imported oil from countries such as Brazil and Russia using STS transfers. But Chinese customs accurately recorded the true countries of origin in those cases, according to Chinese customs data and Emma Li, a Singapore-based oil analyst with Refinitiv. 

In addition, Malaysia is a mid-sized oil producer that has not traditionally sold crude to China in the volumes recorded by Chinese customs last year, the records show. China’s stated 2019 imports from Malaysia were 400% higher than levels recorded just three years earlier, and the highest ever recorded by Refinitiv Eikon, whose figures date to 2006.

The Malaysia External Trade Development Corporation, the government agency largely in charge of foreign trade, did not respond to requests for comment, nor did Malaysia’s state-owned oil company Petronas. 

This triangulated trade in Venezuelan oil is now in the crosshairs of the Trump administration. 

The company that lifted the oil from Venezuela for the China shipments identified by Reuters was Rosneft Trading, according to internal PDVSA documents reviewed by Reuters. Until late March, it was a major player in Venezuela’s oil industry. The U.S. Treasury on Feb. 18 hit Rosneft Trading with sanctions for allegedly helping Venezuela sidestep the U.S. pressure campaign and sell its oil abroad. 

Among the tactics employed by Rosneft Trading were STS transfers, U.S. officials allege. By using one ship to haul crude out of Venezuela, then a second to deliver it to China, Rosneft Trading attempted to blur the chain of ownership and disguise the oil’s provenance, Abrams, the State Department’s special representative for Venezuela, told Reuters, without providing further proof of Rosneft’s intentions. 

“The whole purpose is to evade, the whole purpose is to mislead,” Abrams said. 

On March 28, Rosneft announced it was ending its Venezuela operations and selling all its assets in the country to another, unnamed Russian state-owned firm. 

“Rosneft has no ongoing business involvement, assets or operations in Venezuela; therefore, there is no subject for providing further comments,” the company said in its June 5 statement to Reuters. 

The Trump administration, meanwhile, gave Rosneft Trading customers until May 20 to unwind their contracts with the company or face U.S. sanctions. Asked whether Chinese customers were involved in hiding the Venezuelan origin of the crude, Abrams said that Asian clients often did not care “how it gets to them, what it’s labeled, as long as they’re getting what they bought.” 

China’s Foreign Ministry said in a statement it was not aware of the STS transfers in question. 

“The cooperation between China and Venezuela will be carried out normally no matter how the situation changes,” the statement read. “It’s legitimate and benefits the people of both countries and will not be affected by any unilateral sanction measures.” 

Reuters could not ascertain the final customers for the PDVSA crude in China. But Venezuela’s heavy Merey blend is a favored feedstock for refineries making asphalt in China, according to industry sources there. 

One of the earliest STS transfers involved the Adventure, a tanker chartered by a CNPC subsidiary. On July 18, it took on 1.9 million barrels of Venezuelan crude from another vessel in Malaysian waters, then headed for China, Refinitiv Eikon data show. 

The manager of the Adventure, Greece-based Eastern Mediterranean Maritime Ltd, said it had never entered into any agreement with PDVSA or any company sanctioned by the United States, and that it “respects and complies in full” with U.S. sanctions. The maritime company said the cargo’s bill of lading and certificate of origin said the oil had come from Malaysia. 

PIT STOP IN MALAYSIA

Malaysia is a popular location for STS transfers of crude because of its proximity to Singapore, one of the world’s largest oil trading and storage hubs. One of the STS transfers reviewed by Reuters occurred near Malaysia’s port of Kuala Linggi; the rest took place outside the country’s Tanjung Bruas port. 

To demonstrate how these STS transfers work, Reuters used records available on Refinitiv Eikon to reconstruct a shipment to China of 2 million barrels that left the Jose terminal in northeastern Venezuela on Aug. 5, 2019.  

The oil was carried aboard a Liberia-flagged vessel called the Delta Aigaion, according to Refinitiv Eikon data and an internal PDVSA document seen by Reuters. The crude was a heavy blend known as Merey 16, which is unique to Venezuela, and the customer was listed as Rosneft Trading, the PDVSA document shows.  

