US offers life support to Venezuela’s economy

Washington’s decision to lift sanctions on Caribbean country’s oil sector has improved growth forecasts

Art installation of an oil well in the center of Caracas, VenezuelaMatias Delacroix ( BLOOMBERG )

To gauge the effectiveness of sanctions, there’s nothing like measuring the rebound generated when they’re removed.

The decision made by the American government on October 18 to suspend the prohibitions on Venezuelan oil for six months — among other economic relief measures — has generated a radical change in the country’s growth forecasts. According to the latest estimate from Ecoanalítico — an independent consulting firm in Caracas — the Venezuelan GDP would go from declining by 0.7% this year to growing by 9.4% in 2024.

Oil trades on the high seas, ghost ships with the GPS disconnected, shady fees of up to 15%, massive discounts in the sale price, as well as the use of bartering and cryptocurrencies... these were the costs of a black market that ceased to be necessary as of last month, when the Nicolás Maduro administration reached an agreement with the Venezuelan opposition at a summit in Barbados. The government agreed to release political prisoners and remove political bans from rival candidates, among other measures aimed at restoring democracy.

According to Alejandro Grisanti — director of Ecoanalítica — the boost to next year’s GDP will occur due to three factors: the rising sale price of hydrocarbons, the reactivation of the Venezuelan private sector and increased production of crude oil. The first is the easiest to understand: under the sanctions regime, Venezuelan oil was smuggled into the Asian market and sold at discounts of between 25% and 40% beneath the real market price per barrel. Further profit was lost due to higher transportation costs and currency manipulation.

According to the estimates made by Francisco Monaldi — an expert in the Venezuelan oil industry and a professor at Rice University — ending the costs imposed by the black market will mean going from $11 billion in annual hydrocarbon export revenue to about $16 billion. Grisanti believes that this increase is more than enough to stimulate Venezuela economic activity across the board.

Lifting the sanctions will also encourage a small increase in oil production… a variable that has already been improving since 2022, when Chevron was granted permission to sell Venezuelan crude in the United States. The condition was that any profits made from these sales by PDVSA — Venezuela’s state-owned oil company — would be used to settle debts with American creditors.

Grisanti’s estimates that the particular permit granted to Chevron — as well as the general one granted in October to the entire fossil fuels industry — could allow Venezuelan output to approach one million barrels per day by 2025, compared to the 750,000 that Venezuela produces today. Even so, such an improvement is insufficient, considering that the South American country — which has the largest proven crude oil reserves in the world — is capable of producing two million barrels per day.

“Chevron has already added 135,000 [barrels]. By the end of the year, [the daily increase] will reach 150,000. In each of the next two years, [the American company] could add another 50,000 [daily],” Monaldi notes. According to his estimates, the sum of projects set up by the Italian energy company Eni, Spain’s Repsol and the French companies Perenco and Maurel & Prom (the latter controlled by the Indonesian state company Pertamina) could add another 70,000 barrels of Venezuelan oil output per day in the same period.

The big question now is what the China National Petroleum Corporation (CNPC) is going to do. It has traditionally been the second-biggest buyer of Venezuelan crude oil after Chevron. The Chinese state oil company has already informed Reuters of its intention to buy 265,000 barrels of Venezuelan crude each day, paying in cash. According to Monaldi, this detail is relevant, because it implies that — for the moment — China isn’t demanding immediate repayment of the “$12 billion that Venezuela owes [Beijing].”

A wait-and-see attitude

“A purchase of 265,000 barrels per day would open the door for the CNPC to invest again in its [Venezuelan-based] projects and daily production, to increase [output] by another 100,000 barrels,” Monaldi says. “Now, if I were in their place, the logical thing would be to wait and see if the permission granted by Washington is renewed, and whether or not the electoral cycle of the United States and Venezuela [in 2024] ends up ruining this peace.”

Waiting to see what happens is, perhaps, the phrase that best defines the current moment in Venezuela. In the short-term, no one doubts that income will multiply with the easing of costs incurred on the black market… but the medium-term remains as mysterious as ever. Hence, Monaldi affirms that there’s a guarantee that all European oil companies are going to demand before embarking on any significant production expansion in Venezuela: “They’re going to ask for a contract equivalent to the one Chevron has, which doesn’t involve putting fresh money into the projects, but rather reinvesting the cash flow that the projects generate. That is, [these companies aren’t willing] to risk anything.”

In the short-term, the consensus among analysts is that the United States isn’t going to reimpose sanctions, despite the Venezuelan government’s decision to disqualify María Corina Machado as a presidential candidate, after she obtained an overwhelming victory in the presidential primaries.

The White House feels obliged to maintain the suspension of sanctions because it has to guarantee a minimum amount of legal protection for American oil companies. The Biden administration is also keen on thawing the relationship with Caracas. “In the region, [Biden] was receiving a lot of pressure from left-wing governments that had welcomed Maduro back, while the sanctions were pushing Venezuela towards Iran and Russia, among other undesirable actors [in the eyes of the US government],” says Risa Grais-Targow, a Venezuela specialist at the Eurasia Group. “Reducing migratory pressure on the southern border (as many refugees come from Venezuela) is also a major concern for Biden, as is the global price of oil.”

If those are Biden’s reasons, Maduro’s main motivation for reaching an agreement was to generate the cash flow that will allow him to increase social spending ahead of the 2024 presidential elections. The goal, says Grais-Targow, is to be re-elected as president in elections that at least have the appearance of being clean. This would allow Maduro to legitimize himself in the face of the international community and secure the withdrawal of remaining sanctions. “In a sense, these elections represent something new for him, because they’re the first in which the opposition is actually competing, after they decided to boycott the previous ones (2018).”

No one believes that the extra $5 billion that the Venezuelan government will receive annually (after the temporary lifting of sanctions) will go towards desperately-needed reinvestment in the country’s oil fields. Permanent drilling is required to maintain production, but excess funds will likely be spent on boosting the regime’s popularity among the electorate.

Monaldi says that, right now, “there’s only one drill in the country, compared to the 50 that [were previously operative] when Venezuela produced two million barrels per day.”

“It’s true that Chevron has said that it’s going to install two more drills,” he acknowledges. “This would leave the total at three. But to achieve the significant increase that Venezuela has the capacity to generate, at least 20 would be needed.”

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