March 27, 2018
Venezuela’s Petroleum Sector and U.S. Sanctions
In response to the ongoing political and economic crisis in
Venezuela, the United States has imposed targeted
sanctions on certain Venezuelan individuals as well as
broader financial sanctions on the Venezuelan government
and the state-owned oil company Petroleos de Venezuela,
S.A. (PdVSA). On February 4, 2018, then-Secretary of
State Rex Tillerson remarked that the Administration is
considering sanction options that may limit U.S. petroleum
trade with Venezuela. As Tillerson acknowledged, a
challenge with such sanctions is balancing the desired
effects on the Maduro government with potential negative
effects on the Venezuelan people, U.S. consumers, and U.S.
business interests. The following discussion examines
Venezuela’s oil production, U.S.-Venezuela petroleum
trade, and the potential effect of various types of petroleum
sanctions on the Venezuelan and U.S. oil sectors.
Contributing factors to Venezuela’s crude oil production
decline include (1) using oil revenues for general
government programs resulting in limited cash availability
to pay for operational expenses such as oil field services
contracts, (2) non-optimal reservoir management due to
inadequate investment in production asset maintenance, (3)
loss of experienced PdVSA personnel, and (4) government
policies that affect cash flow and deter private investment.
Venezuela Crude Oil Production
Table 1. U.S. and Venezuela Petroleum Movements
Thousand Barrels Per Day
Production and export of crude oil is a critically important
element of the Venezuelan economy. According to the
Organization of the Petroleum Exporting Countries, the oil
and gas sector represents approximately 25% of
Venezuela’s gross domestic product and accounts for 95%
of export earnings. In 2016, Venezuela produced 2.3
million barrels per day (mbpd) of crude oil; 0.5 mbpd was
consumed domestically and 1.8 mbpd was exported.
Venezuelan crude oil production has been trending
downward since 1998 when oil production peaked at
approximately 3.4 mbpd. Between 2012 and 2017
production has declined by more than 0.5 mbpd on an
annual basis with 2017 production just below 2 mbpd.
According to the International Energy Agency (IEA), oil
production is projected to continue declining—even without
the effect of targeted U.S. sanctions—through 2021 to just
over 1 mbpd, less than half of 2016 production levels (see
Figure 1. Venezuela Crude Oil Production 2012-2023
Source: International Energy Agency, Oil 2018, March 2018.
U.S.-Venezuela Petroleum Trade
Petroleum trade between the United States and Venezuela is
bilateral, although heavily weighted towards Venezuela
crude oil exports to U.S. refiners (see Table 1). Generally,
in terms of sanction considerations, the larger the trade
volume the larger the impact of sanctions for each
U.S. Exports to Venezuela
Crude Oil (to Curacao)
Venezuela Exports to the United States
Source: Energy Information Administration, Imports/Exports and
Movements, http://www.eia.gov, accessed March 2018.
Potential Impact of Petroleum Sanctions
Various sanction options on Venezuela’s petroleum sector
are reportedly being considered by the Administration as a
potential means of applying economic pressure on the
Maduro government. Generally, the economic impact of
sanctions will depend on the timing (e.g., immediate versus
phased) of each option as well as whether or not such
sanctions are unilateral (i.e., U.S. only) or multilateral (i.e.,
U.S. cooperation with other countries). The following
discussion assumes that potential sanctions are unilateral.
Prohibit U.S. Crude Oil Exports to Venezuela
In 2017, the United States exported 15,000 bpd of crude oil
to Curacao that was used as a feedstock at PdVSA’s
330,000 bpd Isla Refinery. U.S. crude oil exports to
Curacao started in 2016 following a legislative repeal of
restrictions that prevented U.S. crude oil exports to most
countries. Prohibiting the movement of these barrels would
result in PdVSA having to find alternative sources of
similar crude types, which could potentially result in a
short-term price premium for the replacement crude oil.
Given the relatively low volume of crude exports to
Venezuela’s Petroleum Sector and U.S. Sanctions
Curacao, in addition to global waterborne crude oil trade,
prohibiting these exports would likely have a small and
limited economic impact on PdVSA’s operations.
Prohibit U.S.-Venezuela Petroleum Product Trade
Venezuela exported 55,000 bpd of petroleum products to
the United States in 2017. In turn, the United States
exported 77,000 bpd of petroleum products to Venezuela.
