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US considering letting Venezuela waiver expire for Chevron, other US companies

Highlights

End of general license would further reduce Venezuela oil output

Chevron projects, including Petropiar, to be impacted

Could allow Russian, Chinese firms new foothold in sector

Washington — The Trump administration is strongly considering letting a waiver which allowed Chevron and four US oil services companies to continue work with Venezuela's state-owned oil company expire at the end of the month, potentially accelerating the collapse of the country's oil sector, sources told S&P Global Platts on Tuesday.

The waiver, a general license issued by the US Treasury Department on January 28 as the administration unveiled its most punitive sanctions on Venezuela's oil sector, allowed Chevron, Halliburton, Schlumberger, Baker Hughes, and Weatherford International, to continue certain work with PDVSA. The waiver expires on July 27.

Sources said Treasury is considering allowing the waiver to expire in an attempt to ramp up pressure as part of its "maximum pressure" campaign on the Maduro regime. One source familiar with the administration's plans said that if the administration does not extend the waiver it will likely give Chevron and the other US companies a 60 to 90-day grace period to wind down operations in Venezuela.

If the waiver is allowed to expire, Venezuelan oil output, which has already fallen to lows not seen in more than 16 years, will see further production declines, the US Energy Information Administration said Tuesday in its Short-Term Energy Outlook.

Analysts said the waiver may ultimately be extended, though administration officials have given no indication that it will.

"The administration faces a tradeoff on this," said Andrew Stanley, an associate fellow with the Center for Strategic & International Studies' energy and national security program.

"On the one hand, if they follow through on this deadline, it would further negatively impact Venezuelan production and increase the pressure on Maduro," Stanley said. "But on the other, it would hurt U.S. companies. The sanctions to date have had modest impacts on US business interests. This action would be more severe and so it will be interesting to see if the administration is willing to go to that length in trying to bring about a change in power."

COSTS VS. BENEFITS

If the administration lets the waiver expire, projects currently under control of Chevron and other US firms could be overtaken by Chinese and Russian firms, eliminating any influence the US may have over Venezuela's oil sector, according to Francisco Monaldi, the Latin American energy policy fellow at Rice University's Baker Institute for Public Policy.

"I personally think the costs of forcing the US companies to leave outweigh the benefits," Monaldi said.

Kevin Book, managing director at ClearView Energy Partners, said that Treasury's Office of Foreign Assets Control may renew the general license without "fanfare" before it expires near the end of the month.

"Venezuela benefits from the technical excellence of US operators and services companies, but the US benefits, too, because eradicating the US services footprint in Venezuela would cede a vital role towards Venezuela's potential restoration to Cuba, Russia and China," Book said.

In March, Treasury extended a waiver for Citgo by 18 months to buy crude and to wind down contracts and transactions with parent company PDVSA.

Spokespeople for Treasury and the US State Department declined to comment on the administration plans.

"We do not discuss internal deliberations or preview sanctions related actions," a State Department spokeswoman said.

In addition, spokespeople for Chevron and the four oil services companies also declined to comment.

"Our operations in Venezuela continue in compliance with all applicable laws and regulations," Ray Fohr, a Chevron spokesman, said in a statement.

CHEVRON OPERATIONS

Chevron, which has operated in Venezuela for nearly a century, currently works with PDVSA on four joint-venture operations in western and eastern Venezuela, including three heavy or extra-heavy crude oil projects, according to the company's website. Chevron's biggest project is Petropiar in the Orinoco Belt which had an average net production of 26,000 b/d of liquids in 2018, according to the website.

In 2018, Chevron's net production averaged 42,000 b/d of crude oil, according to the website.

Operations in Venezuela, amid an economic collapse and US sanctions which blocked US exports of diluent to Venezuela and have served as a de facto ban on US imports of Venezuelan crude, have made this work a challenge.

"Venezuela continues to be very difficult," Chevron CEO Mike Wirth said during an April 26 earnings call.

On April 28, the US prohibited transactions between non-US firms and PDVSA involving the US financial system, essentially banning the use of US dollars in all transactions with PDVSA.

According to a May 2 filing with the US Securities and Exchange Commission, Chevron's Q1 2019 net oil equivalent production in Venezuela averaged 40,000 b/d.

"The operating environment in Venezuela has been deteriorating for some time," the company said in the filing. "Future events could result in the environment in Venezuela becoming more challenged, which could lead to increased business disruption and volatility in the associated financial results."

Monaldi said while some projects involving Chevron could be overtaken by Rosneft or CNPC, a short, sharp decline in output would be likely.

"The service companies leaving will have some additional effect since they are involved in the operation of at least a third of the rigs in activity," Monaldi said. "The negative effects of them leaving would be gradual but persistent."

Venezuela's overall oil output averaged 760,000 b/d in June, up 40,000 b/d from July, but 680,000 b/d below its June 2018 output and 1.64 million b/d below its output in June 2015.

S&P Global Platts Analytics expects Venezuelan production to average 790,000 b/d in the third quarter, slipping to 700,000 b/d in Q4.

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

-- Edited by James Bambino, newsdesk@spglobal.com