Venezuela

Why the world’s swelling refugee population has shrinking options.

The staying power of Nicolas Maduro’s embattled government may hinge on three critical allies: Russia, China, and Cuba.

Test your knowledge of Venezuela, from its role in global oil markets to its increasing political instability.

In early 2003, when debate was surfacing in the United States whether to invade Iraq, a Council on Foreign Relations working group drafted a monograph outlining the problems that such a policy would face. As I explained at the time as part of that effort, Iraq’s oil industry was in tatters and it would take years, not months, to restore it. It was clear prior to the 2003 war that Iraq’s oil could neither pay for the war, nor be nearly enough to fund its reconstruction. Given the news that the United States has recognized the speaker of the democratically elected National Assembly Juan Guaido as interim President of Venezuela in defiance of ruling strongman Nicolas Maduro, the question about how long it would take Venezuela to restore its oil production under a new government is likely to arise. Like Iraq, Venezuela will need massive amounts of money to rebuild deteriorated national infrastructure. Also like Iraq, Venezuela’s oil industry has suffered serious damage, and the damage could arguably be harder to restore than in Iraq. The invasion of Iraq took place in 2003. Iraq’s oil production is now gaining ground, but that positive trajectory took almost a decade to establish, as seen in figure 1.  It might seem relevant to note that Iraq faced a destructive war in 2003, followed by years of civil war and more recently, a battle to expunge ISIS and therefore its oil installations took a military beating that won’t be analogous in Venezuela. That is certainly true. But the fact is that there has been tremendous violence on the ground in Venezuela with multiple armed groups looting and raiding the country’s key infrastructure, and the oil sector has been targeted across the country. The violence has caused many of the international oil companies previously operating in the country to withdraw. One challenge that will face any new government, were one to be able to emerge, is that there are multiple renegade armed groups operating inside Venezuela, including Cuban mercenaries and others deeply entrenched in drug trafficking. This has made and will continue to make guarding Venezuela’s oil industry a major challenge. Further complicating any oil sector transition, the Venezuelan military has virtually taken over as the gate keeper on the operation of the oil industry. The employment ranks of state firm PDVSA is said to now total as many as one hundred and sixty thousand people, up from its normal ranks of forty thousand in the years prior to the election of Hugo Chavez. Organizations like the Military Corporation for Mining, Petroleum and Gas Industries (Camimpeg) created in 2016 actively intercept the flow of income from the oil sector. Camimpeg’s soldiers have been working to suppress strikes by oil workers unions at oil fields around Lake Maracaibo, and Petroleum Intelligence Weekly is reporting that soldiers often siphon off barrels and engage in illegal smuggling for payments for stolen oil being included at Venezuela’s ports in larger shipments to Russia and China. Last week Guaido bravely told a public rally that “We will not permit the continued use of public funds by a gang of thieves so they can continue stealing,” but acknowledged that gaining control of Venezuela’s offshore assets like Citgo Petroleum in the United States would take time. In fact, Guaido’s opposition government will need time to develop the leadership and capable administrative staffing that it would require to run an industry as technically complex as oil and gas.   The condition of Venezuela’s oil industry is dire. Of its four refineries, only one is running. Fires, explosions, looting and mis-operation has shuttered most of Venezuela’s refining capacity. Refining throughput is estimated at just under three hundred and fifty thousand barrels per day (b/d), mainly from the large Amuay Bay facilities, compared to its prior operational capacity of 1.5 million b/d. The Cardon, El Palito and Puerto La Cruz facilities face equipment failures and manpower shortages. PDVSA has also abandoned the Isla refinery on the Dutch Island of Curacao, which it had operated under a lease. The refining problems have led to gasoline and diesel shortages across Venezuela. Venezuela has experienced a sharp oil production decline over the past two years, dropping from 2.2 million b/d in early 2017 to about 1.1 million b/d currently, as is seen in figure 2. The declines result from chronic technical mismanagement and underinvestment in the sector over a decade or more and massive arrears to suppliers such as international drilling companies and equipment suppliers who have slowed activity in Venezuela over the past year or so to limit unpaid bills. Other more recent problems are also taking their toll, including shortages of basic equipment, logistical problems on export loading ports, corruption, and labor unrest, worker desertions, and mass resignations. Historically, Venezuela’s conventional fields near Lake Maracaibo have required constant intervention because their natural decline rate is among the highest in the world at 25 percent. Venezuela’s heavy oil extraction operations are labor and equipment intensive and requires cash purchases of diluent on the international market. Estimates are that it would take an injection of over $20 billion of new investment to reverse the current downward path on production. Given this cost, the extent of existing damage, and the deterioration of PDVSA’s workforce, a reversal of Venezuela’s oil industry woes might prove more difficult even than war-torn Iraq.      