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As imports dip, US weighs options to dull Venezuela oil sanctions


Tillerson wants to "soften" impact of oil sanctions

Phase-in, import caps, SPR release likely being considered

Decline in Venezuelan exports increasing sanctions odds

Washington — Bolstered by a decline in US imports of Venezuelan crude, the Trump administration is preparing to impose sanctions on Venezuela's oil sector following the country's April 22 presidential election, according to administration sources.

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But US Secretary of State Rex Tillerson said the administration is looking to "soften" the impact of these penalties. This, analysts believe, will likely include phasing in sanctions or capping import levels at current levels. In addition, drawing crude from US government crude stocks to offset a loss of crude and refined product flows will be considered, analysts said.

Administration officials have yet to determine what the sanctions will cover and are studying how it can dull the impact of the potential sanctions on both US refiners and Caribbean and Central American nations which still import hundreds of thousands of barrels of Venezuelan crude daily.

The Trump administration "will be looking at what are actions the US might take to mitigate the negative impacts of that," Tillerson said Wednesday during a news conference in Kingston, Jamaica.

Tillerson, the former CEO of ExxonMobil and an initial opponent on oil sanctions against Venezuela, declined to give specifics on the administration's plans.

"We're going to undertake a very quick study to see: Are there some things that the US could easily do with our rich energy endowment, with the infrastructure that we already have available - what could we do to perhaps soften any impact of that?" he said.

According to John Auers, an executive vice president at Turner, Mason & Company, the impact of oil sector sanctions could be blunted by a phase-in period of two or three months to allow refiners to find alternatives to heavy Venezuelan crude.

"They really could go in any direction," said Richard Nephew, a principal deputy coordinator for sanctions policy at the State Department during the Obama administration. "They could start with essentially 'no more than what's bought or sold today' and then ratchet down over time. They could focus on sanctioning US imports but not exports. They could announce an intent to sanction in the future, with timeline to be set on when thresholds for how low imports or exports can go."

Auers said refiners may be grandfathered in to the new sanctions and allowed to keep imports of Venezuelan crude at current levels, an option that Nephew sees as the Trump administration's most likely path forward.

The administration would cap exports or imports and then push those caps down as time goes on, similar to how sanctions on Iran and North Korea were structured. Going with caps and import declines over time would allow the administration to avoid "freaking" markets, Nephew said.


Roughly 75% of all US imports of Venezuelan crude in November were imported by five refineries along the Gulf Coast. Valero's St. Charles Refinery in Norco, Louisiana, and its Port Arthur Refinery in Port Arthur, Texas, imported nearly 208,000 b/d of Venezuelan crude in November, more than 40% of all Venezuelan crude imported into the US that month, according to the US Energy Information Administration.

Source: US EIA

A Valero spokeswoman did not respond to a request for comment Thursday. In a July letter to Trump, Chet Thompson, president and CEO of American Fuel & Petrochemical Manufacturers, the leading trade group for US refiners, argued that oil sector sanctions against Venezuela would harm US refiners, increase domestic fuel prices and destabilize crude markets.

"AFPM remains concerned about the potential impact broad sanctions could have on US refineries and consumers," the trade group said in a statement Thursday. "We appreciate the thoughtful approach the administration has taken on this issue so far, and look forward to working with administration officials to ensure any new sanctions are targeted, effective, and do not inadvertently harm US business and consumers."

Auers said the threat of oil sector sanctions have already motivated US refiners to seek new heavy crude sources and Venezuelan output has plummeted in recent months.

"The [US refining] industry has been phasing out Venezuelan crude anyway over the last several months knowing there's a potential for sanctions, but also because Venezuelan crude production has fallen off," Auers said.

US imports of Venezuelan crude averaged 505,000 b/d in November, down from 812,000 b/d in April and its lowest point since January 2003 amid Venezuela's oil strike. According to an S&P Global Platts OPEC survey released Wednesday, Venezuela's oil production fell to 1.64 million b/d in January. That's down from 2.09 million b/d in October 2016 and 2.34 million b/d in October 2015.

The recent decline in imports of Venezuelan crude imports by US refiners caused a shift within the Trump administration, including Tillerson, who opposed oil sanctions due to the potential impact on Gulf Coast refiners, according to an administration source.

"We are much more flexible today and not very reliant on Venezuelan imports," the source said.

In August, the US Treasury imposed new sanctions prohibiting trading new debt and equity issued by the Venezuelan government and state oil company PDVSA. It has imposed several rounds of sanctions on Venezuela, including on President Nicolas Maduro.


Analysts said this week that they expect the administration may sanction US diluent exports to PDVSA refiners first, before moving to crude imports.

The US sent 88,000 b/d of crude and products to Venezuela in November, its highest export level since June when it sent 109,000 b/d to Venezuela, according to the EIA.

The administration could also authorize a release from the US Strategic Petroleum Reserve to help counter the loss of Venezuelan imports.

"The president has broad power to authorize a strategic stock draw if they go that route," said Bob McNally, president of the Rapidan Energy Group.

Auers said an SPR release may do little since there is not a Venezuelan heavy crude equivalent in government stocks.

Finding heavy crude alternatives has been challenged, somewhat, by stagnant production in Mexico and pipeline capacity constraints out of Canada, Auers said.

Tillerson told reporters Wednesday that the US, Mexico and Canada were working together to study ways to lessen the impact of potential sanctions.

Mexico's Energy Secretary Pedro Joaquin Coldwell said Thursday that Mexico's government is evaluating with Canada and US the repercussions oil sanctions on Venezuela would create in the market.

"It is an issue the chancellery is following, but Mexico isn't going to impose oil sanctions to any country and we are concerned of the repercussions an oil sanction could have on the Venezuelan people and other countries in Latin America," Coldwell said at a news conference.

-- Brian Scheid,

-- Edited by Jason Lindquist,