Trump Will Eventually Overpower Maduro

There has been a remarkable lull over Venezuela - the country as a whole is still unsure what step to take next, the international community has tired a bit of the issue, whilst mainstream media switched over to the prospects of Boeing and the botched Brexit campaign. Yet Venezuela's national oil company PDVSA finds itself in an increasingly complex situation, seeing its list of potential counterparties narrow by the day, its finances wane and its operations exacerbated by a week-long blackout. Whatever your political backgrounds and preferences, you should look out for President Nicolas Maduro's actions as he approaches the last months of his tenure. Maduro's ouster now seems as certain as death and taxes, however, his departure will not make life easier for anyone.

The Venezuelan opposition presented its vision of Venezuela's future in the post-Maduro era, which should appeal to anyone advocating free trade. The comprehensive oil reform draft created in the recent days sets out the creation of an independent hydrocarbon management agency that would kick off a Mexico-styled Round Zero during which PDVSA, about to remain in state hands, would pick the upstream assets it wishes to retain. Most notably the oil bill would allow foreign oil majors to fully own an asset on Venezuelan soil, be it an upstream or downstream one, thus opening up the country for foreign investment. The proposal, however, comes with a seemingly innocent flexibility clause - even if Maduro is ousted tomorrow, the oil reform would only see light by 2024-2025, i.e. by the time when nothing is left from today's opposition.

The opposition's attempts to establish themselves as advocates for a free and uninhibited access to Venezuela's oil sector comes at a very difficult time to PDVSA. The blackout has resulted in the nation's main oil port, the José export terminal, being out of operation between March 06 and March 12. The overwhelming majority of cargoes after exports started flowing out again was bound for China, with India-bound volumes on a palpable decrease month-on-month from February's 0.41mbpd loading level. Unsurprisingly, so far there has been no cargo in March that would sail towards the United States as American refiners take extra precaution not to see themselves sanctioned.

Head of PDVSA Manuel Quevedo confirmed during his recent visit to Baku, Azerbaijan, that India is no longer a primary market outlet for Venezuelan crude and that his company is seeing China and Russia as two main export markets. Reliance used to take up almost 90 percent of India's aggregate Venezuelan imports but now seems to be intent on ensuring "full compliance" (as per the company's spokesperson) with US sanctions. The Indian firm still buys Venezuelan crude at a reduced rate of 0.2mbpd - previously it bought 0.3-0.4mbpd as its highly sophisticated Jamnagar complex allows it to extract maximum value from the bituminous Orinoco crudes - and will most likely use its Venezuelan purchases as a bargaining chip with the US Administration.

The thing is India now finds itself in a peculiar situation, whereby two main sources of imported crude, Iran and Venezuela, are finding themselves under US sanctions that significantly narrow its maneuvering space. Thus it should not come as a surprise if India contrives a plan whereby it would be allowed to import more Iranian crude in return for its full compliance on Venezuelan issues. Saying India, this would include all the state-owned companies like ONGC Videsh or Oil India, as well as large private refiners like Reliance, with one notable exception - Nayara Energy, previously known as Essar Oil, now under the control of Rosneft, the Russian national oil company of sorts. As PDVSA still owes Rosneft more than $2 billion, to be returned in crude, Nayara Energy will most likely continue to bring in its Venezuelan favorite, Merey, despite State Secretary Pompeo's urges not to do so.

By all estimates, the Trump Administration has counted on a quicker meltdown in Venezuela and least of all did it expect the current "breathing space" period. This uneasy edginess can be seen whenever high-ranking officials from the US Administration comment on Venezuela - look no further as Francis Fannon, assistant secretary for the State Department's Bureau of Energy Resources, claiming US sanctions were designed to prevent damage to Venezuela's oil industry. A ridiculous claim amidst terminals going offstream after a week-long blackout, crude upgrading unit suddenly bursting into fire before that and pumping stations in the Orinoco belt burning down to the ground.

Despite all the roadblocks ahead, trade in Venezuelan crude still continues as some suppliers still export refined products to the Latin American nation for dilution purposes. Shipowners were the first to sense the immediate risks of US sanctions as freight rates to Venezuela have climbed to unprecedented heights, with recent gasoline cargoes heading to PDVSA reported to have been fixed at Worldscale rates of 270-280 points, roughly 100 points above regular market activity. However, even if PDVSA gets to dilute the crude, there is no guarantee that the DCO would be ultimately marketed. Currently some 6 million barrels of Venezuelan crude loaded in February seems to be anchored either in Venezuelan territorial waters or close to them, waiting for a final destination to discharge the volumes.

Against such a background the Trump Administration is getting together a second round of sanctions, aimed at clearing all the deficiencies of the initial round. Elliott Abrams, the State Department's special representative on Venezuela, indicated the US would expand the sanctions net so as to among others include all entities that facilitated refined product trading with PDVSA, effectively aiming for all the European and North African entities that did supply gasoline and naphtha to Venezuela. With the traditional supplier of diluents for its Orinoco crudes, the United States, put out of the way, PDVSA had to compensate somehow for the lost volumes of the feedstock. This would effectively liquidate the last lifeline the Maduro-era PDVSA had of not seeing its export volumes dwindle.

In a stark contrast to the 1990s and even (who would've thought at that point) the seemingly evident lowpoint of the 2000s with the military operation against Iraq, geopolitics is taking over the crude market. What State Secretary Pompeo describes as "pushing bad actors off the target", effectively using US energy-related instruments to facilitate regime change abroad, will work in the end with Venezuela. President Maduro has left a very weak legacy behind, lacks the personal charisma of Hugo Chavez and will go down as one of Venezuela's weakest leaders. Just as America's military intervention in Iraq did not bring about a large-scale investment spree from US oil majors (only US services company, Dick Cheney's Halliburton and Baker Hughes, "profited" from the war), the treatment the Trump Administration prescribed to Venezuela will not lead to any massive business opportunities.

There are three things which will make it very difficult for anyone after President Maduro to sort out the Venezuelan oil quagmire. First, any repetition of the 1990s "apertura" is a straight-out political suicide, even if differently labelled and presented to the general public - the oil sector's opening should be gradual so as not to make the Venezuelans feel as if it were a firesale. Second, today's Venezuelan populace is much more nationalistic than it used to be 20 years ago and anyone advocating a direct US intervention into Venezuela (like Guaidó did) might feel the love of the public wane quickly. Third, the opposition is united as long as they do not have access to real political power - the distribution of roles and responsibilities of any future government would inevitably compel the ones that were left out to trounce the current entente.