The United States had previously banned U.S. entities from trading in new Venezuelan government debt beyond the thirty days customary for letters of credit for oil trade. U.S. entities were similarly banned from trading in existing debt held by the Venezuelan government as well as trading in new debt instruments with maturity beyond ninety days. Citgo, as a U.S. entity, was forbidden to make financial distributions back to Venezuela. Last week, U.S. National Security Advisor John Bolton reiterated the Trump administration goal to disconnect “the illegitimate Maduro regime from the sources of its revenue.” With the U.S. recognition of Guiado as interim President of Venezuela, one option will be to establish a special purpose bank account for the opposition government in the United States, to include revenues that involve payments by American firms involved in business dealings in Venezuela. U.S. refiner Valero has been a major importer of Venezuelan crude, and Chevron Corporation has ongoing oil field operations in the country. The U.S. Department of State has already served notice to the U.S. Federal Reserve to recognize Guaido as the primary agent for access to Venezuelan financial assets in U.S. banks.  The practicalities of implementation remain to be seen. There is speculation that Venezuela will stop shipping any oil to the U.S. including to Citgo to avoid transfer of any funds to the Guaido-led interim government. That means in effect the current U.S. actions have already in effect embargoed imported Venezuelan crude to Citgo and other U.S. buyers. In a sign that Maduro regime is already taking a different approach, state PDVSA issued a tender early last week for the open market sale of four million barrels of Venezuelan crude oil slated for delivery in late January and into February. Black market sales of oil and refined products either by truck or otherwise have been a staple of declining oil regimes over the last few decades, and could possibly sustain Maduro with some cash even if his regime has difficulty maintaining official government exports. The situation with Citgo Petroleum is also a sticky problem with the Trump Administration. The wholly Venezuelan owned U.S. refiner also imports crude oil from Venezuela and purchases Canadian and other crude oil for its three refineries. Citgo is among the largest U.S. branded gasoline marketer in the United States. Citgo’s refineries produce roughly 4 percent of U.S. refined petroleum products. At its peak, Citgo supplied close to 9 percent of annual sales of U.S. retail gasoline. The firm is a major supplier to the Chicago area. Prior to the recent political events, investors who hold Venezuela’s unpaid bonds in Citgo had been organizing and were expected to push for a restructuring. Canadian miner Crystallex won a legal judgement against Venezuela last year that would have facilitated it to seize and sell Citgo as compensation for Venezuela’s 2007 nationalization of a gold mine. Venezuela still has $1.5 billion in settlement payments to make to ConocoPhillips as part of its 2007 nationalization of the American oil company’s assets in Venezuela’s oil sector. It is unclear how the unraveling of Citgo’s financial structure would proceed under a new Venezuelan government. Guaido has specifically announced plans to create a new board for Citgo but has been mum on how it might restructure the liens against the company’s assets and revenues. In 2016, Caracas used a 50.1 percent stake in Citgo as collateral for new bonds. Russian state oil firm Rosneft also has a $1.5 billion lien on the other 49.9 percent share of Citgo. Additionally, Venezuela remains highly indebted to China, which extended over $60 billion in aid during the rule of Hugo Chavez. To date, Venezuela has been repaying this latter debt slowly over time in the form of oil shipments. Geopolitically, the oil situation in Venezuela presents a difficult and complex challenge for U.S. diplomatic and treasury officials. On the one hand, the United States is helped by the fact that the Organization of American States (OAS) issued a resolution declaring Nicolas Maduro’s January 10 reelection “illegimate.” The United States has been leaning on allies and the United Nations to address the humanitarian emergency that has been created by the exodus of several million Venezuelans to neighboring countries. But China and Russia, which have invested heavily in the Maduro regime, are likely to push back on efforts to topple it, arguing at the U.N. Security Council that wider intervention is interfering with sovereign internal affairs. Both countries are heavily embedded in the Venezuelan oil sector.   Given the complexities of how Venezuela has tried to insulate itself over the years from U.S. pressure using friendly oil investors as leverage, it will be tricky for the Trump administration to proceed to back a Guaido presidency without creating a disruption in Venezuelan oil production and exports as an unintended result. Presumably, a new government would be in a position to receive some debt forgiveness combined with a broad restructuring of its government debt. In doing so, the demands of Russia and China will have to be factored in to ensure a lasting resolution of Venezuela’s indebtedness. The obvious importance of Citgo inside the U.S. refining system and as a key preserved asset for Venezuela should give pause to all parties about the relative stakes of failing to find a creative diplomatic solution to the current stand-off. Implementation of a political transition on the ground inside Venezuela, given the multitude of rogue military gangs operating within the country, may still make geopolitical deal-making just the tip of an iceberg for restoring stability to either the country and to its oil industry.  

