By Ian Talley and Bradley Olson 

Venezuela's deepening political crisis is threatening to upend the nation's critical oil industry and further damage an economy that has already undergone one of the biggest collapses in modern times.

The economy has contracted by half during President Nicolás Maduro's first six-year term. Inflation is estimated at more than a million percent. Widespread shortages of food and medicine have prompted three million Venezuelans to emigrate, mostly on foot.

Now, Venezuela's opposition, backed by the U.S., Canada and many Latin American nations, has declared Mr. Maduro illegitimate and recognized the head of the National Assembly, Juan Guaidó, as a temporary president until new elections are called. Mr. Maduro has responded that he isn't going anywhere and has been backed by the armed forces.

A long and drawn-out stalemate that affects Venezuela's oil exports, which provide 95% of the country's hard currency income, could double the size of this year's economic contraction to a 30% decline in economic output from an estimated 15% decline, estimates Asdrubal Oliveros, head of the consulting firm Ecoanalitica in Caracas. That would further fuel the country's widespread hunger problem.

U.S. officials say they want to divert oil money -- as well as control over other assets like gold reserves -- away from Mr. Maduro to the new interim president without stopping crude exports from the country.

"Diplomatic and economic relations between the United States and Venezuela must be consistent with the United States' recognition of Juan Guaidó and the National Assembly," the U.S. Treasury Department said in a statement late Friday. "The United States will use its economic and diplomatic tools to ensure that commercial transactions by the Venezuelan Government, including those involving its state-owned enterprises and international reserves, are consistent with this recognition."

While oil exports have dramatically reduced in recent years, they remain important to global oil markets and to American refiners, which rely on heavy Venezuelan crude to make fuel.

Venezuela still exports about 500,000 barrels of crude oil to the U.S. every day. Since much of the rest of its oil output goes to China and other markets as repayment of loans, the oil it sends to the U.S. represents the only real cash that the country gets nowadays, economists say. Companies like Chevron Corp. also have major investments in Venezuela.

Cutting off Mr. Maduro's oil money could have dramatic effects, causing Venezuelan oil production to fall another 40% this year, estimated Francisco Rodríguez, head of Torino Capital. U.S. based oil-field service providers like Schlumberger still operate in Venezuela, and the country relies on imports of parts and fuels from the U.S. to keep its industry going.

Mr. Rodríguez likened the situation to sanctions on Libya in 2011, which caused output there to collapse by 70% or so.

Administration officials are studying the possibility of Mr. Guaidó establishing separate boards for state oil giant Petróleos de Venezuela S.A., or PdVSA, as well as U.S.-based refiner Citgo Petroleum, which is owned by the Venezuelan government, two people familiar with the administration's thinking said. Those boards, the thinking goes, could then direct management decisions, including the use and direction of revenues generated from exports and held in special purpose accounts in the U.S.

On Thursday, the State Department served notice to the Federal Reserve that Mr. Guaidó is the agent for access to Venezuelan assets in U.S. banks.

But no one seems to know how, exactly, any of this will work. Industry officials knowledgeable about the matter said that simply having two boards for PdVSA, Citgo and other companies creates a mountain of legal and regulatory problems.

"It's a mess for creditors, a mess for employees, a mess for everyone, a mess, a mess, a mess," one of those officials said.

Because Mr. Maduro's government is still in charge of PdVSA and the oil fields, any payments for oil, or any other allowed transactions between U.S. firms and Venezuela, could be stuck in limbo.

"One thing is clear " for companies like Chevron and other big PdVSA clients, says Gustavo Coronel, the former head of PdVSA in the early 1990s, now living in exile in the U.S. "They can no longer send money to the Maduro government."

To overcome legal hurdles with the move, the Trump administration is exploring executive powers, including the International Emergency Economic Powers Act, that the White House believes could help pave the way for a smooth transition of the assets into the Guaidó government's hands. a person knowledgeable about negotiations said.

That act grants the president authority to regulate commerce, including cross-border payments and trade, during a time of war or after declaring a national emergency. To justify his act, Mr. Trump could say the political crisis jeopardizes those crude imports critical to the U.S. energy sector.

Chevron spokeswoman Isabel Ordóñez said in the meantime the company's "operations in Venezuela continue, and the company is committed to the country's energy development in compliance with all applicable laws and regulations," Chevron spokeswoman Isabel Ordóñez said. She declined to comment about the current situation in the country.

The Maduro administration could try to divert oil shipments away from the U.S., its main client, to India, China and elsewhere. Given that U.S. refineries are specially fitted to handle sulfur-laden Venezuelan crude, however, that would take time and come at a steep discount -- hitting the government's cash flow hard.

"It will be difficult to sell that oil elsewhere, will be difficult to invoice for that oil, it is difficult to carry out transactions that don't go through the U.S. or European financial system," said Mr. Rodríguez. "Would China or India be willing to take 500,000 barrels of oil overnight?"

Companies that operate in Venezuela or buy significant quantities of their crude had been told by the White House to expect more strident sanctions, but none was prepared for a diplomatic attempt to support a transition government. The companies, and even some officials they consult with at the U.S. State Department, were caught completely off guard, the people said.

"It was total chaos," one company official said of the first 24 hours after Vice President Mike Pence released a video Tuesday addressed to Venezuelans pledging support for Mr. Guaidó.

Amid the search for cash to finance Mr. Maduro's opposition, officials have also explored the possibility of financing from the World Bank or the International Monetary Fund. But those institutions will wait for broader international consensus before recognizing a new government in a case like this.

John Otis in Bogotá and Vivian Salama in Washington contributed to this article.

Write to Ian Talley at ian.talley@wsj.com and Bradley Olson at Bradley.Olson@wsj.com

 

(END) Dow Jones Newswires

January 25, 2019 19:08 ET (00:08 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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