Venezuela: Sanctions relief, free elections and the dilemma facing oil investors

The US rolled back a series of restrictions – mostly related to the oil and gas industry – after Venezuela's government reached an agreement with opposition parties to allow a competitive, internationally monitored election next year.

The most significant concession was a general license issued by the US Treasury Department, allowing Venezuela to produce and export oil without restrictions for the next six months. 

Francisco Monaldi, a Latin America energy policy expert at Rice University in Houston, tells BNamericas what lies in store for the South American country and its battered hydrocarbons sector.

BNamericas: What does the partial lifting of sanctions mean for Venezuela?

Monaldi: This is a carrot that [President Nicolás] Maduro couldn't resist. All the previous negotiations were about licenses to specific companies like the one to Chevron. But most of those meant first that the companies would be hesitant to invest if they didn't have clarity about how long any agreement would last with all of the political instability in the middle of an election year in the US and in Venezuela. 

There is also the fact that most of the fruits of those investments will be produced later on. Maduro needs the money right now, so the license is very attractive. Maduro can now redirect the oil that is going through the black market to China at a discount of Brent minus US$40/b to the Gulf coast of the US at full price, which is a little below Brent. That means that he will significantly increase the revenues that he gets for those, say, half a million barrels. 

And that is, of course, vital because he otherwise doesn't have any money in an electoral year. You might think of a Nicaragua-type scenario in which Maduro could end up with no competitive opposition candidates. Or he might raise his popularity and divide the opposition enough – maybe continuing to ban some candidates – and win elections that are not free and fair but that are at least somehow competitive and might bring him into some kind of normalization with at least part of the international community. 

BNamericas: Is it realistic to expect that Maduro will keep his end of the deal by guaranteeing free and transparent elections?

Monaldi: Let's assume that six months from now, Maduro feels that he cannot win the election in any fair form, he might face sanctions again. I think he will continue to have the license after six months because the final decision that he has to take is later on given that the elections are likely to be in November or December 2024. 

But if he cannot pull it off and his popularity doesn't increase with the expenditure of this money, then I’m 100% sure that Maduro will not give up power. There is no reason why he would, and he faces significant costs if he exits. So my sense is that, in this situation, it could move to a Nicaragua-type scenario and the US will be faced with the tough decision to decide if reverts to previous sanctions or at least take away the license for [state oil company] PDVSA to sell in the US. 

That's why I think it's attractive for Maduro. He gets a bird in hand, a few months of great revenue, the opportunity to maybe potentially win some mildly competitive elections and, if that isn't the case, he still has the prerogative to basically go back and try to see if the US doesn't fully re-enact sanctions. 

BNamericas: What will be the impact of the agreement on Venezuela's oil sector? Can it significantly increase production? And what does it mean for Chevron, which was already granted a license to resume production and exports from Venezuela late last year?

Monaldi: I still think that the license that is specific to Chevron will continue to work out. And that's the only significant increase in production that we will continue to see. There might be, say, a little more than 100,000 additional barrels a day from the 140,000b/d that Chevron currently produces. Maybe there will be a small increase in production from European companies such as Eni and Maurel & Prom or perhaps even from Repsol. And they might get their specific licenses for their contracts. The Russians are out of a license and they are a major player, but won't be able to increase production much. 

The only other major player is China. The question is: Will China be willing to invest? They can increase their production relatively fast from around 100,000b/d to 200,000b/d in a year or two. But can they be confident that this is not going to be reversed any time soon? I think what we will see is that the Chinese will invest a little and they will get the oil from their own projects to China. That will mean that Venezuela will have to start repaying some of the debt that it wasn't paying with the black market deals.

BNamericas: Is there now an end in sight to Venezuela's economic and humanitarian crisis? And will it come soon enough for Maduro to win next year's presidential election in a manner that satisfies the international community?

Monaldi: The main benefit for Maduro is the price he will get for the exports. It will be a windfall. He will attempt to generate economic growth and distribute money in a way that is politically effective to try to increase his chances of winning an election. The increase in production will be important, but it will take time and it will not pay off significantly before the elections. The bottom line is that this is important, not because of production but because of prices and the capacity to actually collect because in the black market it was very hard. 

The impact in the global market will be minimal because 200,000b/d in a year or year and a half is a drop in the bucket of the global oil market. It will benefit the refiners on the Gulf coast because it's the crude that they use for some of their capacity. It's designed for heavy oil and Venezuelan crude will be a welcome addition for those refiners that will improve their margins. Maybe that helps with bottom-of-the-barrel products like diesel or fuel oil, but I don't think it will [reduce] the price of gasoline in the US.