The United States has eased its sanctions on Venezuela following an election deal. This follows four years of sanctions on its oil and gas industry, restricting the South American oil giant’s production and export levels. Despite the tough restrictions on the country’s energy industry, Venezuela continued to produce and export its crude using secret channels, to limited success. Sanctions, the poor state of the economy, and the mismanagement of the oil industry have led to operational failures, with many of Venezuela’s oilfields dramatically underperforming. So, could the easing of sanctions on Venezuelan energy finally turn the industry around?
Just a couple of decades ago, Venezuela was producing over 3 million bpd of oil, before widespread corruption and a fall in the price of oil devastated the country’s energy industry, with a severe knock-on effect on its economy. Adding to its challenges, former U.S. President Trump introduced sanctions on Venezuelan oil and gas following the inauguration of President Nicolas Maduro in 2019.
The sanctions on the Venezuelan oil industry brought production to a grinding halt, from which some say it may never recover. Several oil companies pulled out of the Latin American oil major, and many operations were left abandoned, no longer financially viable to maintain. However, as Venezuela looked to repair its broken economy, and the easing of sanctions looked ever closer, under President Biden, it began to rebuild its oil industry and trade relations.
Since 2021, Venezuela has been working in partnership with Iran, which also has U.S. sanctions imposed on its oil industry, to mutually assist the development of their energy sectors. The two powers have worked hand-in-hand to circumvent sanctions on their oil and gas industries with support from China, which bought energy from both countries by using alternative routes and ghost ships to transport sanctioned oil. Venezuela agreed to trade its oil for Iranian condensate, which was in short supply and is needed to dilute heavy Venezuelan crude. In May 2022, Iran signed an agreement with Venezuela to renovate the El Palito refinery.
The state-owned Petróleos de Venezuela (PDVSA) and its joint ventures exported around 616,540 bpd of crude and refined products in 2022, a 2.5 percent decrease from 2021. Nevertheless, Venezuela’s ports, oilfields and refineries are in extremely poor condition. Further, Russia has become a major competitor for exports to China, with Putin offering highly discounted crude to any country that will take it, following U.S. and European sanctions on Russian energy.
Francisco Monaldi, a Latin American energy expert at Rice University's Baker Institute stated, “Despite the increased Iranian help, the decline in net exports results from a combination of production stagnation and the increasing competition of Russian exports in the Chinese black market.”
This week, the Biden administration broadly eased sanctions on Venezuelan oil in response to an agreement achieved between Venezuela’s government and opposition parties for the 2024 presidential election. The U.S. Treasury Department issued a new general license, allowing it to produce and export crude to markets of its choice for the next six months with no limitation. However, the deal will only stay in place if President Maduro starts to lift bans on opposition presidential candidates, as well as release prisoners and “wrongfully detained” U.S. citizens.
The U.S. decided to ease sanctions to boost the global oil output and reduce high oil prices caused by sanctions on Russia and OPEC+ decisions to cut output across member states. It means that the Venezuelan oil industry is once again open to foreign investment. This could lead to dozens of oil companies with frozen or reduced operations in Venezuela to recommence operations.
But Venezuela’s oil industry was hit hard by several years of sanctions and a failing economy, meaning that it is unlikely to be able to effectively offset OPEC+ reductions any time soon. There is strong pressure on the PDVSA to make a quick comeback and to provide competitively-priced oil to the market. This year, oil production in Venezuela has averaged 780,000 bpd, higher than the 2022 average of 716,000 bpd. However, the South American country is far from achieving its 2024 average production aim of 1.7 million bpd. Only one rig is in operation in Venezuela, compared to over 80 in 2014, and much of the country’s infrastructure is in a dire state.
To get anywhere close to its production aim, Venezuela will require significant investment for new drilling rigs, new infrastructure replacements for refineries, flow stations and crude upgraders and a reliable power supply. This will be no easy feat considering the uncertainty companies face in investing in Venezuela. There is no guarantee that the U.S. will not reintroduce sanctions, with the success of investments in the country’s oil sector largely relying on the actions of President Maduro, who has been unwilling to cooperate with the U.S. in the past. However, if oil majors are willing to take the risk and recommence operations in Venezuela, it may just pay off.
By Felicity Bradstock for Oilprice.com
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