Shifting Sanctions on Venezuelan and Russian Oil Sectors Create Opportunities and Compliance Risks for The Global Oil Industry

What Happened

The US Department of the Treasury’s Office of Foreign Assets Control (OFAC) recently issued a number of new General Licenses that suspend certain sanctions on Venezuela’s oil and gas sector, as well as certain other sanctions imposed on Venezuela.  Separately, OFAC has recently stepped up enforcement of sanctions on the shipment of Russian oil amid reports of increasing evasion of that sanctions regime.

The Bottom Line

The recent changes to US sanctions on Venezuela and Russia create opportunities and compliance risks to companies engaged in or providing services to global oil markets.  US companies in the global oil industry should monitor these developments closely and adjust compliance efforts to meet the changing landscape of US sanctions on oil.

The Full Story

US Suspends Certain Sanctions on Venezuela

Starting in 2016, the United States imposed significant economic sanctions on Venezuela.  Initially, those sanctions did not cover Venezuela’s oil and gas sector.  Following the 2018 re-election of Venezuelan President Nicolás Maduro, the United States escalated its economic sanctions against Venezuela, citing concerns over public corruption, political repression, and election integrity.  These sanctions targeted, among other things, Venezuela’s oil and gas sector by imposing blocking sanctions on Petróleos de Venezuela S.A. (PdVSA), Venezuela’s state-owned oil and natural gas company; Venezuela’s gold sector, by imposing blocking sanctions on CVG Compania General de Mineria de Venezuela CA (Minerven); and the trading of Venezuela’s sovereign bonds on the secondary market.

On October 18, 2023, OFAC issued several General Licenses temporarily suspending certain sanctions on Venezuela.  According to OFAC’s press release accompanying the General Licenses, the easing of sanctions is in response to an agreement between Venezuelan President Maduro and the Unitary Platform, an opposition political alliance in Venezuela, seen as providing a step towards holding free and fair elections in Venezuela. 

The most significant of the four General Licenses according to OFAC, General License 44 (Oil and Gas GL), temporarily authorizes all transactions otherwise prohibited by US sanctions on Venezuela’s oil and gas sector, including transactions with PdVSA and its subsidiaries.  The Oil and Gas GL specifically authorizes the production, lifting, sale, and export of oil or gas from Venezuela, the provision of or payment of invoices for goods and services related to Venezuela’s oil and gas sector operations, new investment in Venezuela’s oil and gas sector, and the delivery of oil and gas from Venezuela to creditors of the Government of Venezuela or PdVSA for the purposes of debt repayment, unless otherwise prohibited by US sanctions.  The Oil and Gas GL expires on April 18, 2024 unless otherwise extended by OFAC.

OFAC issued updated guidance on November 16, 2023 clarifying that, while the Oil and Gas GL provides broad relief to oil and gas sector operations in Venezuela, the relief is limited by several key prohibitions that remain in place:

• The Oil and Gas GL does not authorize any transactions involving any financial institution blocked pursuant to Executive Order (EO) 13850 other than with Banco Central de Venezuela or Banco de Venezuela SA Banco Universal.
• The Oil and Gas GL does not authorize the provision of goods or services to, or new investment in, an entity located in Venezuela that is owned or controlled by, or a joint venture with, an entity located in the Russian Federation or any transactions related to new investment in oil or gas sector operations in Venezuela by a person located in the Russian Federation or any entity owned or controlled by a person located in the Russian Federation.
• The Oil and Gas GL does not authorize new debt transactions, such as the provision of loans to PdVSA, that are not for the payment of invoices or repayment of debt through delivery of oil or gas.
• The Oil and Gas GL does not authorize any transactions prohibited by EO 13827 (relating to certain virtual assets issued by, for, or on behalf of the Government of Venezuela) or EO 13835 (relating to debt that is owed to the Government of Venezuela, as well as certain transactions involving any equity interest in any entity in which the Government of Venezuela has a 50 percent or greater ownership interest).
• The Oil and Gas GL does not unblock any property blocked pursuant to US sanctions on Venezuela. Accordingly, all property blocked pursuant to the Venezuela sanctions regime remains blocked unless separately authorized by OFAC.
• The Oil and Gas GL does not authorize any transaction otherwise prohibited by US sanctions other than those imposed under the regulations implementing US sanctions on Venezuela located in 31 C.F.R. Part 591.

US companies may continue to rely on other authorizations provided by OFAC related to Venezuela’s oil or gas sector operations in Venezuela other than the Oil and Gas GL.

OFAC also issued General License 9H, which authorizes all transactions ordinarily incident and necessary to dealings in any debt of or equity in PdVSA or its subsidiaries issued prior to August 25, 2017, unless otherwise prohibited.  General License 9H replaces General License 9G, which did not authorize US persons to purchase or invest in, or to facilitate the purchase of or investment in, directly or indirectly, these PdVSA Securities.  US persons are no longer subject to the restriction that any divestment of holdings in PdVSA Securities must be to non-US persons.

