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US has cut Venezuelan flows and output, but plans for China, Rosneft trade unclear

Highlights

China, Rosneft continue to trade with PDVSA under loan repayments

US has focused on dollar trade restrictions, not secondary sanctions

Analysts believe Rosneft-PDVSA loan may be paid off

Washington — US sanctions on PDVSA shut down roughly 500,000 b/d of crude flows from Venezuela to Gulf Coast refineries within a matter of weeks after being imposed in January, and helped cut the South American nation's oil production roughly in half before the end of the summer.

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Headed into 2020, analysts see no clear end to US sanctions on PDVSA, Venezuela's state-owned oil company, and claim that the supply impact of these sanctions may soon bottom out, if it has not already. In order to drive Venezuelan oil production and exports down further, the US will have to both ramp up its sanctions enforcement efforts and impose secondary sanctions, a path sources say the administration remains reluctant to take at the moment.

The sanctions have yet to achieve their intended aim, as Venezuelan President Nicolas Maduro remains in power, and output and exports have seen at least a modest output recovery in recent weeks, with support from Russia's Rosneft and some Chinese companies continuing to support Venezuelan crude flows, analysts said.

"China and Russia ... continue to receive Venezuelan oil," analysts with IPD Latin America wrote in a recent report. "The two countries remain bound to Venezuela; their financial ties, developed under President Chavez' efforts to foster market diversification, play a role in keeping them there."

Venezuelan oil output averaged 700,000 b/d in November, according to the latest S&P Global Platts OPEC survey. That's up from 650,000 b/d in October and 600,000 b/d in September.

"Electricity blackouts effectively shut down field operations without on-site generation as well as upgraders," said Frank Verrastro, a senior vice president at the Center for Strategic and International Studies' energy and national security program. "Diluent shortages also impact operations, though as US exports were shut down, Iran and Russia reportedly sent light cargoes."

Platts Analytics forecasts Venezuela's oil output to decline to 600,000 b/d by the end of 2020.

SECONDARY SANCTIONS CARRY RISK

But, the introduction of secondary sanctions, similar to the sanctions the US has imposed on Iranian oil exports, could cause Venezuelan oil output to fall below 400,000 b/d by the end of next year, according to Platts Analytics.

"The US has yet to implement explicit secondary sanctions on Venezuelan crude flows, choosing instead to restrict US dollar transactions with PDVSA," said Paul Sheldon, chief geopolitical adviser with Platts Analytics. "Its future intentions are unclear, but a move toward Iran-style restrictions would make direct sanctions on Rosneft an unavoidable consideration."

Rather than imposing explicit secondary sanctions on Venezuelan crude flows, the US has placed restrictions on dollar transactions with PDVSA, keeping loan-for-oil agreements between Venezuela and China and roughly $7 billion in prepaid crude agreements between PDVSA and Rosneft outside the scope of US sanctions enforcement.

But this may be only temporary.

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Analysts with IPD calculate that the loan between Rosneft and PDVSA, backed by 49% of Citgo shares, may be entirely paid off.

"Rosneft may still be able to lift Venezuelan crude under the guise of debt repayment, which may allow the company to comply with current US sanctions," IPD analysts wrote. "But that strategy should be short-lived, particularly because PDVSA has likely paid off its debt with Rosneft."

SANCTIONS ON ROSNEFT UNLIKELY

A senior Trump administration official told Platts in August that the US was prepared to sanction Rosneft if it continued to trade crude oil and fuel with PDVSA, but analysts said those sanctions have yet to be imposed due to the expected impact they may have on the global oil market.

"The US will be careful when sanctioning Rosneft, one of the top oil producers in the world and part of a much bigger geopolitical game than Venezuela," said Francisco Monaldi, the Latin American energy policy fellow at Rice University's Baker Institute for Public Policy.

Monaldi said that the US may impose some limited secondary sanctions instead, potentially targeting one of Rosneft's trading arms.

China and Venezuela agree to about $50 billion in load between 2004 and 2014, but a $20 billion loan from China announced by Maduro in 2015 appears to have never been executed, according to IPD. Venezuela still owed China about $13.7 billion, according to IPD, but CNPC stopped lifting crude directly from Venezuela in August in order to comply with US sanctions, suggesting that Venezuela has defaulted on its debt with China.

"I think they are in a wait and see mode," Monaldi said. "CNPC has been very careful to avoid sanctions, but as in the case of Russia is part of a larger geopolitical game and they need to get the Chinese government loans repaid."

Rosneft continued to export more than 500,000 b/d of Venezuelan crude to China's independent refineries this summer and Venezuelan crude has been shipped to Malaysia when it is blended and re-exported to China.

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

-- Edited by Gary Gentile, newsdesk@spglobal.com