SCENARIOS-Possible next steps after U.S. sanctions on PDVSA

CARACAS Wed May 25, 2011 1:12pm EDT

CARACAS May 25 (Reuters) - Venezuelan President Hugo Chavez wants to respond robustly to sanctions on oil company PDVSA by his ideological enemy, the United States.

Yet if he goes too far, he risks billions of dollars of oil trade and financing as the economy emerges from recession and he prepares a re-election bid. (Full coverage [ID:nUSAPDVSA])

Here are some scenarios of possible consequences of Washington's decision this week to punish Venezuela for sending two shipments of a gasoline additive to Iran.

CHAVEZ LIMITS HIS RESPONSE TO STICK-WAVING

Quite likely. After a few days of angry rhetoric and perhaps threats to limit oil shipments to U.S. clients, Chavez could quietly drop the subject. The president has already been in office 12 years, but is preparing a re-election bid for next year and may want to avoid the distraction of a protracted spat with Washington.

However, Chavez the candidate will take advantage of the perception of aggression by the United States to bring some people over to his side -- nobody likes to feel bullied. This will help him sell the idea that he is the natural, nationalist defender of Venezuela's sovereignty and independence.

CHAVEZ STOPS ALL OIL SHIPMENTS TO THE UNITED STATES

Highly unlikely. Although Venezuela has been diversifying oil customers in recent years, the United States is still its No. 1 client, and the Gulf Coast is home to many refineries designed to process its sour crude. It also pays in cash.

Over the years, Chavez has made serial threats to "send not one more drop" to the United States but for all his noisy rhetoric, he knows who pays the bills of his socialist revolution.

The former soldier, who first sought power in a coup almost 20 years ago, has since won numerous elections, mostly because of generous social spending that drives growth.

With an eye on the 2012 presidential vote, Chavez wants a fledgling economic recovery to flourish and he knows public spending of oil income is vital for that to occur.

CHAVEZ AVOIDS BREAKING U.S. SANCTIONS ON IRAN IN FUTURE

This is the billion dollar question. In the next few days, we can expect a lot of rhetoric about Iran being a brother and Venezuela's right to choose its own friends.

But PDVSA may well think twice before risking shipping products to Iran that the U.S. sanctions prohibit.

Tuesday's measures were largely symbolic. Next time, U.S. President Barack Obama will be under pressure to get tough and could limit PDVSA's access to U.S. financial institutions. This would especially hurt PDVSA's U.S. subsidiary, CITGO.

The Venezuelan company has issued about $6 billion in bonds in the first six months of the year, and will likely issue more as the year goes on, as much to help contain Venezuela's exchange rate as for its financing needs.

With the election looming next year, Chavez will want to steer well clear of a freeze on funds for his revolutionary goals.

VENEZUELA MOVES CLOSER TO IRAN AND MORE SANCTIONS KICK IN

Possible. This is the worst-case scenario for both Venezuela and the United States. Tuesday's measures were more bark than bite, but the two countries are now playing a game with very high economic stakes.

Venezuela and Iran have signed a pre-agreement to give PDVSA a 10 percent stake in Iran's South Pars natural gas project.

A February 2011 report from the U.S. Congressional Research Service concluded that the deal, if it happens, would "appear to subject PDVSA to sanctions."

A second round of sanctions, which are already authorized by the White House but not yet applied to Venezuela, could easily affect PDVSA financing and exports. They could also freeze CITGO's assets including three large refineries, with serious consequences for oil markets.

Chavez's pragmatic streak is probably strong enough to stop him taking this route, but he may well gamble that the United States would never go so far as to risk its oil supplies and that the political benefits of defiance outweigh the risk.

PDVSA LIMITS SHIPMENTS TO SOME CLIENTS

Possible. Oil Minister Rafael Ramirez said this is an option being considered. Venezuela has joint-venture refineries such as the 192,500 barrel-per-day Chalmette in Louisiana, which it shares with Exxon Mobil Corp (XOM.N).

It also operates a 350,000 bpd refinery with Hess Corp HESS.N on the Virgin Islands and the smaller Merey Sweeney unit with ConocoPhillips (COP.N).

Relations are already very strained with Conoco and Exxon, who have arbitration cases against Venezuela for the nationalization of oil projects four years ago. PDVSA could also try to sell more oil on the spot market to traders who deal principally with Europe and Asia in a bid to squeeze U.S. oil supplies.

VENEZUELA IMPOSES SANCTIONS ON U.S. COMPANIES

Far-fetched. But not totally impossible -- Chavez could choose to limit relations with certain U.S. companies who make money in Venezuela.

Despite years of deteriorating relations, many U.S. firms still operate in the South American OPEC member, including a number of large oil service companies such as Baker Hughes and Schlumberger.

It is hard to imagine PDVSA wanting to end its ties to these companies, since they provide rigs and drilling vital to its operations.

Another option is a symbolic measure to prevent a company such as Exxon Mobil from doing business with Venezuela. The company has been particularly aggressive with PDVSA in the past, seeking and briefly winning a $12 billion asset freeze a few years back.

It is also seen by Chavez as essentially an extension of the U.S. government. Such a move would be similar to the U.S. measures against PDVSA, since Exxon does no business in Venezuela and has no desire to do so while Chavez remains in charge.

Companies such as Chevron (CVX.N), which is actively investing in Venezuela's vast tar-like crude reserves near the Orinoco river, are almost certainly safe from retaliation. However, along with the service companies, they may be at risk from the U.S. sanctions that some analysts believe limit the use of American components in the Venezuela oil industry.

VENEZUELAN BONDS TAKE A HAMMERING

Depends on all the above. On Tuesday, prices for Venezuelan debt briefly plunged after news of the sanctions broke. Once it was clear the measures would not affect crude sales for now, and Venezuela's ability to pay, the bonds recovered.

That could change if the conflict with Washington escalates and the market senses tougher measures are imminent. (Additional reporting by Marianna Parraga; Editing by Andrew Cawthorne and Doina Chiacu)

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