The Delta Aigaion sailed to waters off Malaysia near the port of Tanjung Bruas. There, the crew used a STS transfer to offload the Merey 16 to another tanker, the Malta-flagged Lipari, on Oct. 28, according to Refinitiv Eikon data. The Lipari then headed for China, discharging its crude on Dec. 12 at the port of Zhanjiang, the data show.

Refinitiv Eikon ship-tracking data shows the location of ships and indicates how full they are. In this case, the data showed that the draft of each ship changed dramatically while the two were in the same location off Malaysia’s coast at the same time. The draft is the vertical distance between the waterline and the bottom of a vessel’s hull - a sign of how heavy a load it is carrying. The draft measurements showed that the Delta Aigaion arrived in Malaysia full and left empty, while the opposite was true for the Lipari - an indication that an oil transfer between the two took place.

In a photo taken using a European Space Agency radar satellite and provided to Reuters by San Francisco-based earth imaging company Planet Labs, the Delta Aigaion and the Lipari can be seen approaching one another to start the oil transfer on Oct 28. The authenticity of that photo was verified by oil industry data provider TankerTrackers.com, which specializes in satellite image analysis for vessel tracking. 

Refinitiv Eikon retrieves location information from satellite images as well as from land-based sensors that collect data from ships’ transponders. Ships are required by international maritime law to carry transponders to transmit information about their position, speed and destination. The U.S. government has accused tankers and shipping firms transporting oil from Venezuela and Iran of manipulating this data to evade authorities, either by flashing false destinations or simply turning off their transponders.  

The Delta Aigaion, while on its way to Venezuela in July after leaving its previous berthing in India, never indicated it was heading to the South American country, Refinitiv Eikon data show. The tanker listed its destination as “For Orders,” a message meaning it had not yet received instructions on where to go next. 

Delta Tankers Ltd and TMS Tankers Ltd, the shipping companies that manage the Delta Aigaion and Lipari, respectively, did not respond to requests for comment. MMC Corp Bhd and T.A.G. Marine Sdn Bhd, which operate the Tanjung Bruas and Kuala Linggi ports, respectively, did not respond to requests for comment.  

When the Lipari unloaded in the southwestern Chinese city of Zhanjiang, Chinese customs labeled the crude as “Singma blend,” a grade of crude that did not exist in the market before last year. Customs recorded the country of origin as Malaysia. 

Li, the Refinitiv analyst, said the labeling of the crude as a blend appears to be incorrect. If the crude were a blend of different grades - a practice common in the oil industry - the STS operation would have involved multiple vessels bringing crude from separate origins, Li said. Ship-tracking data show no indication that this occurred. “It doesn’t look like there’s any blending,” Li said. 

For 14 of the 18 tankers reviewed by Reuters, the grade of crude recorded by Chinese customs was Singma or Mal, another blend that did not exist before last year, data compiled by Li show. In other cases, the Venezuelan crude was given the names of more established Malaysian grades such as Miri or Kimanis, or was not specified, according to the data compiled by Li. Merey 16, the Venezuelan blend, was not mentioned.

ROSNEFT EXIT

The arrival of Venezuelan oil in China via STS transfers continued through at least the first two months of 2020. During January and February, Chinese customs once again reported no imports of Venezuelan crude. However, nearly 130,000 barrels per day of PDVSA oil arrived at Chinese ports in those two months from seven tankers that had done STS operations, according to the Reuters review. 

With U.S. pressure on Venezuela rising, it is unclear whether the tactics PDVSA and its partners employed over the past year to export Venezuelan oil will remain viable.  

Even before it announced its complete withdrawal from Venezuela on March 28, Rosneft had not lifted any crude from the country’s ports for around a month. Meanwhile, global oil prices have plunged in recent months due to a collapse in demand resulting from the spread of the novel coronavirus. Venezuela’s crude output has dropped by more than 20% this year to below 700,000 barrels per day.  

Still, there are signs the discreet trade will continue. 

With few established oil companies willing to buy oil directly from Venezuela over fears of provoking Trump, two little-known Mexican firms - Libre Abordo and Schlager Business Group - recently emerged as the largest intermediaries for PDVSA crude. The companies told Reuters they had a deal with Maduro’s government to supply goods, including corn and water trucks, in exchange for the oil, which they then resell.  

