A deep global energy crisis, which is sharply impacting Western Europe, is forcing countries around the world to find additional sources of oil and natural gas. Severe fossil fuel supply constraints emerged due to a lack of drilling caused by nearly a decade of soft prices, which was exacerbated by the COVID-19 pandemic and Russia’s invasion of Ukraine. An October 2022 decision by the OPEC Plus cartel to slash production by 2 million barrels per day amplified the global oil shortage. Soaring energy prices are threatening the world’s post-pandemic economic recovery, bolstering the sense of urgency associated with obtaining additional supplies of fossil fuels. It is the pariah state of Venezuela which possesses the world’s largest oil reserves of 303 billion barrels and was once a major petroleum exporter that is viewed as a possible solution. For this reason, there is considerable speculation U.S. President Joe Biden will ease sanctions allowing Caracas to officially export oil and for western energy companies to operate in the OPEC Member. Venezuela was once one of the world’s largest oil producers and exporters. Before former President Hugo Chavez assumed office in 1999, the country pumped 3.5 million barrels per day and exported 3.1 million barrels, or 98% of its output, during 1998. Since then, as western energy companies fled Chavez’s heavy-handed nationalization of oil assets and ever stricter U.S. sanctions a bit deeper, Venezuela’s oil industry collapsed. National oil company PDVSA and its operations are now merely a shadow of what they used to be. According to the latest OPEC report, the pariah state only produced an average of 666,000 barrels of oil per day during September 2022 and 636,000 for 2021. The state of Venezuela’s oil industry is so parlous that refineries run intermittently, environmentally damaging oil spills from faulty pipelines as well as storage facilities are commonplace, and production is less than a quarter of what it once was.
Obtaining access to Venezuela’s vast 303 billion barrels of oil reserves, which are the world’s largest, makes considerable sense. Many U.S. Gulf Coast and Mid-west refineries are configured to process heavy crude oil grades. That feedstock can be obtained at a considerable discount to the prevailing market prices for lighter, sweeter grades, the comprise the majority of U.S. petroleum production, providing a significant economic incentive to refine heavier grades. Venezuela, prior to Chavez’s ascension to power, was a key supplier of heavy crude oil feedstock for U.S. refineries shipping 627 million barrels to the U.S. during 1998 alone. Those volumes fell steadily as Washington gradually imposed tougher sanctions on Venezuela, falling to 218 million barrels for 2018, the last year before Trump’s heavy-handed sanctions blocked all legitimate Venezuelan petroleum exports.
Source: U.S. EIA.
By 2019, when annual oil imports from Venezuela totaled a paltry 33.7 million barrels, those U.S refineries configured to process heavy oil grades were forced to look to Canada and Mexico.
To unlock Venezuela’s vast oil reserves and rebuild petroleum infrastructure to significantly expand production, substantial investment will be required, with it estimated that it will take $250 billion to return output to pre-Chavez volumes. The only energy companies capable of providing the substantial investment, technology and skilled labor to rebuild Venezuela’s shattered oil industry are Western energy majors. Nearly all Western energy companies operating in Venezuela when Chavez was inaugurated in 1999 have gradually exited the strife-torn country. Many, like ExxonMobil and ConocoPhillips, left when Chavez seized energy assets as he nationalized industries during the 2000s, while others chose to leave because they found it increasingly difficult to operate profitably as Washington ratcheted-up sanctions against the hostile socialist regime. French and Norwegian super-majors TotalEnergies and Equinor were among the last to leave, transferring their stakes in Petrocedeno to PDVSA in July 2021. While Equinor did not disclose its loss, TotalEnergies announced a $1.38 billion capital loss. According to Reuters, in October 2022, Caracas gave the remaining foreign energy companies operating in Venezuela authority to abandon their joint ventures with PDVSA on the condition that they forgive all debts and unpaid dividends. Those are the terms that TotalEnergies, Equinor and Inpex accepted when exiting Venezuela.
U.S. oil super-major Chevron, which has a long history of operating in Latin America, is the last remaining major international oil company with a presence in Venezuela.
The U.S. energy super major holds interests in five projects with PDVSA. These are the Petroboscan, Petroindependiente, Petropiar, Petroindeopendiencia and Loran operations.
Before Trump ratcheted up sanctions in January 2019, Chevron’s share of production from those assets for 2018 was 44,000 barrels per day. The additional harsh sanctions imposed by the White House prevented Chevron from conducting operations in Venezuela except for undertaking maintenance on its operations. As a result, the super-major, in 2020, took a $2.6 billion impairment on the value of those assets.
Reputedly, during early 2022 Chevron proposed being granted authorization by the White House to receive Venezuela's oil cargoes to recoup the unpaid debt. That did not occur, but U.S. Treasury did broaden the scope of Chevron’s license allowing the company to negotiate with PDVSA but not enter into agreements. Ostensibly, Chevron has since asked U.S. Treasury to relax the conditions of its Venezuelan license to allow the super-major to take control of the four joint ventures it shares with PDVSA. Chevron’s operations in Venezuela have become embroiled in Washington’s quest to oust Maduro whose 2018 reelection was not recognized by the White House. For a range of reasons recalibrating sanctions against Venezuela is the only logical outcome.
The policy of maximum pressure implemented by the Trump White House, including recognizing Juan Guaido as the legitimate interim president of Venezuela, has failed. Maduro’s position appears stronger than ever. Venezuela’s economic collapse appears to have bottomed, with 2021 GDP expanding by at least 0.5% according to the IMF and is forecast to grow by 6% during 2022. That is the first year Venezuela has experienced economic growth since 2013, when GDP grew 1.3%. Maduro, and his allies, have effectively sidelined Guaido, who lost his parliamentary seat in 2020, resulting in the European Union no longer recognizing the opposition leader as Venezuela’s legitimate interim president. The OPEC member’s fractured opposition has stated it will no longer support his U.S.-backed interim government. Those developments make it incredibly difficult for the White House to extract the concessions from Maduro that it requires to ease sanctions.
Recent White House diplomatic missions to Caracas, the most notable occurring during March 2022, drew considerable indignation from critics within the U.S. as well as Latin America. U.S. senators, according to Reuters, last month expressed skepticism over easing sanctions. This occurred despite Biden claiming that the March 2022 mission was an attempt to free illegally detained U.S. citizens, two of whom were released. Lawmakers in the U.S. and Latin America viewed the first delegation as a cynical attempt to gain access to Venezuela’s vast oil reserves. This is because it occurred at a time when spiraling energy prices in Western Europe and the U.S., after Moscow’s invasion of Ukraine, threatened to derail the global post-pandemic economic recovery. In fact, U.S. gasoline prices surged from an average of $3.41 per gallon at the start of 2022 to hit a record high of over $5.03 in June 2022, placing substantial pressure on an increasingly embattled president during a crucial congressional election year.
Aside from those visits stirring up significant opposition to Washington easing sanctions, there was also considerable fallout for Guaido. The initial diplomatic delegation occurred without his knowledge or consent, thereby damaging any remaining credibility held by the U.S.-backed interim president seeing significant elements within Venezuela’s opposition further distance themselves from Guaido and his Washington-backed shadow government. Those events all present considerable hurdles to the Whitehouse if it is to ease sanctions on Venezuela. That is before Maduro’s considerable resistance to making any concessions to the U.S. is accounted for, with Venezuela’s autocratic leader already refusing to allow oil exports to Europe, which could only be used to repay PDVSA’s outstanding debt.
By Matthew Smith for Oilprice.com
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