Will Venezuela Exploit Russia’s Isolation To Revive Its Oil Industry?

Russia's invasion of Ukraine may offer Venezuela the chance it's been looking for to convince Biden to reduce or drop U.S. sanctions on its oil industry. As countries around the world introduce sanctions on Russia and oil majors pull out of Russian operations, there will be an inevitable dip in the world's oil supply. The question is how this supply shortage can be met in the short term as worldwide demand remains high.

Venezuela recently appealed to Wall Street for support as it attempts to convince U.S. President Biden to lift sanctions. Having produced just over 3 million bpd of crude in 2013, Venezuela has the potential to provide the world with plenty more oil than it currently is. This fact has clearly not been lost on the Biden administration, with reports over the weekend of meetings between U.S.and Venezuelan officials in Caracas regarding bringing more crude to market.

Earlier this year, political officials from Venezuela attempted to charm Wall Street players with the promise of restructuring around $60 billion in bond debt held by Fidelity, T. Rowe Price, and BlackRock, as well as non-US funds. They also offered infrastructure concessions, oil and gas reserves, and asset privatizations in return for the restructuring of a debt that began defaulting in 2017. This would help U.S. bondholders to recover some of the money owed from Venezuela that had previously appeared lost. 

Venezuelan President Maduro stated in a televised announcement in early February, "If all sanctions were lifted - monetary, financial and banking sanctions against Venezuela - Venezuela would respond to bondholders the next day." Going on to say, "We are ready. We have a very solid proposal."

The price of oil has increased substantially over the last year, as demand grew following the pandemic. With oil prices breaking $130 on Sunday over fears that the U.S. and its European allies would ban Russian crude. If Biden wants to prevent U.S. fuel prices from soaring and to suppress inflation ahead of the midterms, then finding more supply is going to be a key priority.

The U.S. introduced sanctions on Venezuela's oil industry under the Trump administration in 2019 to put pressure on Maduro to leave power, viewing Juan Guaido? as the country's legitimate leader. Despite the sanctions remaining in place, Maduro has kept his position as president. Meanwhile, the Venezuelan economy has suffered immensely from the reduction in oil revenues. 

Despite these sanctions, Venezuela has gradually been reviving its oil operations over the last two years, working with U.S.-sanctioned Iran to mutually develop their energy industries. While Iran has been purchasing Venezuelan oil, Venezuela has bought Iran's petroproducts in a bid to reinvigorate its energy industries as they look to a future without sanctions. 

In addition, China has recommenced its trade route with Venezuela in pursuit of low-cost oil. The Asian giant is thought to have purchased a total of 324 million barrels from Iran and Venezuela in 2021, an increase of 53 percent from 2020, the highest quantity since 2018. It has done this by choosing complex routes and by using tankers with their transponders turned off to avoid detection. But the partnership has become increasingly obvious in recent months and China seems unphased by the potential repercussions of ignoring U.S. sanctions on Venezuela.

In 2021, Venezuela is thought to have almost doubled its oil output, compared to 2020, putting it in a good position to increase its production further to meet global demand. In addition, many argue that the sanctions have not achieved their intended goal of removing Maduro from power, they have instead sent Venezuela into an economic depression, forced millions into poverty, and displaced millions more. 

While clear sanctions have yet to be introduced on Russian oil, many companies are imposing self-sanctions as they support Ukraine in the conflict. Both BP and Exxon cut their ties with Russia this month, leaving billions in assets behind. And it may be only a matter of time until the U.S. imposes sanctions on Russian oil, particularly after the threat of the conflict escalated following the Russian targeting of a nuclear facility. This means that the world could soon be looking to other oil-rich states to fill the gap left in the market from Russian oil, which currently accounts for around 8 percent of global supply. 

But President Maduro may have to change his approach if he hopes for sanctions to be dropped in response to the conflict. Maduro has stated his strong support for Russia, saying that the sanctions being imposed on the country are "madness." For the U.S. to even consider lifting its sanctions on Venezuelan oil, Maduro will have to appeal to President Biden, which this rhetoric certainly will not do. 

Having steadily increased its oil output over the last year, Venezuela is in a good position to increase its crude production should U.S. sanctions be lifted. It could provide a vital supply of oil as the world battles with shortages and increasing oil prices. However, this may all depend on President Maduro's stance on the Russian invasion of Ukraine and his ability to persuade President Biden that his government is the lesser of two evils in the international system.

By Felicity Bradstock for Oilprice.com

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