Special Report: How China got shipments of Venezuelan oil despite U.S. sanctions
By Luc Cohen and Marianna Parraga
CARACAS / MEXICO CITY (Reuters) - Last year, China replaced the United States as the leading importer of Venezuelan oil, another front in the heated Washington-Beijing rivalry.
The United States had sanctioned Venezuela's state oil company to overthrow the country's socialist president, Nicolas Maduro. US refineries stopped buying Venezuelan crude. Caracas' ally China, a major customer for a long time, suddenly found himself a top buyer. In the first six months of 2019, an average of 350,000 barrels of crude oil were imported from Venezuela per day.
But in August, Washington tightened sanctions against Venezuela and warned that any foreign entity that continued to do business with the government of the South American country could be subject to sanctions. The state-owned China National Petroleum Corp, known as CNPC, stopped loading oil into Venezuelan ports this month. China's import data showed that purchases slowed and stopped abruptly in late 2019.
China's largest oil company, like customers in some other countries, appeared to be suffering from US President Donald Trump's threats, despite Chinese President Xi Jinping's alleged support for Maduro.
But China never stopped buying. Crude oil from Petroleos de Venezuela SA (PDVSA) has repeatedly found Chinese ports of Reuters with the help of a Swiss-based unit from Rosneft, Russia's state-owned oil company, and a detour delivery method that made it appear as if the oil came from Malaysia.
Between July 1st and December 31st, tankers delivered at least 18 shipments containing a total of 19.7 million barrels of renamed Venezuelan crude to Chinese ports, Reuters said. This finding is based on a review of vessel tracking data, internal PDVSA documents, and interviews with four petroleum analysts who have followed Venezuelan oil flow around the world.
A CNPC unit has chartered at least one of these tankers, which means that it was responsible for the oil on board, according to the ship's data. This ship, called Adventure, took Venezuelan crude oil on July 18 and unloaded it in China on September 4, according to data. No charter information was available for the other ships that dumped crude oil in China.
CNPC did not respond to requests for comments.
These 18 shipments accounted for more than 5% of Venezuela's total exports in 2019 and totaled around $ 1 billion at market prices for the country's flagship crude, known as Merey, based on OPEC figures. The sales provided much-needed support to Maduro's government, although Reuters could not determine how much was added to the treasury. PDVSA often sells its crude oil with strong discounts, and part of its sales are used to pay off debts rather than generate cash.
Reuters found that the incorrectly labeled shipments continued this year. Data from the financial information provider Refinitiv Eikon, photos from satellite images and AIS (Automatic Identification System) data, which were transmitted by oil tankers, were used in the review. Refinitiv, based in New York, is part of Reuters parent company, Thomson Reuters.
The shipping method - which involves the transfer of oil between tankers at sea - has been under review by the Trump administration for months. Washington imposed sanctions on Rosneft Trading SA, the Geneva-based subsidiary of Rosneft in February, to help Venezuela export its oil with ship-to-ship transfers (STS) to disguise the true origin of the crude oil. Rosneft denied wrongdoing.
"The company has always conducted and conducts its business in full compliance with applicable international laws," said Rosneft in a statement on June 5, when asked about this article.
The Russian Ministry of Energy did not respond to a request for comment.
China's indirect imports of Venezuelan crude oil are falling into a gray area, according to Peter Harrell, a sanction expert at the Center for a New American Security Think Tank in Washington.
Harrell believes that US sanctions will give Washington the power to punish foreign companies that buy PDVSA oil through a middleman, especially if the company "knows or should have known that it is Venezuelan crude". However, this does not oblige the US government to act.
"Ultimately, these sanctions are essentially political demands," said Harrell.
Reuters was unable to independently verify that China knew that the oil that came to its coast via Rosneft Trading came from Venezuela.
The U.S. Treasury Department, which enforces trade sanctions, declined to comment.
When asked about the results of Reuters, US State Department special representative for Venezuela Elliott Abrams said in an interview that potential US sanctions against Chinese companies buying transshipped crude oil were "on the table."
"We will take individual measures regarding STS transfers," said Abrams.
China's general customs administration did not respond to requests for comments. The State Department told Reuters that China's dealings with Venezuela are not inappropriate. The ministry said US sanctions had "severely affected" relations between Venezuela and the rest of the world, but Beijing intended to continue trading with the country.
