Caracas faces hard road to further output gains

Venezuela's oil production is unlikely to increase significantly after years of chronic underinvestment and mismanagement, even if the relief of US sanctions proves to be permanent. But the political dynamic between Washington and Caracas remains complicated — and it will get more complex when the Venezuela-owned US refiner Citgo is auctioned off next year.

Output from the Opec member was already on a downward spiral before the US imposed sanctions four years ago. The consensus suggests that the easing of sanctions could see production increasing by 200,000 b/d — from 800,000 b/d currently — but further gains may be harder to come by. The sanctions reprieve is most likely to result in a reorganisation of trade flows, diverting some of the 310,000 b/d of Venezuelan crude discharged in China last year back to its previous top pre-sanctions destination, the US. US crude imports from Venezuela resumed this year and averaged 120,000 b/d in January-August, according to US agency the EIA. Venezuelan crude could also displace Canadian heavy sour grades on the Gulf coast.

First-mover advantage on the upstream front remains with Chevron, which was granted a limited licence in November 2022 to resume crude exports from its joint ventures with Venezuelan state-owned PdV to Gulf coast refineries. Perhaps mindful of US bipartisan criticism of Venezuela, Chevron chief executive Mike Wirth says the reopening of Venezuela to business would be a boon for other companies, not the US major. Chevron plans to ramp up its Venezuela output to 150,000 b/d by the end of 2023, from 130,000 b/d at present and 60,000 b/d earlier in the year. Longer-term plans by Chevron depend on "the political situation in the country, with elections and the like", Wirth says.

Producers that are not already up and running in Venezuela may be reluctant to make significant investments, given the uncertainty as to whether the sanctions relief will be extended in April. But "Chevron is on a separate track", Houston-based Rice University's Francisco Monaldi says, who points to plans by the major to scale up production before sanctions relief was granted. Italy's Eni could potentially increase output through its minority share in a separate joint venture with PdV. Oil field services giant SLB says it is ready to return to Venezuela.

Extension uncertainty

The sanctions waiver is already being tested. The six-month sanctions pause was announced last month, conditioned on a pledge by Venezuelan president Nicolas Maduro's government to hold free and fair elections next year. But a Venezuelan court on 30 October suspended the results of a presidential primary held by the opposition. The move prompted a warning from US secretary of state Tony Blinken that sanctions could be snapped back if Maduro violates the deal.

The fate of Citgo is another challenge to future US-Venezuela relations. Citgo, with 805,000 b/d in capacity at three US refineries, is nominally a subsidiary of PdV but it has been run by a board appointed by the Venezuelan opposition since January 2019. A US federal court in Delaware has ordered Citgo to be sold to satisfy over $20bn in unpaid debt by PdV and Venezuela, including to ConocoPhillips, which has registered three claims totalling $10.5bn.

The first round of bidding is scheduled to take place in January. If the company's sale goes through as planned, Citgo could have new owners as early as July 2024, potentially marking the largest merger of US refining assets since Andeavor's acquisition by US independent Marathon Petroleum in 2018. The sale will take place before the elections in Venezuela, and Maduro has already denounced the "theft" of what used to be considered the crown jewel of Venezuela's foreign assets.

Venezuelan crude production

US Venezuela imports