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In a major escalation of US policy, the Trump Administration is reconsidering imposing energy sanctions on Venezuela as a direct response to President Maduro’s proposed July 30 election of a new Constituent Assembly that would likely dissolve the current National Assembly and rewrite the constitution.
The White House released late Monday night the following statement from President Trump:
“The United States will not stand by as Venezuela crumbles. If the Maduro regime imposes its Constituent Assembly on July 30, the United States will take strong and swift economic actions. The United States once again calls for free and fair elections and stands with the people of Venezuela in their quest to restore their country to a full and prosperous democracy.” (The full White House statement is available here.)
Nearly 7.6 million people protested on Sunday in the streets of Caracas against Maduro’s move to establish the Constituent Assembly and held an unofficial vote that opposed the plan.
While the White House statement does not mention energy sanctions, we believe the “strong and swift economic actions” may include US energy sanctions.
The US National Security Council (NSC) has been developing various policy options including US energy sanctions against Venezuela and state-owned energy company PDVSA for several months in case it would be needed. In recent days the NSC has been driving a policy announcement of US energy sanctions to be triggered by the Constituent Assembly election on July 30.
We believe the threat of US energy sanctions will be used to force Maduro to reconsider and drop the July 30 election plan for a new assembly.
However, we note that there is strong opposition within the Administration following through and imposing energy sanctions with the State Department and DOE siding against the plan. Both sides have presented their views in a meeting with the President who will make the final decision. The State Department is concerned about a severe economic collapse and humanitarian crisis while DOE is concerned about the potential big impact on gasoline markets.
It is unclear what form the energy sanctions will take but we believe new sanctions may at least ban imports of Venezuelan crude to the US. The move will likely cripple PDVSA-owned CITGO which would be forced to buy higher-priced crude on the spot market for its refineries. Venezuela recently pledged CITGO as collateral for a loan from Russian energy company Rosneft. Any transaction shifting ownership to Rosneft by default on the loan would likely not receive approval from US regulators.
But US refiners, who oppose the sanctions, would also be impacted as it would force Gulf refiners to find replacements for heavier grades of Venezuelan crude. According to the Energy Information Administration (EIA), the US in 2016 imported 761,000 barrels a day (b/d) of Venezuelan crude which is nearly 40 percent of total Venezuela production.
According to EIA, US refiners who are top buyers of Venezuelan crude include (in million barrels): CITGO (66.2), Valero (57.5), Phillips 66 (46.2), Chevron (33.8) and PBF (17.5).
PDVSA would be forced to divert exports to the US elsewhere - likely to China and Asia but at a potential discount and with higher transportation costs.
Crude sales from the Strategic Petroleum Reserve (SPR) are being discussed as a potential option to provide assistance to US refiners impacted by any sanctions. Refiners have mixed views on SPR crude sales due to the different crude grades from Venezuelan crude. However, additional SPR crude sales would likely impact oil markets by putting additional crude on the global market and causing further draws in weekly EIA US crude inventory data.
US sanctions, or a Venezuela response to any sanctions, could also impact oil and gas companies operating in the country. International companies operating in Venezuela with US economic exposure include: ExxonMobil, Chevron, Shell, ENI, Petrobras, Statoil, Total and Repsol.
Venezuela produces about 1.93 million b/d down from 2.5 million b/d in 2014.
