Venezuela gets partial oil sanctions relief in exchange for election assurances

The Biden administration on Oct. 18 partially eased sanctions on Venezuela's oil and mining sector, in response to the electoral agreement signed between the government of Nicolas Maduro and the Venezuelan opposition.

"Treasury is prepared to modify or revoke the authorizations at any time if Maduro's representatives fail to meet their commitments," US Treasury Under Secretary for Terrorism and Financial Intelligence Brian E Nelson said in a statement Oct. 18.

"All other restrictions imposed by the United States on Venezuela remain in place, and we will continue to hold bad actors accountable," he added.

The general license temporarily authorizes transactions related to the oil and gas sector in Venezuela for six months, until April 18, 2024. The license will be renewed only if Venezuela fulfills its commitments under the election roadmap, as well as other commitments with respect to unjustly detained individuals, according to the statement by treasury department's Office of Foreign Assets Control, or OFAC.

Treasury said that it expects Venezuela by the end of November to define "a specific timeline and process for the expedited reinstatement of all candidates" and "begin the release of all wrongfully detained US nationals and Venezuelan political prisoners."

"Failure to abide by the terms of this arrangement will lead the United States to reverse steps we have taken," Treasury said in the statement.

A second general license authorizes operations with Minerven -- Venezuela's state-owned gold mining company -- which, according to the Treasury, would have the effect of reducing black-market gold trading.

Additionally, OFAC modified two relevant licenses to remove the prohibition on secondary market trading in certain Venezuelan sovereign bonds and PDVSA's debt and shares.

According to the statement, the prohibition on primary market trading of Venezuelan bonds remains in place.

"Treasury assesses that this would also have the positive effect of displacing nefarious actors in this market, and with negligible financial benefit to the Venezuelan regime," the statement said.

Venezuelan government officials were not immediately available for comment.

The Venezuelan government and the Venezuelan opposition grouped in the so-called Unitary Platform signed two partial agreements to promote political and electoral guarantees to hold presidential elections in the second semester of 2024.

The partial agreements were signed by Jorge Rodríguez, president of the National Assembly, on behalf of the government of Maduro, and attorney Gerardo Blyde on behalf of the opposition parties grouped in the so-called United Platform, in Bridgetown, Barbados, on Oct. 17.

It is unclear whether recognizing the right of each political actor could mean lifting the disqualifications of the most important pre-candidates: Maria Corina Machado of the Vente Venezuela party and Henrique Capriles of the Primero Justicia party.

Machado, who is the most popular candidate, has said that if she comes to power, she will privatize PDVSA in search of investment and to increase oil production. On Oct. 7, meanwhile, Capriles resigned from participating in the primary elections.

In September, Venezuela's crude production averaged 770,000 b/d, according to a PDVSA production report reviewed by S&P Global Commodity Insights. Output was expected to hold steady roughly through the end of 2024, according to S&P Global analysts.

Reshuffling of Venezuelan oil

The sanctions relief on Venezuela is unlikely to have an immediate impact on its oil production but it could lead to a quick reshuffling of Venezuelan oil flows and a significant increase in exports to the US, said Fernando Ferreira, director of geopolitical risk service at Rapidan Energy Group.

"I also suspect we'll see an increase in diluent exports to Venezuela, which could help boost Venezuelan output in the coming months," Ferreira said.

The US was a regular supplier of naphtha as a diluent to Venezuela in 2011 and 2012, according to US Energy Information Administration data.

The oil markets are likely to view this favorably in terms of supply, said Rachel Ziemba, an adjunct fellow at the Center for a New American Security. But still, she said, "Production gains will be constrained by the temporary nature of the suspension, the other sanctions still in place on Venezuela, and the need for new investment in some of the projects."

The sanctions relief was more comprehensive and front-loaded than some analysts expected, effectively lifting most restrictions on the oil sector.

However, the fact that the sanctions are only suspended and not lifted may limit the degree of new investment and require comfort letters from banks and suppliers to engage in trade, Ziemba said.

"Remember that there are meaningful debts present in Venezuela, [and this] could prompt a range of legal actions which might add to de-risking," she said.

Tim Evans, long-time energy analyst and founder of the new consultancy Evans on Energy, pointed out that Venezuelan crude production has been on the decline for some time, dropping from 3.2 million b/d in 1997.

"Sanctions have contributed to the decline, but there's been a long-term lack of investment as well," Evans said. "And so lifting of sanctions may not add back much supply in the near term. An increase of 200,000-300,000 b/d may look large in percentage terms from the lower base, but it's only an incremental of 0.2% added to total global supply."

OANDA senior market analyst Ed Moya echoed a similar sentiment.

"The suspension of some sanctions on Venezuelan crude will likely have minimal impact on energy markets, as Caracas will struggle to ramp up output," he said. "The oil market will still remain very tight, so prices should not see a major dip on the Venezuelan news."

Competition for Russia, Mexico

Despite expectations of little impact on global supply and prices, the sanctions relief "will redirect suppliers in a more efficient manner, which will have the salutary effect of weakening demand for Russian crude, and potentially marginally lowering the cost of production for US gasoline," David Goldwyn, chairman of the Atlantic Council Global Energy Center's Energy Advisory Group, said.

He applauded the Biden administration for "usefully leveraging these largely counterproductive sanctions for a credible electoral timetable, as agreed to by the Venezuelan opposition." He called it "a significant win" for US interests that will "undoubtedly relieve migration pressure from Venezuela by enabling the country to produce its own gasoline and provide for internal mobility and power generation."

Likewise, Marco Cota, CEO of consultancy Talanza Energy, said additional Venezuelan crude may "reduce demand for the Mexican exports, which could" deepen price discounts for Mexican crude.

Additional Venezuelan crude would also compete in US Gulf Coast refiners with Canadian heavy barrels. Mexican Maya coking refining margins on the US Gulf Coast averaged $16.82/b in September, while Western Canadian Select coking margins averaged $21.62/b, S&P Global data shows.

No easy fix for industry

"Venezuela has the largest oil reserves of any country in the world, but most of that oil is a sludgy, heavy, sour crude that is locked in the Orinoco belt," said Ellen Wald, a nonresident senior fellow with the Atlantic Council Global Energy Center and the president of Transversal Consulting.

"To increase Venezuela's oil production and bring that oil to market will require huge amounts of investment and expertise. Many of the companies that used to work with Venezuela's state oil company, PDVSA, will likely be hesitant to reinvest their money and manpower in Venezuela given the likelihood that sanctions could be reimposed or foreign nationals could be imprisoned. Even if the Maduro government does meet the Biden administration's conditions and the sanctions are eased, there is no quick or easy fix for Venezuela's oil industry."

She added that "there will undoubtedly be political backlash toward Biden from Republicans who hope to make this a political issue and would like to see more domestic oil production rather than more Venezuelan oil."

Brenda Shaffer, an energy expert at the US Naval Postgraduate School, asserted that "the Biden administration wants to keep as many barrels in the market as possible in an election year." However, "Venezuela will not be able to significantly increase its production and export volumes in the near to mid-term, regardless of sanctions relief, due to large-scale technical challenges."

"The sanctions relief for Venezuela is not about democracy, but about barrels in the market. For the same reason, Biden is not pointing a finger at Iran for guiding the Hamas attacks on Israel," Shaffer contended. "If the administration admitted Tehran's role in these attacks, it would have to start enforcing sanctions on Iran and let Israel attack Iran. Biden prefers to keep the Iranian barrels in the market, and thus ignores Iran's role in the Hamas attacks."