Neither PDVSA, the Venezuelan Ministry of Oil, nor the Ministry of Information, which responds to media requests on behalf of the government, responded to requests for comments. Venezuelan officials have repeatedly described US sanctions against their country as illegal and unilateral.
Oil analysts have announced since last year that Venezuelan oil reaches China via STS transfers. This report is the first to show the scale of these programs and how systematic the tactic was. Reuters also checked internal PDVSA documents showing that the Rosneft unit was involved in the transportation of the oil.
In this way, so much PDVSA oil was shipped to China that the country's total imports of Venezuelan oil in 2019 averaged 283,000 barrels a day. According to Reuters calculations, which are based on comparing the Refinitiv Eikon data with official Chinese customs data, this is 24% more than the 228,700 barrels per day reported by Chinese customs.
This was not enough to fully offset the impact of the US sanctions on PDVSA. US refineries imported an average of 500,000 barrels a day when the sanctions were imposed in January 2019. But it helped Venezuela to keep its oil industry alive when the fall in demand from foreign buyers ashore caused an overload and almost forced PDVSA to shutdown production in key oil fields.
The STS maneuvers reflect the tactic with which Iran, whose oil industry is also under US sanctions, has been delivering its oil to China for years. As Reuters has documented in reports from 2019 and 2015, Iranian oil is often referred to as coming from neighboring Iraq. [Https://reut.rs/2XIOeiE]
A representative of the operator of a Chinese terminal where such a shipment was unloaded in 2019 denied that the origin of the oil was Iranian in nature.
Alireza Miryousefi, spokeswoman for the Iranian mission to the United Nations in New York, said in a statement: "How we sell or export our oil is nobody's business." He said US sanctions on Iranian oil exports were "illegal."
Chinese supplies of Venezuelan crude oil were unusual for a number of reasons, oil analysts said.
STS transfers are typically used for legitimate purposes - for example, to dump oil from deep-water drilling vessels or to pump oil from large tankers to smaller vessels that can sail on narrow or flat waterways. The use of this technique to transport oil from Venezuela to China was only seen in the middle of last year, the oil analysts said.
Tankers who left Venezuela loaded with PDVSA crude did not travel directly to China as in the past. Instead, 15 tankers, the routes of which were checked by Reuters, left Venezuela and initially drove to the coast of Malaysia. A few miles off the coast, on Malacca Street, everyone met a second, empty tanker that had been pulled next to it.
The full tanker then pumped its cargo into the waiting ship and in some cases into several smaller ships. Eighteen of the ship's recipients then went to China, where Venezuela's crude oil was dumped and registered as a Malaysian product, according to Chinese customs records.
Reuters has not been able to determine who changed the identified origin of the crude oil before it reached Chinese customs, or whether this explicitly violated maritime laws or local laws in the applicable jurisdictions.
Michelle Bockmann, market editor and analyst at Lloyd's List, a shipping magazine, said the new label was highly unusual. With the exception of Iran, Bockmann said she could not remember any other case of gross identity changes in this way.
Imports broke with China's previous practice. China has routinely imported oil from countries like Brazil and Russia using STS transfers. According to Chinese customs data and Emma Li, a Singapore-based oil analyst at Refinitiv, Chinese customs has pinpointed the true countries of origin in these cases.
In addition, Malaysia is a medium-sized oil producer that has traditionally not sold crude oil to China in the quantities recorded by Chinese customs last year. China's declared imports from Malaysia in 2019 were 400% higher than three years ago and the highest ever recorded by Refinitiv Eikon, whose numbers date back to 2006.
The Malaysia External Trade Development Corporation, the government agency primarily responsible for foreign trade, did not respond to requests for comments or to Petronas, the state oil company in Malaysia.
This triangulated trade in Venezuelan oil is now in the crosshairs of the Trump administration.
The company that picked up the Venezuelan oil for the China shipments identified by Reuters was Rosneft Trading. This is evident from internal PDVSA documents that have been checked by Reuters. By the end of March, it was a major player in Venezuela's oil industry. The U.S. Treasury Department sanctioned Rosneft Trading on February 18 for allegedly helping Venezuela bypass the US print campaign and sell its oil overseas.
