US sanctions increase pressure on Venezuela
The US is poised to impose fresh sanctions on Venezuela, ratcheting up the stakes in the country's political crisis by curbing the Maduro government's access to cash from crude exports.
While the sanctions do not ban US entities from importing oil from Venezuela, they intensify pressure on Maduro to step down, by limiting his access to oil revenues through PDVSA.
Venezuelan crude exports to the US are about 500,000 barrels per day (b/d), although the full volume is not immediately at stake.
Venezuelan output appeared to stabilise at the end of 2018, with reports that repairs to key heavy oil projects temporarily reinstated some production.
Our base case of 1.1 million b/d of crude oil production in 2019 already assumes that PDVSA invests the minimal capital necessary to keep operations active.
Declines are expected to continue while fields are deprived of the investment needed to stabilise output.
Even in the event of regime change, we anticipate it could take until the end of the year for investment to restart and field declines to stabilise.
The sanctions allow Chevron, the only US upstream operator in Venezuela, to continue to operate normally.
However, they prohibit the export of diluent from the US to Venezuela. Diluent is blended with extra heavy crude produced from Faja projects that do not have upgraders installed. The largest consumer of diluent is Petrolera Sinovensa where production climbed to 130,000 b/d by the end of 2018.
Venezuela exports have fallen in recent years, with exports to PADD 3 declining from 700,000 b/d in 2016 to 500,000 b/d in 2018. Excluding 180,000 b/d of Venezuelan crude run at Citgo refineries leaves roughly 300,000 b/d at stake, distributed to mainly Valero, Chevron and PBF.
Canada and Mexico are two of the largest suppliers to the Gulf Coast, but their ability to cover a shortfall from Venezuela may be limited.
Instead, as Venezuela re-directs its exports east to current clients or by tenders, Saudi Arabia and Iraq will likely divert barrels from Asia and thereby fill the gap.
US consumers will likely feel some pressure as it will be more expensive for US refiners to import alternative crudes.