PdV supply cut to Cuba exposes light crude deficit

OREANDA-NEWS. September 15, 2016.  A large portion of the oil that Venezuela has stopped delivering to close ally Cuba this year is light crude, mirroring the composition of the steep decline in Venezuelan production.

Venezuelan state-owned PdV's shipments of crude and refined products to Cuba have dropped to a contractual minimum of 53,000 b/d so far in 2016 compared with about 79,000 b/d in 2015, with light crude accounting for a "very significant part" of the 26,000 b/d supply cut, an energy ministry official told Argus.

PdV is still sending some light crude to Cuba, the official said, but declined to detail the current supply mix.

PdV has tried to offset the reduction in light crude supply to Cuba with increased volumes of diesel, fuel oil and LPG. But the 33pc drop in Venezuelan oil exports to Cuba over the past year has left the island with a crude supply deficit that PdV cannot cover, the official said.

The Cuban government acknowledged in July that Venezuela has cut back oil supplies, and imposed sharp cuts in motor fuel distribution and power generation. State-owned oil company Cupet uses most of the crude in its 65,000 b/d Cienfuegos refinery that it runs jointly with PdV, but some of the Venezuelan crude has historically been quietly resold on the international market.

The reduction in PdV's oil deliveries to the island does not violate the bilateral Venezuela-Cuba oil supply pact in effect since 2000, the Venezuelan official added. "PdV is delivering the oil supplies to Cuba that are stipulated in the bilateral pact."

According to Article 3 of the October 2000 bilateral agreement, Cuba nominates on a quarterly basis "up to 53,000" b/d of crude and products.

The actual volume that PdV sent to Cuba peaked at around 125,000 b/d in 2008, and has been falling since. Havana compensates Venezuela for the oil supply mainly with the deployment of medical, security and sports specialists.

PdV was forced to cut shipments to Cuba because its crude production is falling sharply, with much of the decline concentrated on light and medium crude fields in the company's legacy eastern and western divisions.

Cash-starved PdV's credit problems are another factor in its reduced exports to Cuba, since part of the light crude and products PdV has shipped to the island in recent years was purchased from third parties.

PdV's foreign crude and products suppliers increasingly demand payment in full before discharging cargoes at PdV terminals in Venezuela and the Caribbean, the energy ministry said.

PdV has been importing light crude in recent years to complement its declining production. The company uses the light crude mainly to blend with Orinoco extra-heavy crude into export-grade Merey 16. Most of the Merey is shipped to Chinese companies to service oil-backed loans from Beijing.

Part of the blending takes place offshore on other Caribbean islands such as Curacao, where PdV leases a refinery. The company is seeking to establish more blending operations in Aruba by leveraging its US downstream subsidiary Citgo.

Cuban officials tell Argus they are exploring alternative sources of supply, such as Russia and Iran. And Algerian state-owned Sonatrach could load a shipment of light quality Saharan Blend for Cuba next month.

Despite the cutback in Venezuelan oil supplies, Havana's rapprochement with the US over the past year, and PdV's focus on other Caribbean islands, Cuban political relations with Caracas appear to remain tight.