The oil industry continues to be by far the most important sector of the Venezuelan economy. Though it seems unlikely the production levels obtained prior to 2014 can be reached, stabilizing and raising oil output is key to any prospect of economic recovery in the short and medium-term.
Venezuela’s oil industry rebounded in 2021 from record lows in the second half of 2020. However, the way forward is replete with obstacles.
Earlier this year, President Nicolás Maduro announced that the state-owned oil company PDVSA would reach two million barrels per day (BPD) by the end of the year. While it is obvious that one should have ambitious objectives and a heroic attitude, setting unattainable production goals is counterproductive.
According to official sources, production reached one million BPD on December 24, 2021. However, the data that PDVSA submitted to OPEC indicates that production in December was in fact 871,000 BPD, and it dropped to 755,000 BPD in January. Secondary source data points to even lower output levels in this time period, but that discrepancy is not the subject of this article.
This means that Venezuela’s oil production has to increase more than 2.5 times to reach Maduro’s announced target of two million BPD. Some analysts suggest that two million BPD may be reached within several years, while others believe that PDVSA will never reach those levels again. What one can be sure about is that the country’s oil production will not reach this milestone in the next 11 months.
Last year was a kind of dress rehearsal: the official target was 1.5 million BPD but, in the last months of the year, the government lowered its objective to one million BPD – a goal that was, at best, reached only briefly.
Tugging on a small blanket
Oil production has more than doubled since it reached its lowest levels in decades during the second half of 2020. This rebound is largely behind Venezuela’s modest economic recovery in recent months. However, despite the optimism that this growth has inspired, production simply cannot double again and again.
Venezuela’s oil industry faces serious obstacles on all levels. The most important hindrance is US sanctions (we will return to the theme later). These unilateral coercive measures reinforce and aggravate other problems.
There are structural difficulties in the oil industry, which include corruption and emigration of skilled workers, but it is also useful to look at the impediments that emerged in the midst of the recent production increase.
In March 2021, there was an explosion in a pipeline in Monagas state that hurt the extraction of light crude, it being the result of an alleged act of sabotage. This pipeline was important for the processing of extra-heavy crude, and for obtaining export blends.
Once the pipeline problem was solved, another one soon appeared on the horizon: a shortage of light crude oil. Production levels of light blends were not high enough to satisfy both the growing demand for exports and the demand for domestic refining. As is said: pulling a blanket over to one side only exposes the other.
As has happened in the recent past, Iran came to the rescue with an agreement to exchange Venezuelan crude for Iranian condensate (1). This international help made possible the increases in the production of both oil and gasoline in recent months.
However, the fragility of this recovery became evident in January. A delayed shipment of Iranian condensate provoked a new drop in production. The other major bottleneck is the lack of storage facilities appropriate for an increased production scenario, and to handle returned shipments.
In short, even if Venezuela could magically continue to increase its production, it would quickly exhaust its storage capacity. At the present time, because of the sanctions, there are very few potential buyers.
The sanctions straightjacket
In January 2019, the US imposed an oil embargo on Venezuela. Almost immediately, the 500,000 BPD that Venezuela exported to refineries in the Gulf of Mexico were left with no buyer. Over the next two years, the US harassed all PDVSA customers, imposed secondary sanctions on them, thereby forcing these firms to abandon operations in Venezuela, or to stop buying crude directly.
This means that the state-owned company is now forced to sell through intermediaries, transferring cargoes ship-to-ship in 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 that there is less revenue.
However, the main consequence (and goal) of the 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 away potential business partners. This also has had the effect of closing access to financial markets to PDVSA and the Venezuelan state.
This means there is another reason to not project a large-scale recovery of oil production. At some point, the wells that can be easily and cheaply reactivated will run dry, and there will be no funds to invest in the more costly ones.
The arrival of Biden to power led to speculation about a possible softening of the sanctions against Venezuela. So far there is no sign of that happening, but rather the contrary!
Right now, Chevron is seeking a license from the OFAC (Office of Foreign Assets Control) to once again get crude oil as payment for its joint operations with PDVSA. Yet even if Chevron obtains this license, it will result in only marginal production increases. In fact, only a real softening of the sanctions would allow, for example, for the return of Chinese companies to Venezuela, thereby solving the country’s production and export problems. Sadly, this is not likely to happen.
Using oil resources for national development
High oil prices in the international market are currently favoring Venezuela’s 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 hit production again in an already frail industry.
The purpose of our analysis is not to generate pessimism. Instead, we want to provide a realistic perspective about an industry that is crucial to the national economy.
Cutting across all these issues is the question of sovereignty. Increasing production at the cost of offering tremendously favorable conditions to transnational corporations would mean that little or no funds will return to the nation.
The Venezuelan government has reacted to the sanctions by seeking “new models” that increasingly favor private investors. While one can understand the need for some such concessions, the question is whether the current conjuncture will be used as an excuse to go too far. In any case, as long as the blockade remains in place, current and future concessions will fail to attract major capital investments.
The road out of the crisis is a protracted one, and at some point, it will require long-term planning. It is important to place our bets on national sovereignty and on the capacity of the oil industry’s workers to dismantle a century of dependence. Also, prioritizing production that is not tied to crude oil exports, such as gasoline and diesel, could have a “multiplier effect” on other areas of the economy.
Still, what is most important is strategy. If the options we face are reduced to, on the one hand, either recovery via massive concessions to transnational corporations or, on the other, a more diversified but equally market-driven economy, then neither will lead to the emancipation and well-being of the Venezuelan people. In the words of Comandante Chávez paraphrasing Che Guevara, “Socialism cannot be built with the blunt weapons of capitalism. A turtle doesn’t climb trees and an armadillo doesn’t shave.”
(1) This agreement is a clear demonstration of solidarity among anti-imperialist countries. However, it is not ideal in economic terms. Iran is far away and is also a crude oil exporter, which most likely means that Venezuelan crude oil is sold below the market price.
The views expressed in this article are the author’s own and do not necessarily reflect those of the Venezuelanalysis editorial staff.