This year, a deepening of the economic crisis and growing political instability in Venezuela was included as a top tier priority in the Center for Preventive Action’s annual Preventive Priorities Survey.

Mexico's Andres Lopez Obrador may be able to play a decisive role in bringing this agonizing chapter of Venezuelan history to an end.

Bankrolling the region’s biggest humanitarian disaster won’t win Beijing many friends.

U.S. administration is coming out on the wrong side of anti-corruption and migration in the hemisphere, with potentially lasting consequences for U.S.-Latin American relations.

How much worse do things in Venezuela have to become before the world would be prepared to act?

The answer to Venezuela’s crisis is not military intervention. The United States and neighboring countries should instead focus on a widespread diplomatic, financial, and humanitarian response.

As energy ministers from major oil producing countries gather in Vienna this week to discuss the stability of global oil markets, the variables that will dictate outcomes have rapidly shifted. Pre-meeting narratives that previously focused on the appropriate level of external private investment—either too much, in the case of U.S. shale producers, or too little, in the case of private sector international oil companies—look woefully inadequate to explain current oil market conditions. Instead, how to deal with the accelerating political and institutional breakdown of several national oil companies across multiple continents now stands out as a pressing structural challenge for the Organization of Petroleum Exporting Countries (OPEC) and U.S. policymakers alike. I highlighted this problem vis a vis Venezuela last March. Stated intentions to replace lost barrels from Venezuela and potentially Iran has brought acrimony back into the OPEC fray. U.S. plans to sanction Iran’s oil exports are the most recent publicly visible geopolitical irritant, but the history has shown that eliminating the endogenous geopolitical swings in the oil cycle takes more intervention and planning capability than even the most well intended partnerships can master, much less nation states whose relations have been punctuated by direct military threats or proxy wars. Talk of a sustained Saudi-Russian alliance that would be effective in eliminating the factors that could cause gyrations in oil prices seem overstated. All of OPEC’s fourteen members have flagship national oil companies (NOCs), that is, state-controlled entities that oversee their nation’s energy industry. Other important oil producing countries such as Brazil, Mexico, and Russia also have NOCs that dominate their oil and gas sectors. Many of these national firms are facing structural budgetary, corruption, or other internal political challenges, including attacks on facilities by local rebel groups, criminal gangs, terrorists, cyber hackers, and/or armed combatants in ongoing military conflicts.   As a result of these ongoing NOC difficulties, supplies from several OPEC countries, Venezuela, Libya, Iraq, Iran, Nigeria, and Angola have been volatile in recent years. In particular, the collapse of Venezuela’s oil industry and a slide in deep water oil production from Angola have been more instrumental to the market success of OPEC’s agreement with Russia and other non-OPEC oil producers than the producer group’s “planned” cuts in reducing excess inventories by almost 200 million barrels since early 2017 and pushing Brent oil prices up from about $55 to $75 a barrel. Cornerstone Macro noted in a recent report that oil stocks in industrialized countries experienced a counter seasonal decline of three million barrels in April, as compared to the more customary twenty million buildup on the heels of reduced global supplies and more robust than expected U.S. and global economic growth. While Saudi Arabia, Kuwait, the United Arab Emirates, and Russia did make promised output reductions to help tighten oil supply over the course of 2017, unintended production declines continue to be more material. Not only did oil output declines from Venezuela, Algeria, Angola, Ecuador, and Gabon amount to losses of close to one million barrels a day since early 2017, according to Citibank, markets have come to expect accidental supply disruptions from conflict prone oil regions in Libya and Nigeria. That reality prompted one prominent