Venezuela Oil Sanctions Lifting May Boost Profits, But Output Won't Rebound Quickly

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ten data blog20-10-2023

The full easing of U.S. oil sanctions on Venezuela won't expand its output quickly, but could boost profits by allowing some foreign companies to return to its fields and supply crude to a wider range of cash-paying customers, experts said.

On Wednesday, the South American OPEC producer received a broad waiver from the U.S. setting a six-month deadline to resume oil and gas operations, which have been severely curtailed by sanctions and decades of underinvestment.

"This looks like a broad lifting of sanctions on Venezuelan oil, which is surprising because the license is broader than expected," said Francisco Monaldi, a Latin American energy expert at Rice University's Baker Institute.

U.S. officials lifted Trump-era sanctions and issued general licenses for Venezuela's oil, gas and mining industries in response to a deal Venezuelan President Nicolas Maduro struck with the country's opposition for the 2024 presidential election.

President Joe Biden's administration has been seeking to increase the flow of oil globally to mitigate high oil prices caused by Russian sanctions and OPEC+ production cuts. But experts say that without continued investment, Venezuela's overall exports are unlikely to offset the global cuts.

Monaldi said the oil licenses exempt energy companies around the world from the individual licenses or "letters of comfort" required to work with state oil company PDVSA.

After years of being forced to discount, Petroleos de Venezuela could quickly return to traditional oil markets and offer crude at higher prices. The license could also reduce the company's difficulties in raising capital, importing drilling rigs, repairing refineries, advancing projects and securing related partnerships.

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Slow Recovery

Sanctions lifting authorizes Venezuela to produce, sell and export crude oil and natural gas, while business with Russia remains prohibited. A senior U.S. official said the easing would not change Iranian sanctions related to Venezuela.

The changes pave the way for new investment in the sector through April 18th.

Payments to Venezuela for goods or services related to the oil and gas industry are also allowed, which removes a number of barriers to PDVSA receiving cash for oil.

Since 2020, when the U.S. imposed secondary oil sanctions on Venezuela, PDVSA has been unable to fulfill supply contracts to customers from Europe to Asia. Chevron Corp's (CVX.N) individual authorization allows Venezuelan crude to be shipped back to the U.S. this year.

But the six-month authorization is short, and the easing could be reversed if Maduro doesn't comply with the election deal. It could take more than a year for some currently idle production and export operations to have an impact on world supply.

So far this year, Venezuela has averaged 780,000 bpd of crude production, up from 716,000 bpd in 2022 last year, but still well below the official 2024 target of 1.7 million bpd.

Before sanctions began in 2017, the country averaged 2.4 million bpd. According to Baker Hughes, the country has only one active rig, compared to more than 80 rigs in 2014.

Organization of the Petroleum Exporting Countries (OPEC) allies have excluded Venezuela from quotas, providing it with room to increase production further, but experts predict the country's recovery will be slow due to the severe deterioration of Petróleos de Venezuela's (PDVSA) infrastructure.

Production is expected to grow by 170,000 to 200,000 bpd over the next two years, driven by increased output from joint ventures with U.S.-based Chevron (CVX.N), Eni (ENI.MI), Repsol (REP.MC) and other foreign firms, Monaldi said.

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Investment Needed

Venezuela needs a long list of projects to become a relevant oil exporter again, including dozens of drilling rigs, billions of dollars in refinery infrastructure replacements, flow stations and crude upgrading facilities, and a reliable electricity supply, analysts said.

Venezuela could also begin natural gas exports if U.S. negotiations to authorize joint offshore projects with Trinidad and Tobago progress, while some of the oil currently destined for China could end up in the Caribbean if Maduro re-establishes his Caribbean oil supply program.

Analysts say Venezuela could move more of the oil that currently goes to China in the near term as the U.S. authorization clears the way for more exports to the U.S., Europe and the Caribbean.

So far this year, Venezuelan exports to China, both directly and through transshipment centers, have fallen to 437,000 bpd from 477,000 bpd in 2022, according to Vessel Monitor data.

If Venezuela and China reach an agreement to resume debt servicing and expand joint oil projects, production could increase by an additional 100,000 b/d in two years, Monaldi said, potentially expanding exports to that destination again.

However, he said it was difficult to predict total production exceeding 1.1 million b/d in the short to medium term without continued investment.

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