Manohar Parrikar Institute for Defence Studies and Analyses
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US-Venezuela Stand-off: Impact on Global Oil Prices

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Oil prices are on the rise again. Part of this is due to the ongoing stand-off between the United States and Venezuela, one of OPEC’s member producers. However, Washington’s announcement on January 28, 2019, after a two-year long unrelenting pressure campaign, that it was imposing sanctions on the Venezuelan oil industry did not initially have the expected impact on global oil prices, since Venezuela’s oil production has been declining over the last few years and now stands at around 1.57 million barrels of oil per day (mbd), down from 3.1 mbd in 2010. Moreover, the US, which was the largest market for Venezuelan crude, will now terminate imports completely after sanctions were imposed on Petroleos de Venezuela, S.A (PdVSA). Essentially, the sanctions seek to deprive the Nicolas Maduro government of oil revenues worth $11 billion, besides blocking some $7 billion in state assets. Moreover, all property and interests in property of PdVSA that are subject to US jurisdiction would be frozen. And Americans are generally prohibited from engaging in transactions with PdVSA, and its 50 percent-owned subsidiaries would be prohibited from engaging in transactions with the company. However, the general licenses for certain transactions and activities related to PdVSA and its subsidiaries, viz., the US-based PdVSA subsidiaries such as CITGO Holdings and PDV Holdings, as well as several American companies that are importing Venezuelan oil have been permitted to continue till July 27, 2019 although payments for transactions benefiting PdVSA will have to be made into an escrow account that the Maduro government would not be able to access.1

How is Venezuela expected to deal with this increasingly difficult situation given that oil is its main revenue earner? More importantly, how will this crisis impact on global oil prices, and what will the repercussions be for India, which is not only the third largest consumer and importer of oil, but currently the largest buyer of Venezuelan oil?

The first challenge that Caracas faces is to find markets for its crude. With the American market now on the verge of dissipating, Asia, and particularly China and India, have increasingly become Venezuela’s largest and perhaps the only other possible markets. Refineries in these countries are the only ones outside the US with the ability to refine Venezuelan heavy, sour crude. Even before the most recent sanctions were imposed by the United States, President Maduro had said during his visit to China in September 2018 that Venezuela would increase oil exports to China to one mbd. This would essentially be in return for the loans Venezuela had received from China – more than $50 billion over the last decade, in addition to $17 billion as loans and credit lines from Russia. But as Caracas still owed about $20 billion to Beijing, it has been repaying the debt with oil exports in a barter deal. China has also agreed to invest $5 billion more in Venezuela to boost crude production.2

The other market that Venezuela is banking on is India. At the Petrotech meeting in New Delhi on 10-12 February 2019, Manuel Quevedo who is not only Venezuela’s oil minister but also the president of PdVSA and the current chairman of OPEC, said that his country wanted to double its export of oil to India. In 2018, India imported more than 3,40,000 barrels per day (b/d) from Venezuela, becoming the second largest importer of Venezuelan oil.3 Caracas has also expressed interest in expanding its trade in technology and services with New Delhi.

Given that several European nations, along with the United States, have de-recognised the Maduro government in favour of opposition leader, Juan Guaidó, payment for Venezuelan oil would be a challenge for India. As of now, New Delhi has not taken any firm stand on the issue, having issued a statement only on January 25, 2019, that: “India and Venezuela enjoy close and cordial relations”, and “We are of the view that it is for the people of Venezuela to find political solution to resolve their differences through constructive dialogue and discussion without resorting to violence. We believe democracy, peace and security in Venezuela are of paramount importance for the progress and prosperity of the people of Venezuela.”4  

The companies that have been buying crude from Venezuela are Reliance Industries Ltd. (RIL) and Nayara Energy (formerly Essar and which is partly owned by Russia’s Rosneft).5 Prior to the recent US-Venezuela stand-off, RIL had been paying PdVSA in cash through the latter’s American subsidiary, CIDGO. However, as in the case of Iran from which RIL imported crude, the company may terminate its trade with PdVSA due to its exposure to the US financial system. Nayara, however, may decide to continue to trade with Venezuela, given its links with Rosneft, which is an important source of loans for PdVSA, although Nayara has terminated all imports from Iran after it was hit with the recent US sanctions. Such decisions will, however, be weighed against possible sanctions on shipping and payment mechanisms, which may be imposed after July 28, 2019.

With regard to the Indian state-owned refiners, it is unlikely that they will opt for Venezuelan crude because they will need to blend it with lighter crude before it can be processed in their facilities. Moreover, given its falling oil production, it is unclear whether Venezuela would be able to meet its contractual obligations with current clients. Already, Venezuelan shipments to India fell by 11 per cent in the first half of 2018 due to production problems within PdVSA, which forced Indian refiners to look for alternate supplies, although not many can replace the Venezuelan heavy crudes.

At the Petrotech meeting, Quevedo had also said that Venezuela was open to conduct trade with India through a barter system, which would provide India the opportunity to balance its trade with Venezuela. In fiscal 2017-18, India’s imports from Venezuela were worth $5.87 billion, while its exports totalled $79.3 million.6 Hence, a barter system could allow for the trade deficit to be bridged to some extent. Currently, India has limited items to export to Venezuela, however, and is trying to expand its trade basket to include rice and pharmaceuticals,7 apart from the current items of exports consisting of chemicals, calcined petroleum coke, textiles and engineering products and machinery.8 India’s main imports from Venezuela are crude oil, iron pellets and electrical cables.9 Venezuela has also evinced interest in collaborating with India in the health, bio-technology, remote sensing and IT sectors.10

However, the MEA spokesperson has clarified that “Venezuela is the chair of OPEC and GECF (Gas Exporting Countries Forum). We don’t have any barter system with Venezuela; commercial considerations and related factors will determine the value of trade which we have with any country.”11 It is also likely that PdVSA would offer incentives like price discounts and other sweeteners to increase oil sales to India.

Although Venezuela has appealed to OPEC for support against US sanctions, there has been no official statement from the cartel so far. However, with the OPEC plus countries now agreeing to further cut production, accompanied by the fall in Iranian and Venezuelan supplies, producers in general will gain as the price of oil has gone up, with some predicting that it may cross $70 a barrel over the next few weeks.

According to some reports, the US is planning more punitive actions, including blocking foreign companies from dealing with PdVSA, in order to hasten Maduro’s exit. This may deter countries that are still dealing with the Maduro regime from doing business with PdVSA. In the meantime, while the sanctions have sent ripples down the global oil sector, the crisis could have larger geopolitical and geo-economic consequences, with big powers like the US, Russia and China picking sides. All in all, the world seems set to undergo yet another round of high oil prices.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

Keywords: Venezuela, Energy Security, United States of America (USA), US Sanctions
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