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Trump administration weighing sanctions on imports of Venezuelan oil

Highlights

Sanctions would impact Gulf Coast refiners

Petroleum exports seen as effective target

Venezuela is third-largest supplier to US

Washington — The Trump administration is considering a ban on US imports of Venezuelan crude oil, one of a number of sanctions considered in response to Venezuelan President Nicolas Maduro's pledge to rewrite that country's constitution.

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During a briefing with reporters Tuesday, a senior administration official said sanctions on crude oil imports, as well as targeted sanctions on individuals were being weighed, but declined to comment in detail.

"All options are on the table," the official said, adding that sanctions could be imposed before July 30. "All options are being discussed and debated."

Related: Find more content about Trump's administration in our news and analysis feature.

The official said that administration officials were "mindful" of the impact potential sanctions on crude imports would have on US businesses and consumers and said all economic effects were being studied.

"The United States will not stand by as Venezuela crumbles," President Donald Trump said in a statement Monday night. "If the Maduro regime imposes its Constituent Assembly on July 30, the United States will take strong and swift economic actions."



US imports from Venezuela of crude oil

The National Security Council has been developing various sanctions policy options, including US energy sanctions against Venezuela and PDVSA as a US probe of bribery and money laundering allegations involving the state-owned energy company continues, according to Joe McMonigle.

McMonigle, an oil analyst for Hedgeye and a former Energy Department chief of staff under President George W. Bush, said he believed sanctions could ban imports of Venezuelan crude to the US.

"The move will likely cripple PDVSA-owned Citgo, which would be forced to buy higher-priced crude on the spot market for its refineries," McMonigle said in a note Tuesday. "But US refiners, who oppose the sanctions, would also be impacted as it would force Gulf refiners to find replacements for heavier grades of Venezuelan crude."

The Treasury Department's Committee on Foreign Investment in the US is currently investigating a deal which would give Russia's Rosneft 49.9% ownership of US refiner Citgo if PDVSA defaults on its loans, further complicating any potential US sanctions on Venezuela.

Many administration officials have been reluctant to push for sanctions on Venezuelan crude oil imports due to the impact on US refiners, sources said.

But sanctions on Venezuela's energy sector may ultimately prove to be the only effective option, according to Richard Nephew, a principal deputy coordinator for sanctions policy at the State Department during the Obama administration.

"At the end of the day, there aren't too many things outside of [Venezuela's] energy sector that the US could sanction," said Nephew, now a senior research scholar at Columbia University's Center on Global Energy Policy.

"The question for the Trump administration is: Do you intend to do something that has meaning or are you doing something for demonstration effect?" Nephew said. "If you're going for demonstration effect, there's lot of stuff you could do, it might have zero practical impact. If you're going to go after something that's going to have an impact in some meaningful, tangible way, at some point you have to go after energy."

Crude oil and petroleum product exports account for roughly 95% of Venezuela's total exports and the US is often the country's largest export market.


US REFINERY IMPACT


In April, the US imported 812,000 b/d of Venezuelan crude, according to the Energy Information Administration. Venezuela is the third-largest supplier of foreign crude to US, behind Canada and Saudi Arabia. US imports of Venezuelan crude peaked at 1.6 million b/d in October 1997.

US refiners imported about 271.1 million barrels of Venezuelan crude in 2016, about 95% of which was imported by refiners along the Gulf Coast.

The Phillips 66 Sweeny Refinery in Old Ocean, Texas, imported nearly 46.2 million barrels of Venezuelan crude in 2016, the most of any US refinery last year, according to the EIA.

Citgo's Lake Charles, Louisiana, took in the second-most with nearly 44.7 million barrels of Venezuelan crude in 2016, according to EIA.

It total, 13 US refineries imported Venezuelan crude in 2016, according to EIA.

Sanctions on Venezuelan crude imports would force refiners to look for similar grades from alternative markets, potentially including additional imports of Canadian crude, but also more imports from Colombia and Mexico.

"It would probably mean that we would be short heavy barrels and the world is already tight on heavy barrels," said Rick Joswick, managing director for oil with the PIRA Energy Group, a unit of S&P Global Platts.

The OPEC supply cut agreement has mostly impacted medium crude grade and much of the global supply growth will be in light, US crudes, Joswick said. In addition, production of the heavy grades US refiners would be seeking, such as in Mexico or Colombia are either not growing or in decline.

"We're out of balance right now and this would make us more out of balance," Joswick said.

Platts data shows the US Gulf Coast coking yield for Venezuelan BCF 22 crude roughly on par with domestic Mars crude, while the yield for Venezuelan Merey crude is roughly on par with Mexican Maya crude.

The BCF 22 coking yield has averaged $54.27/b so far in July, slightly below the $54.55/b average for Mars, for instance.

In a July 6 letter to Trump, Chet Thompson, president and CEO of American Fuel & Petrochemical Manufacturers, wrote that sanctions on Venezuelan crude imports could have a "significant negative effect" on domestic refiners and consumers.

"Sanctions limiting US imports of Venezuelan crude would disadvantage many US refineries, particularly those in the Gulf Coast and East Coast regions, that have optimized to utilize sour crudes produced in Venezuela," Thompson wrote, adding that due to the nature of the global oil market, crude bound for the US could be diverted to Asian trading competitors if sanctions take root.

McMonigle said these Venezuelan exports to Asia, however, would likely be sold at a discount with higher transportation costs.

The Trump administration is considering sales of crude from the US Strategic Petroleum Reserve as one potential option to assist American refiners impacted by the potential sanctions, McMonigle said.


POLITICAL RISK


Nephew said the administration is likely weighing the risks of crude oil sanctions on US refiners and moving the issue from an internal Venezuela conflict to a US-versus-Venezuela fight.

"You put yourself in the center of this, then you give ample room for Maduro to argue that you're the one to blame," he said.

Bob McNally, president of the Rapidan Group and a former White House energy advisor, said Trump likely has "ample" legal authority to implement a boycott of Venezuelan crude or sanctions on petroleum product exports there. He may also look to work with Congress for new sanctions legislation, McNally said.

"Whether [the sanctions] would be effective is harder to assess and depends on what effect we would be looking for," he said. "Can we impose a cost on Venezuela? Yes. Will it soften or change the Maduro regime? That's not clear."

Venezuela crude output average 1.91 million b/d in June, down 30,000 b/d from May, according to the latest S&P Global Platts OPEC survey. Venezuela produced 2.4 million b/d in 2015, but output has declined as the country's economic crisis has worsened.

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

--Edited by Richard Rubin, richard.rubin@spglobal.com