The Venezuelan government that US sanctions aim to topple is sustaining crude exports and partially replenishing fuel supplies through a debt loophole that is now an exclusive perk of Western oil companies.
In its most aggressive escalation of Venezuela sanctions to date, the US imposed sanctions on the oil trading arm of Russian state-controlled Rosneft and its chief executive and Rosneft board member Didier Casimiro, accusing the firm of "skirting sanctions" and reaping "extraordinary profits" from its oil-backed debt.
The White House is hoping to pressure Moscow into abandoning Venezuelan president Nicolas Maduro to allow for free elections this year. But so far the Kremlin is showing no sign of easing its resistance to the US regime-change policy.
Geneva-based Rosneft Trading became the top Venezuelan crude lifter after the US levied oil sanctions on the Opec country just over one year ago. Its loadings do not breach US sanctions, which have no direct secondary component except for companies that use the US financial system. But Washington says it is using an August 2019 executive order "embargoing" sales of Venezuelan property to target Rosneft Trading since it is the main conduit for Venezuelan exports.
The Venezuelan cargoes that Rosneft picks up go toward servicing billions of dollars in debt that the Russian firm extended to Venezuelan state-owned PdV before the US imposed financial sanctions on Venezuela in 2017. As of third quarter 2019, Rosneft said it was still owed $800mn, and PdV said last year that it expected to pay off the full debt by March 2020.
With the new sanctions, Rosneft Trading could still lift Venezuelan cargoes, but it might struggle to resell whatever it cannot place in its partially owned Indian refining system Nayara, once a wind-down period expires on 20 May.
"Anyone outside the United States engaging in any action, any activity with (Rosneft Trading or Casimiro), whether it involves Venezuelan crude or non-Venezuelan activity, runs the risk of being sanctioned themselves," US special Venezuela envoy Elliott Abrams said yesterday.
Trafigura, which is among the companies that trades with Rosneft, says it "will comply with the requirements of these latest rules within the wind-down timeline that has been set by the general license."
Even Nayara is sounding cautious. The Mumbai-based refiner says "it complies with all relevant and applicable US sanctions and we reaffirm our commitment to this position following the recent announcements."
Although the sanctions target is Rosneft Trading, not its Moscow-based parent company, some wary market participants could sidestep the Russian enterprise altogether, but its coveted Urals crude business will likely keep others on its side.
Rosneft says the new US sanctions are an "arbitrary" vehicle to lock the company out of competition with its Western peers.
In contrast to Rosneft, Western oil companies are still lifting Venezuelan crude as debt payment, although these PdV obligations are related to joint upstream ventures, rather than outstanding financial credit.
The most prominent case is Repsol. The Spanish company regularly takes Venezuelan crude to its refineries at home in exchange for PdV's offtake of the oil and gas that it still produces inside Venezuela.
In his briefing, Abrams said Repsol "has always been in compliance with US laws and US sanctions in all its activities," but anticipated "more conversations" that would lead to a change in its future activities.
Italy's Eni, which is Repsol's 50pc partner at Venezuela's Perla offshore natural gas field, has begun similar, if less frequent, loadings of Venezuelan oil in exchange for its production.
The most controversial Western lifter of Venezuelan cargoes is Chevron. The US major has been hanging onto its extensive Venezuelan operations through a string of oil sanctions waivers, the latest of which lapses on 22 April.
The California-based company is PdV's most coveted partner in terms of technology and resources. PdV's PetroPiar joint venture with Chevron recently restarted heavy crude upgrading operations, allowing the firm to market its own share of the resulting synthetic crude, although the sanctions do not allow the oil into US refineries that used to absorb most of Venezuela's exports.
Notably, Chevron says the proceeds from its loadings are used for the maintenance of its joint venture operations, as permitted under its successive waivers.
Rosneft also has upstream assets inside Venezuela, and these are not affected by the new sanctions.
Trickle of resentment
The greatest near-term impact of the new sanctions may be felt at the pump. While shortages are widespread across Venezuela, some fuel as well as diluent has been trickling in, mainly through Rosneft but also Repsol that returns products to Venezuela to compensate for any overage in the debt value of the crude.
From the election-colored perspective of the White House, the Western oil companies are helping to maintain Venezuela's oil industry in anticipation of reconstruction under a future democratic government, an aspiration of Florida's Latino voters. But for some hawkish members of the US-backed political opposition, the loophole for companies from countries that do not recognize the Maduro government — and the US push for Venezuelan elections without forcibly removing Maduro first — are starting to sow resentment.
