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Sanctions on the energy and mining sectors were temporarily lifted for six months last October in return for an agreement by the government of President Nicolás Maduro (which has been in power since 2013) and the Venezuelan opposition to hold competitive presidential elections in July this year.
The sanctions relief was suspended over concern that the Venezuelan opposition had been prevented from registering its preferred candidate for the poll – the free market advocate María Corina Machado – and the intimidation and detention of other members of the opposition, representing a clear breach of what was agreed in October.
Yet while it had little choice but to reimpose sanctions in the face of Caracas reneging on its commitments, Washington does not want to completely exclude Venezuela from the oil and gas market. Total exclusion could deepen the country’s economic crisis triggering further illegal Venezuelan migration into the US; possibly end Caracas’s cooperation on migrant repatriation; and prompt it to strengthen economic ties with American adversaries. With presidential elections in the US later this year, such developments could impair Joe Biden’s bid for a second term.
The sanctions relief offered in October allowed Venezuela to temporarily increase oil sales. In March, they reached their highest level since early 2020, with customers in Asia, namely China and India, among the biggest buyers. Yet export levels were still relatively small compared to the late nineties.
Despite the sanctions reprieve, western tanker owners and oil companies faced the challenge of working in a country where corruption and mismanagement had decimated the docks and the oil industry for years.
Intended to oust Maduro, the so-called maximum pressure sanctions of the Trump era barred the state energy company PDVSA from exporting oil and gas, Venezuela’s main foreign currency earner. The American restrictions’ damaging impact was compounded by the inclusion of secondary measures targeting non-US persons doing business with sanctioned Venezuelans, effectively warning international energy companies to stay away from the country.
Under the tough US sanctions regime of recent years, Venezuela saw little western foreign investment in its hydrocarbon extraction and refining infrastructure, further undermining PDVSA’s production capacity, which has been declining for years. In September, the country was only able to produce 824,000 barrels per day, compared to daily production of over three million barrels in the 1990s.
Even before the 2019 sanctions, American and European oil and gas companies were pulling out of Venezuela because of the unstable political and economic climate. Corruption scandals in the oil sector compounded the challenges facing western firms. Two US oil majors exited after one’s property was seized by the government and the other’s nationalised. Their departure had a profound impact on the economy. Outside the hydrocarbon sector, it was a similar story, with big US airlines suspending flights, an American car manufacturer repeatedly halting, and another shutting down operations. US multinationals in other sectors also ended their involvement in the country.
With western markets largely closed off, Caracas sought to smuggle what oil and gas it managed to produce to countries willing to run the risk of non-compliance with American restrictions, in particular China, raising concerns in Washington. The black-market trade in oil has reportedly been made possible by ships turning off their transponders and ship-to-ship transfers to evade US detection. Also of worry for Washington has been Venezuela’s growing economic ties with Russia, Iran and China which threaten to shift it out of America’s sphere of influence. In particular, the US is keen to decrease Russian-Iranian-Chinese influence in the country’s energy and defence sectors. Companies still operating in these jurisdictions should be aware of the regulatory and reputation risks they face.
The Biden administration has not sought to reverse Trump’s sanctions policies against America’s adversaries, but in the case of Venezuela decided that there was merit in trying to engage with the country. The argument being that there’s probably more chance of seeing democratic changes in Venezuela by incentivising the Maduro regime to reform than by completely isolating it. Moreover, ‘maximum pressure’ restrictions failed to deliver even modest improvements in human rights in Venezuela, and the Biden administration faced pressure from European and Latin American governments to lift them.
For the US, there have also been other more practical considerations. Opposed to sourcing Russian energy over its invasion of Ukraine and with the Middle East so unstable, the US can ill-afford to cut itself off from Venezuela, which has the world’s largest proven oil reserves. Nor can the US ignore the economic consequences of sanctions on the country. Millions of Venezuelans have emigrated to other parts of Latin America and, increasingly, America. This is worsening an already-acute migrant crisis, which could become a major political headache for the US leader – especially if Caracas refuses to cooperate with repatriation flights of illegal Venezuelan migrants, as it has threatened.
Such factors along with the proximity of US elections are likely to have weighed heavily on the Biden administration as the expiration of the six-month sanctions-relief approached. A policy of offering certain companies exemptions from its trade restrictions has been in place for some time, preparing the ground for the snap back formula adopted on 17 April.
The US had already granted sanctions waivers in 2019 to the US oil major Chevron to work with PDVSA in a joint venture to produce oil for the American energy market and also approved authorisations for a number of oil field service companies. Separately, in 2022 two European energy firms received the greenlight to conduct oil-for-debt transactions with PDVSA and in early 2023 the US permitted Venezuela to supply gas to Trinidad and Tobago.
Following the snapback of American measures, reports indicate that the Chevron and oil field service company waivers, as well as those for the European firms and Trinidad and Tobago, will remain in place. Washington has given other companies that took advantage of the 6-month sanctions reprieve until the end of May to wind down their activities in Venezuela. But, significantly, they will be able to apply for authorisations to continue doing business with the country on a case-by-case basis, US national security and foreign policy interests expected to have a bearing on the application process. Therefore businesses should carefully construct their applications and once on the ground, exercise the utmost caution and be mindful of the compliance procedures laid out by the American authorities. Due diligence and monitoring programs must be kept current and in compliance with all the relevant regulatory obligations.
While it remains unclear what kind of exemptions businesses might secure, the Atlantic Council, points out that the waiver mechanism, though “bureaucratically cumbersome”, provides a clear opportunity “for companies to request the ability to swap Venezuelan crude for debt they are owed, for diluent or other products to relieve humanitarian distress in Venezuela, and under conditions similar to Chevron’s existing license, which minimizes the fiscal return on exports to PDVSA.”
While the US willingness to consider exemptions for US and non-US energy companies will likely prompt many to apply, there are no guarantees that they will be successful. However, S&P Global points out that while Washington has always allowed companies to apply for specific exemptions, it was unusual to highlight that option explicitly. It suggests that the Biden administration sees the waiver mechanism as a means of supporting engagement with Caracas despite the reimposition of sanctions. Indeed, one US official said the latter “should not be viewed as a final decision that we no longer believe Venezuela can hold competitive and inclusive elections”.
With Washington still apparently holding out for the democratic outcome it wants, it will likely need to approve a significant number of waivers to allow Caracas to maintain a viable level of oil and gas exports, otherwise it will have little incentive to reform. Yet the window of opportunity for Venezuela and western energy companies may be narrow. Should Trump be re-elected in November, the architect of ‘maximum pressure’ sanctions is likely to curb or possibly completely dispense with the exemptions policy.
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