Arising out of last week’s announcement by the United States to recognize the opposition government in Venezuela, on Monday the Treasury Department designated Petróleos de Venezuela, S.A. (PdVSA), on the Specially Designated Nationals and Blocked Persons (SDN) List. The goal is to starve the Maduro regime of oil revenues necessary to support its continued hold on power. The US estimates that the sanctions will block Maduro from accessing PdVSA assets worth $7 billion and cost the regime $11 billion in lost export proceeds. By freezing PdVSA’s US assets and disallowing its access to US dollars and the US financial system, the US aims to weaken Maduro’s support domestically and to bring about a transition of power to the opposition led by Juan Guaidó. The State Department said Tuesday it had given Venezuelan opposition leader Juan Guaidó the right to control assets and property in the blocked US bank accounts of PdVSA.

The following provides additional detail regarding the sanctions and their immediate impacts.

Specially Designated Nationals and Blocked Persons

The SDN designation for PdVSA takes effect immediately and extends to all entities that are owned, directly or indirectly, 50% or more by PdVSA (other than CITGO, its subsidiaries, and immediate parents).

• This means that, other than in keeping with the General Licenses explained below, all property and interests in property of PdVSA and its majority-owned subsidiaries that are in the United States or come under the possession or control of a US person (i.e., a US bank) are required to be blocked (frozen) and may not be paid, transferred, or otherwise transacted.
• The prohibitions imposed apply to all US persons, which includes all persons located in the United States, all businesses organized under the laws of the United States (including overseas branches), and all US nationals or green-card holders, wherever located.
• US persons are also prohibited from approving or otherwise “facilitating” a transaction that they could not engage in directly. The “facilitation” prohibition extends to direct facilitation of a transaction (e.g., a referral) as well as secondary support and approvals (e.g., logistical or financial support).

Legal and Commercial Implications

Examined below are the immediate legal, commercial and practice repercussions of yesterday’s action:

1. US Crude Imports of Venezuelan Oil Are Permitted for 90 Days, but PdVSA Is Blocked From Accessing Any Payments From the United States.

• Purchase and import into the United States of crude oil (and related transactions) are permitted through April 27, 2019 (90 days). However, PdVSA cannot receive payment for these sales, as any payments from the United States for PdVSA’s benefit must be placed into a blocked, interest-bearing account in the United States. The United States announced that the opposition government has rights to these blocked accounts.
  • US traders with import transactions that directly or indirectly involve PdVSA are permitted to carry out purchase and import activities through April 27, provided that payments to or for the benefit of PdVSA must be placed into a blocked US account.
  • US payments to resellers of Venezuelan crude may raise significant risks of indirectly benefiting PdVSA in violation of the sanctions.
• As a result, PdVSA is reportedly demanding pre-payment for any cargo sold to any US company or destined for a US refiner. Because payments to PdVSA are blocked and the US states that the Opposition government has rights to the blocked accounts, it appears that no further cargos will be loaded from Venezuela for any US destinations.
• Thus, in spite of the authorized 90-day licensed period for US imports, US refiners will likely be forced to rely on existing inventories or find alternative sources to meet supply requirements, with associated upward pressure on heavy crude prices.

2. US Persons Are Permitted to Wind Down Other Pre-Existing Contracts, e.g., for the Sale of Petroleum Products to PdVSA or Resale of Venezuelan Oil to Third Countries, Through Feb. 27, 2019 (30 Days), with the Exception of US Exports of Diluents.

• In-process transactions (i.e., those entered into before January 28, 2019) involving the sale to PdVSA of non-diluent petroleum products may be concluded over the next 30 days.
• Likewise, pre-existing contracts to sell Venezuelan crude to third parties may be concluded during this period.
• The wind-down authorization does not include authorization for any new business.
• Exports or re-exports of diluents from the United States to Venezuela or to PdVSA (or its subsidiaries) are prohibited with immediate effect.
• Transactions with ALBA de Nicaragua (ALBANIS) are not permitted under this General License.

3. Although It Is a PdVSA Subsidiary, CITGO and Its Subsidiaries Are Not Subject to the PdVSA Designation for the Next 180 Days (Through July 27, 2019).

• Transactions with CITGO and its subsidiaries are generally permissible where CITGO (or its immediate parents CITGO Holding, Inc., and PDV Holding, Inc.) is the only PdVSA entity involved and the transaction is concluded by July 27, 2019.
• Like any other US refiner, CITGO is only authorized to import petroleum products from PdVSA through April 28, 2019, and must place any payments for the benefit of PdVSA into a blocked account.
• Another PdVSA subsidiary, Nynas AB, is also exempted from the PdVSA Designation through July 27, 2019.

4. US Financial Institutions Are Otherwise Barred From Processing Any Funds Transfers to/for PdVSA or Otherwise Facilitating Dealings for PdVSA.

• Because transactions denominated in US dollars run a substantial risk of being transferred through the US financial system, in practice, US dollar transactions involving PdVSA are not permitted (other than those identified above) even when carried out by non-US parties and supported by non-US banks.
• The prohibition on US financial support also likely extends to US financing for petroleum shipments and related logistical support outside the bounds of the General Licenses.
• As such, this move has major ramifications for the financing of the purchase and shipment of Venezuelan products even to non-US purchasers and destinations. Such transactions must be financed from non-US sources to the extent that they are not authorized by the General Licenses.

5. Upstream Operations in Venezuela Carried Out by Chevron, Halliburton, Schlumberger, Baker Hughes, or Weatherford (and Their Subsidiaries) Are Permitted Through July 27, 2019 (180 Days).

• Payment transactions involving PdVSA that are incident and necessary to these operations are permitted, provided that those transactions do not run afoul of the debt and equity-related restrictions imposed by prior Executive Orders.
• Again, exports or re-exports of US diluents to Venezuela are not authorized under this or any other General License.

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