Pitts: Venezuela: Geopolitics, Sanctions, Elections and Citgo

Geopolitical events in the Middle East—specifically the Hamas attacks in Israel—and fears of escalation may stand to benefit Venezuela both indirectly from a run-up in oil prices and directly through further easing of U.S. sanctions on its oil sector.

Relaxing sanctions has always been dependent on the U.S.’ much wanted “free and fair” presidential elections in 2024, still heavily factored in on any decisions to come from Washington. Sanction relief announced on Oct. 18 by the U.S. Office of Foreign Assets Control (OFAC) is as much related to elections as it is related to efforts to boost available oil supply in the market.

At the most basic level, both scenarios could translate into higher revenues for the coffers of Venezuela President Nicolás Maduro—the leader the 2019 sanctions aimed at toppling. This, as Venezuela’s oil production averaged 733,000 bbl/d in September 2023, according to secondary source data from OPEC’S Monthly Oil Market Report. Venezuela’s current production is up from a low of 500,000 bbl/d in 2020, but still far from a peak of 3.2 MMbbl/d in 1997.

Higher oil prices that could come about due to global oil supply uncertainties should surely benefit Venezuela, which continues to sell its oil, primarily heavy oil, at a discount to the major benchmarks, owing to sanctions. Currently, Venezuela’s benchmark Merey crude is the cheapest of all the crudes that comprise the OPEC reference basket. So, higher prices absent discounts would be a welcome boost to a Venezuelan economy still struggling under the weight of U.S. sanctions and the global economic downturn caused by the COVID-19 pandemic.

The easing of sanctions on Venezuela’s oil sector should allow international oil companies (IOCs) to boost investments and production. Chevron Corp., which remains in Venezuela, has been the main company behind recent production increases, and the U.S.-based producer is the company mostly likely to contribute to near-term production increases. Other IOCs in Venezuela with potential to expand oil production include Italy’s Eni and Spain’s Repsol, partners in the offshore Cardón IV gas project. Near-term production increases will come from IOCs already present in Venezuela as the short six-month sanction deal is not long enough to attract other players and the billion-dollar investments needed to really impact production.

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But, the easing of sanctions on Venezuela’s oil sector before elections next year without a guarantee of “free and fair” elections could backfire on Washington. Election related guaranteed on Oct. 17 by Venezuela's ruling party in Barbados opened the door for sanction relief, but Washington continues to say the relief could be walked back at any time.

Datanalisis President Luis Vicente León said during an interview this week with Globovision that the “devil is in the details” regarding ongoing talks between Washington and Caracas. But he did say he expected some additional positive advances related to Venezuela oil and gas sectors.

Only time will tell where the negotiations between the U.S. and Venezuela’s ruling party go, as well as talks between the ruling party and the opposition. Maduro is definitely in a much better negotiating position than he was two years ago, and the window of opportunities for the oil and gas markets have seemingly opened again to the benefit of Venezuela. But Washington still holds the keys that represent Venezuela’s access to both markets. A recent amendment by the U.S. Office of Foreign Assets Control allows Trinidad and Tobago to pay for Venezuelan gas with a fiat currency or via humanitarian aid.

For what it’s worth, the fate of U.S.-based refiner Citgo Petroleum, owned by state-owned Petróleos de Venezuela SA (PDVSA), seemingly remains a key indicator of the direction presidential elections could go in 2024. If the potential for a “free and fair” election is positive, the U.S. court system could conceivably extend protection afforded to Citgo from creditors seeking around $23 billion until a winner is decided. On the flip side, if the potential is negative, Citgo’s assets could be put up for auction relatively soon.

While there has been positive noise coming out of Venezuela this week, it’s still too early to claim victory on the election front. For starters, opposition front runner Maria Corina Machado is still banned from running for the Venezuelan presidency next year. Likewise, Venezuela’s Maduro remains buddy-buddy with leaders in Russia, Iran, China, Cuba and Turkey. And an Oct. 15 telephone call between Maduro and his Palestine counterpart Mahmoud Abbas may not be seen favorably by some countries—particularly a major U.S. ally in the Middle East.

Whether it’s time to “buy the rumor, sell the news” in Venezuela depends on your aversion to risk. Stay tuned.

EDITOR’S NOTE: This column was originally written for the Oil and Gas Investor November magazine and has been adapted to take into account recent major events.