Prohibiting Venezuela product exports to the United States
would result in a small but likely manageable constraint in
the petroleum product supply system. Venezuela would
need to establish alternative markets and U.S. buyers would
need to find alternative sources.
Preventing U.S. product exports to Venezuela would likely
result in a similar outcome. Of the 77,000 bpd of petroleum
product exports to Venezuela, approximately 50% is a
partially refined product called Naphtha. Most of the other
50% is finished transportation fuels such as gasoline and
diesel fuel. Naphtha is used by Venezuela as a diluent to
assist with production and transportation of heavy crude oil
produced in the Orinoco region. Limiting access to naphtha
could potentially impact oil production, exports of oil and
related products, and associated revenues. However, there is
a global market for both naphtha and transport fuels.
Prohibiting access to U.S. products would require
Venezuela to find alternative supply, likely resulting in
some degree of price dislocation—potential price premiums
that may cause some financial strain on PdVSA and private
oil producers—as alternative sources and markets for
petroleum products are established.
Prohibit Venezuela Crude Oil Exports to the U.S.
Export of crude oil from Venezuela to the United States is
the largest element of petroleum trade between the two
countries. U.S. imports of Venezuelan crude oil peaked in
1997 at 1.6 million bpd. In 2017, Venezuela supplied
approximately 618,000 bpd of crude oil to U.S. refineries,
most being located in the Gulf Coast region. However, on a
monthly basis, U.S. imports of Venezuelan crude declined
from 812,000 bpd in April to 437,000 bpd in December
2017 (See Figure 2).
Figure 2. Monthly Imports of Venezuela Crude Oil
An immediate prohibition on U.S. crude oil imports from
Venezuela could result in a shock to global oil market and
would create a constraint in the world oil supply system.
From the perspective of Venezuela, the country would lose
access to a close-proximity market that provides muchneeded cash flow to the government. Venezuela would need
to find alternative markets for these crude volumes, with
India and China being likely destinations. Initially, in order
to sell crude to alternative markets, Venezuelan oil may
need to be price-discounted. The magnitude of this discount
is uncertain and the financial impact would depend on the
prevailing market price of crude oil at the time such a
prohibition might be introduced.
Venezuela may need to negotiate payment terms for cash
transactions with certain buyers in order to compensate for
any reduced cash flow from U.S. sales. China and Russia
hold debt with Venezuela, much of which is to be repaid by
crude oil deliveries. China has reportedly been flexible with
Venezuela and has paid Venezuela cash for a portion of oil
shipments. Debt with the Russian state-controlled oil
company Rosneft also includes 49% of collateral in PdVSA
refining subsidiary CITGO, with refining operations in
Texas, Louisiana, and Illinois. Furthermore, Rosneft
acquired refining assets in India in 2017 and is reportedly
planning to use Venezuelan crude oil as a feedstock.
Rosneft is subject to U.S. sanctions related to events in
U.S. oil refiners would also be affected by a prohibition on
Venezuela oil imports. Initially, prices for substitute crude
oils would likely rise in order to attract alternative sources
of supply (e.g., Canada and Iraq). While there are a limited
number of U.S. refiners that acquire crude oil from
Venezuela, any crude oil price increase would likely impact
all refiners. U.S. oil producers, on the other hand, would
benefit financially from an increase in oil prices.
Over time the world oil supply system would reconfigure in
order to accommodate a U.S. oil import constraint. Crude
oil prices would adjust and would ultimately reflect any
inefficiency in the oil transportation system. Arguably, the
oil supply system has been gradually adjusting since at least
the beginning of 2017. Venezuela crude exports to the
United States are down considerably and U.S. refiners have
been sourcing heavy crude oil from alternative suppliers.
Oil and Gasoline Price Considerations
Sanctions that might prohibit U.S. crude oil exports to
Venezuela and petroleum product trade between the two
countries would likely have a short term impact on the price
of crude oil and ultimately transportation fuels (e.g.,
gasoline and diesel fuel) for U.S. consumers. An immediate
prohibition of U.S. crude oil imports from Venezuela would
put upward price pressure on crude oil purchased by U.S.
refiners until the supply system adjusts for this constraint.
To the extent that higher crude oil prices are reflected in the
price of petroleum products, U.S. industries and consumers
would also be affected.
Phillip Brown, Specialist in Energy Policy
Source: Energy Information Administration.
Venezuela’s Petroleum Sector and U.S. Sanctions
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