The U.S. Federal Bureau of Investigation has been investigating the two companies, among others, as part of an inquiry into possible violations of U.S. sanctions on PDVSA, according to three people familiar with the matter. 

The Mexican firms said swaps of goods for Venezuelan oil were permitted under U.S. sanctions as long as no cash payments reached Maduro’s government. The companies said they have no knowledge of any U.S. investigation into their practices. 

On Feb. 11, a Panama-flagged tanker named the Athens Voyager loaded some 700,000 barrels of crude near western Venezuela’s Amuay oil port, according to Refinitiv Eikon data. Its customer was Libre Abordo, according to an internal PDVSA document viewed by Reuters. 

On Sunday, April 5, the fully loaded Athens Voyager arrived at its destination: the Linggi STS hub off the coast of Malaysia. There it pumped its cargo onto a Liberia-flagged vessel named the Loyalty A on April 17. 

The manager of the Athens Voyager, Greece-based Chemnav Shipmanagement Ltd, deferred comment to the vessel’s owner, Marshall Islands-based Afranav Maritime Ltd. The manager of the Loyalty A, Jacinta Marine Corp of Lagos, Nigeria, did not respond to a request for comment.

On June 2, the U.S. Treasury Department announced sanctions against Afranav Shipmanagement for its alleged role in trading Venezuelan oil. It said the Athens Voyager had lifted oil from Venezuelan ports as recently as mid-February. 

Afranav did not respond to requests for comment. 

Libre Abordo, meanwhile, declared bankruptcy on May 31. It said its arrangement with Venezuela had been suspended by Maduro, and that it was the target of an international pressure campaign driven by Washington.  

In a June 8 email to Reuters, Libre Abordo confirmed that the oil transported aboard the Athens Voyager was registered in its name. On June 10, Libre Abordo said further that the documentation of origin reflected that the crude came from Venezuela. The company said it sent the oil to Malaysia, where it was offloaded to another ship at the behest of the final customer, whose name it would not disclose. 

According to Refinitiv Eikon data, the receiving vessel, the Loyalty A, is currently en route to Qingdao, China.  

Reporting by Luc Cohen in Caracas and Marianna Parraga in Mexico City; Additional reporting by Humeyra Pamuk in Washington, Ana Isabel Martinez in Mexico City, Aizhu Chen in Singapore, Muyu Xu in Beijing, Joseph Sipalan in Kuala Lumpur, Michelle Nichols in New York, and Jonathan Saul in London; Editing by Marla Dickerson

Our Standards:The Thomson Reuters Trust Principles.

Oil drops more than 8% as fears over second wave of coronavirus cases hit the market

A derrick man secures a length of drill pipe during drilling on a natural gas drill rig near Montrose, Pennsylvania, U.S., on Monday, April 5, 2010.

Daniel Acker | Bloomberg | Getty Images

https://www.cnbc.com/2020/06/11/oil-news-crude-wti-prices-today.html

Oil prices dropped more than 8% on Thursday amid a broader market sell-off as fears over a second wave of coronavirus cases led to investors shedding assets.

West Texas Intermediate crude futures, the U.S. oil benchmark, fell 8.2%, or $3.26, to settle at $36.34 per barrel. Earlier in the session WTI traded as low as $35.41. International benchmark Brent crude slid 7.7%, or $3.22, to trade at $38.51 per barrel.

Oil has been rallying on the back of an uptick in demand paired with record supply cuts, but data on Wednesday from the U.S. Energy Information Administration showed a surprise build in inventory, suggesting that the demand recovery may have stalled.

For the week ending June 5, inventory rose by 5.7 million barrels to a record high of 538.1 million barrels.

Another key driver of WTI’s recent recovery, which has seen prices jump more than 50% in the last month, has been producers curbing output. Over the weekend, OPEC and its oil-producing allies agreed to extend its record production curb — equivalent to about 10% of pre-coronavirus global demand — through the end of July.

In the U.S., production has pulled back from a record of over 13 million barrels per day in March as historically low prices prompted companies to reduce output.