Rosneft Trading's tactics included STS transfers, US officials claim. With one ship to transport crude oil from Venezuela and a second one to deliver to China, Rosneft Trading tried to blur the chain of ownership and obscure the origin of the oil, Abrams, the State Department's special representative for Venezuela, told Reuters Without doing so, further evidence of Rosnefts intentions.
"The whole purpose is to dodge, the whole purpose is to mislead," said Abrams.
On March 28, Rosneft announced that it would cease operations in Venezuela and sell all of the country's assets to another undisclosed Russian state company.
"Rosneft has no ongoing business, assets or activities in Venezuela, so there is no issue for further comments," the company told Reuters in its June 5 statement.
The Trump administration gave Rosneft trading customers until May 20 to process their contracts with the company or to impose US sanctions. When asked whether Chinese customers were involved in hiding the Venezuelan origin of the crude oil, Abrams said that Asian customers often don't care "how it gets to them, what it labels, as long as they get what they bought." ".
The Chinese foreign ministry said in a statement that it knew nothing about the STS transfers in question.
"Cooperation between China and Venezuela is usually carried out regardless of how the situation changes," the statement said. "It is legitimate and benefits the people of both countries and will not be affected by unilateral sanctions."
Reuters was unable to identify the end customers for the PDVSA crude in China. But Venezuela's heavy Merey blend is a preferred raw material for refineries that manufacture asphalt in China, according to industry reports.
One of the earliest STS transfers concerned the Adventure, a tanker chartered by a CNPC subsidiary. On July 18, it took 1.9 million barrels of Venezuelan crude from another ship in Malaysian waters and then sailed to China, according to data from Refinitiv Eikon.
Adventure manager, Eastern Mediterranean Maritime Ltd, based in Greece, said it had never entered into an agreement with PDVSA or a company sanctioned by the United States and "fully respected and complied with" the US sanctions. The shipping company said the bill of lading and the certificate of origin of the cargo said the oil came from Malaysia.
PIT STOP IN MALAYSIA
Malaysia is a popular location for STS crude oil transfers due to its proximity to Singapore, one of the world's largest oil trading and storage centers. One of the STS transfers reviewed by Reuters was made near the Malaysian port of Kuala Linggi. The rest took place outside of Tanjung Bruas harbor.
To demonstrate how these STS transfers work, Reuters used the records available at Refinitiv Eikon to reconstruct a 2 million barrel shipment to China that left the Jose terminal in northeastern Venezuela on August 5, 2019.
The oil was carried on board a Liberian-flagged Delta Aigaion vessel, according to Refinitiv Eikon and an internal Reuters PDVSA document. The crude oil was a heavy mix called Merey 16, found only in Venezuela, and the customer was listed as Rosneft Trading, as the PDVSA document shows.
The Delta Aigaion sailed to waters off Malaysia near the Tanjung Bruas port. On October 28, the crew used an STS transfer to unload Merey 16 onto another tanker, the Lipari under Malta, according to Refinitiv Eikon. The Lipari then drove to China and unloaded their crude oil in the port of Zhanjiang on December 12, according to the data.
(A graphic showing the path of the two ships can be found at: https://tmsnrt.rs/2UpBlrH)
Refinitive Eikon ship tracking data shows the location of ships and 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 place off the coast of Malaysia. Draft is the vertical distance between the waterline and the bottom of a hull - a sign of how heavy a load it is carrying. The draft measurements showed that the Delta Aigaion fully arrived in Malaysia and was left empty, while the opposite was true for the Lipari - an indication that there was an oil transfer between the two.
A photo taken with a European Space Agency radar satellite and made available to Reuters by San Francisco-based Earth imaging company Planet Labs shows Delta Aigaion and Lipari approaching on October 28 to start the oil transfer This photo has been reviewed by the oil industry data provider TankerTrackers.com, which specializes in satellite image analysis for ship tracking.
Refinitiv Eikon retrieves location information from satellite images as well as from land-based sensors that collect data from ship transponders. According to international maritime law, ships must carry transponders in order to transmit information about their position, speed and destination. The US government has accused tankers and shipping companies that transport oil from Venezuela and Iran of manipulating this data in order to avoid the authorities by either flashing wrong targets or simply turning off their transponders.
