Venezuela’s rapidly disintegrating oil industry, which is the backbone of its economy, is a mere shadow of what it once was, despite the founding OPEC member possessing the world’s largest proved oil reserves totaling 303 billion barrels at the start 0f 2020. Even the intervention of Russia, China, and Iran has done little to revive Venezuela’s rapidly crumbling petroleum industry. There is an emerging opinion, in light of the failure of crippling U.S. sanctions to trigger regime change, that a different approach needs to be taken if Venezuela is not to become a failed state. While there is no consensus as to what that approach will be, it is likely that President-Elect Joe Biden will seek a less confrontational and more political as well as humanitarian approach to resolving Venezuela’s long-running crisis. A crucial element of any strategy is the participation of Western energy majors in rebuilding Venezuela’s shattered hydrocarbon sector. By the end of November 2020, OPEC’s Monthly Oil Market Report for December 2020 revealed that the strife-torn country’s oil output had plummeted to almost a sixth of what it was a decade earlier. That startling deterioration can be squarely blamed on government mismanagement, malfeasance, and corruption as well as the impact of crippling U.S. sanctions. Regime change may not be enough to resuscitate Venezuela’s vital oil industry, which is a key step to rebuilding the strife-torn Latin American country’s shattered economy. In early 2020 the White House ordered Chevron, the last U.S. energy major operating in Venezuela, to cease drilling, wind down operations and cease operations in the country by 1 December 2020. That demand also included oil services companies operating in the crisis-racked country including Halliburton, Schlumberger, Baker Hughes, and Weatherford International. This was viewed by the Trump administration as a crucial element of the sanction-based strategy designed to prevent Caracas from accessing international financial and energy markets to obtain the capital, technology, and expertise required to revive Venezuela’s crumbling oil industry. By ratcheting up existing sanctions and cutting Caracas off from any remaining access to capital and technology, the White House hoped to spark a political transition and Maduro’s removal from power. There was, however, one flaw; if Chevron left Venezuela Maduro would have taken control of the oil major’s assets, which have an estimated value of $2.6 billion, further strengthening the pariah socialist regime’s position.
Thus far, Washington’s hard-nosed strategy has failed. Ever-stricter U.S. sanctions have only served to strengthen Maduro’s grip on power. Despite political, financial, diplomatic, and economic sanctions becoming a key U.S. foreign policy tool since the end of World War Two, there are few examples of when they have been successfully achieved the desired goal. In most cases, they have only triggered regime change when directed at smaller weaker countries and been used in conjunction with other policies designed to destabilize the targeted government. The failure of White House policy to initiate a political transition can be attributed to sanctions making the cost of relinquishing power for Maduro and his supporters far greater than the benefits offered by relief from sanctions. Ever stricter U.S. sanctions forced Maduro to look elsewhere for support, notably Russia, China, Cuba, and Iran. While the loans, investments, aid shipments, and support provided by those countries have done little to rebuild Venezuela’s disintegrating oil industry and shattered economy, they have slowed the decay and provided some financial relief.
Russia, China, and Iran’s support provide Maduro’s pariah regime with the ability to skirt U.S. sanctions and export crude oil to generate urgently needed fiscal income. Moscow has become a lender of last resort to Caracas and remains resolute in the face of U.S. sanctions to financially prop-up its erstwhile Latin American ally with oil-backed loans. There are signs that all four countries are unwilling to dial-down their support, further decreasing the likelihood that crippling U.S. sanctions can initiate regime change and remove Maduro from power. The severity of the OPEC member’s economic crisis, where it is estimated that 90%, or potentially more, Venezuelans live in poverty, means most people are simply incapable of providing support to the opposition as they are too busy trying to survive. Related: China’s Oil Giants Face NYSE Delisting
There is a mounting realization that when a political transition occurs massive amounts of capital, technology and skilled labor will be urgently required to rebuild Venezuela’s broken oil industry. That includes mopping up much of the environmental damage caused by Maduro’s attempts to wring oil out of PDVSA’s failing energy infrastructure and oil fields regardless of social and environmental impacts. The only means of obtaining the necessary capital, skilled labor, and technology required will be to attract substantial investment from international energy majors. Nonetheless, Venezuela’s high operating costs, with breakeven costs averaging $41.97 to $56.06 per barrel, coupled with the additional expenses associated with operating in a nearly failed state means substantial incentives will be required to attract investment. It is Western energy majors that possess the capital, technology, and skilled labor required to revive Venezuela’s oil industry.
Restoring the founding OPEC member’s shattered oil industry is the lynchpin of Juan Guaidó’s plan to finance the reconstruction of Venezuela’s ruined economy. The November 2020 U.S. Treasury announcement that it had extended Chevron’s sanctions waiver until 3 June 2021, from an earlier 1 December 2020 deadline, was an important development. This means the energy major can keep operating and maintaining its Venezuelan assets, ensuring that they do not deteriorate or are seized by Caracas, which was a likely scenario if Chevron was forced to abandon the country. U.S. Treasury also awarded 6-month extensions to oil services companies Halliburton, Schlumberger, Baker Hughes, and Weatherford. While it is unlikely that those companies can provide additional momentum to trigger urgently needed regime change, if allowed to maintain their operations they will form the core of a revival of Venezuela’s oil industry when Maduro is ultimately ousted. Chevron has a long history of successfully navigating politically hazardous jurisdictions. It was among the first of the international oil majors to invest in developing the Vaca Muerta, Argentina’s world-class shale oil and natural gas play. Chevron pressed ahead with that $1.2 billion investment, gaining a first-mover advantage, despite other international energy companies being deterred by the 2012 nationalization of YPF.
Chevron’s ongoing presence in Venezuela will allow it to become a key player in the OPEC member’s recovery when a political transition finally occurs. For that reason, the oil major could play a central role in rebuilding the oil-rich country’s shattered oil infrastructure including corroding pipelines, erratically functioning refineries, and deteriorating oilfields, giving oil production and ultimately government revenue a solid lift. This is a particularly important point because if the expectations of the Venezuelan people are not carefully managed and a tangible economic recovery does not occur within a relatively short period, then it could spark greater political chaos. That could bolster support for the remnants of Maduro’s regime and the socialist Bolivarian revolution adding to the political, social, and economic chaos that will emerge during and after the political transition.
By Matthew Smith for Oilprice.com
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