RECOMMENDATIONS FOR THE NEW POLICY BRIEF ADMINISTRATION U.S. Policy Toward ’s Hydrocarbon Sector

Francisco Monaldi, Ph.D., Fellow in Latin American Energy Policy and Director, Latin America Energy Program José La Rosa Reyes, M.Sc., Research Analyst, Center for Energy Studies

This brief is part of a series of policy recommendations for President-elect Joe Biden’s incoming administration. Focusing on a range of important issues facing the country, the briefs are intended to provide decision-makers with relevant and effective ideas for addressing domestic and foreign policy priorities. View the entire series at www.bakerinstitute.org/recommendations-2021.

Venezuela faces a historic crisis. Its economy of Venezuelan oil imports were immediately has lost more than 80% of its GDP, while halted. In 2020, the U.S. sanctioned non-U.S. and rising poverty have fueled companies trading Venezuelan oil, including the second-largest refugee exodus in the two subsidiaries of the Russian national oil world. In 2020, oil production averaged company, , that marketed most of just above 500,000 barrels per day, under Venezuela’s oil. U.S. oil companies operating a sixth of the level before Chavismo took in Venezuela were restricted to maintain power in 1999. Refineries have been unable or wind down their activities. Swaps of to supply the limited domestic demand for Venezuelan crude for refined products were gasoline.1 As a result of fraudulent elections also restricted. in 2018, Nicolas Maduro is not recognized The U.S. has protected one of the most as the legitimate president by 57 countries, valuable Venezuelan assets overseas: U.S. Sanctions have been including the . refiner CITGO, a subsidiary of PDVSA. The successful in their stated U.S. government supported efforts by the goal of reducing the interim government—designed by the revenues received by U.S. POLICY IMPACTING THE democratically elected National Assembly— VENEZUELAN OIL SECTOR to take control of CITGO, and temporarily PDVSA and the Maduro regime, but they have To restore democracy, the U.S. has enacted limited creditors from seizing its assets. increasingly harsher . Economic sanctions are targeted at failed to lead to a path Financial sanctions in 2017 banned Maduro’s regime but have also impacted the toward democracy or Venezuela and its national oil company, country’s economy, heavily dependent on oil exports, and its population. Polls indicate to avoid Venezuela’s PDVSA, from accessing the U.S. financial continued economic and markets, effectively limiting their capacity that a large majority of Venezuelans oppose to take on new debt or restructure their economic sanctions. The U.S. Congress humanitarian collapse. current obligations. In 2019, oil sanctions has provided bipartisan support for actions banned U.S. entities from importing oil against Maduro’s regime. Most recently, from Venezuela or exporting refined it enacted the VERDAD Act of 2019 that products to it: more than 500,000 barrels codifies several sanctions and authorizes humanitarian assistance for Venezuela. RICE UNIVERSITY’S BAKER INSTITUTE FOR PUBLIC POLICY // POLICY BRIEF

