Bringing Venezuela in from the cold

The United States senses an opportunity to pull the Maduro government out of Russia’s orbit

By Allison Fedirka

For years, U.S.-Venezuelan relations have alternated between saber-rattling and quiet contempt, but a war on the other side of the world could change that. Exploding global oil prices and Europe’s energy crunch, combined with increasingly pragmatic attitudes in Caracas and anxiety in Washington over gasoline prices, have aligned to bolster the United States’ fundamental interest in pulling Venezuela back into its sphere of influence.

Seller’s Market

Russia’s invasion of Ukraine has roiled global commodities markets. In the U.S., the Biden administration is worried about what rising energy prices and high inflation generally will mean for its economic recovery from the pandemic and its prospects in November’s midterm elections. On the foreign policy front, Washington needs to help its allies in Europe secure energy supplies from sources that aren’t subject to the Kremlin’s influence and that don’t contribute to Russia’s war chest. The Russian-Ukrainian war was a major shock to Western Europe that reenergized the trans-Atlantic alliance, but Europe’s dependence on Russian energy limits its ability to go along with the harshest U.S. sanctions. Europe and the U.S. now have a strong interest in boosting their own energy ties, namely through exports to Europe of U.S. liquefied natural gas, and convincing other energy producers to raise output.

U.S. companies are responding cautiously to the White House’s calls for more production. Energy firms have been bringing more drilling rigs online over the past two months, but all indications are that U.S. oil output will not return to pre-pandemic levels this year. (Current U.S. oil production is just under 12 million barrels per day, 8 percent lower than in 2019.) The reasons for the tepid response are numerous. First, many companies are still reporting shortages of workers and difficulty acquiring equipment because of pandemic-related issues. Second, shareholders are pressuring firms to use windfall profits to support dividends and stock buybacks rather than investing in more production. Finally, and related to the previous point, firms are hesitant to rush into investing in more production because of fears that prices could fall in the future.

The other aspect of the U.S. response focuses on foreign energy producers. The energy price shock has prompted the U.S. to reconsider its stance toward major oil producers like Iran, Saudi Arabia and Venezuela, three countries with contentious relationships with Washington. Of the three, conditions for a rapprochement are most favorable in Venezuela. Cooperation with Iran is limited until the sides can find a resolution to the Iran nuclear deal, which is currently held up by disputes between the West and Russia. Saudi Arabia reportedly refused to even answer President Joe Biden’s phone calls. But in Venezuela, U.S. regional dominance simplifies the opening of negotiations with the government of President Nicolas Maduro – and it doesn’t hurt that the U.S. already has refineries made to process Venezuela’s heavy crude.

Rapprochement

On March 5, the U.S. dispatched a high-level delegation to Caracas. Notably, the visit involved direct talks with Maduro himself and was well-publicized, unlike previous meetings that were kept quiet and didn’t include the Venezuelan president directly. (Officially, the U.S. still recognizes Juan Guaido as the legitimate leader of Venezuela.)

To bring Venezuelan crude back onto mainstream markets, the U.S. needs to lift at least some sanctions against the country. The current plan involves the temporary removal of sanctions or the extension of special waivers to select energy firms. Washington could consider waivers for companies like Chevron, Schlumberger, Halliburton,

Weatherford International, Baker Hughes, Spain’s Repsol, Italy’s Eni, France’s Maurel & Prom, and India’s Oil and Natural Gas Corp. Lifting sanctions could immediately add to the market 23 million barrels of Venezuelan crude that are sitting in storage tanks and oil tankers, and there’s room for Venezuelan output to grow.

Businesses in the U.S. are supportive of the effort. U.S. investors are in talks with emissaries from Venezuela about potentially restructuring $60 billion of Venezuelan debt. Caracas reportedly offered a range of investment incentives to encourage U.S. firms to press Washington to lift sanctions. One Indian refiner reportedly hired a former Biden aide to lobby for waivers. According to reports, Chevron already has plans to expand its production in Venezuela in the event of sanctions relief. The firm reportedly could restore 150,000 barrels per day within six weeks.

But energy alone cannot explain the U.S. outreach to Venezuela. The country’s current oil production is insufficient to substantially affect global price trends and would only modestly affect U.S. imports. Last year, average U.S. petroleum consumption was approximately 19.8 million bpd. But the U.S. produced approximately 16.6 million bpd, while it imported about 8.5 million bpd. For reference, stateowned Petroleos de Venezuela (PDVSA) reported 871,000 bpd of production as of December 2021. Private estimates put the figure closer to 681,000 bpd. (Either figure is still a significant increase from the 300,000 bpd posted in 2020.)