The Delta Aigaion, which was heading to Venezuela in July after leaving its former berth in India, never stated, according to Refinitiv Eikon data, that it would travel to the South American country. The tanker listed its destination as "For Orders". This means that he has not yet received instructions on where to go next.
Delta Tankers Ltd and TMS Tankers Ltd, the shipping companies that manage Delta Aigaion and Lipari respectively, did not respond to requests for comments. MMC Corp Bhd and T.A.G. Marine Sdn Bhd, which operates the ports of Tanjung Bruas and Kuala Linggi, did not respond to requests for comments.
When the Lipari were unloaded in the southwest Chinese city of Zhanjiang, Chinese customs called the crude oil "Singma Blend", a crude oil type that did not exist on the market before last year. Customs recorded the country of origin as Malaysia.
Li, the refinitive analyst, said that labeling crude oil as a mixture was wrong. If the crude oil were a mixture of different grades - a common practice in the oil industry - the STS operation would have used several ships with crude oil of different origins, Li said. "It doesn't look like there is a mix," Li said.
For 14 of the 18 tankers tested by Reuters, the crude oil content found by Chinese customs was Singma or Mal, another mix that did not exist before last year, according to data from Li. In other cases, Venezuelan crude oil was given the names of more established Malaysian varieties such as Miri or Kimanis or was not specified according to the data compiled by Li. Merey 16, the Venezuelan blend, was not mentioned.
Venezuelan oil's arrival in China via STS transfers lasted at least the first two months of 2020. In January and February, Chinese customs again reported no imports of Venezuelan crude oil. However, in those two months, nearly 130,000 barrels of PDVSA oil per day arrived in Chinese ports from seven tankers who had carried out STS operations, according to the Reuters review.
Given the increasing pressure from the United States on Venezuela, it is unclear whether the tactics that PDVSA and its partners used last year to export Venezuelan oil will remain viable.
Before announcing his complete withdrawal from Venezuela on March 28, Rosneft had not lifted crude oil from the country's ports for about a month. Meanwhile, global oil prices have fallen in recent months due to a drop in demand due to the spread of the novel corona virus. Venezuela's crude oil production has dropped more than 20% this year to less than 700,000 barrels a day.
However, there are signs that discrete trading is continuing.
With few well-established oil companies willing to buy oil straight from Venezuela fearing that Trump might be provoked, two little-known Mexican companies - Libre Abordo and Schlager Business Group - have recently emerged as the largest intermediaries for PDVSA crude oil. The companies informed Reuters that they had signed a contract with the Maduro government to supply goods, including corn and watercraft, against the oil, which they would then resell.
The U.S. Federal Bureau of Investigation investigated the two companies, among other things, as part of an investigation into possible violations of U.S. sanctions against PDVSA, according to three people familiar with the matter.
Mexican companies said that trading in Venezuelan oil under US sanctions is allowed as long as no cash payments reach the Maduro government. The companies said they had no knowledge of US investigations into their practices.
On February 11, a Panama-flagged tanker named Athens Voyager loaded around 700,000 barrels of crude near the Amuay oil port in western Venezuela, according to Refinitiv Eikon. The customer was Libre Abordo, according to an internal Reuters PDVSA document.
The fully loaded Athens Voyager reached its destination on Sunday, April 5: the Linggi STS hub off the coast of Malaysia. There she pumped her cargo onto a ship under the flag of Liberia named Loyalty A on April 17.
The Athens Voyager manager, Chemnav Shipmanagement Ltd, based in Greece, has appointed the ship owner, Afranav Maritime Ltd. based in the Marshall Islands, deferred a comment. Loyalty A's manager, Jacinta Marine Corp from 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. The Athens-based Voyager only produced oil from Venezuelan ports in mid-February.
Afranav did not respond to requests for comments.
Libre Abordo declared bankruptcy on May 31. He said his agreement with Venezuela had been suspended by Maduro and the target of an international print campaign driven by Washington.
In an email to Reuters on June 8, Libre Abordo confirmed that the oil carried on board Athens Voyager was registered in his name. On June 10, Libre Abordo said that the original documentation reflects that the crude oil comes from Venezuela. The company said it had sent the oil to Malaysia, where it was unloaded onto another ship at the behest of the end customer, whose name it would not reveal.
According to Refinitiv Eikon, the receiving ship, Loyalty A, is currently on its way 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)
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