But with oil moving higher in recent weeks, some producers have begun to open the taps once again, which could send prices lower.

“The higher price levels that we experienced lately have motivated producers to restart some of their shut-down production, in effect reversing a bit the positive price effect that lower production had created,” said Paola Rodriguez Masiu, senior oil markets analyst at Rystad Energy.

“How prices develop further will depend a lot [on] how much and how quickly this shut production will come back to business,” she added.

The broader market was also sharply lower on Thursday, with the Dow Jones Industrial Average dropping more than 800 points and the S&P 500 dipping 2.5%. Stocks most sensitive to the economy’s reopening dragged markets lower as Covid-19 cases in the U.S. surpassed two million. Hospitalizations rose to a record level for a third straight day on Wednesday in Texas, one of the states in the phase one reopening plan, prompting fears that a second wave of cases could be coming.

“The global economy is still in a precarious position,” noted Cailin Birch, global economist at The Economist Intelligence Unit. “The dip in oil prices in recent days most likely reflects the end of the price boost that came from the initial economic re-opening. The global economy is now settling in for a long, slow recovery process, which we only expect to pick up in late 2021, assuming a Covid-19 vaccine becomes available then,” she added.

The U.S. shale-oil industry may collapse, new report says, after Goldman warns crude is set for a fall

https://www.marketwatch.com/story/the-us-shale-oil-industry-may-collapse-new-report-says-after-goldman-warns-crude-is-set-for-a-fall-2020-06-10

The U.S. shale-oil industry may collapse due to the sharp fall in oil prices because of the coronavirus pandemic, a new influential report predicts.

The demand for and price of oil tumbled due to the economic slowdown and have since begun to recover, but Australian think tank the Institute for Economics and Peace warns that a low price will affect political regimes in the Middle East, especially in Saudi Arabia, Iraq and Iran.

IEP’s annual Global Peace Index, published Wednesday, analyzes tension around the world and compiles an index of the most peaceful countries. It suggests the effects of the pandemic may “result in the collapse of the shale-oil industry in the U.S., unless oil prices return to their prior levels.”

While the price of oil US:CL has begun to recover from its nadir — having crashed into negative territory in April — analysts at Goldman Sachs warned in a Tuesday note that the rise in the oil price has been overdone and forecast a drop in Brent crude prices UK:BRNQ20 to $35 a barrel, from around $43 a barrel, within weeks.

Shale oil is produced through fracking, the controversial process of pumping high-pressure water and sand underground to fracture rock and release valuable new energy reserves known as shale.

Among the biggest producers of shale oil are Exxon Mobil US:XOM, Chevron US:CVX and EOG Resources US:EOG.

Read: Oil prices fall for a second session as investors worry about oversupply from Gulf producers

The IEP report says that the combined weakness in commercial, travel and industrial activity led to a plunge in oil prices in global markets. “These markets were already affected by an oversupply, emanating from Russia and Saudi Arabia who could not agree on production curbs,” it says.

Read: Oil ends lower as extension of OPEC+ output cuts fail to stem oversupply worries

But, on a positive note, it goes on to rank the countries most likely to stage a swift economic recovery in the wake of the pandemic, using four indicators. 

China, Indonesia, Russia, Mexico and Australia all emerge as best placed to facilitate a recovery because they have low unemployment rates, low dependence on international trade, low tax revenue relative to gross domestic product, and low central government debt as a proportion of GDP.

IEP founder Steve Killelea said: “COVID-19 is negatively impacting peace across the world, with nations expected to become increasingly polarized in their ability to maintain peace and security. This reflects the virus’s potential to undo years of socioeconomic development, exacerbate humanitarian crises, and aggravate and encourage unrest and conflict.” 

He identified a predictable list of sectors hurt by the lockdown, which includes aviation, hospitality, tourism, retail and finance. Health care, telecom and food production are best placed.

One upside is that drug trafficking and other types of crime have seen a likely temporary reduction as a result of social isolation around the world. However, reports of domestic violence, suicide and mental illness increased.

Iceland remains the most peaceful country in the world, a position it has held since 2008. It is joined at the top of the index by New Zealand, Austria, Portugal and Denmark. 

