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US escalates Venezuela sanctions, may target crude flows to India, China

Highlights

Analysts see latest order acting as secondary oil sanctions

Platts Analytics forecasts Venezuela output falling to 750,000 b/d

Washington — The US escalated sanctions against Venezuela late Monday and may use the executive order to target crude flows to China and India, analysts said Tuesday.

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President Donald Trump signed an executive order blocking individuals or entities deemed to have supported the Venezuelan government.

The order applies to state-owned oil company PDVSA and "any person owned or controlled, directly or indirectly" by the company and "any person who has acted or purported to act directly or indirectly for or on behalf of" PDVSA, "including as a member of the Maduro regime."

Kevin Book, managing director of ClearView Energy Partners, said the order could bar Venezuela from selling crude to and buying diluent from non-US third parties unless the US allows it.

"This could nudge crude to the upside, especially already scarce heavy grades," Book said in a note to clients early Tuesday.

Francisco Monaldi, an expert on Latin American energy and a fellow at Rice University, said the latest action was "essentially secondary sanctions that would reduce exports to India."

"This would be a major blow," he said early Tuesday.

However, enforcement of secondary sanctions against Chinese and Russian entities without financial ties to the US "could prove difficult, particularly if those entities conduct non-dollar transactions," Book said.

The new order does not apply to Chevron, Halliburton, Schlumberger, Baker Hughes and Weatherford International, which have a waiver to continue operating in Venezuela's upstream sector until October 25, the Treasury Department said Tuesday as it updated 12 general licenses and published 13 new licenses related to the executive order.

Treasury said deals with PDV Holding, Citgo and any of their subsidiaries could continue as long as payments are made into blocked US-based accounts.

CITGO CLAIMS

Monaldi said the order may also indirectly protect PDVSA's US refining arm Citgo from "claimants of all types."

A US appeals court ruled against Venezuela last month allowing Canadian miner Crystallex to go after PDVSA's shares in Citgo to collect on its $1.2-billion judgment related to Venezuela nationalizing its gold mine.

A lawyer for Crystallex declined to comment Tuesday.

US sanctions imposed against PDVSA in January blocked US imports of Venezuelan crude and exports of US diluent to Venezuela.

Before the sanctions, PDVSA depended on Citgo's three refineries for supply of refined products and diluent and as an export destination for its crude. Citgo owns a 418,000 b/d refinery in Lake Charles, Louisiana; a 157,000 b/d refinery in Corpus Christi, Texas; and a 179,265 b/d refinery in Lemont, Illinois.

Venezuela produced 690,000 b/d of crude oil in June, down from 1.44 million b/d a year earlier, according to the US Energy Information Administration.

S&P Global Platts Analytics forecasts Venezuelan production to fall to 750,000 b/d by December 2020 from 875,000 b/d in July.

"Most buyers planning to stop purchases from PDVSA have already done so, and 500,000 b/d of Orinoco production has proven more stable than conventional supply," Chief Geopolitical Adviser Paul Sheldon said.

'PROCEED WITH EXTREME CAUTION'

In a speech in Lima, Peru on Tuesday, US National Security Advisor John Bolton said the executive order was intended to weaken support of the Maduro regime from Cuba, Russia, China and Iran.

"We will ensure that Maduro runs out of ways to financially sustain himself," Bolton said.

Bolton said the executive order freezes all of the Maduro regime's assets and prohibits transactions with the Venezuelan government unless specifically exempted. The order authorizes sanctions on anyone providing support, goods or services to the Venezuelan government or other person already subject to US sanctions, Bolton said.

"We are taking this step to deny Maduro access to the global financial system, and to further isolate him internationally," Bolton said. "Also, we are sending a signal to third parties that want to do business with the Maduro regime: proceed with extreme caution."

-- Meghan Gordon, meghan.gordon@spglobal.com

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

-- Edited by Zac Aiuppa, newsdesk@spglobal.com