Overview of Sanctions Action
On April 17, the Department of the Treasury’s Office of Foreign Assets Control (OFAC) released General License (GL) 44A, requiring the wind down of business transactions with Venezuela’s state-owned energy company Petróleos de Venezuela, S.A. (PdVSA). The move effectively allowed General License 44 (GL44) to expire and obligates companies engaged with PdVSA to wind down previously authorized operations in Venezuela by 12:01 a.m. ET on May 31, 2024. The Treasury Department also announced its willingness to allow for temporary sanctions relief as businesses work to divest their operations with PdVSA. The Biden administration is unlikely to seek a renewal of GL44, unless the Maduro government adheres to the conditions of the Barbados Agreement, allowing for all opposition candidates to run unencumbered in the next presidential election.
The release of GL44A, “Authorizing the Wind Down of Transactions Related to Oil or Gas Sector Operations in Venezuela,” specifically applies to: the production, lifting, sale and exportation of oil or gas from Venezuela as well as related goods and services; the payment for goods and services related to the Venezuelan oil sector; and the delivery of Venezuelan oil and gas to creditors of the Venezuelan Government, including the creditors of entities associated with PdVSA. GL44A will not consider the entering of new business nor new investments as a wind down of transactions authorized under GL44.
In October 2023, GL44 was established as part of the Barbados Agreement, which included an easing of energy industry-related sanctions in exchange for free and fair elections in Venezuela. Progress was made under the Barbados Agreement following the December prisoner swap between the United States and Venezuela as well as the announcement that the Venezuelan election would occur on July 28. However, over the past few months, Venezuelan President Nicolás Maduro and the Venezuelan government have blocked prominent opposition party members from participating in the presidential election.
On Jan. 26, the Venezuelan Supreme Court released a decision disqualifying lead opposition candidate María Corina Machado from participating in the election and the Venezuelan government later blocked Machado’s alternate, Dr. Corina Yoris, from registering for the ballot. The Maduro regime has also issued arrest warrants for other opposition candidates as well as individuals involved in their campaigns. The Biden administration decided to reimpose sanctions on PdVSA and the Venezuelan energy sector because of these political intimidation tactics and other signs of interference and manipulation of the upcoming July 28 presidential election. Biden administration officials have also acknowledged other concerns about Venezuela, such as the impact GL44A will have on the global energy industry and the flow of migrants from Venezuela, when discussing the final determination to reimpose sanctions.
Impact to Energy Industry
The Biden administration was initially hesitant to revoke GL44 and the benefits it provided because of concerns that the reimposition of sanctions could increase global oil prices, as well as increase economic pressure on Venezuela that could create additional migratory pressure. It is expected that GL44A will have an economic impact on Venezuela, and likely the wind down of investments in Venezuela’s energy sector will result in declines in the country’s oil production. The reimposition of sanctions means Venezuela and PdVSA can no longer access the U.S. financial system, which some analysts speculate will push Maduro closer to Russia, Cuba, China and even Iran to keep the Venezuelan economy afloat. It will take time for the impact of GL44A and the resulting reimposition of sanctions to be evident, but we expect the Venezuelan energy sector will once again slip back into disarray as PdVSA will not have the funds needed to invest in it.
This move by the Biden administration could have domestic political ramifications, since it has the potential to increase global oil prices and corresponding domestic gasoline prices, as well as create a situation where more Venezuelans seek to migrate legally or illegally to the United States or the surrounding countries.
Members of Congress, including Sen. Marco Rubio (R-FL), Rep. Maria Elvira Salazar (R-FL), Florida Republicans and others, have criticized the Biden administration for being “too soft on Venezuela” and called for the reimposition of sanctions since the establishment of the Barbados Agreement. They have also expressed concerns about Maduro’s connection to Russia, Iran, Cuba, China and other U.S. adversaries. Calls for stronger sanctions also came as the Maduro regime expelled the UN Human Rights Agency in February while continuing to advance territorial claims over the resource-rich Essequibo region in Guyana.
Prior to the Treasury Department’s OFAC release, we understand several larger international investors began to reduce their purchases of Venezuelan oil, crude and other petrochemical products in expectation of the expiration of GL44. Many of these firms are now considering pursuing individual licenses from OFAC in order to stay engaged with PdVSA to continue their operations in Venezuela. Brownstein is uniquely positioned to assist firms on these Venezuelan issues. For more information about OFAC’s determination and how to complete the OFAC application process, please contact one of the authors of this alert.
THIS DOCUMENT IS INTENDED TO PROVIDE YOU WITH GENERAL INFORMATION REGARDING SANCTIONS ON VENEZULA. THE CONTENTS OF THIS DOCUMENT ARE NOT INTENDED TO PROVIDE SPECIFIC LEGAL ADVICE. IF YOU HAVE ANY QUESTIONS ABOUT THE CONTENTS OF THIS DOCUMENT OR IF YOU NEED LEGAL ADVICE AS TO AN ISSUE, PLEASE CONTACT THE ATTORNEYS LISTED OR YOUR REGULAR BROWNSTEIN HYATT FARBER SCHRECK, LLP ATTORNEY. THIS COMMUNICATION MAY BE CONSIDERED ADVERTISING IN SOME JURISDICTIONS.