Sanctions, Leverage, and Venezuelan Sovereignty

By Ricardo Vaz – Jan 3, 2024

The US’ economic coercive measures severely constrain Venezuela’s ability to negotiate with foreign corporations, VA’s Ricardo Vaz explains

On October 18, 2023, the Biden administration eased select sanctions against Venezuela. Alongside suspended restrictions on banking, mining and debt transactions, the US Treasury Department issued a six-month license authorizing dealings with Venezuela’s oil and gas sectors.

The move sparked unrealistic expectations for the nation’s recovery, as well as (justified) demands for the Maduro government to address issues like public sector wages. However, the pattern that emerged in the past weeks paints a different picture. Sanctions, and the constant threat of a snap back, are ultimately in place to hurt the country’s ability to exercise its sovereignty.

What’s in a license?
The removal of sanctions is not the same as a waiver, even more so a temporary one such as General License 44. Though this license has unquestionably led to increased activity in Venezuela’s energy sector, it is worth analyzing what kind of deals are taking place.

GL44 permitted US actors to invest and buy Venezuelan oil and gas until April 2024. Almost immediately, US officials issued public threats that they would reimpose sanctions if the Maduro government did not comply with unspecified “democratic” conditions. Behind the scenes, the US Treasury made sure investors knew the sanctions easing was not a “call for investment.”

In recent weeks there has been a flurry of activity, first and foremost through spot sales of crude cargoes. Major traders have bought Venezuelan oil, and final destinations have included Indian refineries, both public and private owned.

The ability to export crude “openly” has meant selling much closer to market prices, ditching the significant discounts and shady intermediaries previously employed by Venezuela to skirt sanctions. Economist Francisco Rodríguez estimated that oil revenues could grow by some US $3.7 billion annually just due to this price gain.

Still, while there has been no shortage of potential buyers, PDVSA has not been able to secure large-scale investment to raise its production ceiling. And the deals that have taken place come under very specific circumstances.

The ‘Chevron model’
The most significant deal struck in recent weeks involved reactivating a joint venture in Western Venezuela with Maurel & Prom. The French multinational had long been lobbying to return to the Caribbean nation, particularly with plans to capture flared natural gas in oil fields.

Weeks later, Spain’s Repsol signed a similar contract to revamp another mixed company that operates fields both in Eastern and Western Venezuela.

The specific details of the agreements are unknown, but both were reported to be in the vein of the “Chevron model,” in reference to the late 2022 arrangement that saw the US oil giant restart and expand operations in its Venezuela projects.

The arrangement entails the allocation of a portion of revenues to pay outstanding debt. Furthermore, the foreign partner, despite its minority stake, assumes oilfield operations and crude sales. These latter responsibilities have historically belonged to PDVSA, not just as majority shareholder but also as required by energy legislation.

Nevertheless, with sanctions demanding “flexibility,” the prospects remain bleak. The projected production increases from the Chevron, Maurel & Prom and Repsol ventures add up to around 120,000 barrels per day (bpd) over the next couple of years. Venezuela’s output last registered at 780,000 bpd, meaning the foreign partnerships are not even enough to surpass the symbolic 1 million bpd threshold.

With oil initiatives offering limited upside, the Maduro government has shifted its attention to natural gas, which has its own set of constraints and possibilities.

Losing stakes
A recent 30-year contract signed with Trinidad and Tobago to explore offshore natural gas reserves might also set a new standard for partnerships to come. The Dragon field project looks tailor-made for Shell, which will reportedly hold a 70 percent stake in the joint venture and run operations, with Trinidad’s National Gas Company (NGC) holding the remaining 30. PDVSA will not be a shareholder and Venezuela will (only) receive taxes and royalties.

It is important to clarify that this agreement does not violate Venezuelan hydrocarbon legislation. Whereas PDVSA is required by law to hold a majority stake in oil projects, there is no such restriction for natural gas. Former President Hugo Chávez urged the closure of this loophole but there was no action in that direction.

The Dragon initiative is not a novelty in this regard. Cardón IV, for example, is owned by Spain’s Repsol and Italy’s Eni (50 percent each). The touting of potential natural gas investments in Venezuela is not just because of European demand and it being a “cleaner” source compared to oil. If PDVSA holds a minority stake, or no stake at all, US sanctions do not apply (1), though companies still go to Washington first for a green light.

PDVSA Signs Oil Production Agreement With French Company

In the Dragon deal, the Maduro government had originally objected to the US’ “colonial” imposition that Venezuela receive no cash from the project. Though US Treasury amended the respective license in October, the fact that PDVSA is not a shareholder could mean that it will receive royalty and tax payments via natural gas supplies.

Venezuelan leaders touted the agreement with Trinidad as a major step, par for the course given the need to attract investment. However, with the venture estimated to initially yield 185 million cubic feet per day, at current gas prices ($2.5 per thousand cubic feet) it amounts to around US $170 million a year. If royalties and taxes add up to 50 percent, which is surely an overestimate, it would mean $85 million of income for state coffers. Though not negligible, it is certainly not a life-changing amount.

Jeopardized sovereignty
The bluster and sheer absurdity that surrounded the Juan Guaidó-led “interim government” helped create a misguided perception of sanctions. With Trump and his officials boasting of “maximum pressure” to trigger regime change, the economic coercive measures became portrayed as a targeted operation with short-term goals.

The reality instead is that sanctions are designed to constrain Global South economies and inflict long-term damage on their sovereignty. They are a growing tool in Washington’s arsenal to try and defend its falling hegemony.

The Venezuelan case illustrates this perfectly. The recent arrangements with Chevron, Maurel & Prom, Repsol and Shell saw PDVSA enter into very unfavorable agreements compared to past standards. Sanctions first hit its capacity and infrastructure, as well as Venezuela’s whole economy. Then they placed hurdles and dire needs when it came to securing new deals.

In other words, PDVSA’s leverage in negotiating the exploration of Venezuelan resources with foreign partners is much reduced. The Maduro government is not free of responsibility, both in energy deals and overall economic policies, but the playing field is clearly tilted. Furthermore, the flip side of concessions to private capital is a reduced capacity to address social needs, not to mention respond to grassroots demands, which also has worrisome long-term consequences.

For nearly 25 years, successive US administrations tried to overthrow the Bolivarian Process through a myriad of strategies before landing on economic warfare. While it has not succeeded, it has managed to set back some of the Revolution’s most important gains and secure more favorable conditions for multinational corporations. We should expect sanctions to stay, whether in their fully-fledged form or with the most recent license and threat combo.

Note
(1) US sanctions block assets and prohibit transactions with entities where PDVSA or another Venezuelan state company hold a majority stake.

(Venezuelanalysis.com)