The oil industry continues to be by far the most important sector of the Venezuelan economy. Although it seems unlikely that the production levels achieved before 2014 can be achieved, stabilizing and increasing oil production is essential to any prospect of economic recovery in the short to medium term.
Venezuela’s oil industry rebounded in 2021 after hitting record lows in the second half of 2020. However, the path ahead is strewn with obstacles.
Earlier this year, President Nicolás Maduro announced that the state oil company PDVSA would reach two million barrels per day (BPD) by the end of the year. While it is obvious that you need to have ambitious goals and a heroic attitude, setting unattainable production goals is counterproductive.
According to official sources, production reached one million bpd on December 24, 2021. However, data that PDVSA submitted to OPEC indicates that production in December was actually 871,000 bpd, and fell to 755,000 bpd in January. Secondary source data points to even lower production levels during this period, but this discrepancy is not the subject of this article.
This means that Venezuela’s oil production must increase by more than 2.5 times to meet Maduro’s announced target of two million BPD. Some analysts suggest that two million BPD could be reached within several years, while others believe that PDVSA will never reach these levels again. What we can be sure of is that the country’s oil production will not reach this milestone in the next 11 months.
Last year was something of a dress rehearsal: the official target was BPD 1.5 million, but in the final months of the year the government lowered its target to BPD 1 million – a target that was, at best, only briefly achieved.
Shoot a little blanket
Oil production has more than doubled since hitting decades-low levels in the second half of 2020. That rebound is largely behind Venezuela’s modest economic recovery in recent months. However, despite the optimism this growth has inspired, production simply cannot double again and again.
The Venezuelan oil industry faces serious obstacles at all levels. The biggest hurdle is US sanctions (more on that later). These unilateral coercive measures reinforce and aggravate other problems.
The oil industry is experiencing structural difficulties, including corruption and the emigration of skilled workers, but it is also worth considering the obstacles that have arisen amid the recent increase in production.
In March 2021, there was an explosion in a pipeline in the state of Monagas that affected light crude extraction, resulting from an alleged act of sabotage. This pipeline was important for processing extra-heavy crude and for obtaining blends for export.
With the pipeline problem solved, another soon appears on the horizon: the shortage of light crude oil. Light blend production levels were not high enough to meet both growing export demand and domestic refining demand. As they say: pulling a blanket on one side only exposes the other.
As happened in the recent past, Iran came to the rescue with a deal to swap Venezuelan crude for Iranian condensate (1). This international aid has made possible the increase in oil and gasoline production in recent months.
However, the fragility of this recovery became evident in January. A delayed shipment of Iranian condensate caused a further drop in production. The other major bottleneck is the lack of proper storage facilities for an increased production scenario and to handle return shipments.
In short, even if Venezuela could magically continue to increase production, it would quickly exhaust its storage capacity. Right now, because of the sanctions, there are very few potential buyers.
The straitjacket of sanctions
In January 2019, the United States imposed an oil embargo on Venezuela. Almost immediately, the 500,000 BPDs Venezuela was exporting to refineries in the Gulf of Mexico were left without a buyer. Over the next two years, the United States harassed all of PDVSA’s customers, imposed secondary sanctions on them, thereby forcing these companies to either abandon operations in Venezuela or stop buying crude directly.
This means the state-owned company is now forced to sell through middlemen, transferring ship-to-ship shipments on the high seas to hide the origin of the oil. This is how Venezuelan crude can reach its final destinations, mainly in China. This complicated juggling act means less revenue.
However, the main consequence (and purpose) of US sanctions is to close down all prospects for the country’s industry. By banning transactions with state-owned companies and those involving Venezuelan bonds, Washington has scared off potential business partners. This also had the effect of closing access to financial markets to PDVSA and the Venezuelan state.
This means that there is another reason not to foresee a full-scale resumption of oil production. At some point, the wells that can be easily and cheaply reactivated will run out and there will be no more funds to invest in the more expensive ones.
Biden’s rise to power has sparked speculation about a possible easing of sanctions against Venezuela. So far, there is no sign of this happening, quite the contrary!
Currently, Chevron is seeking a license from the Office of Foreign Assets Control (OFAC) to re-obtain crude oil as payment for its joint operations with PDVSA. Yet even if Chevron obtains this license, it will only result in marginal increases in production. Indeed, only a real easing of sanctions would allow, for example, the return of Chinese companies to Venezuela, thus solving the country’s production and export problems. Unfortunately, this is unlikely to happen.
Use of petroleum resources for national development
High oil prices on the international market are currently favoring the Venezuelan oil industry. These prices make the Venezuelan product more attractive to international buyers. However, this favorable situation also generates uncertainty: a drop in prices could once again hit the production of an already fragile industry.
The aim of our analysis is not to generate pessimism. Instead, we want to provide a realistic perspective on an industry that is crucial to the national economy.
The issue of sovereignty cuts across all of these issues. Increasing production at the cost of offering extremely favorable conditions to transnational corporations would mean that little or no funds will flow back to the nation.
The Venezuelan government has responded to the sanctions by looking for “new models” that increasingly favor private investors. While one can understand the need for such concessions, the question is whether the current conjuncture will serve as an excuse to go too far. In any case, as long as the blockade remains in place, current and future concessions will not attract significant capital investment.
The way out of the crisis is long and, at some point, it will require long-term planning. It is important to bet on national sovereignty and on the ability of workers in the oil industry to dismantle a century of dependency. Additionally, prioritizing production that is not tied to crude oil exports, such as gasoline and diesel, could have a “multiplier effect” on other sectors of the economy.
However, what is most important is the strategy. If the options before us are reduced, on the one hand, either to a recovery via massive concessions to transnational corporations, or, on the other hand, to a more diversified but also market-oriented economy, none of the two will only lead to the emancipation and well-being of the Venezuelan people. In the words of Commander Chávez paraphrasing Che Guevara, “Socialism cannot be built with the blunt weapons of capitalism. A turtle does not climb trees and an armadillo does not shave.”
(1) This agreement is a clear demonstration of solidarity between the anti-imperialist countries. However, this is not ideal economically. Iran is far behind and is also a crude oil exporter, which most likely means that Venezuelan crude oil is being sold below market price.
The opinions expressed in this article are those of the author and do not necessarily reflect those of the editorial staff of Venezuelanalysis.