China to tax Venezuelan crude: the possible end of an alliance that marks another chapter in Maduro's economic debacle

A new Chinese oil refinery tax would appear to deliver a severe economic blow to the regime of Nicolás Maduro by targeting Venezuela’s exports of its heavy crude oil in a move that caught energy experts by surprise.

The Chinese government is set to start collecting the 30% environmental tax on June 12, effectively doubling the cost of Venezuelan oil imports, making it commercially unviable, analysts say.

There has to be a catch, some observers suspect, as it is hard to understand way China would suddenly turn its back on Maduro and potentially risk its significant stake in Venezuela’s oil industry.

“At the end of the day, does China want to hurt Maduro? That seems highly unlikely. There has to be something in the background to this that helps him”, said Jorge Pinon, an oil industry veteran and director of the Center for International Energy and Environmental Policy at the University of Texas.

The tax’s timing, coming only three months after Joe Biden entered the White House, has also raised geo-political speculation about the impact which could potentially increase Washington’s leverage to force political concessions from Maduro.

Some experts say China has shown signs that it may have lost patience with Maduro and could even be willing to walk away from Venezuela.

“It’s been quite clear for some time that China’s interest in doing much for Maduro has waned,” said Maximilian Hess, an Asia expert with the Foreign Policy Research Institute in Philadelphia.

Observers note that Venezuela has disappeared from the headlines in Chinese state media, a marked change from the past when Beijing reveled in Maduro’s anti-U.S. defiance.

Oil rich econony

It’s hard to understate the importance of Venezuela’s trade in oil with China. The embargo busting shipments account for 90% of Venezuela’s current exports after U.S. sanctions in 2019 closed off the country’s access to traditional oil and gas markets. A small amount – the equivalent of about 60,000 barrels per day - goes to Cuba.

Oil accounts for a large share of Venezuela’s foreign income - apart from drug trafficking, gold and remittances from abroad - so losing the China market could potentially bankrupt the Venezuelan government by leaving it without foreign currency to pay its massive debts.

China is one of Venezuela’s chief allies – along with Russia and Iran - and has stood by Maduro during the onslaught of U.S. sanctions that Washington has heaped on his government in recent years. Although the details of China’s trade with Venezuela are secret, a portion of the oil shipments were presumed to be non-cash, used to pay down a $19 billion debt.

China also has major oil interests in Venezuela, including a 49% stake in Sinovensa, a joint venture between PDVSA, Venezuela’s state-owned oil company, and China National Petroleum Corp (CNPC), which produces about 140,000 barrels a day of extra-heavy Orinoco crude.

Black market

But analysts have questioned whether Venezuela has been repaying its debt to China, and instead selling its blend of ‘dirty’ crude on the black market.

After the U.S. imposed oil sanctions on Venezuela in 2019, PDVSA has used a number of intermediaries to smuggle its oil, especially to small independent refiners in China.

To avoid U.S. sanctions, most tankers arriving and leaving Venezuelan ports sail ‘dark’, with their geographic location signaling system, or transponder, turned off. The shippers then used ship-to-ship transfers off Malaysia and Singapore to deliver their cargo to China.

They also use other risky tactics, such as renaming ships, often with the names of scrapped or decommissioned vessels, and altering – or ‘doping’ - the cargo with chemical additives to disguise the Venezuelan Merey crude in paperwork.

The tax is officially designed to clean up China’s small, independent ‘teapot’ refiners who process Venezuelan crude, which is heavy in sulphur, and is used for asphalt.

However, China has been importing Venezuelan oil via Malaysian refineries, where it is mixed with fuel oil or bitumen before continuing on to China. China’s new rules could add around $30 per barrel to this "diluted bitumen", making it economically inviable.

"A small number of companies have imported record amounts of these fuels and processed them into sub-quality fuels which were then funneled into illicit distribution channels, threatening fair market play and also causing pollution", the Chinese Ministry of Finance stated.

The teapot refiners are allowed to import crude on a quota basis and the Chinese government is investigating their black market dealings, according to S&P Global Platts, an energy and commodities news organization. In theory, that would require the independent refiners to buy from other legitimate sources, such as the Middle East.

'Decarbonization'

Experts say that China is serious about its ‘decarbonization’ strategy to reduce its dependence on fossil fuels, but they question whether it is willing to make a geopolitical sacrifice in Venezuela.

“It depends on China’s motivation. If they don’t want to import Venezuelan crude any more because of the U.S. sanctions it would be a disaster. It would leave a large quantity of barrels that can't be exported,” said Francisco Monaldi, a Venezuelan oil expert at Rice University in Houston.

“If it's truly an environmental issue, then it would seem very easy to resolve by making a new blend,” he added, noting that Venezuela exports its oil to Asia as a blend of extra-heavy crude from the Orinoco oil belt and a lighter grades to produce a medium grade, known in the industry as Merey 16.

In that case, some Venezuelan crude could still make its way into the market, but demand is would still be expected to drop as it would need to be more heavily diluted in order to fall out of the newly-taxed heavy bitumen category.

While the Maduro regime has not commented on the tax, it has not gone unnoticed in Venezuela. PDVSA is reportedly rushing to load as much as five million barrels on three large oil tankers before the deadline.

"We have seen the regime panicking as they realize what's going on and they try to get get as much oil shipped out before that June 12 deadline," said Russ Dallen, the Miami-based head of Caracas Capital Markets, who tracks Venezuelan shipping activity.

Deepening crisis

Meanwhile, Venezuela remains submerged in one of the hemisphere’s worst political and economic crises in contemporary times. Some six million refugees have fled the country in recent years as the economy collapsed after decades of socialist corruption and misrule, under Maduro and the late Hugo Chavez.

Oil production has slumped to around 500,000 barrels per day this year, a third of what it produced before the sanctions went into effect and one fifth of its production a decade ago.

Despite having the largest oil reserves in the world, the country has not had a single rig drilling for either oil or gas since September 2020. Increasingly, other revenue from drug trafficking, mining of gold and remittances, has increasingly become the regime’s mainstay.

Given that grim scenario, it could simply be that China has had enough, realizing perhaps that its debt will never get repaid.

“China wasn’t getting paid what it was due, and I’m sure the Chinese didn’t want to get tainted by the business and sanctioned,” said Evan Ellis, a professor of Latin American Studies at the U.S. Army War College. “So, for them it made sense to shut down the business,” he added.

But, don’t expect China to abandon Venezuela altogether and allow Maduro’s government to collapse. “They are not going to abandon a friend, and in the process help bring to power a pro-Washington democratic government,” said Ellis.