When President Joe Biden won the 2020 U.S. presidential election, a wave of optimism washed over Latin America. Many in the region saw Biden’s rhetoric on closer relations between the U.S. and regional governments as a sign of a thaw after an adversarial four years under President Donald Trump. The expected re-engagement with Latin America, notably Venezuela a near-failed state suffering from the world’s worst peacetime economic and humanitarian crises, did not eventuate. This was especially disappointing because it was clear that harsh U.S. sanctions had failed and were only worsening the suffering of the Venezuelan people. In little over a decade, from when President Hugo Chavez took power, Venezuela went from being among the wealthiest countries in Latin America to one of the poorest. The humanitarian crisis is so severe that the UNHCR estimates 6 million Venezuelans have fled their homeland to escape hunger, extreme poverty, violence, and insecurity. Now there are several signs that the White House is considering easing strict U.S. sanctions and bringing Venezuelan crude oil back to global energy markets. In a surprise move, Biden dispatched a diplomatic mission to meet with President Maduro in early March 2022. That was the first diplomatic contact between the U.S. and Venezuela since the Trump administration suspended diplomatic operations in March 2019. While the White House claimed the mission, which secured the release of two American citizens held by the Maduro regime, was a humanitarian initiative critics viewed it as a cynical attempt to access Venezuela’s vast oil reserves, which at 303.6 billion barrels are the world’s largest, at a time when domestic fuel prices were surging to record highs. Since then, a second diplomatic mission in June 2022 failed to secure the release of other U.S. nationals detained in Venezuela, including the remaining five Citgo executives of the group known as the Citgo six who have been held since 2017.
Rampant inflation, because of soaring oil as well as natural gas prices and supply chain breakdowns, is threatening the global post-pandemic economic recovery. That is further exacerbated by the energy crisis that emerged in Europe and North America because of Russia’s invasion of Ukraine. As a result, policymakers are under considerable pressure to bring inflation under control, with a focus on reducing energy prices which can only be achieved by boosting global oil supplies. For those reasons, the Biden administration is edging closer to relaxing strict sanctions against Venezuela to allow the OPEC member to increase petroleum exports. The return of Venezuelan crude oil to North American refining markets could be a game changer for the U.S. with the potential to significantly lower domestic gasoline prices while boosting global petroleum supplies at a crucial moment.
The Biden administration has previously tinkered with the harsh sanctions introduced by Trump. The most notable development was the U.S. Office Of Foreign Assets Control (OFAC) authorizing the import of liquified petroleum gas to Venezuela in July 2021. That was an important development because chronic shortages of the fuel were causing considerable hardship for everyday Venezuelans because 90% of households use it for cooking. This was recently extended by OFAC to July 2023. That was widely seen at the time as the start of a thawing of relations between Washington and Caracas, but it took until Russia’s February 2022 invasion of Ukraine and the ensuing energy crisis for the Whitehouse to entertain moderating sanctions further. After the March 2022 diplomatic mission to Caracas, the White House made minor concessions during May 2022. While they were not significant, they included removing a former senior PDVSA official and nephew of Maduro’s wife from the list of sanctioned individuals and allowing global energy super major Chevron to negotiate licenses with PDVSA. That alteration, while significant in the context of existing U.S. sanctions, still does not allow the energy supermajor to enter new contracts or drill in Venezuela. Those developments occurred after the U.S. Treasury Department, in early May 2022, renewed Chevron’s license to maintain existing assets in Venezuela until November 2022. These actions were aimed at incentivizing Maduro to continue negotiations with Washington over the fate of U.S. citizens detained in Venezuela.
Then in the most significant development to date, during June 2022 it was announced that Venezuela would resume oil exports to Europe after a two-year hiatus. Washington authorized European energy majors Italy’s Eni and Spain’s Repsol to receive Venezuelan oil cargoes as a means of paying down the billions of dollars of debt that the two companies had accrued since 2019. You see, when the Trump Administration ratcheted-up sanctions during early 2019 the oil swaps used by Caracas and national oil company PDVSA to facilitate debt payments using shipments of Venezuelan crude oil were suspended. As a result, foreign energy companies, including Chevron, found themselves owed billions of dollars that could no longer be recouped through Venezuelan petroleum cargoes.
It is estimated the greenlighting of Venezuelan oil cargoes to Europe saw around two million barrels shipped during June 2022 with more to follow over the remainder of the year. Those cargoes must go to Europe and cannot be resold anywhere else. While this has been heralded as a means of easing Europe’s worsening energy crisis, such small cargoes and the continent’s over-reliance on Russian natural gas means they will not materially ease the existing energy shortages and spiraling prices. To recoup billions of dollars of debt accrued since 2019, Chevron is renegotiating its contracts with PDVSA with the supermajor rumored to be discussing expanding its operations while taking control of joint ventures held with Venezuela’s national oil company. Those moves make sense when it is considered that at the start of 2021 Maduro proposed allowing private companies to operate oilfields and even control energy projects in Venezuela. This formed part of Caracas’ plans to rebuild Venezuela’s shattered oil industry, which is the country’s economic backbone, by attracting crucial foreign energy investment. Various numbers have been thrown around with it estimated that it could take an investment of up to $110 billion over a decade to rebuild decaying industry infrastructure and lift Venezuela’s production to at least 2.5 million barrels per day. It is only foreign energy majors, like Chevron, which possess the massive amounts of capital, technology, and skilled labor required to rebuild Venezuela’s shattered oil industry.
There are further signs that the frosty relationship between Washington and Caracas is slowly thawing. U.S. refiner Citigo, which is indirectly owned by PDVSA and at the center of creditor lawsuits against the national oil company, in a recent statement, said it was willing to resume imports of crude oil from Venezuela if authorized by Washington. Two U.S. investment funds, Gramercy Funds Management and Atmos Global Energy, announced in early July 2022 that they will partner with Venezuelan energy company Inelectra Group to exploit the Gulf of Paria East offshore oil discovery. The companies did not disclose the size of their investment or whether they had yet been granted approval by the U.S. Treasury Department to make such an investment given that U.S. approval is needed for it to proceed.
There are emerging signs that the hostile relationship between Washington and Caracas, which has existed since President Obama declared Venezuela a threat to U.S. national security in 2015, is thawing. The Biden administration is tinkering with sanctions, making minor concessions, to keep the autocratic Maduro regime at the negotiating table. There are signs that Washington is ready to further ease sanctions to access Venezuelan crude oil so as to ease the energy crisis and rampant inflation. That, however, is under threat with Venezuelan authorities detaining, in separate incidents, three U.S. citizens earlier this year who they claim entered the country illegally. Those citizens, who the U.S. State Department considers to be wrongfully detained, are facing lengthy prison terms. Washington believes they are being held by the Maduro regime for use as bargaining chips, but such actions point to the considerable hostility that still exists toward the U.S. within Venezuela’s government. There are fears that hardliners in Venezuela, who are opposed to negotiations, are exploiting Maduro’s lack of control and undertaking such measures to derail any further discussions. This could see further plans to ease strict U.S. sanctions against Venezuela stall.
By Matthew Smith for Oilprice.com
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