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What impact will new US sanctions have on Venezuela's August crude exports?

Caracas, Venezuela — New US sanctions against Venezuela will likely impact the country's planned crude exports in August, but by how much depends on the US government's willingness to sanction Russian and Chinese companies.

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PDVSA plans to export 680,000 b/d of crude in August, of which just 43,000 b/d is going to a company with a waiver from the US government, Sweden's Nynas, according to a PDVSA document seen by S&P Global Platts.

That leaves 637,000 b/d of crude exports that could be impacted if buyers are deterred by the US sanctions.

"If US sanctions were extended they could impact 95% of the crude exports planned for August," said the PDVSA official who spoke on condition of anonymity. "PDVSA will have to grant great discounts and even sell at a loss to export."

Nynas, which has been given a waiver to do business with PDVSA until October 25, is a joint venture between PDVSA's PDV Europa and Neste Oil.

However, the bulk of PDVSA crude is exported to pay debts, specifically to China and Russia.

Roughly 293,000 b/d of crude is scheduled to be exported to China in August, which will go to repaying debts, the PDVSA document showed. The PDVSA source said the company was hoping to export at least 3.9 million barrels in August, or roughly 125,800 b/d, to Rosneft, also to repay debts.

While only Nynas has been given an official waiver to import Venezuelan crude, crude exported to pay off debts so far seems to have fallen outside of the scope of US sanctions.

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.

Rosneft said in May it had come to an agreement with US authorities for delivery of Venezuelan crude to Rosneft's Indian refinery, as the supplies were carried out under prepayment contracts.

SANCTIONS LOOPHOLE

The US has yet to officially acknowledge any such agreements, and it is thought that Monday's executive order signed by President Donald Trump was intended to address that loophole.

The order blocks individuals or entities deemed to have supported the Venezuelan government, and applies to PDVSA.

"It remains unclear if [the new sanctions] will cause Russian and Chinese entities to take less Venezuelan crude, but at this point we expect geopolitical factors and Venezuelan investments from both countries to prevent a major change," S&P Global Platts Analytics Chief Geopolitical Adviser Paul Sheldon said. "If US law moves to prohibit all Venezuelan oil exports to third countries, market focus will shift to compliance and enforcement, as is already the case with Iran."

The US could sanction Russian or Chinese firms, but that appears "unlikely," said Eurasia Group analysts in a report.

The US "has shown a proclivity to avoid major sanctions on large foreign-owned firms, including Rosneft, which is PDVSA's main facilitator in avoiding existing sanctions," the analysts said.

"Moreover, even in the event of secondary sanctions, Maduro's allies can find ways to evade consequences, as evidenced by the case of Iran," the analysts said. "This includes using certain banks with limited exposure to the dollar payments system or already under sanctions."

Buyers of Venezuelan crude are "unlikely to shift their behavior since they are benefitting from significant discounts on Venezuelan crude and if anything, PDVSA is shifting its output to meet their demands by moving away from upgrading to blending."

PDVSA still has significant debts with Rosneft. From June 2014 to November 2016, PDVSA and Rosneft had signed six prepaid contracts, which include payments with crude oil and refined products. Of these contracts, only one has been completely canceled.

Rosneft is a partner with PDVSA in several upstream joint ventures, including PetroMonagas, PetroPerija, PetroVictoria, Boqueron and PetroMiranda.

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

-- Newsdesk-Venezuela, newsdesk@spglobal.com

-- Edited by Richard Rubin, newsdesk@spglobal.com