Some congressional members, however, humanitarian effects of sanctions. These have expressed concerns about the swaps could be also conditioned on humanitarian impact of broad sanctions, and external monitoring. have called for their suspension.2 • Increase pressure on illicit activities: As Venezuela’s formal exports have dried up, Maduro’s regime has further resorted POLICY OPTIONS FOR THE BIDEN to illegal mining, money laundering, and ADMINISTRATION other illicit activities to obtain foreign Sanctions have been successful in their exchange and reward key members stated goal of reducing the revenues of the ruling elite. These activities received by PDVSA and the Maduro regime, have significant negative social and but they have failed to lead to a path environmental effects and empower toward democracy or to avoid Venezuela’s criminal groups. continued economic and humanitarian • Allow foreign oil companies to remain in collapse. What policy options for the oil Venezuela: U.S. and European companies sector should the new administration should play a crucial role in rebuilding the Over the long term, consider? Some considerations for existing Venezuelan oil sector. A forced exit from Venezuela must diversify oil sanctions policy include: the country that hands over assets to oil companies from geopolitical rivals would its economy (and • Try a multilateral approach: Unilateral sanctions appear to have had limited hurt long-term U.S. interests without energy sources), but political effectiveness and have been accomplishing any goals. oil revenues are the used by the Maduro regime to shift • Safeguard CITGO: Preserving CITGO, and fastest option to obtain blame for the economic collapse. A avoiding a disorderly auction of its assets, fiscal resources for the democratic transition would require the should continue to be a policy priority. Venezuela’s reconstruction will require an country’s reconstruction active support of European and Latin American partners. Conditional sanctions orderly restructuring of its external debts. and to address the relief could be a tool to spur multilateral CITGO is the country’s most valuable humanitarian collapse, negotiations. and strategic external asset and should import essential inputs, • Evaluate humanitarian exceptions: only be sold if required as a coherent Options to minimize the humanitarian part of this process. Auctioning it today and support would fetch just a fraction of its long- the transition. effects of sanctions should be explored— for example, a program that swaps term value and compensate in full just oil exports for humanitarian aid, food, a few creditors. In case it is possible to and medicine, and includes credible retain it, CITGO could be a key part of the international monitoring. recovery of the Venezuelan oil industry, guaranteeing a market for its extra- • Consider long-term impacts: Sanctions heavy oil. implementation should take into account their long-term impacts on the country’s oil and gas production capacity. Due THE RECOVERY OF VENEZUELA AND to the nature of Venezuelan oil fields, ITS ENERGY SECTOR: WHAT ROLE production declines permanently hurt SHOULD U.S. POLICY PLAY POST- production capacity, making the recovery TRANSITION? harder later on. • Review the swap policy more generally: In case there is a successful political Swaps of crude for gasoline or other transition in Venezuela, its economic and refined products (diesel and LPG), that political recovery would hinge considerably do not generate cash to the regime, can on its capacity to recover its oil sector, at maintain the oil production capacity least in the short term. Over the long term, that is needed for reconstruction Venezuela must diversify its economy (and while avoiding some of the negative energy sources), but oil revenues are the fastest option to obtain fiscal resources for the country’s reconstruction and to address 2 U.S. POLICY TOWARD VENEZUELA’S HYDROCARBON SECTOR

the humanitarian collapse; to acquire foreign • Provide technical cooperation: The exchange to import essential inputs for the U.S. government, both directly and recovery effort; and to back the multilateral through multilateral agencies, allied aid package to support the transition. countries, and other expert institutions, (The magnitude of such package would should provide assistance in the design be directly tied to the country’s expected and execution of a new oil and gas repayment capacity.) These resources would institutional framework, as well as in be critical for the country’s economic and the areas of technological support and political stability. environmental remediation. Another By any measure, Venezuela has one of area of cooperation could be in training the largest hydrocarbon endowments in the programs in technical areas, including world, including massive unconventional a focus on natural gas, decarbonization, extra-heavy oil fields, conventional mature and integrated energy systems. Finally, fields, and natural gas. Venezuela could support could be provided in the areas increase its oil production to around 1 million of crime reduction and law enforcement. barrels per day in the first couple of years, • Offer financial support for the energy and to 2.5–3 million barrels per day within transition: While oil and gas investments a decade. This recovery requires massive are funded by private capital, U.S. investments estimated at US$ 10-12 billion government agencies and U.S.- per year on average—over $110 billion in supported multilateral agencies may total. Given the collapse of PDVSA and the help fund (or insure) projects connected country’s massive external debt, which to the recovery of the energy sector that exceeds $140 billion, the investment effort simultaneously further climate policy must be largely from foreign companies, objectives. Examples include electricity including those in the U.S. infrastructure, reduction of gas flaring, The recovery of the oil sector requires a carbon-reducing technologies, and new institutional framework with a flexible environmental remediation. The fiscal and contractual framework that can gasification of the country could help generate the necessary credibility to attract the energy transition by reducing the foreign investment and at the same time use of more carbon-intensive fuels. maximize long-term value creation for the • Facilitate access to the U.S. market: nation. The establishment of an independent Market access and trade can be hydrocarbons regulatory agency could be reestablished by enabling the the cornerstone of such a framework. A new preservation of CITGO in Venezuelan Hydrocarbons Law would be required. hands and reducing any obstacles to the A bill along these lines was drafted in 2020 U.S. import of Venezuelan crude and the by the Energy Commission of Venezuela’s U.S. export of refined products and light 3 National Assembly. oil to Venezuela. How can the U.S. government help the • Encourage U.S. oil and gas operators recovery of the post-transition Venezuelan and service companies to return to oil and gas sector? These are some key Venezuela: Chevron still has a stake in recommendations: major projects in Venezuela that should • Lift sanctions: When political conditions be preserved and could be instrumental make it feasible, executive orders already in the recovery. Similarly, U.S. oil service prepared by the U.S. government will and equipment companies would be allow it to rapidly lift the sanctions key actors to execute the massive affecting the Venezuelan oil sector. investments needed. U.S. operators Moreover, the U.S. Treasury Department ConocoPhillips and ExxonMobil, as should actively help the Venezuelan oil well as a few service companies, were sector deal with the likely continued expropriated by Hugo Chavez and left over-compliance by potential partners the country. Some of these companies and suppliers of goods and services.4 are still owed significant compensation. 3 RICE UNIVERSITY’S BAKER INSTITUTE FOR PUBLIC POLICY // POLICY BRIEF

