The Trump administration looks like it will take a harder line on Venezuela after its initial hopes of a quick ouster of President Nicolas Maduro faded.
The White House has policy levers it can pull other than taking military action. It looks like Trump will use them as frustration with Maduro’s stubborn hold on power in crisis-ridden Venezuela boils over.
Regime change is rarely quick and easy. I warned of a likely stalemate in Venezuela earlier this year after the United States backed opposition leader Juan Guaido and imposed tough sanctions on Maduro. Those sanctions were supposed to cut Maduro off from Venezuela’s critical oil revenues.
The sanctions have been useful but have still come up short. Venezuela’s oil production plunged from 1 million barrels a day at the start of the year to around 700,000 barrels a day. But sanctions haven’t been enough to bounce Maduro, who still enjoys the support of Venezuela’s military.
A U.S. embargo on Venezuelan oil prompted Caracas to shift oil sales to Asia, primarily China and India, with significant help from Russia’s state-controlled Rosneft.
Trump must go further to cut off Maduro’s oil revenues and push for an even bigger collapse of the OPEC member’s oil sector. The president looks like he is ready to do just that.
By extending Chevron’s special license to operate in Venezuela by only 90 days, Trump is signaling to the oil major that it should be ready to wind down operations.
Chevron - as well as top oil-services companies Schlumberger, Halliburton, Baker Huges and Weatherford - have successfully argued in the past that it’s in the U.S.’s interest to maintain a presence in Venezuela’s oil sector. The alternative is to allow state-run Russian or Chinese companies with unsavory political aims to fill the void.
The White House was on board with that perspective until July 26 when it cut the length of their operating licenses in half. Some administration officials also made it clear that no new operating licenses were likely to be forthcoming in the future.
The departure of these foreign partners in Venezuela’s oil sector should hasten its demise.
The four Chevron-led joint ventures with state Petroleos de Venezuela (PDV) now account for about 25 percent of Venezuela’s oil production. Participation of the global oilfield services companies has been critical to getting the most from oil fields in Venezuela, which have been starved of investment by PDV. The state oil company has teetered on the brink of collapse for years, operating in “selective default” since 2017 according to S&P Ratings, and its finances worsen by the day.
Without Chevron and the other foreign companies, Venezuela’s oil production could drop well below 500,000 barrels a day. Assuming the Trump administration forces them to leave before the end of October, Venezuelan production could hit rock bottom by the end of this year.
PDV’s oil exports to Asia are also vulnerable. The state-owned oil company has so far been able to find buyers in Asia, mainly in China. But those countries have had to blend Venezuela’s heavy crude with lighter-grade oil to better fit their refineries.
Some of Chevron’s joint ventures with PDV, including Petropiar in Venezuela’s Orinoco Belt, have been integral to the blending of this Merey-16 crude grade. But the latest round of restrictions on Chevron’s operations means that the burden will shift entirely to cash-starved and talent-bereft PDV.
Pulling international oil companies is not the only lever left for Trump to use against Venezuela. He could also impose so-called “secondary sanctions” on foreign buyers of Venezuelan crude in global markets. These consumers would then have a choice: continue buying Venezuelan oil or lose access to U.S. financial markets. That’s a simple choice for most multinational companies.
We’ve already seen how effective secondary sanctions can be in the case of Iran. Trump’s “maximum pressure” campaign reduced Iran’s oil exports to below 300,000 barrels a day, down from more than 2 million barrels a day in production before Trump withdrew from the international nuclear accord in May 2018.
Imposing maximum sanctions on two OPEC members at the same time seems crazy for a president heading into an election year. But global oil prices remain manageable at around $62 a barrel for benchmark Brent — primarily due to the continued growth of U.S. oil production.
U.S. oil production is expected to average 12.4 million barrels a day in 2019, up 1.4 million barrels a day, and 13.3 million barrels a day in 2020. Most analysts expect the shale boom to keep U.S. output rising until the late 2020s.
That should provide much comfort to Trump if he decides to turn up the heat on Maduro.