Separately, General License 5M authorizes transactions related to the provision of financing for, and other dealings in, certain PdVSA 2020 8.5 percent bonds after January 18, 2024 (such transactions are prohibited until that date).  General License 5M replaces General License 5L, which previously authorized dealings in PdVSA 2020 8.5 percent bonds after October 20, 2023.  US persons must now wait until at least January 18, 2024 to engage in any transactions in connection with the PdVSA 2020 8.5 percent bonds unless specifically authorized by OFAC.

Other Venezuela General Licenses

Also on October 18, 2023, OFAC issued the following General Licenses:

• General License 43 authorizes all transactions otherwise prohibited by US sanctions on Venezuela with Minerven and its subsidiaries. This General License does not authorize any other transactions involving any other sanctioned person.
• General License 3I authorizes all transactions related to the provision of financing for, and other dealings in the specific sovereign bonds listed in General License 3I (GL 3I Bonds), unless otherwise prohibited. Sanctions relating to trading in the primary Venezuelan bond market remain in place.  General License 3I replaces existing General License 3H, which did not authorize US persons to purchase or invest in, or to facilitate the purchase of or investment in, directly or indirectly, the bonds specified in General License 3H.  Under General License 3I, US persons are no longer subject to the restriction that any divestment of holdings in GL 3I Bonds must be to non-US persons.

OFAC has stated that it is prepared to amend or revoke the foregoing General Licenses at any time should the US determine that representatives of Venezuelan President Maduro have failed to follow through on their commitments to the Unitary Platform.

US Steps Up Enforcement of Sanctions on Russian Oil

In December 2022, the Group of Seven countries (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) (G7), the European Union, and Australia (the Price Cap Coalition) implemented a “price cap” on Russian-origin oil.  OFAC implemented US sanctions through a ban on the provision of maritime shipment and related services for any Russian-origin oil bought or sold above the price cap.  Our coverage of these sanctions is available here.

Separate from the easing of sanctions on Venezuela’s oil and gas sector, recent enforcement actions highlight that OFAC has stepped up enforcement of sanctions on Russian-origin oil.  These efforts follow reports that, since the initial implementation of the price cap, an increasing volume of Russian-origin oil is being sold above the price cap and advisories from sanctions authorities on suspected sanctions evasion with respect to the price cap.  On April 17, 2023, OFAC issued an alert advising maritime oil industry participants of suspected sanctions evasion activities particularly involving oil exported through the Eastern Siberia Pacific Ocean (ESPO) pipeline and ports on the eastern coast of the Russian Federation.  On October 12, 2023, the Price Cap Coalition issued an advisory for the maritime oil industry to provide recommendations on best practices for detecting sanctions evasion and meeting sanctions compliance obligations, noting that shippers are using older, riskier vessels and foregoing western insurance products in order to ship Russian oil in violation of the price cap.

On October 12, 2023 OFAC imposed the first set of blocking sanctions on market participants for violating the price cap sanctions on Russian oil.  OFAC sanctioned two oil tankers and their registered owners for transporting Russia-origin crude oil determined to have been sold above the price cap.  The sanctioned vessels are Yasa Golden Bosphorus and SCF Primorye, and are owned by, respectively, Ice Pearl Navigation Corp, a Turkey-based entity, and Lumber Marine SA, a UAE-based entity.  According to OFAC, both vessels were found to have used US maritime services in the shipment of Russian oil sold above the price cap, indicating US persons may separately face enforcement actions related to the two vessels. 

On November 16, 2023, OFAC imposed blocking sanctions on three more UAE-based vessels (the Kazan, Ligovsky Prospect, and NS Century) and their registered owners and stated that OFAC remains committed to reducing oil revenues to the Russian government through imposition of the price cap sanctions.  Media reports indicate that a larger investigation by OFAC into suspected sanctions violations by US companies involving as many as 100 vessels may be underway.

Takeaways for Global Oil Market Participants

The easing of sanctions on Venezuela’s oil and gas sector is a reversal of US sanctions that have sharply cut Venezuela oil production since 2019.  This easing could bring more supply to the global market, but it is important to note both the short duration of the Oil and Gas GL and its limitations.  Given OFAC’s position that further extension of the Oil and Gas GL will depend on the commitments towards free and fair elections, the risk that sanctions on Venezuela may be reimposed, together with the risk of corruption, which, in conjunction with the threats to democracy, led to the imposition of sanctions in the first place, should be carefully assessed by companies considering transactions involving Venezuela’s oil sector.  These companies should closely monitor OFAC’s implementation of the Venezuela sanctions regime for further developments and develop possible exit strategies.  An additional challenge is that, for these same reasons, the banking industry may be reluctant to engage in these transactions notwithstanding the Oil and Gas GL.  Meanwhile, OFAC’s recent enforcement efforts with respect to the price cap on Russian oil appears to be the start of a broader crackdown on suspected sanctions evasion with respect to Russian oil.  OFAC’s recent actions with respect to US sanctions on the Venezuelan and Russian oil sectors represent independent developments in the sanctions landscape.  Taken together, however, these developments demonstrate the complex sanctions compliance challenges facing companies operating in the global oil market.

Hunton Andrews Kurth LLP will continue to monitor closely the development of these and other US sanctions matters.  Please contact us if you have any questions or would like further information regarding these developments or other questions related to US sanctions programs or sanctions compliance.