VENEZUELA: The US Treasury issued General License 44A to replace General License 44 which OFAC says allows companies to wind down some oil activities by 31 May. Read OFAC FAQ related to the action:
https://ofac.treasury.gov/media/932821/download?inline.
DESK VIEW: This is credit neutral to positive. Let us be clear, the ideal, credit positive scenario would have been the full renewal of GL44, and that is not what happened. The message from the US that this is a “wind down” license, is meant as a negative action against the regime of Nicolas Maduro. That said, some things to note:
• This is positive for the business of Western oil companies: On the positive front, the action that OFAC calls a “wind down of transactions” still leaves in place licenses GL8M (which allows oil services companies Halliburton, Schlumberger, Baker Hughes, and Weatherford International to do business in the country) and GL41 (which allows Chevron’s operations in the country). This means that, aside from the expiration of GL44, Chevron – the largest oil operator in the country – can continue to do work to further increase oil production in Venezuela. OFAC also notes in its FAQs that any companies that have been engaging with Venezuela more recently can seek their own licenses on a case-by-case basis. This suggests that PDVSA will need its private sector partners (aside from Chevron) to get licenses approved by OFAC now and in the future, arguably making PDVSA more dependent on those partners to produce and sell its oil. This also explains why many companies moved quickly to farm into projects and why companies such as Repsol received increased acreage in Venezuela recently, just ahead of the 18 April deadline. One question that remains unclear is which other Western companies have already secured such special permits from October until now, and that is a piece of information we will get only gradually.
• This is still positive for oil production, but limited: We should note that of the 840,000 barrels a day produced in February, roughly 49% was generated by state owned PDVSA, and 51% by the joint venture partners, of which 155,000 barrels a day was produced by Chevron alone, and the rest by Russian oil companies, China’s CNPC, European companies (Repsol, ENI, M&P, and Perenco) and an India’s ONGC, as per estimates by oil economist Francisco Monaldi. In Monaldi’s middle-ground scenario of no GL44 renewal, but Chevron keeping its license and Europeans getting additional licenses, the country’s production could surpass 1m b/d by 2025 but decline from that point on if no new investment is forthcoming. This scenario appears achievable given that rising oil production as of March stood at 874,000 barrels a day, based on direct communication data from OPEC’s monthly.
• No more secondary bond trading restrictions: Another positive is that yesterday’s action did not bring about the reimposition of secondary bond trading restrictions and this means in our view that those are unlikely to return any time soon, likely because they do not hurt or impede the Maduro regime in any meaningful way. This should help put away the fear of some folks in the market that Venezuelan debt could face another trading ban if the relationship with the U.S. worsens.