Afghanistan remains the least peaceful country, a position it has held for two years, followed by Syria, Iraq and South Sudan.

“The fundamental tensions of the past decade around conflict, environmental pressures and socioeconomic strife remain,” Killelea said. “It’s likely that the economic impact of COVID-19 will magnify these tensions by increasing unemployment, widening inequality and worsening labor conditions — creating alienation from the political system and increasing civil unrest. We therefore find ourselves at a critical juncture.”

Why Saudi Arabia Will Lose The Next Oil Price War

Mandel Ngan/AFP/Getty Images

Donald Trump with Crown Prince Mohammed bin Salman during a White House meeting in March

https://oilprice.com/Energy/Energy-General/Why-Saudi-Arabia-Will-Lose-The-Next-Oil-Price-War.html

By Simon Watkins

Saudi Arabia has instigated two oil price wars in the last decade and has lost both. Given its apparent inability to learn from its mistakes it may well instigate another one but it will lose that as well. In the process, it has created a political and economic strait-jacket for itself in which the only outcome is its eventual effective bankruptcy. OilPrice.com outlines why this is so below.

The principal target for Saudi Arabia in both of its recent oil price wars has been the U.S. shale industry. In the first oil price war from 2014 to 2016, the Saudi’s objective was to halt the development of the U.S. shale sector by pushing oil prices so low through overproduction that so many of its companies went bankrupt that the sector no longer posed a threat to the then-Saudi dominance of the global oil markets. In the second oil price war which only just ended, the main Saudi objective was exactly the same, with the added target of stopping U.S. shale producers from scooping up the oil supply contracts that were being unfilled by Saudi Arabia as the Kingdom complied with the oil production cuts mandated by various OPEC and OPEC+ output cut agreements.

In the run-up to the first oil price war, the Saudis can be forgiven for thinking that they stood a chance of destroying the then-relatively nascent U.S. shale sector. It was widely assumed that the breakeven price across the U.S. shale sector was US$70 per barrel and that this figure was largely inflexible. Saudi Arabia also held record high foreign assets reserves of US$737 billion at the time of launching the first oil war. This allowed it room for manoeuvre in sustaining its economically crucial SAR-US$-currency peg and in covering any budget deficits that would be caused by the oil price fall. At a private meeting in October 2014 in New York between Saudi officials and other senior figures in the global oil industry, the Saudis were ‘extremely confident’ of securing a victory ‘within a matter of months’, a New York-based banker with close knowledge of the meeting told OilPrice.com. This, the Saudis thought, would not only permanently disable the U.S, shale industry but would also impose some supply discipline on other OPEC members.  

Related: Will U.S. Shale Ever Return To Its Boom Days?

As it transpired, of course, the Saudis had disastrously misjudged the ability of the U.S. shale sector to reshape itself into a much meaner, leaner, and lower-cost flexible industry. Many of the better operations in the core areas of the Permian and Bakken, in particular, were able to breakeven at price points above US$30 per barrel and to make decent profits at points above US$37 per barrel area, driven in large part through advances in technology and operational agility. After two years of attrition, the Saudis caved in, having moved from a budget surplus to a then-record high deficit in late 2015 of US$98 billion. It had also spent at least US$250 billion of its precious foreign exchange reserves over that period that were lost forever. In an unprecedented move for a serving senior Saudi politician, the country’s deputy economic minister, Mohamed Al Tuwaijri, stated unequivocally in 2016 that: “If we [Saudi Arabia] don’t take any reform measures, …then we’re doomed to bankruptcy in three to four years.” 

The even more enduring legacy of this first oil price war, though – and part of the reason why the Saudis could never hope to win the last one, or any future oil price war either – is that it created the resilience of the U.S. shale sector as it now stands. This means that the U.S. shale sector as a whole can cope with extremely low oil prices for a lot longer than it takes Saudi Arabia to be bankrupted by them. Saudi Arabia has much greater fixed costs attached to its oil sector, regardless of how low market prices go. Before the onset of the latest oil price war, the Kingdom had an official budget breakeven price of US$84 per barrel of Brent but, given the economic damage done by this latest price war folly, it is much higher now. By stark contrast, the U.S. shale sector that Saudi crucially helped to shape in the first oil price war is now so nimble that US$25-30 per barrel of WTI is enough to bring some of the production back on line, as long as operators believe that prices will not fall and hold below the US$20 per barrel level. But, even if prices are below that key US$25-30 per barrel level, it does not matter to the long-term survivability of the U.S. shale sector as the key players are able to shut down wells instantly as and when needed and to start up them up again within a week as demand requires. In sum: in any oil price war, the Saudis simply cannot wait out the U.S. shale sector.

