Venezuelan President Nicolás Maduro on Feb. 19 declared an “energy emergency” and announced the creation of a commission to rehabilitate state oil company PDVSA in a bid to bolster the country’s crumbling industry. The announcement came one day after the United States blacklisted Rosneft Trading, a subsidiary of Russian state oil firm Rosneft which has become a major intermediary for Venezuelan crude since the Trump administration slapped sanctions on PDVSA. What is the “energy emergency,” and what should Maduro’s commission focus on to successfully boost Venezuela’s crude output? To what extent will the new Rosneft sanctions deter the company, and more broadly Russia, from doing business with the Maduro government? How much will the latest sanctions hurt Venezuela’s oil production and exports, and will the move ultimately result in significantly more pressure on Maduro to step down?
Francisco J. Monaldi, fellow in Latin America energy policy at Rice University’s Baker Institute for Public Policy and lecturer in energy economics at the Center for Energy Studies: “The U.S. sanctions on PDVSA that started in 2019 significantly reduced the company’s cash flow. Before the sanctions, PDVSA exported about 550,000 barrels per day (bpd) to the United States and produced about 1.3 million bpd. U.S. refineries also supplied around 125,000 bpd of products to Venezuela. By the second half of 2019, PDVSA did not trade oil or products with the United States and produced about 800,000 bpd. Production also fell due to other factors, such as electricity blackouts, but exports have been constrained by lack of buyers. Rosneft has been trading more than half of Venezuela’s oil exports, and PDVSA has had to discount the barrels it sells by as much as 40 percent and import around 150,000 bpd of products in disadvantageous swaps. As a result, PDVSA’s net cash flow fell by close to $10 billion. Sanctions on Rosneft Trading are a blow that should increase the risk of buying from PDVSA and the discounts it has to give. But if, as it appears, Russia wants to continue trading Venezuelan oil for geopolitical reasons (it also made handsome profits and was paid close to $2 billion in debt for doing so), it would do so through other subsidiaries, such as TNK Trading, at the risk of also getting it sanctioned. The threat of sanctions might dissuade other buyers, such as Reliance, Repsol and ENI, from trading with PDVSA. Thus, production and exports should continue to fall in 2020, although at a much lower rate than in 2019. Gen. Quevedo’s leadership of the company has been disastrous, and there is no doubt that a change is required. But appointing Tareck El Aissami as head of the restructuring board seems like a move by Maduro to reduce the power of Diosdado Cabello. If, as repeatedly stated, the government wants to increase the role of international partners in joint ventures, picking a person on the United States’ most-wanted list for trafficking narcotics does not seem to be the right move.”
Massimiliano Ballotta, partner in the Moscow office, and Javier Coronado, associate attorney, both at Diaz, Reus & Targ: “U.S. sanctions on relatively small Rosneft Trading, which was created in 2011 to assist Rosneft on foreign projects, will not deter Russia from doing business with the Maduro regime. The designation does not apply to Rosneft or its other subsidiaries and affiliates. In fact, right after learning of these sanctions, Rosneft, in line with Russia’s traditional position on U.S. sanctions, publicly criticized them as illegal and said it would continue with its Venezuela-related operations. However, the fact that the United States is imposing secondary sanctions on non-U.S. firms operating in the oil sector of the Venezuelan economy, such as Rosneft Trading, makes the picture appear grim for Maduro. While the 2019 U.S. economic sanctions on PDVSA caused a drastic drop in Venezuela’s oil production and created severe barriers for Venezuela to trade with U.S. refineries, Maduro managed to keep Venezuela’s oil industry afloat by dealing with companies not subject to U.S. jurisdiction. Secondary sanctions pose a threat to that strategy and force Venezuela to increasingly rely on dealings with Russia. Not surprisingly, PDVSA is preparing a fuel rationing plan for domestic consumers. To further address the crisis in Venezuela’s oil industry, Maduro is considering to transfer ownership of a number of PDVSA’s subsidiaries to international corporations. Although that change in ownership would be a step in the right direction to boost Venezuela’s crude output, it will only work if international corporations also take control over PDVSA’s operations and work alongside the U.S. government. Otherwise, these international corporations could also face economic sanctions.”
Arturo H. Banegas Masiá, partner at the Latin America and the Caribbean practice group of Akerman: “Rosneft has been a key foreign patron of Nicolás Maduro to overcome the effects of U.S. sanctions on Venezuela’s PDVSA, allowing the sale of Venezuelan crude to tankers and other international buyers. However, sanctions and an FAQ that OFAC released specifically excluded Rosneft, one of the largest oil companies in the world, and any other company of which Rosneft Trading owns less than 50 percent, either directly or indirectly. However, this does not prevent the U.S. government from extending its sanctions to other companies of the Rosneft group and even its parent, which may be disastrous to Russia. As an almost immediate reaction, Maduro declared by decree an ‘energy emergency,’ after Venezuela’s oil production fell to its lowest level in 75 years, producing much less than one million bpd, according to Trading Economics report. A new commission was created to restructure PDVSA, with the name of a late energy minister known for his fierce opposition to the opening of the oil sector in the 1990s, which led to Venezuela’s highest oil output. This commission will be headed by Tareck El Aissami, a sanctioned Venezuelan vice president, and will include three other individuals, two of whom are also sanctioned by OFAC, too. According to recent reports, other sanction-free companies of Rosneft group are quickly stepping up to replace Rosneft Trading and keep selling Venezuelan crude. El Aissami is internationally known for having presided over a debt restructuring commission in Venezuela in 2017, when the first set of sanctions were imposed. He was already designated at that time and that prevented all banks and bondholders subject to U.S. jurisdiction to negotiate the expected restructuring. The results of that commission, more than two years after it was created, are PDVSA’s default on some of its bonds in 2017 and on the rest of its bonds in 2019. It is in default on $6 billion in interest and principal. We cannot expect a different outcome from the new ‘energy emergency’ commission.”
Richard N. Sawaya, vice president of the National Foreign Trade Council: “When one reviews the sanctions-based maximum pressure campaigns directed at Iran and North Korea, the major economic sanctions directed at Russia, and the results of the sanctions on Venezuela to date, one can only conclude that the sanctions directed at the Maduro regime will probably not result in his removal. As Robert Pape wrote in ‘Why Economic Sanctions Do Not Work’: ‘Modern states can adjust to minimize their vulnerability to economic sanctions, because administrative capabilities allow states to mitigate the economic damage of sanctions through substitution and other techniques. Coercers never anticipate all the adjustments and reworking that targets can devise, including endless varieties of conservation, substitution, and more efficient methods of allocation.’ ”