Venezuela’s oil industry needs Biden to lift sanctions
In less than a decade, Venezuela’s once powerful oil industry, the economic backbone of petrostate, has nearly collapsed. Since Maduro’s predecessor, Chavez, seized power in 1999 and launched his socialist Bolivarian revolution, the oil production of the founding member of OPEC has declined steadily. OPEC The data shows that in 2015, Venezuela pumped an average of nearly 2.4 million barrels of crude oil per day, which was significantly lower than the 1998 annual production record of 3.1 million barrels. By 2020, Venezuela’s oil production had fallen to 500,000 barrels per day, about a fifth of what it was five years earlier. This precipitous decline can be attributed to the rapid deterioration of Venezuela’s energy infrastructure and the implementation of increasingly stringent sanctions by Washington against the OPEC member. The near collapse of Venezuela’s economic backbone has wreaked havoc on the country’s economy, which is being exacerbated by gasoline shortages. These events forced autocratic President Maduro to reconsider his position and find a way to rebuild Venezuela’s devastated oil industry.
The brutal impact of the deterioration of the Venezuelan oil industry on the economy becomes evident when one considers that the gross domestic product has declined every year since 2013. In 2019, the GDP dived 39%, then an additional 30% for 2020, ever stricter US sanctions aimed at cutting Caracas off from global capital and energy markets a little deeper. The collapse of the Venezuelan economy triggered what is described as the worst humanitarian crisis outside of war to occur. Nearly five million Venezuelans have fled their country as the economic crisis has deepened in the past five years. This had a destabilizing effect in South America with neighboring Colombia, a key regional ally of the United States, bearing the brunt with about a third of Venezuelan refugees settling in this conflict-torn Andean nation.
In response to severe US sanctions and a deepening economic crisis, autocratic President Maduro has tightened his grip on power, demonstrating that the sanctions have failed to meet their goal of triggering regime change . As Washington tightened the noose on Maduro, it turned to allies of last resort, including RussiaChina, Cuba and Iran, for support in the form of oil loans, were in urgent need of gasoline and help to rebuild abandoned energy infrastructure. While these countries have provided crucial lifelines for an almost bankrupt and increasingly desperate Caracas, they have done little to restore Venezuela’s crumbling hydrocarbon sector and boost oil production. In April 2021, Venezuela was only pumping an average of 445,000 barrels of crude oil per day, 28 percent less than a year earlier and a far cry from the 1998 peak of over three million barrels per day. This has forced Maduro to consider changing the way Venezuela’s oil and gas industry is administered. most radical proposition being the opening of the petrostate oil industry to private control and even foreign ownership of assets. This Caracas hope will attract the urgently needed foreign investment to rebuild the crumbling Venezuelan oil industry.
There is a lot of speculation about the amount of investment needed to refurbish the economic backbone of the OPEC member. A February 2021 document from the national oil company PDVSA declared that it was necessary $ 58 billion to overhaul vital energy infrastructure, including oil fields, to restore Venezuela’s production to pre-Chavez levels of around 3 million barrels per day. This number appears particularly optimistic with many sources, including the director of Juan Guaido economic recovery plan, claiming that it will take between 110 and 250 billion dollars to reach this level of production. In addition to this huge financial investment, it also takes huge transfers of technology, skilled labor and spare parts for the urgently needed reconstruction program to take place. The severe deterioration of Venezuela’s oil fields, pipelines, refineries and other infrastructure means that it will take at least a decade to restore Venezuela’s oil industry to its former glory and achieve pre-Chavez oil production.
After years of support, Russia, China and recently Iran, Maduro’s main backers, have proven unable to resuscitate the crumbling Venezuelan oil industry. Just two years ago, Chinese entrepreneurs reportedly hesitated to overhaul Venezuela’s major refineries due to their dilapidated condition and inability to access vital parts due to US sanctions. Venezuela’s refineries were built by Western energy companies, primarily the predecessors of Shell and ExxonMobil, which means most of the key parts required must come from Western suppliers. Iran then offered its assistance by flying in planes loaded with catalysts, parts and technicians for the overhaul of the Cardona, Amuary and El Palito refineries. After a series of problems and a failed restart, two refineries were finally brought back online, including the 140,000 bpd refinery at El Palito, but they are only operating at around 10% of capacity. This is due to the need for major overhauls which cannot be completed due to a lack of capital and parts as well as a chronic lack of thinner.
Heavy crude oil produced in the Orinoco Belt, which accounts for about 70% of Venezuela’s production, must be blended with light crude oil before it is refined into gasoline and diesel. PDVSA is unable to source enough light crude oil from Venezuela, and Washington sanctions have cut off international supplies. Prior to 2019, when Trump Whitehouse increased sanctions, the United States was a major supplier of light crude oil shipping 45 million barrels to Venezuela in 2018. In a desperate attempt to secure a vital thinner, Caracas bypasses Washington sanctions using dark voyages, where tankers turn off their transponders to import condensate from Iran. These shipments prove insufficient to allow more than limited refining cycles, always leaving Venezuela short of fuel, further exacerbating the long-standing economic crisis. The only way to access the massive investments, including capital, skilled labor and technology, needed to rebuild Venezuela’s nearly collapsed oil industry is to attract investment from Western energy supermajors. This will only happen once the US sanctions are relaxed, and Maduro provides the appropriate legal protections demonstrating that the risk of nationalization of assets is minimal.
If it looks like US sanctions have stalled, do not trigger The desired goal of regime change, Biden Whitehouse has pledged to recognize Guaido as president and will not negotiate with Maduro. There are, however, signs of an emerging easing between Caracas and Washington. Maduro has taken unilateral steps, such as releasing the Citgo Six from house arrest and accepting international food aid, to build political guarantees with the Biden administration. In March 2021, Caracas launched military operations against dissident FARC guerrillas, which are part of a foreign terrorist organization designated by the United States, operating along the western border with Colombia. The actions come after Maduro signaled earlier this year that private control of oil assets was possible and that reforms would be made to oil laws to allow for what he described as new business models. Bloomberg, in a recent article, said U.S. government figures with access to Biden opened a speech with Maduro. Guaido, recognized interim president in the United States recently proposed a gradual easing of sanctions to motivate Maduro to reach an agreement on the planning of free elections and obtaining international aid for Venezuela.
By Matthew Smith for Oil Octobers
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