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Takeaway: OPEC said Venezuela production was 734,000 b/d in June but Chevron exit would put about 200,000 b/d at risk. Secondary sanctions much more.

The Trump Administration is seriously considering not extending a general license that expires on July 27 allowing Chevron to continue operations in Venezuela despite US sanctions. We have learned the White House this week may terminate the last US lifeline to the Maduro regime and with it prompt another sharp drop in Venezuela oil production.

Chevron is lobbying to extend the license making the case that if it is forced to pull out of Venezuela, the Maduro regime will try to give the operating assets to Russian or Chinese companies. 

There has also been some confusion in Washington about whether the Guaido government and opposition leaders support extending the license. But this is not the case.  We are told by a top Guaido official based in Bogota, Colombia that the opposition wants the Chevron license ended, and that they have conveyed this position privately to the Trump Administration.

Today, Guaido’s government tried to make it easier for the Trump Administration to do just that and issued a decree that attempts to prevent Maduro from transferring the assets to Russian or Chinese entities. The Guaido decree declares the decision not to renew “constitutes an event of force majeure” that the Guaido government will view as allowing Chevron to legally reclaim the assets in the future.

We believe the Chevron license renewal is in trouble, according to our sources both in Washington and in the Guaido government. In our view, the Guaido decree today signals that the Trump administration will not extend the Chevron license when it expires on July 27.

The Guaido government is asking the Trump Administration to step up pressure on Maduro and take remaining steps to try to cut off oil production and revenues to the regime.

Combined with this pressure and the likely end of the Chevron license, we think the tougher approach will soon trigger secondary sanctions on Maduro’s regime that will likely ensnare other companies operating and doing business in Venezuela, including Russian, Chinese and European companies.

First, we are told Guaido is flat out asking for secondary sanctions. But it also seems rationale that if Maduro were to try to give the Chevron assets to Russian or Chinese entities, the only recourse for the US government is secondary sanctions.  In our view, the termination of the Chevron license may be the catalyst for secondary sanctions as well.

According to recent SEC filings, Chevron’s net oil production in Venezuela is about 40,000 barrels per day (b/d). But taking into account joint ventures with state-owned PDVSA in which Chevron is the operator, the resulting production is more than 200,000 b/d.

OPEC’s Monthly Oil Market Report put Venezuela June production at 734,000 b/d so the end of the Chevron license could at least temporarily result in a drop in production to  a new low of about 500,000 b/d if operations ceased.  In our view, it is probable the administration will provide Chevron with a 30 or 60 day wind down period if the license is not renewed.  However, secondary sanctions would put at risk much more Venezuelan production, even if China and Russian companies continued operations.

Venezuela OIL: Chevron License Extension in Trouble & Likely Trigger for Secondary Sanctions - Venezuela crude production June 2019