What Does the Reimposition of U.S. Sanctions Mean for Venezuela’s Oil Industry?

• The U.S. has reimposed sanctions on Venezuela's oil sector due to President Maduro's failure to adhere to democratic principles.
• The renewed sanctions will reduce Venezuela's crude exports and force U.S. energy companies to seek special licenses to continue operations.
• Despite sanctions, Venezuela is likely to continue clandestine oil trade with countries like Iran and China to generate revenue.

At the end of last year, the White House decided to ease sanctions on Venezuelan oil to stabilize oil prices and help the South American country improve its failing economy. The agreement to ease sanctions was dependent on President Nicolas Maduro allowing his political opposition to run in the upcoming elections. After a six-month ease, the U.S. has once again imposed sanctions on Venezuela due to the failure of Maduro to adhere to democratic principles. So, going forward, what will this mean for Venezuela’s already troubled oil industry?

In 2018, the Trump administration imposed severe sanctions on Venezuela in response to Maduro’s illegitimate re-election. This led to the downfall of the South American country’s previously lucrative oil industry, as countries worldwide were restricted from pursuing oil operations or trading energy with Venezuela. This has had an extremely negative impact on Venezuela’s economy, with the absence of oil revenue leading to rampant hyperinflation. The knock-on effect has been a humanitarian crisis exacerbated by government mismanagement and corruption that has led 7.7 million Venezuelans to flee the country. 

In 2023, the Venezuelan opposition united to run against Maduro in the 2024 elections, leading the Biden administration to ease sanctions in return for Maduro’s agreement to a free and fair electoral process. In April, the White House rolled back most of its sanctions’ relief due to antidemocratic actions by the Maduro government, which violated its agreement with the U.S. The current Venezuelan government has banned several political opponents from participating in the presidential elections on 28th July, after initially agreeing to a democratic electoral process last October. 

On 17th April, the U.S. Treasury Department announced that it had issued a replacement license that gave companies 45 days to “wind down” their business and transactions in Venezuela’s oil and gas sector. The U.S. Department of State spokesperson Matthew Miller reasoned, “We are concerned that Maduro and his representatives prevented the democratic opposition from registering the candidate of their choice, harassed and intimidated political opponents, and unjustly detained numerous political actors and members of civil society.” 

The reintroduction of sanctions is expected to reduce Venezuela’s crude exports and force U.S. energy companies working in the South American country to seek special authorizations to continue operations. By late May, the U.S. had received up to 50 requests for individual licenses from companies hoping to continue their oil business in Venezuela. These licenses cover a wide range of sectors including investment, authorizing oil exports and imports, exploring for oil and gas, and negotiating contracts and payments. Some companies have had licenses approved by the U.S. government, such as France-based oil producer Maurel & Prom and Spain's Repsol, while others are waiting to hear their fate. 

Guidance from the U.S. State Treasury Department suggests that it will prioritize the issuing of licenses to companies with existing oil output and assets above those looking to enter the Venezuelan energy market. Francisco Palmieri, Chief of the U.S. Mission for Venezuela explained, “The oil sector is very important to reactivate Venezuela's economy, but the most important thing of all is the election of July 28th.” Palmieri emphasized that the diplomatic channels with Maduro's government remain open. 

Before the easing of sanctions, Venezuela had been steadily increasing its oil production and trade using little-known intermediaries to sell its crude at a discounted price. While the reimposition of sanctions will hit the country’s oil industry hard, not all will be lost for Venezuela, as it will likely continue to ship oil to Iran, China, and any other country that will take it. Venezuela’s Petroleum Minister Pedro Tellechea stated, “We are open [for business], willing to keep progressing along with all foreign companies that want to come.” Tellechea added, “Venezuela is ready to secure the stability of global oil markets that we need so much.” 

Venezuela has been circumventing U.S. sanctions by exporting oil using either old ships that are set for the scrapyard; tankers that have gone dark that have their transponders turned off to avoid detection, or by transferring their oil cargoes at sea from tanker to tanker to avoid knowledge of where the oil came from. Much of the oil is rebranded to make international authorities believe it came from Oman and Malaysia. In 2021, China is thought to have purchased around 324 million barrels of oil from Iran and Venezuela, marking an increase of 53 percent from 2020, the highest quantity imported since 2018. 

There is no doubt that the reimposition of U.S. sanctions on Venezuela’s energy sector will hit the South American country’s economy hard. It remains uncertain how many companies will be allowed to continue oil operations in Venezuela, and this will not change so long as the Maduro government continues to hinder the democratic election process. However, Venezuela is likely to continue producing oil and pursuing clandestine trade agreements to bring in oil revenues until relations are restored. 

By Felicity Bradstock for Oilprice.com

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