For over five months, hundreds of thousands of Venezuelans have taken to the streets of the country to protest against the dictatorial Venezuelan regime. Since the protests started, more than 125 people have been killed, nearly 4,000 have been arrested and thousands injured across the country.
The unrest began after the Venezuelan Supreme Court of Justice, managed by pro-Maduro judges, initiated a process that will deprive the opposition-led National Assembly of legislative powers. Five months later, the political, humanitarian and economic crisis reached its highest level yet, when in an allegedly fraudulent election, the constituent assembly tasked with rewriting Venezuela’s constitution was elected.
On August 1st, one day after the elections of the constituent assembly, the Trump administration qualified Venezuelan President Nicolas Maduro as a “dictator” and individually targeted him with economic sanctions, freezing his assets under U.S. jurisdiction and banning U.S. citizens from doing business with him. These economic sanctions placed President Maduro on a blacklist which includes the leaders of North Korea, Zimbabwe and Syria. In addition, the White House placed sanctions on 21 others Venezuelan government members.
With Venezuela being so heavily economically dependent on the sale of crude oil to the U.S. (with the U.S. being its primary buyer and Venezuela ranking as the third largest exporter of crude oil to the U.S.), global oil and gas investors are concerned about four sanctions that may be implemented by the U.S. government.
- Sanctions on the Venezuelan oil company Petróleos de Venezuela, S.A (“PDVSA”)
U.S. government has not ruled out imposing sanctions on the Venezuelan oil sector, but for now, it remains focused on sanctioning individuals close to President Maduro.
Direct sanctions targeting the Venezuelan oil sector would freeze PDVSA’s funds and assets under U.S. jurisdiction – this would include all capital and assets allocated by U.S. companies and banks.
Furthermore, these sanctions may result in the PDVSA failing to meet its bond payments. This would not necessarily impact President Maduro – and is more likely to impact everyday life of regular Venezuelans.
For this reason, the likelihood of far-reaching sanctions on the Venezuelan oil industry is, in my personal opinion, very low. On August 10th, a group of Republican senators, representing states with a large oil refining sector, warned President Trump of the potential consequences of further sanctions on the U.S. Gulf Coast and the rest of the country. Higher gasoline prices for the end-user and a negative impact on the competitiveness of the Gulf Coast refineries would be among the consequences
Hence, the White House understands that any radical increase in gasoline prices will have an adverse impact on the popularity of the Trump administration, an impact that will likely be amplified during the current summer holidays. It is more likely that targetted individual sanctions will continue rather than sanctions of the company itself.
- Additional measures that can be implemented by the Trump administration
As mentioned above, one of the additional measures open to Trump is the implementation of sanctions against PDVSA’s top management. The U.S. government has already sanctioned PDVSA’s chief financial officer Simon Zerpa. This measure isn’t expected to have a serious impact on the Venezuelan economy, but will increase the pressure on the inner circle of President Maduro, affecting any PDVSA’s financial transactions between U.S. companies and the sanctioned individuals.
The second measure that could be taken is the closing of the tap on new loans and financing for PDVSA. This kind of measure has been used before, with the E.U and U.S. implementing this type of sanction back in 2014 against the Russian oil majors during the Ukrainian crisis.
The immediate consequence of these measures would be additional restrictions on U.S. persons keen to do business with PDVSA with the purpose of refunding Venezuela’s debt (including trading of PDVSA’s bonds or providing a new credit line) which has a default probability of 70 percent for the upcoming payments of $3.5 billion in due obligations from October and November.
These financial issues have seen Venezuela’s foreign reserves plunge to $10.4 billion, according to the latest Central Bank data, which represents only 10 percent of Venezuela’s outstanding debt. Therefore, the risk of default for the rest of 2017 will remain high until political and economic stability are achieved.
In any case, in order to have a real impact, these measures would need to be supported and implemented by other major countries.
The third measure is the banning of all crude oil shipping from and to Venezuela. The U.S. is the primary market for Venezuela’s crude oil exports, with Venezuelan oil representing 9 percent of total U.S. imports, and American companies such as Valero Energy Corp, Phillips 66, Chevron Corp and PBF Energy Inc were the major purchasers of Venezuelan oil in 2016 (154.90 million barrels) representing more than one-third of PDVSA revenues in 2016.
Before any sanction was implemented, Venezuela’s crude oil exports to the U.S. had dropped by around 25 percent (to 491,340 barrels per day in June 2017), the lowest level in fourteen years. The number of cargoes shipped by PDVSA (and its joint ventures) to the U.S. decreased in May 2017 from 42 crude cargoes to 29 crude cargoes. The Venezuelan oil industry has deteriorated over time due to a lack of investment, maintenance and technical knowledge (as several highly qualified PDVSA employees who were opponents of Hugo Chavez’s regime in 2002 were fired and left the country).
On August 11th, 2017, PDVSA’s annual financial results were published – showing that oil and fuel sales in 2016 had dropped 34 percent year on year to $48 billion. Net profit crashed nearly 90 percent from $7.3 billion in 2015 to $828 million.
PDVSA is largely dependent on its sales to U.S. refineries, which keep the Venezuelan industry afloat. From the 2 million barrels per day produced by PDVSA, (i) around 500,000 barrels per day are selling at a loss to the internal market, (ii) between 500,000 to 560,000 barrels per day are used to pay debts to China and Russia, (iii) around 100,000 barrels per day are used in a swap agreement with Cuba and PetroCaribe (crude oil towards doctors and military services) and (iv) 491,340 barrels per day are sold to U.S. refineries.
Moreover, Venezuela imports between 100,000 and 200 000 barrels per day of light crude oil from U.S. upstream companies, so if the Trump administration decides to completely halt oil exports to Venezuela, the PDVSA will become unable to blend domestic heavy crude oil to sell on to the international markets. In this scenario, the PDVSA will be obliged to purchase light crude oil in Europe, Africa, and Asia at a higher cost and as a result, it will see further erosion of already poor operating margins.
- Impact on the U.S gasoline prices
The average U.S. gasoline retail price since the beginning of 2017 stands at $2.26 per gallon, around 15 cents higher than the average price when President Trump was elected. Related: Tech Guru Unveils New Battery To Challenge Lithium-Ion
According to my analysis, each additional sanction described above will have a different impact. From nearly no oil price impact (in the event of a PDVSA top management sanction) to an increase in U.S. gasoline retail prices of between $0.15 and $0.50 per gallon in the case of a total crude oil shipping ban.
The above calculation would depend on the U.S. refineries’ ability to find new delivery contracts for heavy crude oil with others countries such as Canada, Saudi Arabia, Mexico, and Colombia.
- Impacts on the Venezuelan economy
The roll-out of economic sanctions as mentioned above would immediately collapse Venezuela’s oil industry, increase Venezuela’s debt and would most likely result in an unavoidable and total default.
The social consequences of these sanctions would also be dire, and as long as Maduro is able to maintain alliances with China and Russia, the political impact is unlikely to be anywhere near as great as the social one.
By Luis Colasante for Oilprice.com
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