The economy of Venezuela, home to the largest proved oil reserves in the world, has collapsed. The nation continues in political and humanitarian turmoil, with more than three million Venezuelans having fled in recent years for other countries, according to the U.N., and internally displaced people on the move. President Nicolás Maduro is defiantly pushing back on international pressure to vacate his office to the self-declared president and opposition leader, Juan Guaidó. The 35-year old Guaidó was not well-known outside of Venezuela, where he was the National Assembly leader, prior to January 23 when he invoked a constitutional provision, Article 233, to declare himself interim president.
After the declaration in front of thousands of supporters in Caracas, the United States, Brazil, Colombia, Chile, Peru, Argentina, European nations and dozens of nations across the globe gave their backing to Guaidó as interim president of Venezuela. U.S. Secretary of State Mike Pompeo announced, via Twitter, that the “U.S. will conduct diplomatic relations with Venezuela through the government of interim President Guaidó. U.S. does not recognize the Maduro regime.”
Guaidó’s action was spurred on by the economic collapse, humanitarian despair and rampant violence Venezuelans have faced the past few years in the oil-rich nation. In 2018, GDP shrunk by double digits for a third consecutive year. Hyperinflation reached 80,000% in 2018, according to Forbes, conflicting with the IMF’s forecast of 1,000,000%. Anyway you cut it, inflation has made the currency, the Venezuelan bolívar, virtually worthless and nearly impossible for families to afford the dwindling choices of food, medicine and other staples in a nation where nearly 90% of the population lives below the poverty line. Violent deaths have become frequent and are widespread. Couple this with tons of humanitarian aid from the international community being blocked at the border with Colombia, the conflict does not appear to have a near-term end in sight.
The state-owned oil company, Petroleos de Venezuela S.A. (PdVSA), which controls the vast reserves and, funds are designed to meet its mission to support social and development programs throughout the country. However, decreasing capital inflows, underinvestment in upstream projects and mismanagement, among a host of other issues, has stymied PdVSA to effectively achieve this mission cutting to the heart of the national problems.
The U.S. enacted sanctions January 28 on PdVSA in the boldest attempt to force Maduro out. Maduro, however, claims these are “illegal, criminal and immoral” and has continuously claimed food and other shortages are results of U.S. interference.
Energy Sector in Disrepair
Perhaps not widely known, Venezuela holds more proved oil reserves (303 billion barrels) than Saudi Arabia (266 billion barrels), according to OPEC. However, the collapse of the national economy, technical experts being fired and leaving PdVSA and the price of crude oil dropping from mid-2014, has led to what analysts have referred to as a production “freefall.” Estimates range within the wide band of about 3 million barrels per day (bpd) being produced in 2010 to cratering as low as 1 .5 million bpd today, a 30-year low. In its low case scenario, Rystad Energy, a consultancy, estimates production could drop as low as 777,000 bpd by 2020.
It is necessary to note the price to produce a barrel of oil in Venezuela is costlier compared to other top producers partly due to its heavy crude composition, but far from the sole reason for the tremendous production drop.
Despite the top reserves, Venezuela is outside of the top 10 producers globally. In 2017, in middle of the freefall, the country ranked 12th globally in production, according to the U.S. Energy Information Administration (EIA). The United States is now the top global producer tallying over 15 million bpd. International oil companies such as Total, BP, Chevron and ConocoPhillips and ExxonMobil have been active in the oil region known as the Orinoco Belt but dynamics have changed.
Venezuela has historically been an important source for the United States to import oil. in Fall 2018, the nation supplied the fourth largest volume following Canada, Saudi Arabia and Mexico (which has had its own struggles). The U.S. has also been importing refined products, according to EIA. With increasing U.S. domestic oil production and sanctions imposed on PdVSA, Venezuela has been forced to look for new customers.
With vast sums of debt owed to China and Russia, oil sales to those nations will not result in needed cash inflows, rather only reducing its debt burden. India recently has partially stepped into the void with its imports of Venezuelan oil increasing 66% in the first half of February to 620,000 bpd. Venezuela’s oil revenues account for about 98% of export earnings, leaving it extremely vulnerable to unpredictable market price swings, and as seen currently, exposed to geopolitics and consumer demand.
Impact on Refineries
Analysts have predicted that U.S. refiners will be among the biggest losers from the PdVSA and Venezuelan sanctions. The EIA does not see it that way, however, despite eliminating its imports. EIA’s conclusion is based on falling imports for years and that refiners have gradually been replacing Venezuelan crude oil.
Citgo, wholly owned by PdVSA and based in Houston, has been front and center. The company operates three U.S. refineries located in Lake Charles, Louisiana; Corpus Christie, Texas; and Lemont, Illinois with a capacity of about 758,000 bpd. It has been directed by the Trump administration to send payments to a U.S. bank account to ensure the funds are diverted from the embattled Maduro regime. It is believed that Guaidó will have access to the account and be able to appoint members to Citgo’s board.
Maduro has declared U.S. sanctions “intend to rob the CITGO company from Venezuelans” and cautions “we will announce necessary and forceful measures to protect the interests of the nation”.
International Cooperation
In addition to the U.S., Bulgarian officials blocked a bank account as part of a money-laundering investigation after a forewarning from U.S. authorities about millions of euros transferred to PdVSA.
Furthermore, and perhaps surprising, Russian firm Gazprombank froze the accounts of PdVSA and ceased transactions, which can be viewed as reducing the potential it would become subject to U.S. sanctions in the future. The specific instance with Gazpromobank proves interesting as the Russian government is a strong ally of the Maduro regime and opposes Guaidó’s actions.
The Power Sector Feels the Pinch
The economic struggles have impacted the power sector with lack of funds to maintain infrastructure, yet another problem for citizens to cope with. The country’s grid is well connected via transmission and distribution lines with population access rates about 100%. Nevertheless, power shortages and losses from inefficiencies and crumbling infrastructure or plants not able to operate to capacity due to the inability to provide sufficient maintenance, has left the National Electric Company (CORPOLEC), which oversees for the entire sector, to ration power – including to the state of Zulia, once thought of as the center of the oil industry.
The electricity sector portfolio consists of hydroelectric (60%), natural gas (24%) and oil (16%) in 2016, according to the International Energy Agency (IEA). There is policy for renewable energy and growth, but solar and wind are still in their infancy in the country. A successful small-scale renewable program for remote and indigenous communities is Sowing Light. It has provided 2.5 megawatts of electricity to 270,000 people through solar photovoltaic and hybrid systems. In the right economic climate and geographic location, small-scale systems can be an alternative to relying on the centralized infrastructure. It appears, though, all investment in the electricity sector nationwide has stopped in the midst of the ongoing economic collapse.
What Happens Next?
Mr. Maduro, who has been in office since 2013, is not ceding his office without a fight. He has the support of the military and international support from Russia and China. In May 2018, Maduro secured reelection in a race that the United States and other countries stated were plagued with problems. The U.S. sanctions, including on PdVSA, may influence Maduro, but finding other international customers, like India, for PdVSA can slightly counter the measure. There is plenty of speculation but if Maduro loses the support of the military, it seems it will force his hand and Guaidó will assume full presidential power and gain responsibility of the largest oil reserves in the world.