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Venezuela: New LPG Rule Humanitarian Move
US authorizes liquefied petroleum gas exports to Venezuela.
BY ENERGY ADVISOR
Inter-American Dialogue
The U.S. Treasury Department in July announced it would authorize Venezuela to import liquefied petroleum gas, or LPG, from the United States and other sources. However, U.S. product traders and Venezuelan state oil company PDVSA’s U.S.-based refiner, Citgo, have said they have no plans to resume LPG exports to the Andean nation. What is the reason behind the Biden administration’s move to lift sanctions on LPG in Venezuela, and will the action have any tangible consequences? What is President Nicolás Maduro’s administration doing to circumvent existing U.S. sanctions on the country’s oil sector, and will it be able to boost oil production by the end of the year? To what extent is the removal of these sanctions on the table in upcoming talks between Maduro’s government and the Venezuelan opposition, which the United States backs?
Antero Alvarado, managing partner and Venezuela director at Gas Energy Latin America: General License 40 (GL40) is a first step in the Biden administration’s adoption of a smart sanctions policy. We believe that more complex sanctions, including on PDVSA, will remain in place for a long time, and will be removed only when there are real and tangible changes in Venezuelan politics. With this license, the Biden administration recognizes the importance of LPG in residential use. In Venezuela, 90 percent of families use LPG to cook food. Furthermore, LPG today has a deficit of approximately 75 percent in the country. That means there are more than four million families cooking with firewood. This general license seeks to open a humanitarian channel. Within the license, the exchange of crude oil for LPG is explicitly prohibited. This situation forces PDVSA or any importer to pay for the fuel with money. With GL40, Citgo could sell LPG to PDVSA. However, historically, Citgo has traded refined products for crude. We do not see PDVSA paying cash to Citgo in exchange for LPG, and we do not see PDVSA buying LPG from any other importer in the short term. The company’s priority is to import diesel and gasoline for the domestic market. Gasoline deficits after sanctions on Russian state oil company Rosneft in February 2019—the sole importer of gasoline into Venezuela— is of around 60 percent. PDVSA does not cover domestic demand for gasoline.The company has been able to deal with high-cost sanctions and has managed to increase crude production modestly, selling FOB crude to a high-risk offtaker, ensuring significant cash flow. However, there is concern among international partners, particularly Europeans, who continue to be tied up without being able to collect debts or make new investments in their assets.
The recent departure of two important partners from a large project in the Orinoco Belt, without requesting compensation from PDVSA, has set off alarms about the future of international oil companies in the country. The maintenance of sanctions until political change is achieved, which can take several years, raises uncertainty for these companies regarding the continuation of existing\ and future projects in Venezuela.
Francisco Monaldi, fellow in Latin America energy policy at Rice University’s Baker Institute: In Venezuela, there is a severe scarcity of LPG, which most families use for cooking. This has created health and environmental concerns, as poor households have turned to burning timber. As with other fuels, the country’s crumbling oil industry has been unable to supply the domestic market and has relied on imports. Although LPG imports were never sanctioned, OFAC wanted to make that clear, in case overcompliance was deterring imports. However, since swaps of oil for LPG were not authorized, Maduro is unlikely to use his scarce cash to fully solve the problem. The Treasury’s ‘good will’ signal coincided with a hardening of repression in Venezuela, making further flexibilization moves less likely for now. Venezuela has been able to increase oil exports by more than 50 percent from the bottoms reached last summer. Financial and shipping schemes for sanctions avoidance, set up with the help of Iran and Russia to sell oil in China, have made this possible. Significantly higher oil prices, which provide incentives for intermediaries to take risks, have also encouraged this. The restriction had mainly been the ability to sell oil, but there is not much additional spare capacity to increase production further. Thus, to significantly increase output, substantial investments are required. For more than a year, there have been zero oil rigs drilling new wells.
