In the space of less than a decade Venezuela’s once-mighty oil industry, the petrostate’s economic backbone, has nearly collapsed. Since Maduro’s predecessor Chavez took power in 1999 and launched his socialist Bolivarian revolution the founding OPEC member’s petroleum production has steadily declined. OPEC data shows that during 2015 Venezuela pumped an average almost 2.4 million barrels of crude oil per day which was significantly less than the 1998 annual production record of 3.1 million barrels. By 2020, Venezuela’s oil production had plunged to 500,000 barrels per day or roughly a fifth of what it had been five years earlier. That precipitous decline can be blamed on Venezuela’s rapidly deteriorating energy infrastructure and Washington implementing ever stricter sanctions on the OPEC member. The near-collapse of Venezuela’s economic backbone has wrought havoc with the country’s economy, which is being exacerbated by chronic gasoline shortages. Those events have forced autocratic President Maduro to reconsider his position and find a means of rebuilding Venezuela’s devastated petroleum industry. The sharp impact of the deterioration of Venezuela’s oil industry on the economy becomes is apparent when it is considered that gross domestic product has shrunk every year since 2013. During 2019 GDP plunged 39% and then by another 30% for 2020 as ever stricter U.S. sanctions aimed at cutting Caracas off from global capital and energy markets bit deeper. The collapse of Venezuela’s economy has triggered what is described as the worst humanitarian crisis outside of war to ever occur. Nearly five million Venezuelan’s have fled their country as the economic crisis has worsened over the last five years. This has had a particularly destabilizing effect in South America with neighboring Colombia, a key regional U.S. ally, bearing the brunt with roughly a third of Venezuelan refugees settling in the strife-torn Andean nation.
In response to harsh U.S. sanctions and an ever-worsening economic crisis, autocratic President Maduro has strengthened his grip on power, demonstrating that sanctions failed to achieve their intended purpose of triggering regime change. As Washington tightened the noose on Maduro, he turned to allies of last resort, including Russia, China, Cuba, and Iran, for support through loans for oil, urgently needed gasoline and aid for rebuilding derelict energy infrastructure. While those countries have provided crucial lifelines for a near-bankrupt and increasingly desperate Caracas, they have done little to restore Venezuela’s crumbling hydrocarbon sector and bolster oil production. By April 2021 Venezuela was only pumping an average 445,000 barrels of crude oil per day, a whopping 28% less than a year earlier and a far cry from the 1998 peak of over three million barrels per day. This forced Maduro to consider changing how Venezuela’s hydrocarbon sector is administered. The most radical proposal being the opening of the petrostate’s oil industry to private control and even foreign ownership of assets. That Caracas hopes will attract the foreign investment urgently needed to rebuild Venezuela’s shattered oil industry.
There is considerable speculation as to how much investment is required to refurbish the OPEC member’s economic backbone. A February 2021 document from national oil company PDVSA stated it requires $58 billion to overhaul vital energy infrastructure including oilfields to restore Venezuela’s production to pre-Chavez levels of around 3 million barrels per day. That number appears especially optimistic with many sources, including the director of Juan Guaido’s economic recovery plan, asserting it will take anywhere between $110 billion and $250 billion to achieve that level of production. Aside from that tremendous financial investment, there is also the need for enormous transfers of technology, skilled labor, and parts for the urgently needed reconstruction program to take place. The severe deterioration of Venezuela’s oilfields, pipelines, refineries and other infrastructure means it will take at least a decade to restore Venezuela’s petroleum industry to its former glory and reach pre-Chavez oil output.
After years of support, Maduro’s key backers Russia, China and lately Iran have proven incapable of resurrecting Venezuela’s shattered oil industry. It was only two years ago when contractors from China reportedly balked at overhauling Venezuela’s main refineries because of their dilapidated state and inability to access vital parts because of U.S. sanctions. Venezuela’s refineries were built by western energy companies, mainly Shell and ExxonMobil’s predecessors, meaning many of the key parts required must be sourced from western suppliers. Iran then offered to assist, flying in plane loads of catalyzers, parts and technicians for the overhaul of the Cardona, Amuary, and El Palito refineries. After a series of issues and failed restarts two refineries were eventually brought back online, including the 140,000 barrel per day El Palito refinery, but they are only operating at around 10% capacity. This is because of the need for major overhauls that cannot be completed due to a lack of capital and parts as well as a chronic lack of diluent.
The heavy crude oil produced in the Orinoco Belt, which accounts for around 70% of Venezuela’s production, needs to be mixed with light crude oil before being refined into gasoline and diesel. PDVSA is unable to source sufficient light crude oil feedstock in Venezuela and Washington’s sanctions have cut off international supplies. Before 2019, when the Trump Whitehouse ratcheted up sanctions, the U.S. was a significant supplier of light crude oil shipping 45 million barrels to Venezuela in 2018. In a desperate attempt to obtain vital diluent, Caracas is circumventing Washington’s sanctions by using dark voyages, where tankers turn off their transponder, to import condensate from Iran. Those shipments are proving insufficient to allow more than limited refinery runs, still leaving Venezuela chronically short of fuel, further exacerbating the long-running economic crisis. The only way to access the massive investment, including capital, skilled labor and technology, required to rebuild Venezuela’s near-collapsed oil industry is to attract investment from Western energy supermajors. That will only occur once U.S. sanctions are eased, and Maduro provides the appropriate legal protections demonstrating that the risk of assets being nationalized is minimal.
While it appears that U.S. sanctions have stagnated, failing to trigger the desired goal of regime change, the Biden Whitehouse is committed to recognizing Guaido as president and will not negotiate with Maduro. There are, however, signs of an emerging détente between Caracas and Washington. Maduro has taken unilateral actions, such a releasing the Citgo six from prison to house arrest and agreeing to international food aid, to build political collateral with the Biden administration. In March 2021, Caracas launched military operations against dissident FARC guerillas, who are part of a U.S. designated foreign terrorist organization, operating along the western border with Colombia. Those actions come after Maduro earlier this year flagged that private control of oil assets was possible and that reforms would be made to oil legislation to allow what he described as new business models. Bloomberg, in a recent article, stated that U.S. government figures with access to Biden have opened a discourse with Maduro. U.S.-recognized interim president Guaido recently proposed a gradual easing of sanctions to motivate Maduro to reach an agreement on scheduling free elections and securing international aid for Venezuela.
By Matthew Smith for Oilprice.com
More Top Reads From Oilprice.com:
- 3 Strong Oil And Gas Stocks For The Summer
- The ESG Bubble Has Finally Burst
- Iran To Saudi Arabia: Sell Our Oil And We Will Reduce Houthi Attacks