A potential temporary relief to the U.S. sanctions against Venezuela could jumpstart the oil industry in the South American country where output has slumped to a five-decade low.
The sanctions, imposed by the Trump Administration, have crippled Venezuela’s crude oil production and exports. But the industry in the nation sitting on the world’s largest crude oil reserves – even bigger than Saudi Arabia’s – had been in a decline for years due to mismanagement, corruption, and a lack of investment in field operations and refinery maintenance by state oil firm PDVSA.
Last year, Venezuelan crude oil production hit a 50-year low of around 700,000 barrels per day (bpd).
The first opening of the Biden Administration to Venezuela occurred at the end of last year when it eased sanctions on Venezuela to allow Chevron to resume its work in Venezuela and export the crude when access to Russian heavy crude was shut off by the sanctions on Russia over its invasion of Ukraine.
In November, the U.S. government granted Chevron a license to operate in Venezuela under its joint ventures with PDVSA there. Profits from the sale of Chevron’s Venezuelan-derived crude oil go towards paying down PDVSA’s debt to Chevron and will not bolster state-run PDVSA’s profits.
Venezuela’s heavy crude oil is prized by U.S. Gulf Coast refiners, who, until recently, looked to Russia’s heavy grades to replace it. Last December, it was reported that several refiners were attempting to get their hands on the rare Venezuelan crude oil.
If the Biden Administration further eases the sanctions and allows other Western oil companies to operate in Venezuela, the South American country could ramp up its production by around 200,000 bpd and reach about 1 million bpd in crude output by 2025, analysts say.
Yet, for this to happen, several conditions need to be met. First, Nicolas Maduro has to agree to hold free presidential elections. Next, the Western oil companies have to be sure that the possible temporary relief in the sanctions regime would open enough of an investment window for them to invest in reviving production at Venezuelan oilfields, many of which have been sitting idled and neglected due to PDVSA’s lack of resources to operate them and the sanctions on Venezuela’s oil exports.
There could be an opening in the U.S. Administration to allow more companies – other than Chevron – to export crude oil from Venezuela.
Federal government officials in Washington are reportedly working on a draft proposal for sanctions relief to be offered to Venezuela if it organizes “free and fair” presidential elections.
The pitch focuses on letting more companies buy Venezuelan crude, Reuters reported, citing unnamed sources.
“Should Venezuela take concrete actions toward restoring democracy, leading to free and fair elections, we are prepared to provide corresponding sanctions relief,” a spokesperson for the National Security Council said, as quoted by Reuters.
If Maduro shows willingness to hold fair and free elections – something he hasn’t been keen on doing for years – Venezuela could be able to increase its oil production. Companies including Eni and Repsol, which are still owed payments by PDVSA, could also receive relief to sell Venezuelan crude.
“Venezuela could add 200,000 barrels a day by 2025 and reach 1 million barrels per day as a result of successful negotiations and new issuing of licenses,” Francisco Monaldi, a fellow in Latin American energy policy at Rice University’s Baker Institute for Public Policy, told Bloomberg.
Chevron, the only Western firm currently allowed to do business with Venezuela, has already doubled its production in the country, to 135,000 bpd as of May this year compared to October 2022, just before the U.S. sanctions relief.
Chevron could begin drilling new wells in Venezuela next year and could further ramp up its output to 200,000 bpd by the end of 2024, a source with knowledge of the U.S. supermajor’s plans told Bloomberg.
Venezuela could see higher output in the near term – and the global oil market, more supply – but only if Maduro is open to holding a free and fair election.
By Charles Kennedy for Oilprice.com
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