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Will PetroChina Pull Out of Venezuela Amid US Sanctions?

Zacks Equity Research

Although Venezuela has the world’s largest oil reserves, the oil industry therein is in deep trouble in the wake of tougher U.S. sanctions and years of mismanagement. As a result of political and economic unrest in Venezuela, PetroChina PTR has suspended direct purchase of crude oil from the South American nation. Amid severe sanctions, the Chinese energy giant cancelled loading plans of 5 million barrels of Venezuelan oil this month. 


Venezuelan Political Crisis Subjects its Oil Industry to Doldrums


As we know, during 2019 Venezuelan presidential crisis, Trump imposed sanctions on Venezuelan state-run oil firm PDSVA in January, in a bid to push out Nicolas Maduro. As part of U.S. sanctions, American companies have been restricted to conduct business with Venezuela's PDVSA. However, the United States granted six-month waivers to Chevron CVX, and major oilfield firms including Halliburton HAL, Schlumberger SLB, Weatherford and Baker Hughes, allowing the companies to conduct transactions with PDSVA. 


In August, Trump ramped up the sanctions, in turn freezing all Venezuelan government assets in the United States. Markedly, this placed Venezuela on par with countries like North Korea, Syria, Cuba and Iran, which are also under such severe U.S. sanctions. The latest move by Trump threatens to impose sanctions on any company or individual that provides support to Maduro. This has put many foreign companies carrying out business with PDVSA at risk. 


The severe U.S. sanctions are aimed at further isolating the Nicolas Maduro regime. Despite imposing new curbs on Venezuela to oust Maduro, the Trump administration granted a three-month extension to U.S. major Chevron last month to continue its operations in Venezuela till late October. Had Trump not extended the license, it would certainly have triggered huge losses for Chevron, which has spent billions in the Venezuelan business.


Years of mismanagement, under investment and alleged government corruption have also resulted in deterioration of Venezuela’s energy industry. With the country tethering on the verge of political and economic collapse, oil output has dwindled more than 50% since 2016. In fact, Venezuela’s oil production plunged to a 30-year low, prior to enforcement of the U.S. sanctions. According to OPEC Monthly Oil Market Report, Venezuelan oil production declined 32,000 barrels per day (bpd) in July, totaling 742,000 bpd.


Restrictive financial sanctions imposed by the United States on the Maduro regime and periodic power blackouts throughout the country have further strangulated the Latin American nation’s struggling energy sector. 


China’s Loyalty Toward Venezuela at Risk Due to Sanctions Threat


China has been a loyal supporter of the Venezuelan government, as the former considers the oil-rich nation as a chief trading partner and geopolitical ally. China has loaned Venezuela $50 billion over the past decade. Notably, China became the largest export destination for Venezuelan oil, post U.S. sanctions against PDVSA.


Oil exports have been a major source of revenues for Venezuela, which bankrolls the Maduro regime. China imported around 339,000 barrels of oil per day this year from the crisis-struck country, with bulk of the commodity coming in through PetroChina.


However, the company is now looking for reducing the risk of U.S. sanctions by shunning Venezuelan oil for the first time in more than a decade. In light of the political unrest engulfing the nation, we believe this Zacks Rank #3 (Hold) company’s latest decision is a well-timed one. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Wrapping Up


PetroChina’s backing out of three Venezuelan oil shipments is a major setback for the strife-torn nation, which has failed to attract another buyer yet. The company has also been contemplating to dump PDVSA as a partner in a mega oil refinery project in China. Well, these moves suggest that PetroChina is distancing itself from the embattled nation. Now, whether the energy giant will completely withdraw from Venezuela is a wait and watch story.  Without China’s support, Venezuela may not be left with many options and the nation’s crisis is likely to exacerbate. 


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