energy columnist to conclude that OPEC has become “an increasingly unreliable supplier of an essential commodity.” Whatever the outcome of the OPEC-non-OPEC Vienna group’s deliberations this week, it could turn out to be only a temporary fix to this more structural NOC problem than generally understood. Right now, OPEC spare productive capacity is highly limited. Saudi Arabia and Russia together would probably have difficulty adding much more than 1.5 million barrels a day to markets through the end of the year. Ongoing problems in Libya and Venezuela, combined with renewed sanctions on Iran, could possibly take more than that off the market. And what if a new supply problem emerges? Saudi Arabia and Russia are discussing longer run cooperation. What would that look like in a world where uncertainty plagues many national oil companies around the world, including, perhaps, their own firms? Does budget-constrained Saudi Arabia agree to divert billions in tandem with Russian firms to expand additional oil fields’ productive capacity down the road to capture future market share that could be available as NOCs in other countries continue to fail? If Saudi and Russia make capacity expansion pushes, what becomes of OPEC as a coherent organization? Will the Vienna group need to shrink in number? Conversely, if Saudi Arabia and Russia choose to make only a quick stop-gap measure just to keep markets from overheating in the next few months and don’t invest in new capacity, will they sacrifice future revenues to private oil and gas investors who can bring on capacity more quickly if NOC capacity continues to falter? The 2014-2015 price collapse has proven that a year or two of low prices won’t be sufficient to knock out growth in U.S. tight oil. That means restarting a price war in the short run isn’t an ideal option for OPEC, especially if those flooding the market do not appear to be able to survive the prolonged revenue drop that would make a price war option an effective threat. And my guess is that low oil prices also aren’t likely to be sufficient to knock out capital investment by the major international oil companies (IOCs). Those companies have started to pivot their strategies to direct their capital spending to activities that will be more productive than those pursued over the last decade when booking new large reserves was the priority. Rather, companies are focused on spending programs that can bring higher production more quickly, such as directing capital spending to shorter cycle field extensions and satellite field developments that can bring first oil into the market rapidly within one to three years (as opposed to mega-projects that took near a decade to develop). Companies are also developing new techniques to reduce the cycle time and costs on challenging green field projects.  Moreover, innovation in the private oil and gas sector is increasingly de-risking the landscape for future oil and gas investment for private investors. As technology improves, companies are going to be able to squeeze more barrels out of all kinds of existing known in place source rock, not just oil and gas from shale formations. The most recent example is the Austin Chalk where U.S. companies are rushing to test new drilling techniques to positive results.   There’s an additional rub. Saudi and Russian efforts could have trouble influencing intermediate oil demand trends. Even if the Vienna group takes production increase decisions this week that staves off any economically crippling oil price shock that could have sent oil demand into a tailspin, caution signs are already emerging that oil prices even at $70 a barrel are creating some economic headwinds. Markets are already nervous about trade wars. Reports are emerging that high fuel prices are hindering economies within the Euro zone and elsewhere. Rising fuel prices are visibly creating economic and political problems in India and other developing economies. And the United States needs strong demand growth elsewhere to manage its own economic issues. In the case of an unexpected global economic slowdown, OPEC supply disruptions could take a back seat again to “lower for longer” story lines about failing oil demand (potentially in the midst of rising U.S. production in 2019), which could make any discussion of a more permanent, workable Saudi-Russia oil alliance even harder to envision.

