Listen: Venezuela’s oil future is up for grabs in election contest

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Jeff Mower:

Hello, and welcome to the Platts Oil Markets Podcast by S&P Global Commodity Insights, where today we will be discussing the oil market implications of Venezuela's recent presidential election. I am Jeff Mower, Director of Americas Oil News, and with me today is Commodity Insights analyst Nick Blanco, and Maria Jimenez Moya, senior editor for refined products.

Venezuelan president Nicolas Maduro is fighting to maintain power following a contested July 28th presidential election. The opposition party led by a presidential candidate, Edmundo Gonzalez, and former candidate, Maria Corina Machado, claim to have won the election by a wide margin. Her findings support by many international leaders, including the Biden administration in the US.

While post-election protests and arrests have caused some local gasoline supply shortages, for the most part, there's been very little impact of Venezuela's oil operations. However, that could change down the road, depending on who ends up controlling the presidency. Not just in Venezuela, but in the US. Maria, let's start with you. What are your sources on the refined products markets? What are they saying about the Biden administration, as far as the Biden administration's approach to sanctions right now, and the implications for refined products?

Maria Jimenez Moya:

What my sources are saying, and by sources, I mean market participants in the Latin American refined products market, what they're thinking is that they don't think that the US can geopolitically afford to enforce harsher sanctions, just due to the ongoing conflicts that are happening in the Middle East, as well as Europe, alongside with the current OPEC agenda.

They believe that the sanctions will keep being effective, the ones that are in place, but they do not see this having a real effect in the refined products market, because Venezuela is still exporting product to the US, and Chevron is their main buyer for their US refinery. What my market sources believe is that at the end of the day, what sanctions do is they keep the money out of the US system and the US economy, but in reality, it does not really affect Venezuela much, as they still have access to export to the other sites of the world.

In terms of how much Venezuela can import/export, we are seeing actually a decrease in imports. We are seeing that the imports, according to Commodities at Sea, have decreased with June, importing 2 million barrels, July, 1.1 million, and so far in August, about 800,000 barrels. We see a downward trend that I assume is going to pick back up this month, as we have only just started.

Jeff Mower:

Oh, and you mean by imports, refined products imports?

Maria Jimenez Moya:

Yes. Refined products imports.

Jeff Mower:

Oh, Venezuela, yeah. They were able to import some refined products. Yeah. It's interesting, because the refineries, just let our listeners, our refineries are operating really low percentage of capacity, something like 18% of capacity in Venezuela. I know they've relied on some fuel from Colombia before, although some of that could have been smuggled over.

Yeah, they definitely, they've had a hard time, especially with the recent protests, they were having a hard time with some fuel deliveries. From what we've heard on the ground there, that's improved somewhat. What I think is interesting when you talk about the imports is a lot of the imports they were bringing in, they were bringing in naphtha, which is being used to blend with their heavier crude. While we've seen some of those naphtha deliveries drop off, they used to import a lot of condensate from Iran. This is like late 2002, early 2003, but that dropped off because of sanctions.

Because of the lifting of sanctions, they were able to import naptha from the US, blend that into their crude, and it's kind of boosting their total crude output numbers as well. What we've heard is that their upgraders, they have several upgraders there, including the Petro San Felix and Petromonagas, they're down. They're not really able to upgrade this crude, and that could be a reason why we saw a big drop in crude exports in July from Venezuela. They fell like 342,000 barrels a day.

Now, I think to your point, Maria, still a lot going to the US, like exports to the US actually held up. I just think that's something to take into account. Even though we have these sanctions lifted in part, allowing more crude to be produced, that doesn't necessarily mean higher exports, right? It just depends on other factors.

Maria Jimenez Moya:

That is correct. We do see that as exporting refined products. However, they do, as you mentioned, the refineries, they do have operational challenges with their refineries, as their major refineries are operating below capacity. You mentioned how one of them was operating 19%, that's going to be the Paranágua Refinery.