As part of the settlement of these 4. A recent report by the U.S. General claims, it would be desirable if they Accountability Office (GAO) finds that could consider returning to the country. several organizations have faced challenges Creating a rational framework to settle conducting lawful or authorized operations these claims would be key. involving Venezuela due to concerns of suppliers and financial service providers about potential sanctions. This is commonly ENDNOTES known as over-compliance. For further details, see “Venezuela: Additional Tracking 1. For background on the collapse of the Could Aid Trasury’s Efforts to Mitigate Any Venezuelan oil sector, see Igor Hernandez Adverse Impacts U.S. Sanctions Might Have and Francisco Monaldi, “Weathering the on Humanitarian Assistance,” United States Collapse: An Assessment of the Financial and Government Accountability Office, GAO-21- Operational Situation of the Venezuelan Oil 239, February 8, 2021. Industry,” Harvard University, 2016, https:// growthlab.cid.harvard.edu/publications/ venezuelan-oil-assessment; Francisco AUTHORS Monaldi, “The collapse of the Venezuelan oil industry and its global consequences.” Francisco Monaldi, Ph.D., is the fellow in Atlantic Council, March 9, 2018, https:// Latin American energy policy and director www.atlanticcouncil.org/in-depth- of the Latin America Energy Program at the research-reports/report/the-collapse- Center for Energy Studies. He is a leading of-the-venezuelan-oil-industry-and- scholar on the politics and economics of the its-global-consequences/; and Francisco oil industry and oil wealth management in See more policy briefs at: Monaldi, Igor Hernandez, and Jose La Rosa Latin America and developing countries. www.bakerinstitute.org/policy-briefs Reyes, “The Collapse Of The Venezuelan Oil Industry: The Role Of Above-Ground Risks José La Rosa Reyes, M.Sc., is a research This publication was written by a analyst at the Center for Energy Studies. researcher (or researchers) who Limiting FDI, Rice University’s Baker Institute His studies have focused on the political participated in a Baker Institute project. for Public Policy, February 24, 2020, https:// Wherever feasible, this research is www.bakerinstitute.org/research/collapse- economy of oil, the role of energy security reviewed by outside experts before it is venezuelan-oil-industry-role-above- on international relations, and technological released. However, the views expressed ground-risks-limiting-fdi/. advances in renewable energy sources. herein are those of the individual 2. Clare Ribando Seelke, “Venezuela: author(s), and do not necessarily represent the views of Rice University’s Political Crisis and U.S. Policy,” Congressional Baker Institute for Public Policy. Research Service, September 15, 2020. 3. For a discussion of the proposals © 2021 Rice University’s Baker Institute for a new institutional framework, see for Public Policy Igor Hernandez and Jose La Rosa Reyes,

This material may be quoted or “Venezuela’s Oil and Gas; Proposals for reproduced without prior permission, Investment Framework in Comparative provided appropriate credit is given to Perspective,” Chatham House, forthcoming. the author and Rice University’s Baker Institute for Public Policy.

Cite as: Monaldi, Francisco and José La Rosa Reyes. 2021. U.S. Policy Toward Venezuela’s Hydrocarbon Sector. Policy brief: Recommendations for the New Administration. 02.23.21. Rice University’s Baker Institute for Public Policy, , . https://doi.org/10.25613/scns-td13

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