This post is co-written by David R. Mares, the Institute of the Americas chair for Inter-American Affairs and professor for political science at the University of California San Diego and the Baker Institute scholar for Latin American energy studies at the James A. Baker III Institute for Public Policy at Rice University. Venezuelans are due to go to the polls on May 20, in an election that is seen as problematical for the largest members of the Organization of American States (OAS). Last month’s OAS summit was inconclusive on how to respond to the deepening humanitarian crisis inside Venezuela that has spurred 230,000 refugees to cross the border to Colombia and oil workers to abandon their posts. This week’s news included an announcement that Chevron was withdrawing executives in light of the arrest of two company employees who were arrested for refusing to participate in official corruption. Chevron’s announcement follows the exit of major U.S. oil drilling service companies. Oil production from areas such as Chevron’s operations were a bright light in a rapidly declining sector. As the Venezuelan oil industry collapse accelerates under the rule of Major General Manuel Quevedo, oil production is likely to continue to crater, perhaps at a faster rate. Eventually, the industry’s performance will be so debilitated that it will render the option of U.S. sanctions against Venezuelan oil exports less relevant.   The prospects that General Quevedo will run Venezuela’s oil industry into the ground raises the specter that the ranks of the country’s military could consider a coup against President Nicolas Maduro. That will present a different kind of challenge for the United States and the OAS.  Opening Pandora’s Box – Again? The U.S. government’s response to Venezuela’s situation will complicate a broader Latin American response. Former President Barack Obama’s designation of Venezuela as a threat to U.S. national security alienated most of Latin America with its harkening back to Cold War unilateralism. The recent thinly veiled calls by high U.S. officials including Senator Marco Rubio—chairman of the subcommittee on the Western hemisphere—for a military coup to oust President Maduro raises fears of a return to Latin American militaries as the arbiters of politics. The fact that some members of the Venezuelan political opposition also support the call for the country’s military to intervene is also troubling, as significant minority opinions in Latin America’s past supported military coups that were followed by severe repression and suspended democracy for years. A Checkered History of Efforts to Defend Democracy in Latin America  Latin America has committed itself in multiple international fora to defending democracy. In the twenty-first century they have acted in concert multiple times to isolate governments that came to power through irregular or highly questionable means (e.g., Venezuela 2002 and Honduras 2009) or to effectively mediate government-opposition conflicts (e.g., Bolivia 2007-2008). But today Latin America is divided regarding how to respond to the political, economic, and humanitarian crisis engulfing Venezuela. The Lima Group of fourteen countries (including Canada, Guyana, and Saint Lucia as non-Latin American members) is pressuring the government of Nicolás Maduro for credible commitments to free elections and reforms, but several members of the OAS call for a hands off approach. Even the Lima Group is divided regarding how much to pressure Maduro: Peru told Maduro that he was not invited to the 2018 Summit of the Americas, but Chile publicly stated that all governments were invited to the inauguration of President Sebastián Piñera. The reasons for this disunity are not simply ideological disagreements, dependence on Venezuelan oil, or kowtowing to Washington. Rather, they are rooted in the region’s history of political instability, frustrated social change, and experience with the heavy and clumsy hand of the United States, all of which have led to the region prizing sovereignty and generally opposing interference by other nations in domestic affairs. Drawing the Line - Where? OAS leadership, both the current Secretary General Luis Almagro and the former Secretary General Jose Miguel Insulza, have sought to make the organization live up to its responsibilities under the 2001 Inter-American Democratic Charter, and to critique the intransigence of the Maduro government. The United States, Brazil, Colombia, and Argentina all supported this approach at the OAS summit last month in Lima.  