By Deisy Buitrago, Marianna Parraga and Matt Spetalnick

CARACAS/HOUSTON/WASHINGTON (Reuters) – Venezuela has agreed to a key contract to swap its heavy oil for Iranian condensate that it can use to improve the quality of its tar-like crude, with the first cargoes due this week, five people close to the deal said.

According to sources, the agreement between the state-run companies Petroleos of Venezuela (PDVSA), and National Iranian Oil Company, (NIOC), deepens Washington’s cooperation.

According to one person, the first phase of the swap agreement will last six months. However, it could be extended. Reuters couldn’t immediately find out more details about the mwpact.

Requests for comment were not answered by the oil ministers of Venezuela and Iran and neither state-run PDVSA nor NIOC.

According to a Treasury Department email sent to Reuters, the deal may be a violation of U.S. sanction on both countries. This was based upon U.S. government orders which established punitive actions.

The U.S. sanctions program not only prohibit Americans from conducting business with Venezuela and Iran’s oil sector, but threaten to impose secondary sanctions against anyone or any entity outside the United States that does business with these countries.

Secondary sanctions may entail a variety of penalties, such as the suspension of access to the U.S. banking system and fines.

The Treasury Department stated that any “transactions by non-U.S. individuals with NIOC are generally subject to secondary sanctions” in response to a query about the agreement. The Treasury Department also stated that it retains the authority to impose sanctions against any person who is determined to work in Venezuela’s oil sector. However, they did not address the question of whether this current agreement is a violation.

The administration at power can often impose U.S. sanctions. Former U.S. President Donald Trump’s government seized Iranian fuel cargoes https://www.reuters.com/article/us-usa-iran-cargo-idUSKCN25A2AH at sea bound for Venezuela for alleged sanction busting last year, but his successor Joe Biden has made no similar moves.

A source close to the situation in Washington said that the swap agreement between Iran and Venezuela has been considered a possible violation of sanctions in the United States in recent months. They want to know how it goes in practice.

The source claimed that the U.S. is concerned that Iranian diluent shipping could give President Nicolas Maduro a greater financial cushion as he deals with Venezuelan opposition to the elections.

Since sanctions on the two countries have impacted their oil sales over recent years, NIOC has been supporting Venezuela through transportation services and fuel swaps in order to allocate exports to Asia.

On Wednesday, foreign ministers from Iran, Venezuela, and Iran made public statements at the U.N. General Assembly.

Trump’s tightening restrictions contributed to last year’s 38% drop in Venezuela’s oil imports. These are the backbones of the economy. They also cut fuel imports which worsened the gasoline shortages in the nation with 30 million inhabitants.

An American Treasury spokesperson stated that they were “concerned” by reports about oil deals between Venezuelan and Iranian, though they had not yet verified the details.

According to the spokesperson, “We will continue enforcement of both our Iran-related and Venezuela-related sanction.” The official said that Treasury had “proved its willingness” “to blacklist entities which support Iranian efforts to evade U.S. sanction and who further enable their destabilizing behaviour around the globe.”

People said that the swap contract would give PDVSA a stable supply of condensate which it needed to dilute its extra heavy oil output from the Orinoco Belt. Mixing is required before bituminous oil can be exported or transported.

The people spoke on condition of anonymity because they weren’t authorized to talk publicly. Iran will be receiving heavy oil from Venezuela in return.

CARGOES THIS WEEK

PDVSA has boosted oil swaps to minimize cash payments since the U.S. Treasury Department in 2019 blocked the company from using U.S. dollars. Washington has also issued sanctions to foreign companies who receive and ship Venezuelan crude oil.

PDVSA imported Iranian condensate last year in swap agreements to satisfy specific diluents needs. It also traded Venezuelan jet fuel with Iranian gasoline.

According to three people, the contract will allow PDVSA access to diluents to stabilize its Orinoco-exported crude blends. The agreement also gives Venezuela the opportunity to refining lighter oil in Venezuela for the production of vital motor fuel.

According to three individuals and TankerTrackers.com, the first 1.9million barrel shipment of Venezuelan Merey heavy crude oil under the swap set sail from PDVSA’s Jose port earlier this week on Felicity (a very large crude carrier) owned by National Iranian Tanker Co. (NITC).

The NITC unit of NIOC did not return a request to comment.

PDVSA’s September port schedules did not list the vessel. It lists both planned and actual imports. TankerTrackers.com recognized the vessel while it was at Jose earlier this month.

According to three sources, and one of PDVSA’s port schedules, the Venezuelan crude shipment was a partial payment for 2 million barrels Iranian condensate. It arrived in Venezuela Thursday.

LITTLE ENFORCEMENT

Last year, the previous Trump administration seized over 1 million barrels of Iranian fuel bound for Venezuela and blacklisted five tanker captains, as part of a “maximum pressure” strategy, but the United States has not interdicted recent Iranian supplies to Venezuela.

The U.S. State Department refused to comment. A Treasury spokesperson declined to answer a question from Reuters about the concern that PDVSA might have over Iran-Venezuela dealings.   

    U.S. officials insist they won’t ease Venezuelan sanctions until Maduro steps forward to free and fair election.

    Trump’s ban on PDVSA-related companies causing disruption led to the socialist-ruled state to seek out trade opportunities with Iran and other nations, as well as trading with unknown clients.

    After zigzagging in 2020, PDVSA has been able to maintain exports at 650,000 barrels per hour (bpd), thanks to new customers and swaps.

    However, a growing shortage of diluents recently restricted oil exports and placed the Orinoco belt production in an emergency, according to PDVSA documents which were reviewed by Reuters. These documents related to Orinoco Belt’s output status from August to September, as well as other PDVSA documents.

    PDVSA will mix Iranian condensate and extra heavy oil in order to make diluted, which is a required grade by Asian refiners. This grade has been difficult to export since the end of 2019, when suppliers stopped diluent shipment due to sanctions.