Hours before its expiration, OFAC extended and re-issued General License 8 as General License 8F on April 21, 2020. The new General License implements significant changes in US sanctions policy with respect to the oil and gas sector in Venezuela.
Background: General License 8
On January 28, 2019, the US designated Petróleos de Venezuela, S.A. (PdVSA), Venezuela’s state-owned oil company, as a Specially Designated National (SDN). The purpose of the sanctions was to seek to prevent the Venezuelan Maduro regime from profiting off revenues generated by Venezuela’s oil sector.
As an SDN, all property and interests in property of PdVSA, as well as all entities that are 50% or more owned (directly or indirectly) by PdVSA (with the exception of CITGO and its subsidiaries) that are in the US or come under the possession or control of a US person must be blocked and may not be paid, transferred or otherwise transacted.
OFAC introduced 36 general licenses to carve out certain authorized transactions with, in or related to Venezuela. Commonly referred to as the “Chevron License” in the industry, General License 8 (GL 8) originally authorized US persons to engage in all transactions “ordinarily incident and necessary to the maintenance of operations, contracts, or other agreements in Venezuela involving PdVSA” for Chevron, Halliburton, Schlumberger, Baker Hughes, and Weatherford International.
The initial GL8 was set to expire on July 27, 2019. The US Government kept extending the deadline for three months at a time. Most recently, on January 18, 2020 OFAC had extended GL8’s deadline through 12:01 am on April 22, 2020. In the July 27, 2019 extension (GL 8B), the US Government limited the authorized activity only to those related to contracts or operations that were in effect prior to that date. Other than incorporating reference to the new executive orders, there had been no other significant policy changes in the body of General License 8 until the April 21 action.
Most recent update to General License 8
The revised GL 8 (amended as GL 8F) authorizes transactions and activities that are ordinarily incident and necessary to (a) “the limited maintenance of essential operations, contracts, or other agreements, that: (i) are for safety or the preservation of assets in Venezuela; (ii) involve PdVSA or any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest; and (iii) were in effect prior to July 26, 2019” and (b) “the wind down of operations, contracts, or other agreements in Venezuela involving PdVSA or any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest, and that were in effect prior to July 26, 2019.”
It further clarifies that “limited maintenance” includes:
“transactions and activities necessary to ensure the safety of personnel, or the integrity of operations and assets in Venezuela; participation in shareholder and board of directors meetings; making payments on third-party invoices for transactions and activities authorized by paragraph (a) of this general license, or incurred prior to April 21, 2020, provided such activity was authorized at the time it occurred; payment of local taxes and purchase of utility services in Venezuela; and payment of salaries for employees and contractors in Venezuela.”
but excludes:
“(1) The drilling, lifting, or processing of, purchase or sale of, or transport or shipping of any Venezuelan-origin petroleum or petroleum products;
(2) The provision or receipt of insurance or reinsurance with respect to the transactions and activities described in paragraph (c) (1) of this general license;
(3) The design, construction, installation, repair, or improvement of any wells or other facilities or infrastructure in Venezuela or the purchasing or provision of any goods or services, except as required for safety;
(4) Contracting for additional personnel or services, except as required for safety; or
(5) The payment of any dividend, including in kind, to PdVSA, or any entity in which PdVSA owns, directly or indirectly, a 50 percent or greater interest.”
What this means
GL 8F appears to instruct these US companies to prepare to exit Venezuela no later than December 1, 2020. Until then, they can engage in activities necessary to preserve their assets and wind down agreements pre-dating July 26, 2019, but must not provide any new loans to, new debt accruals for, or new investment (subsidization) in PdVSA. The other limitations of General License 8 continue to apply. Of course, the License must be interpreted in light of current market conditions for the balance of 2020, in which oil production is expected to be significantly curtailed.
Recent developments influencing policy change
“Maximum Pressure Campaign”
In 2019, the Trump Administration began a “maximum pressure” campaign to effect change in the Venezuelan Maduro regime while ensuring the industry does not get negatively impacted through the general licenses. More recently, the Venezuela sanctions regime has targeted Russian actors believed to be supporting the Maduro regime. As a result, OFAC designated as an SDN Rosneft Trading SA on February 18, 2020, and later also designated Rosneft subsidiary TNT Trading SA. In March 2020, Rosneft withdrew from Venezuela, handing off its assets there to an unnamed Russian state-owned entity. Because the Maduro regime still has not stepped down, the Trump administration is taking additional steps in an effort to bring about a democratic transition of power.
Oil price collapse
As a result of COVID-19, in line with the general global trend of a drop in trade, the oil industry also experienced a slowdown of activity. This slowdown first began in China, when it was the epicenter of the epidemic. Then, as the COVID-19 epidemic spread across the globe, the slowdown also spread. Consequently, the price of a barrel of oil has fallen below the operating and capital costs of production, making continued production non-economic in some cases. This, too, caused Chevron and other companies to cease or decrease operations in Venezuela.
Conclusion and recommendations
As a reflection of US policies supporting a continued western presence in Venezuela’s oil sector, GL 8 has acted as a guide not only to the enumerated companies contained therein, but also to non-US companies operating in Venezuela in compliance with US policies. Non-US companies looking to GL 8 to gauge sanctions risks in various transactions and to assess their operations and investments in Venezuela will take less comfort from this more limited general license.
GL 8F signals the US policy of “maximum pressure,” and the message that companies should not engage in any new transactions or investments in Venezuela; rather, they should look into how they may wind them down. The General License permits US companies to preserve their assets and continue to pay employees in Venezuela until there is either a democratic transition of power and lifting of sanctions, possibly concurrent with a recovery in oil prices, or license expiration on December 1st, at which point there will no longer be authorization for these companies to have a presence in Venezuela.
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