Can Venezuela’s Oil Industry Bounce Back With The Help Of Iran?

After five years of plunging oil production and experiencing the near-collapse of its economically crucial petroleum industry and the worst peacetime economic crisis of the modern age, there are signs a recovery is underway in Venezuela. For some time, President Nicolás Maduro has claimed Venezuela’s once-mighty petroleum industry is recovering, yet plummeting crude oil output, deteriorating infrastructure, and numerous oil spills indicate otherwise. The latest numbers from OPEC, of which Venezuela was a founding member, indicate that the economically crucial industry could be in the process of recovering. The cartel’s December 2020 Monthly Oil Market Report indicates that the country’s oil output is slowly but steadily growing since the third quarter of 2020 when it averaged 362,000 barrels daily. For the month of November, Venezuela pumped on average 407,000 barrels of crude oil per day which is a healthy 6.5% increase over a month prior. 

Source: OPEC and U.S. EIA.

Nevertheless, petroleum output overall keeps trending downward since the end of 2019. For the 11 months ending on the 30th of November, 2020 Venezuela pumped on average 500,727 barrels daily which is 37% lower than the 796,000 barrels pumped during 2019. 

*Daily production average for January 2020 to November 2020.

Source: OPEC and U.S. EIA.

It is Russia, China, and now Iran which are providing the considerable support required to prop-up Maduro’s socialist regime and rebuild Venezuela’s vital oil industry. Since the early days of Hugo Chavez’s presidency, Moscow has been forging close ties with Caracas. During the early 2000s, Russian energy majors Rosneft, Gazprom and Lukoil were establishing ties with Venezuela’s national oil company Petróleos de Venezuela, S.A, known by its initials PDVSA. In January 2013, the then president of PDVSA, Rafael Ramírez, claimed investment from Russian companies would see them become the country’s largest petroleum producers pumping over one million barrels a day by 2021. While that prediction will not eventuate, there is no denying that Russian energy companies have injected vast amounts of capital into Venezuela over the last two decades. By the start of 2020 integrated Russian energy company Rosneft, in which the Kremlin owns a controlling interest of just over 50%, had acquired a swathe of Venezuelan oil assets in exchange for loans and joint ventures with state-controlled PDVSA. These included interests in various oil and natural gas fields as well as a 49.9% equity stake in U.S.-based refiner Citgo acquired as collateral for oil-backed loans. It was estimated that by the end of 2019 there were $800 million in loan repayments owed to Rosneft and another $3 billion of debt with the Russian government. Those funds bolstered PDVSA’s ability to repair some vital infrastructure and even boost oil output for a short period. The loans and investment by Rosneft in joint ventures with PDVSA saw the company emerge as a major owner of Venezuela’s economically critical oil infrastructure and a key seller of the Latin American country’s crude oil. During March 2020, after the U.S. government placed sanctions on Rosneft, the energy major divested its Venezuelan assets to Kremlin-controlled entities as it sought to avoid the impact of those sanctions. While ownership changed, Moscow remains in control giving the Russian government considerable influence in a near-bankrupt Venezuela.  Related: Will Batteries Kill Off Traditional Power Plants?

Russia’s influence does not end there. Moscow, to cement its bond with Caracas and prop-up an important regional ally, has deployed military advisers and specialists to Venezuela as well as provided billions of dollars in arms and other military equipment. The Kremlin also financed the deployment of private Russian security contractors to Venezuela, linked to the controversial Wagner group which operated on missions in the Ukraine and Syria. This, Russia’s government hopes, will deter U.S. military intervention in the crisis-torn Latin American country, which was a recurring threat under the Trump administration. 

While Russia is a lender of last resort for Maduro’s regime and a key backer, it is Iran that has accelerated building ties with Caracas. Teheran has openly provided tankers and urgently needed fuel as well as even food aid to Caracas. During early-December 2020 it was reported that the biggest fleet yet of Iranian tankers were heading to Venezuela in open defiance of U.S. sanctions. Those vessels will offload fuel to ease the crippling gasoline shortage gripping Venezuela and then ship the country’s crude oil to various international energy markets, circumventing U.S. sanctions preventing the sale of the country’s petroleum. The sale of Venezuelan crude will not only raise cash for an almost bankrupt Caracas but also relieve pressure on nearly full storage facilities, which when full force PDVSA to shutter its oilfields. Reducing the volume of crude in storage is a key driver of higher oil production.

The hard currency earned by those oil exports will allow the Maduro regime to fund urgently required maintenance work on crucial oil infrastructure, although it is likely to be too little too late. U.S. sanctions coupled with the Maduro regime fast running out of cash has made it virtually impossible to import parts or hire skilled contractors to perform the required work. The impact is magnified by the dearth of skilled industry labor in Venezuela with a large proportion of oil industry workers having fled Venezuela since 2003. Caracas is receiving assistance from Teheran to overhaul vital oil industry infrastructure, much of which has rapidly deteriorated since 2015 because of a lack of maintenance, machinery overhauls, and upgrades. The main project being considered is the overhaul of the 310,000 barrels per day Cardon refinery, the last regularly operational plant in Venezuela. Earlier repairs completed with outside assistance have faltered causing the plant to operate erratically. Cardon forms part of the Paraguana refining center, ranked as one of the world’s largest refining complexes, which was rocked by an explosion, reputedly sparked by a water leak, that crippled the Amuay refinery’s distillation unit in October. That along with the Amuay plant estimated to be operating at only 12% capacity underscores the parlous state of PDVSA’s energy infrastructure and the crisis facing Venezuela’s oil industry which is the strife-torn country’s economic backbone. The inability to access U.S. technology and parts, along with the Cardon refinery being severely rundown means Iranian workers will need to fabricate key parts to complete the urgently required repairs complicating, slowing, and possibly preventing the overhaul.

Teheran’s assistance is not confined to Venezuela’s economically crucial oil industry. According to the U.S. military, Iran is sending arms and military units from the Revolutionary Guard’s Quds force, long associated with supporting Lebanese Hezbollah, to Venezuela. That serves to strengthen Maduro’s position and mitigate some of the impact of U.S. sanctions while blunting the threat of military intervention. The deployment of the Quds force provides support for earlier U.S. assertions and investigations pointing to Hezbollah, a designated terrorist group, having established a significant presence in Venezuela and established a network of illicit operations in the country with Caracas’ consent. Hezbollah provides Maduro’s regime with vital access to illicit financing and trafficking networks, generating additional urgently needed government revenue.

While those developments are boosting fiscal revenue and bolstering oil production, they are unlikely to provide a long-term sustainable path to rebuilding Venezuela’s shattered petroleum industry or broken economy. If anything, they only serve to prop-up Maduro’s pariah regime and further prevent regime change thereby prolonging the suffering of the Venezuelan people while increasing the substantial environmental damage caused by an erratic and rapidly deteriorating oil industry.

By Matthew Smith for Oilprice.com

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