Another Murky Oil Deal by Iran, this time with Venezuela

Business is booming between Iran and Venezuela, as they are expected to sign a 20-year cooperation accord when the Venezuelan President, Nicolas Maduro, visits Tehran in the next few months.

Both countries, who are under the U.S. sanctions, have also recently struck a new agreement to swap Venezuela's extra heavy oil for Iranian condensate that Venezuela can use to improve the quality of its tar-like heavy crude. As part of the deal, Iran has sent two cargoes to Venezuela, including a very large crude carrier (VLCC) named Felicity with 2 million barrels of condensate. As a result, Venezuela's oil exports in October surpassed 700,000 barrels per day (bpd), a 76% increase from September, according to the Reuters news agency.

This is not the only murky trade that Iran has done with Venezuela. In May 2020, three Iranian-flagged product tankers called at Venezuela's Puerto Cabello terminal to offload Iranian gasoline, which was in short supply in Venezuela. The Venezuelan government paid for the cargo in gold, a senior Islamic Revolutionary Guard Corps officer confirmed last September. The value of the transaction was about $500 million, according to Bloomberg.

But what does this new murky deal with Venezuela entail?

Iran has a large production of condensate, which is mostly associated with gas production from the South Pars field in the Persian Gulf. South Pars condensate is much lighter than Iran’s crude oils (South Pars Condensate’s API is 61.6 vs. 33.7 for Iranian Light Crude) and it also has lower Sulphur (0.25 wt%) than average Iranian crudes (1.5-1.8 wt%). Therefore, Iran's condensate is in high demand among world refiners and oil traders. On the other hand, under OPEC rules, condensate production is not controlled by OPEC , and hence Iran is free to produce and sell as much condensate as it wishes.

As far as relations between Iran and Venezuela are concerned, there has been a strong rapport between the two countries since the mid-2000’s when Ahmadinejad and Chavez, two populist Presidents, became close allies. There are many similarities between the two countries. In one of Iran Open Data’s previous articles (Iranian oil production: from global domination to subjugation under sanctions), we illustrated the decline of Iran’s oil industry under the Islamic Republic.

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Venezuela, also had a mighty economy 30 years ago and in 1990’s its national oil company (PDVSA) was the standard  that other national oil companies in the world aspired to. But Venezuela’s economy deteriorated after Hugo Chavez took over in 1999 and the mismanagement of the economy continued after his death in 2013, when his deputy Nicolas Maduro became president.

Figure below shows the demise of Venezuela’s oil production as foreign oil companies left the country and investments in the oil industry dried up. For a country with the largest oil reserves in the world, even higher than Saudi Arabia, Venezuela produced less oil than Argentina in 2020. 

Venezuela and Iran have teamed up to bypass the international sanctions. The first shipment of Iranian condensate in September 2021, which in today’s prices could be valued at over $160 Million (4.5 Trillion Tooman at current  exchange rates), extended a lifeline to the cash-strapped Maduro government. It helped Venezuela to dilute its extra heavy crude oil, which is very low quality (API 16.0 and 2.45 wt% Sulphur) with Iranian condensate and then sell the blended crude in South East Asia. The second shipment of Iranian condensate is expected this month, so this is not a one-off trade and may extend in the future.