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Factbox: US sanctions PDVSA, creating likely major diversions of crude, diluent flows

Washington — The Trump administration Monday announced sweeping sanctions on PDVSA, Venezuela's state-owned oil company, a move which could ultimately block roughly 500,000 b/d of US imports and is expected to immediately shutdown roughly 120,000 b/d in diluent the US ships to the South American nation.

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The sanctions are aimed at cutting off the regime of Venezuelan President Nicolas Maduro from oil revenues and diverting those revenues to the still-forming regime of opposition leader Juan Guaido, who the US formally recognized last week as the country's legitimate president.

While the sanctions are widely viewed as a de facto ban on US import of Venezuelan crude, the US Treasury Department coupled the sanctions with general licenses for US companies doing business with PDVSA and a wind down period which will allow most US imports of Venezuelan crude to continue for the next three months.

"The US government has gone to great lengths to try to limit the implications for the operations of CITGO and the US Gulf Coast refining industry," said Elizabeth Rosenberg, director of the energy program at the Center for a New American Security and a former senior sanctions adviser at the Treasury Department.

"Nevertheless, the new financial pressure plan will have tremendous effects for US firms who are scrambling to evaluate how PDVSA and Maduro will react and whether pressure on US energy product sales to Venezuela will be next."

Here's a look at the potential market impacts of Monday's US sanctions announcement:

TRADE FLOWS

**Under the sanctions, payments for US imports of Venezuelan crude will need to be placed into blocked accounts in the US, a condition which would essentially force a Maduro-backed PDVSA to ship crude to the US for free.

**US imports of Venezuelan crude averaged about 574,000 b/d in December, down roughly 40% from July 2016, when US refiners imported more than 850,700 b/d, according to US Customs and Border Protection data. US imports of Venezuelan crude fell as low as 409,150 b/d in February 2018, the data showed.

**If sanctions are fully imposed, flows of heavy crudes into the US are most likely to increase from Mexico, Canada, Saudi Arabia and Iraq, according to analysts.

**"I'm sure many of our friends in the Middle East will be happy to make up the supply as we push down Venezuela's supply," Treasury Secretary Steven Mnuchin said during a White House briefing Monday.

**Valero, Chevron, PBF Energy and PDVSA-owned Citgo are the largest US refiners of Venezuelan crude, according to the US Energy Information Administration. "We plan to comply with the sanctions and will re-optimize our crude supply to minimize any resulting impacts," Valero said in a statement Monday. Chevron said it "continues to actively manage supply issues to ensure we can supply top quality fuels and lubricants to our customers, while also continuing to comply with all applicable US laws." PBF and Citgo spokesman did not respond to requests for comment.

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PRICES

**Mnuchin said the administration did not expect the sanctions to have a significant impact on oil or gasoline prices, claiming that US refiners have "enough" supply.

**USGC refiners will eventually need to import more replacement heavy crudes from Latin America, the Middle East and Canada, which will likely drive heavy sour crude prices higher.

**Even with a three-month wind-down period for Venezuelan imports, Maduro may cut exports to the US early, forcing USGC refiner to bid early for heavy crude at premiums due to increasing logistics costs, analysts with ClearView Energy Partners said in a note Monday.

**Medium and heavy sour crude prices have already risen on OPEC production cuts, Canadian output curtailments, and declining Venezuelan and Mexican production. US sour benchmark Mars crude was assessed by S&P Global Platts at a $5.05/b premium to WTI Monday, down from $7.60/b Friday, but up from a $3.25/b premium on January 2.

**The Trump administration had been in talks with US refiners about possible sanctions against Venezuela, so it is possible buyers of Venezuelan crude have already been bidding up replacement barrels.

INFRASTRUCTURE

Venezuela crude production

**According to Platts Analytics, a de facto ban on Venezuelan imports would "raise costs for PDVSA and almost certainly add downward pressure to our forecast for crude production to decline by 175,000 b/d between December 2018 and December 2019, to 1.16 million b/d."

**Venezuelan oil output fell to 1.17 million b/d in December, according to the latest S&P Global Platts survey. The country's output is forecast to decline by 350,000 b/d through 2019, but, depending on sanctions and other risk factors, could fall by as much as 800,000 b/d by late this year, according to Barclays.

**The sanctions announced Monday immediately prohibit US exports of diluent to Venezuela, which will likely hinder PDVSA's ability to produce and market its crude.

**The loss of roughly 120,000 b/d of US diluent could accelerate the decline of Venezuela's oil production, creating a tight supply picture for the start of the summer driving season and the potential lifting of Iran sanctions waivers in May, according to ClearView analysts.

**PDVSA-owned Citgo assets in the US, which include refineries in Louisiana, Texas and Illinois and three pipeline systems, will be allowed to continue to operate, at least for three months, although revenues also will be required to be held in blocked accounts, Mnuchin said.

-- Brian Scheid, brian.scheid@spglobal.com

-- Jeff Mower, jeff.mower@spglobal.com

-- Edited by Norazlina Jumaat, newsdesk@spglobal.com