March 16, 2018
Venezuela’s Oil Industry: Can it Survive?
By Domingo Sadurni
Once the country’s lifeline, Venezuela’s oil industry has been decimated, the product of decades of neglect and mismanagement. As Venezuela’s economic and humanitarian crisis worsens and political conditions deteriorate ahead of upcoming presidential elections, the Adrienne Arsht Latin America Center, in partnership with the Global Energy Center and Eurasia Center, hosted a timely conversation on March 13, 2018 on the future of Venezuela’s oil industry and the implications of the entrance of foreign actors into the space. The event marked the launch of The Collapse of the Venezuelan Oil Industry and its Global Consequences, a new policy brief by Francisco Monaldi, Atlantic Council author and fellow in Latin American Energy Policy at Rice University’s Baker Institute. The brief details what’s ahead for the crisis-ridden country and its energy industry.
The panel discussion, moderated by Center Director Jason Marczak, convened Monaldi; David Goldwyn, chair of the Atlantic Council Energy Advisory Group and senior fellow in the Latin America Center; Rebecca Chávez, former deputy assistant secretary of defense for Western Hemisphere Affairs at the US Department of Defense; Kerry Contini, partner at Baker McKenzie’s Outbound Trade Practice Group; and David Smolansky, former mayor of El Hatillo Municipality in Venezuela and deputy secretary general of Voluntad Popular.
Following Marczak’s initial remarks, Monaldi set the stage for the conversation by providing the historical context that led to the downfall of the Venezuelan oil industry. “The debacle was long in the making. PDVSA was made into a social industry after Hugo Chávez was elected president. The government was taking every dollar it could out of it.” Goldwyn added that, more recently, as PDVSA’s management passed to officials in Maduro’s government, there has been a lack of investment in security, employees, and new project fields. In fact, per Monaldi, PDVSA has not invested in a new oil project in two decades.
Chávez commented on the security concerns resulting from the instability in Venezuela and its regional implications in Colombia and Brazil. “Internal security is a serious problem. The national homicide rate is an estimated 92 per 100,000 (while in the US it is 6 per 100,000). Poor access to food and shelter has made neighboring Colombia divert resources to handle more than 600,000 refugees from Venezuela.” This has created an unprecedented “refugee crisis that threatens to destabilize the region.” In a year of elections across the region, she worried, the world can expect presidential candidates to rally behind anti-immigrant sentiment to favor their campaigns.
On the topic of sanctions, Contini offered an overview of the United States’ implemented sanctions: over forty Venezuelans, including President Maduro, are prohibited from involvement in financial transactions in the US, and PDVSA is restricted from long-term credit and bond financing in the US. She explained that while the US has not explicitly stated the objectives of its sanctions, she believes regime change is not one of them. The sanctions were imposed because “state assets were being sold below market value for cash, at the expense of the Venezuelan people,” said Contini.
The impact of US sanctions has been mostly an economic one, explained Monaldi, despite sanctions not specifically targeting PDVSA’s import-export business. CITGO, PDVSA’s refining subsidiary in the United States, has been buying less oil after sanctions were imposed, reducing PDVSA’s exports to the US oil market – the largest in the world.
But, US sanctions could also have unintended consequences, warned Goldwyn. By isolating Maduro’s government, the US is forcing Venezuela to rely more on Russia and China for markets and financing, a move that could pose larger geopolitical concerns to the US and the region. Goldwyn and Monaldi recommended that the US draw from its extensive foreign policy toolkit to impose better and more sophisticated sanctions on Venezuela.
Smolansky, Contini, and Chávez added that new sanctions must be accompanied by multilateral support from both regional and international actors, including the Lima Group and the European Union. “Officials fear these targeted sanctions. They need to be expanded, not just by the US and Canada, but also the European Union. The international community could be more aggressive with targeted sanctions,” stated Smolansky. Precedent shows that multilateral pressure adds legitimacy and effectiveness to sanctions, as Contini and Chávez remined the audience of US’s experiences with Cuba and Russia.
Goldwyn cautioned that a US oil embargo would increase costs to US refineries as they switch their supply of crude oil, force oil companies to lay off employees at their Gulf Coast operations, and raise gas prices during the summer driving season – a political risk before mid-term elections in November.
Also, an embargo would be an opportunity for President Maduro to blame US imperialism as the country falls deeper into crisis and relies more heavily on Russia, China, and India for oil markets. “If the US tried to unilaterally impose more sanctions, the global conversation would move from what Venezuela’s government has done wrong to how the US is trying to force a regime change,” Goldwyn said. Furthermore, Chávez added that, with or without an embargo, in the likely scenario of a PDSVA default, countries in the Caribbean could turn to Mexico as an alternate oil supplier.
Pivoting to the increasing involvement of foreign actors like Russia and China in Venezuela’s oil industry, Smolansky commented that “the Russians know that Maduro is a threat to the region.” He remained somewhat optimistic, however, stating that Russian loans to Venezuela were not approved by the National Congress, and therefore, could be invalidated by the next administration. Goldwyn added that Russia’s increasing involvement in Venezuela is both a strategic and economic risk to the United States. He cautioned that a long-term Russian presence in Venezuela could threaten democracy, security, and counter-narcotic efforts in the region.
Monaldi concluded the event, stating that the future of the oil industry in Venezuela is not as grim as we might expect. Production will decline in the short-term, but in the longer term, a combination of effective foreign investment partnerships (such as those in Colombia and Mexico, for example) and an independent PDVSA could place Venezuela in a better position to increase its oil production capacity. Smolansky added that a diversified economy and a transition to democracy are key for a better future for Venezuela.