“From the Middle East to South America as Crude Supplies Are Blocked”: Capital Flows In as U.S. Eases Sanctions, Reviving Venezuela’s Oil Industry

Greater autonomy for foreign companies and easing of U.S. sanctions improve investment conditions
Capital inflows from the United States, Europe and the Middle East bolstered by rising crude exports
Tackling high inflation and power shortages and rebuilding industry remain long-term challenges

Venezuela is accelerating efforts to attract foreign capital by prioritizing the rebuilding of its oil and gas industry. After the country expanded foreign companies’ operational autonomy, the easing of U.S. sanctions further improved trading conditions, prompting companies from the United States, Europe and the Middle East to invest and expand their operations. Exports are also rising as the war in Iran disrupts Middle Eastern crude supplies, bolstering efforts to secure development funding. However, high inflation, power shortages and aging production facilities are hampering economic recovery, and translating oil earnings into industrial reconstruction and job growth is expected to take considerable time.

Venezuela Expects USD 76 Billion in Oil and Gas Investment Over Five Years

According to Reuters on the 19th (all dates hereafter are local time), Venezuela’s acting president, Delcy Rodríguez, said on the 17th that she expected USD 76 billion (approximately USD 77.7 billion) in investment in the oil and gas sector over the next five years. Under the revamped oil and gas legal framework, 61 agreements have been signed, with another 44 under negotiation. Among them, bilateral agreements with the United States include plans to develop 17 oil fields and deploy 250 drilling rigs. Rodríguez outlined a strategy to expand production by combining foreign investment with domestic capital and labor, projecting that the related projects would create more than 324,000 direct, indirect and spin-off jobs.

Companies’ investment plans are also taking shape. On the 2nd of last month, U.S. oil company Chevron agreed with the Venezuelan government to adjust the tax, commercial and legal terms of its joint ventures and secured additional development rights in the Orinoco Belt. Building on this, it plans to invest more than USD 7 billion (approximately USD 7.15 billion) in its local joint ventures over the next five years, raising daily production to about 600,000 barrels. Chevron plans to increase output by expanding development into areas surrounding its existing operations. To that end, Petroindependencia, a joint venture in which Chevron holds a 49% stake, secured development rights to the adjacent Carabobo 1 and Carabobo 2 South A blocks. On the same day, the Venezuelan government also signed an agreement with Italian energy company Eni while pursuing cooperation to upgrade the power supply infrastructure needed to expand energy production. This included an agreement between U.S.-based GE Vernova and Venezuela’s state-owned power company to strengthen the national power grid.

Venezuelan Crude Exports Benefit From Iran War

Foreign companies’ expansion in Venezuela has been supported by a shift in government policy toward guaranteeing operational autonomy for Western companies. Amendments to the oil law passed by parliament in January allow private companies to operate projects even when they hold only minority stakes in joint ventures, and to sell the crude they produce directly and collect payment. This has created more room for foreign companies to participate in production and sales previously controlled by state-owned oil company PDVSA. In particular, the ability to collect crude sales proceeds directly is expected to reduce uncertainty over recouping investments and help secure funding for further development.

The United States also supported the resumption of trade by easing sanctions related to crude exports shortly after the legal amendments. This enabled PDVSA’s joint-venture partners and international commodity traders to obtain Venezuelan crude and sell it to refiners in the United States, Europe and Asia. As business conditions changed, ExxonMobil and ConocoPhillips, which had withdrawn after their assets were nationalized, also began exploring a possible return. ExxonMobil sent a technical team to inspect the condition of the oil field and processing facilities at the Cerro Negro heavy-oil project it previously operated. Both companies held discussions with Venezuela while reviewing the conditions needed to recover their investments and protect their operating rights.

The war in Iran has also disrupted Middle Eastern crude supplies, increasing demand for Venezuelan oil. With shipping through the Strait of Hormuz blocked, Indian refiners expanded crude imports from Latin American countries, including Venezuela and Brazil, in April and May to make up for shortages. Venezuela’s crude oil and petroleum product exports averaged 1.23 million barrels per day in April, up 14% from the previous month and the highest level since 2018. Exports rose for a third consecutive month in May to about 1.25 million barrels per day, an increase of 61% from a year earlier. The main destinations were the United States at 558,000 barrels per day, India at 427,000 and Europe at 169,000, with all three increasing their intake from the previous month. Venezuelan export volumes handled by international commodity traders such as Vitol and Trafigura also increased from 691,000 barrels per day in April to 787,000 in May.

Table 1. Venezuela’s Crude Oil and Petroleum Product Exports

United States Takes the Lead in Venezuelan Crude Trade

As Venezuela expands its export markets, the United States holds the initiative in the trade. Beginning in January, before the outbreak of the war in Iran, the United States arranged sales of Venezuelan crude and established a system under which the proceeds were deposited into U.S.-controlled accounts. U.S. Energy Secretary Chris Wright said at the time that the plan was to sell the oil already in storage first and then continue handling future production. European companies also sought U.S. permission to resume their Venezuelan operations. Spain’s Repsol, Italy’s Eni and France’s Maurel & Prom applied to U.S. authorities for crude export licenses in January, taking the steps needed to resume trading.

