(Reuters) - The United States imposed heavy sanctions on Venezuela’s oil industry last week, looking to cut off President Nicolas Maduro’s primary source of revenue.
The sanctions limit transactions between U.S. companies that do business with Venezuela through purchases of crude oil and sales of refined products. Here are details on how the sanctions work:
The United States is aiming to freeze sales proceeds from Venezuelan state-run oil firm PDVSA’s exports of roughly 500,000 barrels per day (bpd) of crude to the United States. There is also a prohibition on U.S firms exporting diluents, unfinished oils used for blending extra heavy crude, to Venezuela.
Venezuela exports oil primarily to the United States, India, and China as well as other nations. Only the United States and India are notable sources of cash, as Russian and Chinese firms currently get shipments of crude through complicated oil-for-loan agreements due to Venezuela’s heavy liabilities with those countries. Russia, in particular, resells the oil it receives to others.
The U.S. Treasury Department’s sanctions do not entirely cut off purchases of Venezuelan oil by U.S. refineries. However, they stipulate that refiners cannot make payments directly to PDVSA, but into escrow accounts that PDVSA will not get access to until the company is controlled by a new government.
Maduro and Manuel Quevedo, who is both oil minister and head of PDVSA, have said they will not allow vessels loaded with crude oil for the United States to leave the country’s ports without being prepaid. Numerous tankers are trapped in the Gulf of Mexico.
Venezuela’s PDVSA sells oil to brokers – trading houses and third-party merchants – with the following terms: the shipments are paid by the merchants who often have another buyer lined up, and delivery is made at the Venezuelan ports. Once a tanker leaves Venezuelan waters, it belongs to the merchant (the buyer). The company is then free to sell the oil to whomever it wants. It is unclear whether payments have been made to either PDVSA or the escrow accounts that the United States said it would set up to help fund opposition leader Juan Guaido’s efforts.
For now, companies can do business but with restrictions. Refineries that import from Venezuela can continue to receive shipments for the next few months before they are forced to get their supplies elsewhere. However, since payments cannot be made to PDVSA, this is expected to restrict the flow of crude oil from Venezuela to the United States.
The sanctions did not directly mention swaps and indirect trade with PDVSA that began in recent years with customers including PDVSA’s U.S. unit Citgo Petroleum, India’s Reliance and Russian state-owned oil giant Rosneft.
Chevron, Halliburton, Schlumberger, Baker Hughes and Weatherford International all have operations in Venezuela, and are allowed to continue transactions and activities with PDVSA and its joint ventures through July 27. Venezuela’s production could fall further later this year if the service companies, which have already reduced operations, leave the country.
Chevron, which has four joint-venture operations in the country, said it would not comment on the current situation in Venezuela. ConocoPhillips and Exxon Mobil both left Venezuela years ago after late President Hugo Chavez nationalized the oil industry.
NON-U.S. PDVSA PARTNERS IN VENEZUELA
Norway’s Equinor has a 9.7 percent stake in a heavy oil project in Venezuela’s Orinoco Belt area, which is majority owned by PDVSA. The company also has a 51 percent stake in a Plataforma Deltana block off eastern Venezuela, and it has 25 employees in Venezuela. “We are just following the situation and making sure that we safeguard our employees,” Equinor’s spokesman said about the political developments and impact on the company’s operations.
Rosneft and China’s CNPC each hold substantial interests in several oilfields in Venezuela, which dwarf those of any other country. Spain’s Repsol, France’s Total, Italy’s Eni, Japan’s Inpex and India’s ONGC Videsh also own minority oilfield stakes.
Russia’s Lukoil was part of a Russian consortium to develop production in Venezuela but quit several years ago and has since then sharply reduced its presence in the country.
Citgo Petroleum is a wholly owned subsidiary of PDVSA and operates refining capacity to process about 750,000 bpd. It also distributes fuel to gasoline stations throughout the United States, accounting for about 4 percent of the nation’s retail fuel market.
The United States has exempted Citgo from its sanctions until July 27. However, previous sanctions have already prevented Citgo from sending PDVSA its profits, which had been paid to the parent in the form of dividends.
As of September, the company had about $500 million in cash and a credit line of approximately $900 million, according to a creditor familiar with the company’s financial statements. Citgo is able to keep importing crude oil from PDVSA for three more months, according to the sanctions.
The sanctions expressly prohibit sales of diluents (heavy naphtha) to PDVSA, which are used for making the country’s extra heavy crude oil ready for export.
The OPEC member’s oil production has dwindled in the last two decades to between 1.2 million and 1.4 million bpd by late 2018 from more than 3 million bpd at the beginning of the century. Most of the crude it produces now is heavy or extra heavy.
Venezuela and PDVSA are estimated to owe more than $100 billion to bondholders, suppliers, allied governments, lenders and creditors holding judgments. Some creditors have gone to U.S. courts to try to seize Citgo to satisfy their legal claims.
Reporting By David Gaffen, Luc Cohen, Marianna Parraga, Jessica Resnick-Ault, Dmitry Zhdannikov, and Tom Hals; Editing by Diane Craft, Rosalba O'Brien and Jeffrey Benkoe