They also have a second refinery called El Palito, which is operating at around 50%. This major refinery's operational challenges are what's going to have them operate below the capacity and unable to import as much refined products as they could, have they operate at full capacity.

Sophie Bryon:

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Jeff Mower:

Shifting to the future, when we talk about these elections and all the turmoil, the future of Venezuela's energy industry is at stake. The country has proven reserves of like 303 billion barrels of crude. That's quite a lot, right? It's important down the road. Today, we're hearing that Maduro's Justice Department is launching a criminal probe in two of his opponents.

My question for you, Nick, is at what point will Biden return to the harsher sanctions, or do you think Biden administration will do that? If the administration returned to those harsher sanctions, considering the drop in Venezuela's crude exports, would it really, I guess, matter that much, or why does that matter so much?

Nick Blanco:

Yeah, I think it definitely would matter, just to answer that question. If we go back during the Trump administration, sanctions at that point crushed production down to, I think as low as 300,000 barrels a day. That's a quick impact. Then when we come back to the Biden administration, we have a General License 41, which allowed Chevron to start investing more into its upstream and also exporting to the US.

Since then, we've seen now about an average of 150,000 barrels a day of crude exports to the US, which is maybe not the largest wedge of exports to the US, but it's important in a regional focus when you think Maya exports from Mexico could start reducing in the coming months with the start of the Olmeca refinery there, and the potential for OPEC cutbacks, there's regional considerations for that.

In terms of what can Biden do, that's the million-dollar question. I would like to talk quickly about the current sanctions status. What we have today is called a General License 44A, and it's an update which actually was really intelligent and allowed the US Treasury to be more selective. Essentially, instead of just letting any foreign operator work in Venezuela, as it effectively could within certain applications under 44, it essentially limits who can operate there by case-by-case basis.

Essentially, it allows them to be more selective who's playing there, and when it wants to, we can maybe turn down the waivers and put more control onto production.

Jeff Mower:

Looking forward, what do you think a Harris win would mean for Venezuela sanctions looking forward?

Nick Blanco:

It's interesting. We're coming to election, and again, as I mentioned earlier, during the Trump administration, that's when we saw the very hawkish application of sanctions. Going through this election cycle, it could be in the case that as Trump says, "Oh, she's going to be very weak on sanctions," and that might push her to be tougher on sanctions going, make her counteract that kind of thing. It's difficult to say exactly. It's hard to predict what kind of sanctions will come out.

The most obvious is repealing the GL-44A, which I just mentioned, which allows companies like Eni and Repsol to invest upstream reliance to export crude to India, which is a very wide-ranging license. Besides that, the more extreme situation would be the repealing of General License 41, which is probably the most important top line production, which allows Chevron to produce its crude and invest, and it's actually currently drilling in the petroindependencia project. Repealing that would be a major impact on Venezuelan production. Those are kind of some of the options that they have at play.

Jeff Mower:

I mentioned that, returning to refined products, that definitely gasoline prices are a big issue during an election year. Right now, the market is kind of subdued, as far as oil and gasoline prices, but I imagine that plays into any kind of decision on whether or not you want to impose harsher sanctions leading up to the November election. We're moving towards closing here. Does anyone have any final thoughts? Nick, Maria?

Nick Blanco:

I'll say quickly that we have to watch what the administration does, what sanctions come out, and to see, and that's when we can note what's going to happen sooner or later. The long-term recovery for Venezuela requires a democratically elected president, which the US can accept and remove sanctions.

That is when investment can return to the country. That is the big question, when will that happen? If it happens too late, it'll be too late in the demand cycle. Going 20 years out, demand is starting to come down, there won't be much investment for Venezuela.

Maria Jimenez Moya:

Nick, I agree with you. I'm excited to see what the future of Venezuela holds, and keeping my eyes on what is decided with this election.

Jeff Mower:

All right, great. Well, thanks Maria and Nick for joining me, and thanks again to our listeners for tuning into this episode of the Platts Oil Markets Podcast. This Oil Markets episode was produced by Jennifer Pedrick in Houston.