After Russia’s president Vladimir Putin launched the invasion of Ukraine, the U.S. along with many of Washington’s allies banned imports of Russian crude oil. This caused energy prices to soar seeing the international Brent price rise to over $129 per barrel during March 2022, its highest level since 2008. Spiraling domestic gasoline prices saw President Joe Biden search for alternate supplies of oil. The White House reopened diplomatic relations with Venezuela which had been suspended since January 2019 when President Trump ratcheted-up sanctions to unseat dictatorial President Nicolas Maduro. This sparked furor with some pundits viewing it as a cynical ploy to access Venezuela’s vast oil reserves at a politically critical moment. Since then, the White House has eased sanctions by authorizing energy supermajor Chevron to extract and export oil from Venezuela which it hopes will ease the energy crisis.
It is easy to see the attraction of Venezuelan crude oil for a White House battling rampant inflation and sharply higher oil prices which have caused prices, especially for gasoline and diesel to spiral higher. The pariah South American country, which was a founding member of OPEC, possesses the world’s largest oil reserves totaling around 304 billion barrels and a major oil exporter. There has always been strong demand for Venezuelan petroleum in the U.S. with many Gulf Coast and Mid-West refineries configured to process the Latin American country’s heavier grade oil. For those reasons, prior to Washington imposing strict sanctions on the pariah Maduro regime, Venezuela was a major source of U.S. oil imports.
During 2016, Venezuela was the third largest exporter of petroleum to the U.S. behind Canada and Saudi Arabia. The crisis-riven Latin American country shipped a total of 291 million barrels of oil to the U.S. which equates to an average of 796,000 barrels per day, equivalent to eight percent of all petroleum imported by the world’s second largest consumer of fossil fuels. By 2019, U.S. imports of Venezuelan petroleum had fallen to 33.7 million barrels for the entire year, then nothing for 2020 and 2021, as the harsh economic sanctions imposed by the Trump administration cut Caracas off from global markets. This caused the economic decline, described as the worst to occur during modern times outside of war, to accelerate adding to an already overwhelming humanitarian crisis where over seven million Venezuelans have fled their homeland.
While President Biden made minor concessions to Maduro, which were rejected by the Venezuelan leader like allowing limited oil exports to Europe, it appeared that little progress to materially ease sanctions was being made. Nonetheless, after the autocratic Maduro regime announced a resumption of negotiations with the opposition in Mexico City in November 2022, Washington made a significant concession by allowing Chevron to restart operations in Venezuela. This is the first material change to U.S. policy on Venezuela since Trump ratcheted-up sanctions in January 2019. The U.S. Department of the Treasury, on 26 November 2022, announced it had issued a six-month license authorizing oil supermajor Chevron to resume extracting Venezuelan petroleum and ship it to the U.S. as long as it is first sold to the supermajor.
General License NO.41 now allows Chevron to extract petroleum from its four joint ventures with Venezuelan national oil company PDVSA, but there are significant limitations placed on those activities. The U.S. supermajor is unable to engage in any transactions that make payments, including taxes and royalties, to Venezuela’s government, PDVSA or related entities and any entity where the owners operate out of the Russian Federation. Chevron is prevented from expanding its operations in Venezuela beyond those that existed as of 28 January 2019, while the petroleum produced from the joint ventures with PDVSA can only be exported to the U.S. Despite those limitations the oil supermajor chartered a tanker to pick up a cargo of Venezuelan oil and had another deliver crucial diluent to its operations in the strife-torn South American country.
Those far-reaching restrictions will impede the urgent reconstruction of Venezuela’s economic backbone, its petroleum industry. Two-decades of corruption, malfeasance, lack of investment in critical maintenance and neglect caused vital energy infrastructure to corrode so severely that Venezuela’s oil production continued to plunge hitting a multidecade low during 2020. This occurred despite Maduro’s and oil minister Tareck El Aissami’s frequent claims that Venezuela’s oil production was recovering, and the OPEC member is open for foreign energy investment (Spanish).
During January 2021, Maduro stated by year’s end national oil company PDVSA would be pumping 1.5 million barrels per day which was dialed down to one million barrels daily toward the end of the year, yet Venezuela only produced an average of 636,000 barrels daily according to Caracas. Maduro made a similar pronouncement during (Spanish) January 2022 asserting that PDVSA’s production had hit one million barrels per day and will reach two million barrels per day by the end of 2022. If achieved that will see Venezuela’s oil production volumes return to 2017 levels when U.S. sanctions were far less strict, and Caracas could still access global energy and capital markets.
Nevertheless, it was yet another ambitious claim that proved to be false. November 2022 Venezuelan government data, provided by OPEC, shows this target was not achieved with the near-failed state only pumping an average of 693,000 barrels per day.
The inability to achieve the desired production volume becomes even clearer when it is considered that for the 11 months ending 30 November 2022 Venezuela only pumped an average of 721,455 barrels of oil per day. Even with Chevron recommencing lifting oil in Venezuela, the county’s production will not grow at the rate Caracas needs to rebuild a shattered oil dependent economy and generate the capital required to reconstruct heavily corroded industry infrastructure.
For Venezuela’s oil production to reach two million barrels per day or more Washington must make material changes to existing sanctions so the Maduro regime as well as PDVSA can access international oil and financial markets. Significant amounts of capital are required to rebuild Venezuela’s hydrocarbon sector which has been devastated by two decades of mismanagement, malfeasance, and a lack of investment in crucial infrastructure maintenance. It has been estimated that it will take an investment of $58 billion to $250 billion and nearly a decade to reconstruct Venezuela’s petroleum industry for production return to pre-Chavez volumes of 2.5 million to 3.5 million barrels of oil per day. That significant investment must include the considerable amounts of capital required to rebuild dilapidated vital infrastructure. While an overly optimistic PDVSA believes $58 billion is sufficient, outside experts are of the view it will take significantly larger amounts. Venezuela energy export Francisco Monaldi, of the Baker Institute, estimates it will take $110 billion over 10-years, whereas prominent Venezuelan economist Jose Toro Hardy has calculated it will take $250 billion.
If Caracas is incapable of accessing global financial markets, PDVSA is incapable of obtaining the necessary investment to rebuild shattered energy infrastructure. The restrictions preventing Chevron from making payments to Venezuela’s government or PDVSA for the oil it extracts from joint ventures with the state-controlled energy company prevents Caracas from obtaining urgently needed revenue at a critical time. That along with strict U.S. sanctions remaining in place will continue deterring urgently required investment in Venezuela’s petroleum industry. For these reasons, the amended license granted to Chevron by the U.S. Treasury is of little to no benefit to Caracas, although it will allow the U.S. energy supermajor to recoup some of the investment it has made in joint ventures with PDVSA.
By Matthew Smith For Oilprice.com
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