The Russian bear is on the prowl once again as President Putin seeks to expand Moscow’s influence and bolster the one-time superpower’s global influence while proving to constituents he can restore Russia’s superpower mantle. As demonstrated by his policy in Ukraine in 2014, Moscow seeks to take advantage of regional conflicts to extend its authority and geopolitical power base while bolstering its economy.
Cynically, many of the countries Russia is targeting are rich in oil. Putin’s administration allied itself with the oppressive regime of Syria’s Bashar al-Assad, embroiling itself in that nation’s bloody multisided civil war. In late January 2018, Moscow finally received its long-awaited payment for its involvement, not only had it secured a close regional ally but the exclusive rights to produce oil and gas in Syria.
Another country benefitting from Putin’s largesse is crisis-ridden and cash strapped Venezuela which has the world’s largest crude oil reserves, placing it ahead of Saudi Arabia and Canada both staunch U.S. allies. Moscow has been using Venezuela’s deepening economic and political crisis to strengthen its relationship with the highly unpopular socialist regime of President Maduro. That has included providing a financial lifeline to cash strapped Caracas and especially state-controlled energy company Petróleos de Venezuela, S.A. known by its initials as PDVSA.
Oil production is caught in an ever wider downward spiral caused by a conspicuous lack of critical maintenance on industry infrastructure including refineries and wellheads. A mass exodus of skilled industry labor is causing that decline to accelerate. In its December 2018 Monthly Oil Market Report, OPEC announced that according to secondary sources Venezuela’s November 2018 oil output was 1.1 million barrels daily. This represents a stunning 41 percent decline compared to the daily average for 2017 and is 26 percent lower than at the start of 2018. The pace at which the troubled Latin American nation’s oil output is deteriorating will likely see it fall below 1 million barrels daily during 2019. Related: Mexico Hedges Oil at $55 A Barrel
There has also been a noticeable decline in both exploration and well development drilling which is only serving to exacerbate oil field decline rates.
This is weighing heavily on a cash strapped Caracas which has very few other sources of income and is profoundly dependent on crude to earn desperately needed hard currency. Caracas and PDVSA have essentially defaulted on their debt and bankruptcy is looming which has raised considerable concern among creditors which in recent months have been scrambling to secure assets. This has only worsened the cash crunch being experienced by Caracas and along with U.S. sanctions preventing Venezuela from accessing international credit markets is a critical driver of Maduro’s attempt alternate solutions including a closer relationship with Moscow. With few friends elsewhere, Russia has become a key ally for the strife-torn nation causing Maduro to leap at the opportunity provided by Moscow.
Russia has shown itself willing to be a creditor of last resort for Maduro. In exchange for moderate loans, cash advances, bail outs and arms over the last five years since Maduro came to power, Moscow has secured significant interests in five of Venezuela’s largest oil fields. The Maduro regime has also signed over almost half of its downstream, refinery and infrastructure business Citgo to Russian state-controlled oil giant Rosneft for $1.5 billion in urgently needed funds. That includes giving Moscow indirect interests in Citgo’s U.S. refining assets.
This is quite a prize for Moscow. It not only bolsters its oil reserves, infrastructure and assets in a country which hold the world’s largest oil reserves, but it gives Russia a strategic presence in a region long considered to be exclusively under U.S. hegemony. Moscow has coveted such a presence since the Cold War began, and even more so after its failure to base missiles in Cuba which triggered the Cuban missile crisis.
It appears that Russia is not interested in the survival of the Maduro regime but rather to evade existing sanctions, apply political pressure to the U.S. and boost its oil reserves, refining capacity and production. There is a growing likelihood that Russia can cement its presence in South America because of a growing void triggered by Trump’s general disinterest in Latin America as well as tough rhetoric on narcotics, migration and corruption. It shouldn’t be forgotten that despite its economic woes Venezuela has one of the most powerful militaries in South America, which has had its strength bolstered by Russian arms.
Moscow is clearly looking to bolster its oil reserves, infrastructure, refining capacity and production to boost its global political power. Venezuela’s vast reserves totaling 300 billion barrels dwarf U.S. reserves which reached a record 39 billion barrels at the end of 2017. Because of the U.S.’s vast shale oil industry and rapidly growing production, which now makes it the world’s largest oil producer, it has been able to effectively dictate oil prices, displacing OPEC’s ability to influence the world economy. Greater ability to influence oil prices and use crude to further extend Russia’s national interest is particularly important to Moscow because oil and gas exports generate around 40 percent of its fiscal revenues.
A notable increase in the volume of oil reserves and production that it controls will give Russia greater influence over oil prices. The validity of such a strategy was demonstrated by the political power that Moscow has been able to exert over Germany, Poland and Ukraine because Russia is a crucial supplier of natural gas to those nations.
Moscow not only wants to expand its global geopolitical power but also maximize the value of its existing reserves and production before the advent of peak oil demand by having a greater say in setting the market price. By achieving control of a substantial proportion of Venezuela’s vast oil reserves Russia can strengthen its global political presence, gain greater influence over oil prices and use crude as an economic weapon to achieve its national interest.
By Matthew Smith for Oilprice.com
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