The other major driver of Washington’s attempted rapprochement with Caracas is strategic. With energy prices – and thus potential profits for Venezuela – going through the roof, and Russia potentially bogged down in Ukraine, the U.S. senses an opportunity to peel Venezuela away from

Russia. Restoring Venezuela’s oil industry would lift up the country’s entire economy. The head of Venezuela’s Petroleum Chamber estimates that, with foreign help, the country could produce more than 1 million bpd before the end of the year. He also said the Venezuelan oil industry needs $60 billion in investment over five years to fully restore production. U.S. industry experts believe the country could produce approximately 2.5 million bpd with just $20 billion to $25 billion in investment over six years. In the short run, Venezuelan oil expert Ali Morishi thinks an investment of $5 billion to $8 billion could enable Venezuela to produce enough oil that it wouldn’t need to borrow from international financiers like the International Monetary Fund to cover its spending.

The U.S. is in a better position to offer financing to Venezuela than is Russia. The Kremlin has been dealing with its own economic challenges for years, and thanks to international sanctions those challenges are getting much worse. For Caracas, a redeeming feature of close ties with Moscow was Russian access to the SWIFT banking network and Moscow’s ability to help get Venezuelan oil to market, assist in financing and get the country access to dollars. Restrictions on Russia’s financial access reduce its ability to facilitate Venezuela’s oil trade, thereby reducing Moscow’s value to Caracas.

Name Your Price

Maduro’s increasingly pragmatic government is open to U.S. overtures. Since the U.S. introduced sanctions against PDVSA in 2019, Caracas has put expertise over ideology in a desperate bid to survive. Legacies of the Hugo Chavez era

have been phased out of government, most notably in the military, where Maduro retired many senior officers who had close ties to Diosdado Cabello. New government appointees have tended to be highly educated, with a broad worldview and a pragmatic approach to navigating the country’s economic problems. Many of them advocate reducing state involvement in the economy and improving ties with the U.S., provided that Washington recognizes Maduro as the legitimate president.

The Maduro government’s response to the March 5 visit suggests that it went well. Shortly after the meeting, Maduro announced his desire to restart dialogue with the opposition – a small step toward addressing Washington’s concerns about democracy. Maduro also released two U.S. citizens from Venezuelan custody. Finally, the U.S. and Venezuela plan to hold follow-up talks, though no date has been set.

At the same time, Caracas has to be realistic about the chances of reconciling with Washington. On March 10, Venezuelan Vice President Delcy Rodriguez paid a visit to Moscow to meet with Foreign Minister Sergey Lavrov about the recent U.S. visit, bilateral cooperation and the oil market. Venezuela has also requested that Moscow unfreeze its oil money held up by U.S. sanctions in several Russian banks, such as Promsvyazbank, where PDVSA and the Venezuelan Defense Ministry have accounts.

Ultimately, Venezuela needs access to dollars and markets for its oil. The dialogue with the U.S. is preliminary enough that Venezuela must hedge its bets and balance with Russia while it evaluates its options and watches how the war in Ukraine unfolds.

This is wise, because the U.S. still faces two major constraints when it comes to rebuilding its influence in Venezuela. The first obstacle is political opposition. Sens. Marco Rubio and Bob Menendez say that the U.S. must do more to support the Venezuelan opposition’s drive for democracy and that reconciliation with Caracas would empower the Maduro government.

The White House responded with reassurances from national security adviser Jake Sullivan that sanctions relief would be contingent on “concrete steps” by the

Maduro government, and the White House press secretary denied that Venezuela’s release of the two Americans was in exchange for sanctions relief. The pressure in Washington to be tough on Maduro’s government will be significant.

More important, the U.S. also needs to maintain positive relations with Venezuela’s neighbor, Colombia. Washington’s close ties with Bogota are a cornerstone of much of the U.S. security strategy in Latin America. The U.S. must be able to offer Colombia security and other guarantees if it moves forward with a rapprochement with Venezuela. To that end, on March 10, Colombian President Ivan Duque arrived in Washington to meet with Biden and discuss oil and Venezuela.

Duque unequivocally rejected the idea of the U.S. buying Venezuelan oil, and offered to increase Colombia’s oil supplies to the United States. Colombia’s current production capacity is 890,000 bpd.

Bogota has good reason to be wary of Washington’s overtures to the Maduro government. The Venezuelan government harbors Colombian guerrillas and maintains a military presence along their shared border. Moreover, Colombia would bear the brunt of the wave of refugees from Venezuela if any deviation from the status quo caused instability in its neighbor. (Colombia already hosts an estimated 1.7 million Venezuelan refugees.)

But the U.S. does not want to empower the Maduro government without getting political concessions in return. A U.S. strategy of gradual, staggered sanctions relief would help soothe concerns in both Colombia and the United States.

But there’s still a long way to go.