Maduro’s drive to attract foreign investment in oil would produce modest results, without institutional changes and sanctions flexibilization. This might be one of his few motives for negotiating. However, so far, he has been unwilling to give up power to obtain sanctions relief and seems unlikely to do so soon.
Vanessa Neumann, former Juan Guaidó-appointed Venezuelan ambassador to the United Kingdom: The issue is thorny and multifarious, with both ethical and pragmatic considerations and a heaping of nationalist sentiment. The primary ethical consideration is funding a brutal and kleptocratic dictatorship. In May 2017, I helped organize the protest in front of Goldman Sachs’ global headquarters, for its primary market purchase of $2.8 billion of sovereign bonds for 30 cents on face value, handing Maduro hundreds of millions in cash, at a time when he was shooting teenagers at point-blank range and running over protesters with armored APVs. The global media agreed with us that this was profit funding murder, ‘hunger bonds’ became a household term for bankers, and Venezuela sanctions kicked into high gear. The reputational risk for anyone doing business with the Maduro dictatorship remains high. There are pragmatic considerations, too. PDVSA was collapsed by a kleptocracy that stole more than $300 billion and turned PDVSA into a money laundering machine for cartels, Iran and Russia. Producing oil ceased to be its main business. Meanwhile, PDVSA continues to evade sanctions with ship-to-ship transfers with a panoply of nefarious actors, while using the sanctions Cuba-style: as a rallying cry against the ‘Evil Empire’ of the United States. Net-net, oil sanctions relief should be negotiated pegged to the following conditions: the oil money goes to food and medicine, and the fuel for their distribution, but only after the liberation of political prisoners and real international electoral observation.
Furthermore, as I have also been arguing since May 2017: stolen money should be captured into an internationally supervised fund for the people, pending those free and fair elections.
Daniel Hellinger, professor emeritus of international relations at Webster University: Lifting sanctions on imports of diesel would help Venezuelans even more, but easing those on natural gas is a positive step. Gas generates about 30 percent of Venezuela’s electricity; gas goes as propane to homes and communities. The gesture does encourage political dialogue, but other motives may be at work. Cracks have appeared in Washington’s blockade. Mexico has already tested it, and countries such as Iran are helping PDVSA recover and distribute some lost oil production. Maduro is unlikely to reach his stated goal of one million barrels per day (bpd) by year’s end, but 700,000 bpd might be attainable. The new policy may throw a lifeline to Trinidad and Tobago (T&T), which faces rapid depletion of its territorial reserves and needs access to Caribbean fields shared with Venezuela. It has processing infrastructure that Venezuela lacks. Because of sanctions, T&T backed away from a 2018 joint project with Caracas to tap offshore reserves and maintain exports, including re-export of LNG to Venezuela. BP, Shell and other transnationals in T&T would benefit from renewal of the deal. Back on land, Venezuela is now wide open to foreign investment, as Maduro earlier this year implemented a new ‘apertura’ similar to that of the 1990s, tempting even to companies upset by Chávez’s nationalization.
Russia’s Gazprom since 2008 has eyed Venezuela’s gas fields, and China is already deeply entrenched in its oil fields. Facing potential geopolitical and commercial competitors, Guaidó’s unpopularity rivaling Maduro’s and with the government’s white flag on oil policy, perhaps Washington feels a ‘humanitarian’ gesture is in order.
Gustavo Coronel, a founding board member of PDVSA: The reasons for the Biden administration’s move are largely humanitarian and also partly political to minimize criticism of the sanctions. The move will not be significant as Maduro has little cash and no concern for the people. The regime has been trying to sell oil through small, obscure third parties, but the United States has sanctioned them, reaffirming its commitment to the sanctions. A significant oil production boost by the Venezuelan regime is unlikely. The Venezuelan oil industry is essentially dismantled, and management is useless. The posture of the United States regarding easing of personal sanctions in future negotiations could become undesirably pragmatic—remember what happened after Chávez’s pardon in the 1990s.
Republished with permission from the Inter-American Dialogue's weekly Energy Advisor
