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Venezuela’s options narrow

Sanctions, the oil price shock and the potential exit of Chevron multiply the country’s misery

Venezuela has had to contend with a series of blows to its already struggling economy and ailing oil sector since the turn of the year. And there is very little sign of light at the end of its tunnel.

In February, the US State Department announced a new round of sanctions against a trading subsidiary of Russian firm RosneftVenezuela’s principal crude marketer since sanctions forced international firms to shun the country’s oil sector. The sanctions were followed in March by additional measures against another Rosneft arm. The company may now step back from Venezuela as a result, making it yet more difficult for the country to find buyers for its oil.

The oil price crisis is compounding Venezuela’s financial woes. State-owned producer Pdvsa has managed to stabilise crude production this year, with output lifting to 760,000bl/d in February after having sunk below 650,000bl/d in September 2019. However, the price collapse will make it even more challenging to generate profit and maintain current volumes.

“With foreign exchange reserves well below $10bn, production costs averaging $30-35/bl, continuing power outages in producing regions, inflation, and the fact that Venezuela has been exporting oil at significant discounts, [lower prices and Rosneft sanctions] will represent a huge blow for Pdvsa in the coming months,” says Jose Chalhoub, an independent geopolitical risk analyst based in Caracas.

“Pdvsa have been planning for these [sanctions],” adds Eileen Gavin, senior analyst for the Americas at political risk consultancy Verisk Maplecroft. “But there will be a point when they run out of options and it is increasingly difficult to get oil out.

Exit stage left

Washington is also considering whether to renew US firm Chevron’s licence to do business in Venezuela. The company was granted a three-month extension to continue operating in January, but this expires on 22 April.  

Chevron represents an interesting case-study for how far the Trump administration is willing to push sanctions. The company has been operating in Venezuela for over a century and has four joint ventures with Pdvsa. If Chevron is forced to withdraw from the country it would mean the loss of crucial expertise, personnel and investment in the oil sector.

760,000bl/d – February oil production

The departure would be an economic blow to Venezuela but also a political one for the US. If Chevron leaves the country then joint ventures could be nationalised or given to another third-party company, likely to be Chinese or Russian. And, in any post-Maduro Venezuela, it could be difficult for the US to play a role without a presence in the oil sector.  

The loss of Chevron would further curtail Pdvsa’s ability to keep pumping. “Even if [Chevron’s] void is filled by Rosneft, for example, it will not be easy to recover those barrels,” Chalhoub says. “[This is true] especially in the middle of the power crisis in the country.”

However, the coronavirus outbreak has rapidly changed the corporate dynamics for all oil producers, and the US may still rethink its strategy. “I think almost everybody expected a non-renewal in April, but current world events are so fast-paced, two weeks ago was a different world,” says Francisco Monaldi, a fellow in Latin American energy policy at the Baker Institute thinktank. “To put any additional pressure on US companies at the moment would be a clear problem.”

Open the door? 

The effects of sanctions, coupled with a deteriorating economic situation, could force Venezuelan president Nicolas Maduro towards a more market-friendly oil sector. The government is exploring the possibility of allowing more joint ventures with third parties.

“Even if [Chevron’s] void is filled by Rosneft, it will not be easy to recover those barrels” Chalhoub

“You can see a pragmatism in that they announced they were willing to operate with foreign partners,” says Monaldi. “They seem to be eager to [revive] the National Assembly in order to change the law and [give] foreign companies a bigger role. 

But there are question marks over the potential legality of a change to the country’s joint venture structure. In January, Maduro obstructed a vote to elect a new speaker for the National Assembly, the legislative body responsible for amending joint venture regulations . The opposition held a rival vote, further complicating the situation and resulting in two candidates claiming victory.  

A win in the upcoming elections to the National Assembly, scheduled for later this year, would allow Maduro to repeal the current laws and likely result in further concessions to Russia and China. But all that is unlikely to be immediately effective while you have sanctions and an oil price tumbling, says Monaldi.

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