CVX Chevron Corporation

By Kejal Vyas and Bradley Olson 

CARACAS, Venezuela -- Venezuelan crude exports are declining sharply as new U.S. sanctions push the country's oil industry closer to collapse, threatening a bigger impact on global markets than many experts anticipated, people familiar with the matter say.

Oil storage is filling up in the country as President Nicolás Maduro's regime struggles to line up buyers for the crude shipments that make up his government's only real source of income. The U.S. restrictions, aimed at redirecting crude revenue to opposition leader Juan Guaidó, are making it difficult for the Maduro regime to secure payment for the oil.

Production is also dropping due to labor problems, including mass defections of workers struggling to survive hyperinflation and delayed payments, as well as shortages of the imported oil byproducts Venezuela needs to dilute its tar-like heavy crude to push it through pipes to export terminals, the people say.

Tankers carrying products linked to Russia's PAO Lukoil, Spain's Repsol SA and U.S. oil giant Chevron Corp. have been delayed, halted or redirected in the past week as payment problems cloud trade with Venezuela, according to people familiar with the movements.

"This is an absolute disaster," said Luis Hernández, an oil union leader. "There's almost no way to move the oil."

Venezuela oil czar Manuel Quevedo said his government is demanding advance payment for oil shipments in light of the sanctions, and is also looking for new buyers away from the U.S., without specifying where.

"This is going to have an impact on world oil markets," Mr. Quevedo said on a pro-government television program Sunday, calling the U.S. sanctions robbery. "This aggression will not go unnoticed," he said.

Satellite images accessed through shipping tracking website FleetMon over the weekend showed several dozen ships that normally carry oil and oil byproducts idling in waters off Maracaibo, the country's oil capital, providing visual evidence of the slowdown in oil-related imports and exports. Several of the tankers had carried cargoes to Corpus Christi, Texas, and New York in recent weeks, according to FleetMon data.

Venezuelan authorities loyal to Mr. Maduro halted one oil shipment scheduled to leave Maracaibo for the U.S. last Tuesday over fears that proceeds would end up in the hands of Mr. Guaidó, one person said. The ship was carrying crude from a field tapped through a joint venture involving Chevron and state oil company Petróleos de Venezuela, or PdVSA.

A Chevron spokeswoman declined to comment. Lukoil and Repsol didn't return requests for comment.

The sanctions already appear to be affecting Venezuela's oil production, people inside and outside the country said, though estimates differed on the extent.

Oil union officials and people closely tracking the operations of PdVSA said backlogs in exports had pushed oil production to well below one million barrels a day, a more-than 10% drop from December, and less than half what the country was producing 18 months ago.

Consultancy Wood Mackenzie Ltd. pegged production at 1.1 million barrels a day.

Still, even some outside monitors are seeing big dropoffs. Genscape, an analytics firm that monitors oil production worldwide by tracking oilfield flares, estimated that on Thursday alone, Venezuela output fell by around 60,000 barrels a day.

"That kind of decline is not out of the question largely due to the challenges of sustaining production and the geopolitical impact of redirecting the flow of crude and other products," said J. Alexander Blackman, an executive at U.S. energy company Standard Delta LLC.

It is unclear whether the production falloff will last. Much of it depends on whether the U.S. gambit to target PdVSA will succeed in ousting Mr. Maduro and putting oil revenue in the hands of the country's opposition.

China and Russia continue to support Mr. Maduro and may be capable of reversing the initial impact on the country's exports and production, some analysts said.

Tens of thousands of Venezuelans took to the streets of Caracas on Saturday to support Mr. Guaidó, whom the U.S. and other countries have recognized as the country's interim president. But Mr. Maduro's authoritarian government shows no immediate signs of relinquishing power.

A prolonged standoff threatens to further batter the economy of the once affluent country, which has been struggling for years with food shortages, high rates of violent crime and the world's highest inflation. The nation relies on petrodollars to import the vast majority of its food supply as well as the blending components it needs to produce gasoline, a crude reality for a country that sits atop the world's biggest oil reserves. Oil workers and diplomats say the country could run out of fuel supplies within a week, including the diesel used for a large part of national power generation, unless the government finds a solution to the bottlenecks.

"This is fast turning into a war economy," said Evanán Romero, a former deputy energy minister.

At least initially, the sanctions appear to be having a far more significant impact on Venezuela's output than the Trump administration anticipated. Treasury Secretary Steven Mnuchin said last week that the U.S. was allowing certain companies to continue making transactions with Venezuela for a limited period of time "to minimize any immediate disruptions."

The sanctions allowed for a grace period until April for some transactions, and extended licenses allowing some companies to continue operations through the summer. But they call for payments to Venezuela to be held in interest-bearing accounts until they can be transferred to Mr. Guaidó's regime, a move that has all but blocked business as Mr. Maduro's government remains in power.

Chevron, which has received an extended license to continue working with PdVSA, said it has remained in close consultation with the U.S. to ensure it is in compliance.

"The U.S. government has been very interested in engaging with us to understand our position on the ground," Chevron Chief Executive Mike Wirth said Friday. "For the foreseeable future, we feel like we can maintain a good, stable operation and a safe operation on the ground in Venezuela."

But the U.S. rules limiting the import of lighter oil and products to dilute Venezuelan oil will make developing the country's resources challenging, according to Wood Mackenzie. It predicts Venezuelan production could fall to 900,000 barrels a day.

Francisco Monaldi, a Venezuela energy expert at Rice University, said the sanctions could cause the country's oil production to be cut nearly in half over the next year and a half.

"If this lasts very long," Mr. Monaldi said, "it will definitely have a very significant effect on the Venezuelan oil industry that is already in a very precarious situation."

--Rebecca Elliott and Benoit Faucon contributed to this article.

Write to Kejal Vyas at kejal.vyas@wsj.com and Bradley Olson at Bradley.Olson@wsj.com

(END) Dow Jones Newswires

February 04, 2019 12:51 ET (17:51 GMT)

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