VENEZUELA – Oil Sector Seeks Reform to Survive

It is no secret that Venezuela’s economy, and by association the country as a whole, is heavily is dependent on oil.

VENEZUELA Oil Sector

Given the drastic fall in global oil demand sparked by the coronavirus (Covid-19) pandemic, and the associated drop in prices, all oil-exporting countries are having to cope with lower than expected revenues. In Venezuela, where the oil sector was already in a precarious situation, efforts have quickly been launched to urgently boost both production and revenue. One of the main criticisms levelled at Venezuela’s state-owned oil company, Petróleos de Venezuela SA (Pdvsa)’ in recent years has been its inefficiency, with corruption and a lack of investment blamed for declining output.

Pdvsa’s deteriorating performance led to Major General Manuel Quevedo being removed from his post as oil minister on 27 April, replaced by minister of industry and production, Tareck El Aissami, who now fills both roles. At the same time, former oil minister, Asdrúbal Chávez (2014-2016), replaced Quevedo as president of Pdvsa. The sidelining of military influence in the oil sector is an important development, as the control of oil profits are thought to be a key factor in the armed forces’ continued loyalty to the Maduro government.

According to news agency Reuters, El Aissami had been tasked as early as February with overseeing the restructuring of Pdvsa, with a focus on encouraging private sector investment, even opening up the possibility of allowing private companies to operate oil refineries in Venezuela. The aim was reportedly to ultimately reduce state ownership of various extraction projects from 60% to 50.1%.

The exact mechanisms by which this would be achieved are yet to be confirmed, but proposals include selling shares into private ownership, and signing service agreements by which private companies would be paid to operate certain oilfields. This plan, seemingly a reversal of Hugo Chávez’s efforts to re-nationalise Venezuelan oil, represents an acknowledgement that the sector is no longer as globally significant as it once was, given the emergence of new producers and the reduction of Venezuela’s production and refinery capacity.

It is hoped that national pride could be preserved (and the spirit of Chávez kept alive, a significant priority for Maduro, keen to preserve what public support he still has) through the recommendation that Pdvsa maintain its 60%-70% holdings in the five most productive Venezuelan oil ventures, which includes those working with China’s state-owned National Petroleum Corporation (CNPC), and with US company Chevron.

Fuel subsidy under threat

Such symbolic gestures are likely to be undermined, however, if the Maduro government also follows through with its plan to gradually phase out the country’s petrol fuel subsidies, which reportedly costs Pdvsa US$11bn each year. The aim would be for fuel to be sold on the domestic market at a rate closer to its international market value, although some exceptions would be made for certain sectors, including public transport, transport of foodstuffs, and electricity generation.

The fuel subsidy has long been a highly controversial programme, slated for removal on a number of occasions over the past decade. Many analysts argue that it provides little tangible benefit to Venezuelans, merely providing lucrative profits for those smuggling cheap petrol across the border into Colombia for resale. Yet the fuel subsidy carries great symbolic significance in Venezuela: the 1989 ‘Caracazo’ riots were partially triggered by a rise in public transport prices, and the resultant collapse in support for Venezuela’s traditional political parties is often linked to Chávez’s rapid political ascent following the ‘Caracazo’.

The first stage of phasing out this subsidy was implemented on 1 June, amid considerable confusion, with many motorists complaining about the suddenness of the move, as well as the apparent injustice of paying the same prices as consumers in wealthy countries which are net importers of petroleum. The new model allows Venezuelans to buy up to 120 litres of petrol a month for the equivalent of US$0.02 per litre, with any additional fuel beyond this limit costing US$0.50 per litre.

Foreign intervention

The launch of the scheme coincided with the arrival in Venezuela of five oil tankers carrying approximately 1.5m barrels of Iranian petrol. The US government had expressed its discontent at Iranian shipment, but despite the presence of the its navy and coast guard vessels in the Caribbean Sea - ostensibly as part of a counter-drugs campaign announced in April, following the indictment of Maduro on charges of “narco-terrorism” - the US forces did not intervene to prevent the tankers from reaching their destination.

This shipment of petrol was preceded by the arrival of several charter flights from Tehran to Venezuela in late April, bringing equipment and technical experts from the Iranian petroleum industry to address the major problems experienced by Venezuelan oil facilities. The flights, run by Iranian private airline, Mahan Air, took place after most air traffic into Venezuela had been grounded amid the pandemic.

Mahan Air has previously been subject to economic sanctions from a number of European countries - including Germany, France, Italy, and Spain - over security concerns, following the US treasury’s 2011 decision to declare the airline a supporter of terrorism, over its alleged financial support for the Quds Force, a unit of the Islamic Revolutionary Guard Corps (IRGC). Venezuela and Iran are both prominent targets of international economic sanctions, a major reason for their unlikely trade partnership.

Admiral Craig Faller, the commander of the US Southern Command (Southcom), has expressed concerns about Iranian activity in Venezuela, questioning the motives behind its support for the South American country. The US has historically been concerned about countries opposed to its foreign policy agenda gaining access to Central and South America, and in the past this has led to military intervention. However, such a move seems highly unlikely in this case; the Iranian government warned that any attempt to block the tankers’ arrival in Venezuela would be perceived as marine robbery or piracy.

The fact that Venezuela, one of the world’s most oil-rich countries, has been forced to import petrol to stock its own petrol stations, is yet another sign of the deepening crisis. It is difficult to imagine how Pdvsa’s fortunes could be turned around - and yet, there is no other export that comes even close to matching the importance of oil to the Venezuelan economy. Amid the turmoil caused by Covid-19, the private investment that the oil sector reforms were supposed to attract is still sorely lacking. It seems that these efforts to turn around the fortunes of Pdvsa may be too little, too late.

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