Latin America Advisor

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Could Venezuela’s Oil Sector Survive U.S. Sanctions?

The administration of U.S. President Donald Trump is mulling possible sanctions on Venezuela’s energy sector, including on state-run oil company PDVSA, Reuters reported in June. Oil is at the core of Venezuela’s economy, with some 95 percent of export revenues coming from the energy sector. Approximately 8 percent of U.S. oil imports in March came from Venezuela, the third-largest oil supplier to the United States. What would happen if the United States stopped buying oil from Venezuela? Would the oil be sold to another country, and, if so, which? What would be the terms for selling the oil that would normally go to the United States to another buyer? How would the U.S. oil sector adapt in the event of such sanctions?

Francisco J. Monaldi, fellow in Latin American energy policy and lecturer in energy economics at the Baker Institute for Public Policy at Rice University: "U.S. sanctions on the Venezuelan oil sector could include: financial sanctions on PDVSA, limitations on U.S. firms doing business with PDVSA, banning of oil and/or product exports from the United States to Venezuela and banning of U.S. crude imports from Venezuela. The United States exports between 100,000-150,000 barrels per day (bpd) to Venezuela of products and light oil, and imports between 750,000-800,000 bpd of heavy oil. Banning U.S. exports to Venezuela would force Venezuela to import products from costlier suppliers in Europe or Asia, and would affect the diluents required to export between 250,000-300,000 bpd of extra-heavy crude. Banning the imports would have multiple effects. The main U.S. buyer of Venezuelan oil is Citgo, an affiliate of PDVSA, which would be affected by the ban at two of its refineries in the Gulf Coast, which refine about 550,000 bpd, of which about a third comes from Venezuela. Other companies affected would be Valero, Phillips 66 and Chevron. The United States would have some difficulty obtaining heavy oil from the hemisphere. Mexico and Colombia can redirect some of their Asian sales to the United States, but it would not be enough. Canada can increase its exports, but transportation problems limit this option. Saudi Arabia might be needed to cover some of the missing oil. In the end, the cost of imports would probably rise, but the needed supply would come. Venezuela will have more trouble finding buyers for all that heavy oil, but in the end it will probably sell a large portion to Asia, at some discount. The combination of both types of sanctions could prove brutal for the already cash-strapped PDVSA, probably forcing it into default. Business sanctions on PDVSA could also affect U.S. companies operating in Venezuela, including Chevron and some large service companies like Schlumberger. Overall, the decline in Venezuela’s production would intensify, and future oil production recovery would be harder."

Luis Giusti, senior advisor (non-resident) for energy and national security at the Center for Strategic & International Studies: "For many decades, PDVSA was the largest supplier of oil to U.S. refiners in the Gulf Coast, over Mexico and Saudi Arabia (the three combined supplied between 5 million and 6 million bpd). Oil from Venezuela and Mexico was mostly heavy and extra-heavy, the best buy for many refiners who years before had invested in conversion capacity so they could buy a cheaper feedstock in the future. Since his arrival, late Venezuelan President Hugo Chávez was aggressive against the United States and the export volumes from Venezuela began to slide (today it’s 700,000 bpd), as a result of the shipping of growing amounts of oil supply to China. If the U.S. government were to impose sanctions on Venezuela, those imports would very likely be banned from entering the United States. Several important local refineries would suffer a shortfall of supply and would have to buy from other vendors to make up for the missing volume. However, there is abundant available oil for sale in the world, and although those refineries would suffer some economic impact because they would likely have to buy more expensive oil, they should survive. In Venezuela, the impact of the sanctions would, no doubt, be a severe blow to the already critical financial situation of PDVSA and the Maduro government; currently, exports to the United States are the only ones that bring cash punctually, and that oil would likely have to be sold to others, perhaps at a discount. However, it cannot be overlooked that the sanctions would bring even more backlash against the already massively impoverished and suffering Venezuelan population."

Gustavo Coronel, a founding board member of PDVSA: "At the rate the Venezuelan crisis is developing, it is very unlikely that the United States will have the time to take effective steps of this type, as the executive branch is showing few signs of moving quickly in this direction. From a political point of view, it would be extremely effective to impose a sanction of this nature, as U.S. importers are probably the only ones that pay the Venezuelan regime in cash and on-time. From a technical point of view, there could be some minor problems, as some U.S. refiners located in the Gulf Coast claim that they depend on Venezuelan heavy, sour crude oil for their needs. However, this type of crude is also available from Canada, Saudi Arabia and Mexico. The volumes of this type of crude oil coming to the United States from Venezuela could rather easily be provided by a combination of these three sources. If this took place, the Venezuelan regime would be in a very difficult financial position, as there are few clients currently ready to absorb the volumes coming to the United States—some 700,000 barrels per day. An equally effective step for the United States in its desire to sanction the Venezuelan regime would be to prohibit the sale of gasoline and diesel to the Venezuelan state oil company, PDVSA, a volume that already amounts to some 100,000 bpd. This is a product sorely needed by the regime, in view of the operational collapse of the Venezuelan refineries."

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