For the U.S. refining industry, the practical benefit is a stable supply of Venezuelan heavy crude. Many large refineries along the Gulf Coast have equipment suited to processing heavy oil, and before sanctions were imposed in 2019, they imported and refined 800,000 barrels of Venezuelan crude per day. Easy access by sea and long experience handling this grade of crude also favor increased imports. U.S. refiners equipped to process Venezuelan heavy crude have also pursued direct purchases to lower procurement costs. In February, Phillips 66 and Citgo discussed direct purchases with PDVSA, seeking to streamline supply routes that had relied on intermediaries.

European and Middle Eastern Capital Joins Venezuela’s Resource Development

While U.S. refiners pursue direct crude purchases from Venezuela, European and Middle Eastern companies are seeking development rights to oil and gas fields. On the 19th of last month, France’s TotalEnergies signed a memorandum of understanding on energy cooperation with PDVSA, laying the groundwork for a return to Venezuela. The agreement provides for its subsidiary, TotalEnergies E&P New Ventures, to participate in energy projects. Middle Eastern capital has entered offshore gas development. Last August, Britain’s BP, XRG, the international investment company of the United Arab Emirates’ state-owned oil company ADNOC, and Qatar’s UCC Oil & Gas secured rights to the second phase of the Loran gas field project. The three companies hold equal stakes, with BP serving as operator. Recoverable gas resources in the block are estimated at about 4 trillion cubic feet (ft³).

The flow of European and Middle Eastern capital into Venezuela appears to reflect efforts to diversify production bases against war-related supply disruptions. XRG described its entry into Venezuela as part of a strategy to expand its gas and liquefied natural gas (LNG) business in Latin America and the Atlantic region. Its plan is to secure the Loran gas field as an overseas production base and expand its regional operations. UCC, a partner in the project, highlighted existing gas demand in nearby areas and the availability of processing facilities. In other words, it examined not only gas field development but also the conditions for processing and selling production. To assess the project’s commercial viability, the companies plan to evaluate subsurface resources, design facilities and review gas sales routes.

Companies entering Venezuela are drawing up long-term investment plans that extend beyond feasibility studies to facility construction and production. At an investor presentation in London last July, British investment company Apertura Energy expressed its intention to participate in local projects over the long term. As a first step, it set a goal of establishing an operational base and completing exploration and production deals within the following year. CEO Greig Gilbert explained that additional capital would be needed to restore production capacity because local oilfield service facilities had deteriorated. This means investment in facility rehabilitation and development must continue even after entering the market. Given the time needed to establish a production base and the companies’ long-term business plans, development funding could continue flowing in after the war ends.

Despite Oil Export Recovery, Restoring Livelihoods Remains a Long-Term Challenge

Even if long-term development funding flows in, however, domestic industry and living conditions will need time to recover. Years of underinvestment have weakened Venezuela’s production base, while foreign currency shortages and currency depreciation pushed annual inflation to about 600% in February this year. Dollars earned from oil exports need to circulate smoothly in the domestic economy to support companies’ raw-material purchases and household consumption. Supplies of electricity and fuel needed to increase production are also unstable. As of May, usable generating capacity was less than 40% of total installed capacity, while power outages at the Paraguaná refining complex delayed the restart of gasoline production facilities and fuel deliveries. Power expert Miguel Lara estimated that stabilizing the power grid alone would require at least USD 15 billion (approximately USD 15.3 billion) over three years.

With restoring the industrial base requiring enormous expenditure, directing oil sales revenues into reconstruction and securing support from international financial institutions have also become important. Some overseas power equipment suppliers that held talks with the Venezuelan government in April proposed receiving direct payment for construction work from oil sales accounts overseen by the U.S. Treasury to ensure they would be paid. That same month, the International Monetary Fund (IMF) and the World Bank resumed relations with the Venezuelan government, opening a channel for discussions on reconstruction funding. Improving the economic statistics needed for financial assistance and assessing repayment capacity remain follow-up tasks. The IMF’s position is that an official government request, commitments to implement policies and sufficient data must be in place.

Given the time required for financing procedures and actual restoration work, the return to normal industrial operations is expected to unfold over several years. In March, opaque government allocation of dollars forced Venezuelan companies to obtain foreign currency at higher prices on the unofficial market, increasing their costs. This underscores the need to overhaul foreign currency supply channels before dollars earned from oil exports can be used for domestic investment in facilities. Even after equipment arrives, installation and trial operations take time, and normal operations require the restoration of electricity and fuel supply networks. Because spending on equipment and infrastructure rises first in the early stages of reconstruction, a lag between increased investment and a recovery in production and employment appears inevitable.