On the other hand, though – in a rising oil price environment - the Saudis are also doomed. This is because the U.S. – even before the latest oil price war – had intimated that it would not tolerate oil prices above around US$70 per barrel of Brent. When the oil price rose last year during the March-October period consistently above US$70 per barrel level, U.S, President Donald Trump Tweeted about Saudi Arabia’s King Salman that: “He would not last in power for two weeks without the backing of the U.S. military.” The US$70 per barrel level is considered one that brings into view oil price levels that might pose problems for the U.S. economy. Specifically, it is estimated that every US$10 per barrel change in the price of crude oil results in a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion per year in consumer spending is lost.

Related: OPEC+ Agrees On Extending Record Output Cuts

Before this latest Saudi-instigated oil price war, the U.S. had little interest in the fact that this US$70 per barrel level was way below Saudi Arabia’s then-budget breakeven oil price. After this latest attack on its strategically vital shale sector, the U.S. has absolutely no interest whatsoever in this budget breakeven fact or indeed in whether Saudi Arabia continues to slowly haemorrhage into bankruptcy in the coming years, according to a number of Washington-based sources close to the U.S. Presidential Administration spoken to by OilPrice.com in the last few weeks. Partly this indifference is due to the perceived ‘betrayal’ of the foundation stone deal that had determined the two countries relationship since 1945. This was that the U.S. would receive all of the oil supplies it needed for as long as Saudi Arabia had oil in place, in return for which the U.S. would guarantee the security of the ruling House of Saud. This altered slightly with the advent of the U.S. shale sector to ensure that Saudi Arabia also allows the U.S. shale industry to continue to function and grow.

Partly as well, this indifference is due to the series of other blunders that senior U.S. politicians believe have been made by Saudi Crown Prince Mohammed bin Salman (MbS), which now make him a liability. This includes – but is not limited to – the Saudi-led war in Yemen, the cosying up of Saudi to Russia in the OPEC+ grouping, Lebanese President Michel Aoun’s allegation in 2017 that then-Prime Minister Saad al Hariri had been kidnapped by the Saudis and forced to resign, and the murder of dissident Saudi journalist, Jamal Khashoggi, which even the CIA concluded was personally ordered by MbS. 

These factors culminated in President Trump making his earlier Tweeted implied threat about the fragile hold that the al-Sauds have on power in Saudi Arabia without U.S. assistance into a guaranteed promise during a telephone conversation on 2 April with MbS. During this call, Trump reportedly told MbS that unless OPEC started cutting oil production (with the implication being to push up prices to levels where the U.S. shale producers could start making decent profits) then he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from Saudi Arabia. Shortly thereafter, MbS did what he was told. The change in this rhetoric from implied threat to guaranteed action means that this is now in the fabric of all future U.S. dealings with Saudi Arabia and it brings the Saudis crashing back to the basic problem. That is: economically it cannot afford to continue to crush oil prices for long enough to cause sustained damage to the U.S. shale sector, politically it is not permitted to allow prices to rise high enough to avoid eventual effective bankruptcy, and any pricing in between just allows the U.S. shale sector to make greater profits and grow even more. In this regard, the OPEC+ production cuts are perhaps the cruellest cut of all for the Saudis: the Saudis have to implement them and abide by them because they are needed to keep oil prices high enough to ensure the profitability and growth of the U.S. shale sector but the cuts cannot continue for long enough to allow the Saudis back into an ongoing budget surplus.

