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Venezuela's combustible crisis

President Nicolás Maduro's power grab has plunged the nation deeper into despair. What's the end game?

The latest dispatches from Venezuela often come in the form of shaky phone-shot videos uploaded to social media. There was the surreal footage in June of a commandeered police helicopter hovering over the Caracas skyline with rogue officers lobbing grenades at the nation's Supreme Court and exchanging gunfire with guards. On 1 August, just hours after polls closed for President Nicolás Maduro's controversial constituent assembly election, Antonio Ledezma's family posted footage of the opposition leader being shunted from his house by a team of intelligence agents in the middle of the night. A few days later, bystanders captured an apparent rebellion at the Fuerte Paramacay military base in Venezuela's second city, Valencia. It was later suppressed by government loyalists.

The grainy videos show snippets of a spiraling chaos taking hold in the Opec nation as Maduro tightens his grip on power and casts aside the country's democratic institutions. Maduro's most brazen move yet was the formation of the constituent assembly. The body has effectively sidelined the National Assembly, over which the opposition had won overwhelming control in late 2015. The new body, supine and subservient, has formally been tasked with rewriting Venezuela's 18-year-old constitution, a process that could take months or longer. In the meantime, it will effectively act as a rubber-stamp body allowing Maduro to rule with no checks or balances.

Maduro quickly made it clear how he intended to wield this newfound power, flexing his muscles in the days after the national assembly election. As with Ledezma's detention, Leopoldo López, another high-profile opposition leader, was also hustled from his home in the middle of the night by security agents. Both were released days later to resume their house arrest, but it was a clear show of force from Maduro and a message to his political foes. Maduro also dismissed his attorney general Luisa Ortega Díaz, a chavista loyalist who had nonetheless grown increasingly vocal in her opposition to the president's power grab and increasingly heavy-handed crackdown on protesters. Ortega was a rare voice of dissent from within Maduro's orbit. Maduro also targeted opposition-aligned mayors: Ramón Muchacho, a Caracas-area mayor, was sentenced in early August to 15 months in prison, ostensibly for refusing a national government order to clear away blockades set up in the city by protesters. He was the fourth opposition mayor charged within a couple of weeks.

20% - Venezuela's production decline since the start of 2015

Maduro's move to consolidate power has sparked furious outcry from within the country. He is not popular and has presided over a catastrophic economic crisis and polls put his approval somewhere around 20%. But there appears little the opposition can do to effectively respond. The National Assembly has been defanged. Street protests continue, but to increasingly little effect absent a broader strategy to counter Maduro.

The military's role is a wild card. Sporadic signs of dissent within the ranks, mostly from low-ranking officers, point to the possibility of a coup d'état in a country where the armed forces have long been seen as a powerful check on runaway executive power. Maduro, mindful of this history, has worked to keep rank and file on side. He has doled out powerful government positions and lucrative financial opportunities, including in the oil industry, to top military officials. By all outside appearances, the top brass remains fat and happy.

Maduro's power grab has also sparked a flurry of condemnation and threats from abroad. A group of 12 nations from across the Americas, including Canada, Mexico, Brazil and other top economies, have refused to recognise the new constituent assembly and the laws it passes, which could have knock-on effects for regional trade. The UN has condemned the Maduro government's "excessive use of force" against protesters. More than 100 have been killed in daily clashes between demonstrators and security forces in four months of unrest.

Sanctions threat

The US' role looms large. As the most important buyer of Venezuelan crude, Washington holds enormous leverage over Caracas. US officials threatened to use this power and slap sanctions on Venezuela's oil exports if Maduro went ahead with the constituent assembly election. The election went ahead, and the Trump administration opted instead for the highly symbolic but mostly benign response of putting economic sanctions on Maduro himself. If Maduro has any US assets, they're now frozen, and Americans are barred from any dealings with him.