But the OAS has not been effective in delivering a clear and consistent pro-democratic message for complex reasons. First, there is no agreement in Latin America beyond periodic elections on what constitutes “democracy,” and therefore it is diplomatically difficult to get agreement on where the Maduro government sits on the spectrum where beyond which politics is no longer democratic. Second, the great discrepancies in political and social inclusion that remain in Latin America reproduce the domestic political polarization and instability at the regional level. Populist governments in Ecuador and Nicaragua still support the Venezuelan government.  Worse still, Latin American governments agree that if the military participates in an overthrow—even if asked by governing institutions to do so (e.g., Honduras)—that it is a coup against democracy. But if riots in the street seek to force a president to resign and thus impose the vocal minority’s will over the results of elections, Latin American consensus breaks down with governments that favor the opposition calling for mediation and those sympathetic to the government supporting the electoral calendar. Similar divisions reveal themselves when one branch of government uses its constitutional powers to remove the leadership of another branch or stop a proposed policy (e.g., Paraguay, Brazil, Venezuela in 2015). This pattern suggests that Latin America’s defense of democracy is not a mature process tied to law and institutions, but still rooted in individuals, ideology, and politics. Looking for Clean Hands Who has the standing to critique Venezuela? Maduro’s popularity in Venezuela is far greater than President Michel Temer’s in Brazil where few voters likely believe that Temer and his administration are more honest than Luiz Inácio Lula da Silva or Dilma Rousseff who are under investigation. Among the mediators selected by the opposition is Mexico—a country with the highest murder rate for journalists, where the government is suspected by international NGOs of being involved in much of the violence against citizens and wallowing in corruption. Colombia is one of the leading voices for sanctioning Venezuela’s government, but Colombia’s bona fides are compromised by the fraying of the peace agreement and the lack of security for FARC candidates in elections. Peru’s President just resigned in the face of serious financial and political corruption scandals.  All this makes the U.S. decision making about Venezuela extremely difficult. If the goal of U.S. intervention is to restore democracy to Venezuela, imposing U.S. sanctions against the country’s oil exports could be overkill, given the decline coming to the country’s oil sector in any case. Targeted sanctions against the Venezuelan military would have limited real effects given Russia and China’s commitment to the current regime and would only reinforce officers who hold anti-U.S. nationalist views. The U.S. government should consider two major points in preparing for the next stages in the evolution of the Venezuelan crisis. First, if the United States is seen as taking the lead in bringing about the collapse of the Maduro government, it will discredit the democratic transition in the eyes of significant segments of Venezuelan and Latin American public opinion. Secondly, United States credibility for providing reconstruction aid and supporting an open and non-discriminatory transition process is low in the region.  With these points in mind, there are some efforts the United States could make in a supporting role to the Lima Group. Colombia has called for a reconstruction plan for Venezuela; the United States should encourage a Latin American conference to develop that plan with clear U.S. commitments. The United States also needs to adopt an active and visible role assisting Brazil and Colombia to deal with the refugees. This would not only be in line with U.S. disaster relief efforts in the past but could constitute a way of getting humanitarian aid to Venezuela, bypassing the government, if enough aid is provided by the United States, the Lima Group, and the EU to enable people to bring some back into Venezuela. While not the ideal means to provide humanitarian aid inside Venezuela, smuggling is a well-established activity and effectively closing the border to the influx of such aid would significantly add to the discredit of the Maduro government. The United States also needs to consider how it would respond to a sudden military take-over and change of leadership. In this case, the United States should coordinate with Latin American governments in an immediate call for a firm date for the restoration of freely organized elections and in which chavismo, minus government officials implicated in corruption and abuse of power, would be free to compete. Only a stable democratic Venezuela will be able to utilize its vast oil and gas resources for the benefit of its people and global energy markets.