Already in this context, March saw Saudi Arabia’s central bank depleted its net foreign assets at the fastest rate since at least 2000, falling by just over SAR100 billion (US$27 billion). This is a full 5 per cent decrease from just the previous month, and the total reserves figure now stands at just US$464 billion, the lowest level since 2011. It leaves only US$164 billion of ‘fighting reserves’ that can be used on everything else that Saudi needs when the US$300 billion that is estimated to be needed to keep the economic cornerstone SAR/US$-peg is subtracted. At the same time, the Kingdom slipped into a US$9 billion+ budget deficit in the first quarter and a number of independent analysts are predicting that its overall gross domestic product could shrink by more than 3 per cent this year (the first outright contraction since 2017 and the biggest since 1999), whilst the budget deficit could widen to 15 per cent of economic output.

By Simon Watkins for Oilprice.com

China Revives Plans For Huge $20B Refinery, Petrochemical Complex

China has given the go-ahead to plans for a huge $20-billion refinery and petrochemical complex in the Shandong province, the home of the country’s independent refiners, Reuters reported on Tuesday, citing two industry sources familiar with the approval process.

The mega petrochemical complex has been years in the planning, but now it looks like the world’s top oil importer is looking to spend money on oil infrastructure in order to reinvigorate the economy hit by the coronavirus.

China’s National Development & Reform Commission (NDRC) approved the Shandong Yulong Petrochemical project on Monday, Reuters’ sources said.

The complex in the Shandong province – where most of China’s independent refiners, the so-called teapots, are based – is expected to host now the mega project which analysts expect to become operational at some point at the end of 2024. Shandong Yulong Petrochemical will have an oil refinery with a capacity to process 400,000 barrels per day (bpd) and an ethylene plant producing 3 million tons per year. According to Reuters’ sources, the investment in the project will be some US$19.7 billion (140 billion Chinese yuan).

Some independent refiners in Shandong have struggled in recent months after huge refineries such as Hengli Petrochemical and Zhejiang Petrochemical began operations last year.

The Shandong Yulong Petrochemical project, while helping China’s petrochemicals industry by reducing imports, could exacerbate the glut of refined petroleum products in the country, according to Reuters.

Meanwhile, China’s crude oil imports are set to increase by 2 percent in 2020, despite COVID-19, thanks to the low oil prices, according to a research think-tank affiliated with state oil giant China National Petroleum Corporation (CNPC).

Last month, China’s National People’s Congress (NPC), the most important policy-setting annual event in the Communist country, didn’t set an annual target for economic growth because of “great uncertainty” of the recovery from the coronavirus.

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China Begins Consolidation Of $100+ Billion Oil & Gas Pipeline Industry

 

https://www.businessinsider.com/this-map-shows-chinas-global-energy-ties-2015-5 

China has required the three biggest state-held oil corporations to transfer the management of half of their liquefied natural gas (LNG) terminals to the newly created state-controlled midstream firm, Caixin Global reported, citing industry insiders.

The transfer of 10 LNG terminals owned by China National Petroleum Corporation (CNPC), Sinopec, and China National Offshore Oil Corporation (CNOOC) is the first step in China’s plan to consolidate the oil and gas pipeline infrastructure into a new giant state-held midstream company. 

 

At the end of last year, China launched the long-mooted state oil and gas pipeline group combining the infrastructure assets of the state-owned energy majors into one huge midstream group, which analysts say could be worth between US$80 billion and US$105 billion.

The new company is part of China’s efforts to allow its energy companies to focus on boosting exploration and production. Combining China’s pipeline infrastructure into one firm and opening access to this infrastructure to foreign and private producers would help the state oil and gas firms to focus on exploration at a time when China aims to increase its domestic production.

Earlier this year, CNOOC said it had signed with the new state pipeline giant to transfer to it the management of oil and gas infrastructure projects.

The ten LNG terminals that are set to be transferred to the new company include seven terminals currently managed by CNOOC, two terminals managed by CNPC, and one by Sinopec, according to Caixin.

The new state pipeline giant, China Oil & Gas Piping, will initially only have the right to manage the assets, while the oil and gas majors will still own the assets until audits are finalized. After the transfer of the LNG terminals to the new company, there still will be 11 other LNG facilities that will continue to be managed by the three oil and gas majors, Caixin’s sources said.

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