Washington — The US is preparing to sanction another Rosneft affiliate for trading Venezuelan crude oil, the latest step in the Trump administration's effort to starve the Maduro regime of oil revenue, sources familiar with the plans told S&P Global Platts on Wednesday.

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The US Treasury Department is expected to sanction TNK Trading, a Switzerland-based affiliate of the Russian state oil company, which has been exporting an increasing amount of Venezuelan crude this year as the US prepared to sanction Rosneft Trading SA, another Swiss affiliate of Rosneft which had moved the bulk of Venezuelan crude exports in 2019. The US announced sanctions on Rosneft Trading on February 18, giving companies 90 days to wind down activities with the company.

The Trump administration is likely to continue to sanction Rosneft affiliates if the state oil company continues to attempt to trade Venezuelan crude outside the reach of US sanctions, sources said.

"Rosneft whack-a-mole has begun," one source said Wednesday.

Sources said it was unclear when the sanctions may be imposed, but said, like Rosneft Trading, TNK Trading would be added to Treasury's Specially Designated Nationals list, which effectively blacklists a company from the US financial system. Sources expected the sanctions to be announced by early March.

Spokespeople for the US Treasury and State Departments declined to comment Wednesday.

"We don't preview sanctions actions," a State Department spokesperson said.

Rosneft did not respond to a request for comment, but has previously claimed its Venezuelan crude trades were repayments of a $6.5 billion loan to PDVSA, Venezuela's state oil company. As of Q3 2019, $800 million remained on that loan, according to Rosneft.

SANCTIONS STRATEGY?

The now-sanctioned Rosneft Trading had been reducing its movements of Venezuelan crude in recent weeks, with the trading affiliate lifting 692,000 b/d of Venezuelan crude in December and then only 321,000 from January through mid-February 2020, according to David Voght, managing director of IPD Latin America.

"Rosneft clearly strategized because it was pretty clear that their extensive support of PDVSA wasn't going to fly with the US government," Voght said. "Before they were sanctioned they had already started to shift their trading to a separate entity."

That entity, the potentially soon-to-be-sanctioned TNK Trading, accounted for more than 26% of Venezuelan crude exports out of Venezuela's Jose loading terminal in early 2020. Rosneft Trading, which had accounted for about 70% of all crude exports out of the key port in second half of 2019, accounted for just over 40% through mid-February 2020, according to Voght.

According to internal PDVSA reports seen by Platts, TNK Trading bought 13.5 million barrels of Merey 16 crude oil from PDVSA in January, about 67% of the total crude volume exported out of PDVSA that month. By comparison, Rosneft Trading which had been leading crude oil purchases from PDVSA in 2019, was only assigned a shipment of 1.9 million barrels of Merey 16 crude in January, according to the reports.

Even with a 90-day wind down period, the biggest buyers of Venezuelan crude, including India's Reliance, will likely cease buying Venezuelan crude from Rosneft Trading, Voght said.

"Every time new sanctions are issued we've seen an immediate over compliance in the market. The market starts feel out what's next as the dust settles," he said.

Even Chinese independent refiners may discontinue their purchases of Venezuelan crude. A dip in demand due to the ongoing coronavirus may contribute to this decision, he said.

A PRODUCTION BOTTOM?

Venezuelan oil output averaged 2 million b/d in January 2017, but fell as low as 650,000 b/d in October 2019 as US sanctions imposed in January 2019 took full effect, according to the US Energy Information Administration. Venezuelan oil output averaged 820,000 b/d in January, according to the latest S&P Global Platts OPEC survey.

Sanctions on Rosneft affiliates could cause a historic, near-term decline in Venezuela's oil output.

Platts Analytics forecasts Venezuelan oil output to fall to 550,000 b/d by the end of this year, largely due to the new sanctions on Rosneft Trading.

Scott Modell, Rapidan Energy Group's managing director and head of geopolitical risk service, said he expects Venezuelan oil output to fall as low as 500,000 b/d. Modell said China will likely continue to receive about 200,000 b/d from joint venture projects and loan payments, Chinese teapot refiners may take another 100,000 to 200,000 b/d, Cuba will receive around 50,000 b/d, joint ventures with Rosneft will likely produce another 100,000 b/d and a portion will be refined domestically.

But with the Trump administration increasing pressure on the Maduro regime, analysts said it is unclear just how far the South American country's oil output may fall.

"In terms of a rock bottom, there are potential scenarios in which Venezuelan oil production goes all the way down to zero," said Lisa Viscidi, director of energy, climate change and extractive industries at Inter-American Dialogue.

Platts Analytics believes that the Trump administration will likely ramp up sanctions ahead of November's presidential election, but with less of a priority placed on them in 2021, Venezuelan oil output is forecast to increase to 650,000 b/d by the end of next year.