The Trump administration appears reluctant to go down the path of oil sanctions, largely because it is everyday Venezuelans, rather than the Maduro government, that would bear the brunt. The US is also keen to avoid blowback against US companies. Gulf coast refiners, who rely on a steady supply of Venezuelan crude, have lobbied against oil sanctions, arguing it would disrupt their operations and potentially raise fuel prices for Americans. Oil sanctions could also backfire. Venezuela would almost certainly be able to find new buyers for its crude, though its unique heavy qualities complicate matters. Meanwhile, the uncertainty generated by sanctions on a key oil producer could inject a geopolitical premium into the oil price, delivering an inadvertent economic boon to Maduro. Rather, the administration appears more likely to continue ratcheting up sanctions on individual Venezuelans: a slow-burn effort to turn the ruling elite against Maduro.

As the sole economic engine left, the nation's oil industry is closely intertwined with the worsening financial and political crisis. It is showing the bruises. Oil output is down 0.55m barrels a day, more than 20%, since the start of 2015 to 2.16m b/d, according to figures the country reports to Opec. Secondary sources, which track oil shipments, put output at less than 2m b/d. This is lost production, not a result of the cuts agreed with Opec. Output will continue to plummet as the cash-strapped state-oil company PdV struggles to muster enough investment to stem the decline. Its strategy over the past decade hinged on ramping up costly new projects in the Orinoco heavy oil belt to offset steep declines from its ageing conventional fields. But the oil downturn and domestic crisis undermined that strategy. New Orinoco projects have not materialised, and older fields are declining unchecked.

PdV finds itself in a tailspin. Falling revenue from lower oil prices cut into investment, which has led to falling output, which cuts further into the company's spending power. This vicious cycle is made worse by disastrous policy decisions that have impaired the company's ability to generate cash. PdV is forced to shoulder a heavy subsidy that makes fuel virtually free for Venezuelans. It has also mortgaged much of its output to service tens of billions of dollars in oil-for-loans deals. The company sells around 0.55m b/d into the domestic market at a heavy loss, though domestic fuel consumption is falling fast thanks to the economic crisis. It sends another 0.55m b/d or so to China to repay its loans and has committed at least 115,000 b/d to Russia's Rosneft to repay some $6bn in recent loans from Moscow, which has replaced Beijing as Maduro's most important financial backer. That leaves precious little left over to export to cash-generating buyers, mostly in the US and India.

Mounting debts

This has put PdV, and the Venezuelan government, at perennial risk of defaulting on its international debt obligations. PdV only barely met steep loan repayments last October and November. It had to put up a 49% stake in its US subsidiary Citgo as collateral to secure a $1.5bn loan from Rosneft. It also had to renegotiate the terms of its bonds with private investors in a way that raised the overall cost of the debt but kicked some of the heftier principal payments down the road. PdV faces another stiff test in October and November this year, when around $3bn in repayments are due. Defaulting could lead to a messy and chaotic showdown with bondholders, who could try to seize the company's oil shipments and other assets abroad. That vulnerability is why Venezuela has been so desperate to remain current on its debt, even as it forces a painful austerity on its own citizens.

The crisis is also pulling PdV ever deeper into the political morass. When chief executive Eulogio del Pino took over the top job in 2014, he made a concerted effort to show the outside world that under his stewardship the company would be depoliticised and refocus on its core mission of producing oil and gas. Some of the measures he took were symbolic. Employees at the company's Caracas headquarters were urged to ditch the red t-shirts of the revolution and don traditional office attire. Other measures were more substantive. Foreign partners were given more authority at their joint-venture operations to encourage them to lift investment and speed along new projects.

Today, Del Pino and PdV are consumed by the nation's politics. The boss's twitter feed, a favourite communication platform for top Venezuelan officials, is now an endless stream of flag-waving political rallies. Rumours of Del Pino's ouster have intensified since he was replaced as oil minister by the former head of Citgo Nelson Martinez and a January leadership shakeup saw many of his top executives ditched. Whatever Del Pino's shortcomings, the Stanford-educated petroleum engineer is probably the best foreign oil executives can hope for at this point.

Where it's all heading isn't clear. It's certainly possible that a coup or negotiated political settlement would restore something like normality to Venezuela's politics and clear the way for badly needed economic reforms. A violent collapse of the political order is a more disturbing possibility. Perhaps more likely, for now anyway, is that the country simply continues its slide into increasing authoritarianism, economic misery and dysfunction. Venezuela's problems are still likely to get worse before they better.

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