(Bloomberg) -- It may be the oil market’s worst-kept secret: millions of barrels of Venezuelan heavy crude, embargoed by the U.S., have been surreptitiously going to China.
The cat-and-mouse games that avoid detection and sanctions include ship-to-ship transfers, shell companies and silenced satellite signals. But there’s another aspect to the dodge. It involves “doping” the oil with chemical additives and changing its name in the paperwork so it can be sold as a wholly different crude without a trace of its Venezuelan roots.
Invoices and emails reviewed by Bloomberg show the lengths to which some traders will go to disguise the crude’s origin and get it to Asia, making Chinese refineries an essential lifeline for Venezuela’s battered oil industry. U.S. officials, of course, can’t ban Chinese or any international companies from buying Venezuelan oil. They can financially squeeze them, though, by prohibiting them from then doing any business with American companies. That is why such intricate steps are taken to disguise the origin of the crude.
Nonetheless, enforcement of the U.S. embargo is difficult, said Scott Modell, managing director at Rapidan Energy Advisors LLC. “There are so many ways to circumvent sanctions,” he said. “There are many people willing to take the risk because there’s so much money to be made.”
The documents show crudes that loaded in Venezuela, like one called Hamaca, are treated with chemical additives off the coast of Singapore and reappear on the market as cargoes with new names such as “Singma” or simply a bitumen mixture. Swissoil Trading SA, a Geneva-based house, made the transactions seen in the documents, acting on behalf of Mexican oil trader Libre Abordo SA, which was sanctioned by the U.S. in June for buying Venezuelan crude.
In one email seen by Bloomberg, a Swissoil trader marketing “Singma” urged a counterpart to violate a standard industry practice by keeping the original loading paperwork off a tanker.“Putting original BL on board of a vessel is insane, do not do it,” the trader said, referring to bills of lading. “You do not understand the problem you are getting into.”
In an email responding to questions, Swissoil’s attorney said, “Swissoil Trading SA is not marketing and has not marketed crude oil from Venezuela.”
Bloomberg saw documents for at least 11.3 million barrels of Venezuelan oil that were sold by Swissoil and delivered to China last year under the guise of other names.
Customs data suggest these documents represent the tip of the iceberg and that other companies are also engaged in such doping and selling. China hasn’t officially imported Venezuelan crude since September 2019, while its purchases from Malaysia -- which hasn’t significantly boosted its heavy-crude-making capabilities -- in 2020 surged to the highest in data going back to 2004. But Bloomberg shipping data show more than half of Venezuelan oil exports last year ended up in China. By December, China accounted for all of the country’s oil exports.
Last April, the vessel Celestial took on Venezuelan crude in a ship transfer off Malaysia. It sailed to an area a few miles from the Singaporean coast known as Western Petroleum Bravo -- not far from Universal Studios Singapore and some of the best resorts and golf courses in Asia. There it received 30 containers of chemical additives at a cost of $233,000, all paid by Swissoil. “Gentlemen, this is the doping fee,” a Swissoil employee said in an email exchange with Libre Abordo, the company that originally lifted the cargo in Venezuela. “I am sure we will need these guys in the future, please make sure they get paid promptly.”
After the Celestial lifted anchor, its cargo was renamed “Singma Blend,” a mash-up of Singapore and Malaysia. Singma and Hamaca are chemically almost the same, according to crude oil assays seen by Bloomberg. A month after the makeover, Swissoil sold the oil to a company in Hong Kong, Dayuan Import & Export Co Ltd., an intermediary to China. In emails between the companies, the oil isn’t identified as originating in Venezuela.
Doping isn’t illegal and is used to bring oil within certain chemical specifications to meet contractual obligations or remove impurities. Hiding the crude’s place of origin and renaming it is, however, prohibited. Multiple communications seen by Bloomberg stress the importance of making sure no original documents that could identify the crude’s provenance should be placed on board. In one communication, a Swissoil trader with Venezuelan crude emphasized “please make sure vessel does not sail away with originals on board. No originals shall be placed on board of any vessel, given the origin of the cargo...”
Swissoil and its top executive, Philipp Apikian, among other traders, were sanctioned by the U.S. Treasury Department on January 19 for doing business with Venezuela after Bloomberg asked for comment for this article. The company didn’t respond to a third request for comment after they were placed on the embargoed list. China’s Commerce Ministry and General Administration of Customs didn’t reply to faxes seeking comment for this article.
Libre Abordo, which filed for bankruptcy in May, didn’t return emails seeking comment, and phone numbers previously associated with its executives were disconnected. Dayuan didn’t respond to an email seeking comment, and multiple calls to its Hong Kong-based office went unanswered. A spokesman for the U.S. Treasury didn’t address the specifics in this story, saying only that the sanctions policy has been effective and would continue to be used to pressure President Nicolas Maduro.
The world is swimming in light oil, thanks to U.S. shale. But the pond of heavy oil is much shallower due to sanctions on Venezuela and Iran.
China’s national oil company, China National Petroleum Corp., cut off direct purchases with Venezuelan oil traders. But Venezuelan oil still holds strong appeal, especially for companies that don’t deal directly with the U.S. Only special refinery units called cokers can process the tar-like Venezuelan crude, and China has the world’s largest coking capacity after the U.S. The Venezuelan oil also fetches brutal discounts.
Washington imposed sweeping sanctions on Petroleos de Venezuela SA in early 2019, sending its sales last year to a 71-year low and straining cash flow to Caracas. But the sludgy oil that Venezuela produces remains in demand. In November alone, Venezuela exported 15 million barrels of oil valued at about $660 million, according to Bloomberg data.
“Maduro needs all the money he can put his hands on to finance the military apparatus that protects the regime,” said Diego Moya-Ocampos, a political-risk consultant at IHS Markit in London.
With the change this week of U.S. presidents from Donald Trump to Joe Biden, Venezuelan oil exports may see a limited revival. Biden officials may ease more recent restrictions on so-called fuel swaps, where companies sell gasoline to PDVSA in exchange for payment in crude oil, Moya-Ocampos said.
“I would dare to say we are going to see more Venezuelan oil in the market in the near future,” he said.
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