Energy Cos Caught In Spat Over Venezuela Sanctions

(Chron, Sergio Chapa, 7.Oct.2019) — Frequent power outages, theft of equipment, a political tug-of-war and billions of dollars in losses would seem to signal to businesses that it’s time to get out of Venezuela.

But energy companies with headquarters or major operations in Houston — including the oil major Chevron and oilfield services firms Schlumberger, Halliburton, Baker Hughes and Weatherford — are instead scrambling to stay in the crisis-ridden South American country, pressing the Trump administration to renew waivers from U.S. sanctions that expire in about three weeks and allow them to continue operating there.

Despite difficult and deteriorating conditions, the companies are trying to maintain business connections and access to the world’s largest proven oil reserves, which hold a valuable type of heavy crude that is prized by refiners and easily extracted by conventional and less expensive forms of drilling. With the Russian oil company Rosneft and China National Petroleum Corp. making an aggressive push at the invitation of Venezuelan President Nicolas Maduro, energy executives and analystsfear that the Russians and Chinese would dominate the Venezuelan oil sector if the American companies leave.

“From the perspective of the United States,” said Francisco Monaldi, a Latin America energy expert with Rice University’s Baker Institute. “It would be leaving the country with one of the largest hydrocarbon resource endowments in the world, in the hands of geopolitical rivals — without achieving the goal of regime change.”

Timeline: Sanctions in Venezuela

February 2, 1999 — Hugo Chavez elected as president of Venezuela

April 25, 1999 — Hugo Chavez gets the support from 88 percent of voters for constitutional reforms

January 10, 2001 — Hugo Chavez elected to second term as president

January 10, 2007 — Hugo Chavez elected to third term as president and begins efforts to nationalize oil & other industries

June 26, 2007 — Venezuela seizes assets belonging to Exxon Mobil and ConocoPhillips while Chevron, Total, BP and StatOil remain

October 18, 2010 — BP sells Venezuelan assets to Russian company TNK-BP to raise cash for damages from Gulf of Mexico oil spill

January 10, 2013 — Hugo Chavez elected to fourth term as president

March 5, 2013 — Hugo Chavez dies in office

March 21, 2013 — Russian oil company Rosneft enters Venezuela at buying TNK-BP in a $12.5 billion deal

December 18, 2014 — U.S. President Barack Obama signs the Venezuela Defense of Human Rights and Civil Society Act of 2014 into law

March 8, 2015 — U.S. President Barack Obama issues Executive Order 13692 to freeze the assets of seven Chavez administration officials

January 20, 2017 — Donald Trump sworn in as president of the United States

August 24, 2017 — U.S. President Donald Trump issues Executive Order 13808 placing sanctions limiting terms of debit issued to PDVSA and the Venezuelan government

March 19, 2018 — U.S. President Donald Trump issues Executive Order 13827 placing sanctions on BitCoin and other digital currency transactions with the Venezuelan government

May 20, 2018 — Presidential elections held in Venezuela end with Nicolas Maduro declaring victory

May 21, 2018 — U.S President Donald Trump issues Executive Order 13835 placing sanctions on issuing debt to the Venezuelan government

November 1, 2018 — U.S. President Donald Trump issues Executive Order 13850 placing sanctions on the gold industry operating in Venezuela, also gives U.S. Treasury Department to add other sectors.

January 23, 2019 – U.S. President Donald Trump recognizes opposition leader Juan Guaido as president of Venezuela

January 25, 2019 — U.S. President Donald Trump issues Executive Order 13857 adding sanctions to the Central Bank of Venezuela and PDVSA

January 28, 2019 — U.S. Treasury Secretary Steven Mnuchin adds the oil sector of the Venezuela economy to the Nov. 1 sanctions

January 28, 2019 — U.S. Treasury Department grants general license to Chevron, Halliburton, Schlumberger, Baker Hughes and Weatherford allowing them to remain in Venezuela for six months

March 22, 2019 — U.S. Treasury Secretary Steven Mnuchin adds the financial sector of the Venezuela economy to the Nov. 1 sanctions

May 9, 2019 — U.S. Treasury Secretary Steven Mnuchin adds the defense and security sectors of the Venezuela economy to the Nov. 1 sanctions

July 25, 2019 — U.S. Treasury Department gives Chevron, Halliburton, Schlumberger, Baker Hughes and Weatherford permission to remain in Venezuela for another three months

August 5, 2019 — U.S. President Donald Trump issues Executive order 13884 freezing all assets of the Venezuelan government

October 25, 2019 — Renewal date for Chevron, Halliburton, Schlumberger, Baker Hughes and Weatherford to remain in Venezuela another three months

Source: U.S. Department of Treasury

The Cost of Sanctions

The cost of doing business in Venezuela is high. Three out of the six companies operating under the U.S. sanctions in the South American nation have reported nearly $2.1 billion of impairments, write downs and other losses over the past three two and a half years.

  Impairments/Write Downs / Losses

Company

2017

2018
2019*
Totals
Schlumberger $938mn $0 $0 $938mn
Halliburton $647mn $265mn $0 $912mn
Weatherford $230mn $0 $0 $230mn
Chevron N/A N/A N/A N/A
Baker Hughes N/A N/A N/A N/A
Nabors N/A N/A N/A N/A
         
Grand Total       $2.1bn

* Through the second quarter of 2019

Source: U.S. Securities and Exchange Commission

Clay Neff, president of exploration and production for Chevron in Africa and Latin America, said his company intends to stay in Venezuela, despite a recent second quarter loss of $21 million for its operations there. Chevron, he said, has operated in Venezuela for nearly 100 years and owns assets there valued at $2.7 billion.

“Chevron is not preparing to leave Venezuela,” Neff said. “We continue to stay focused on our base business operations and supporting more than 8,800 who work with us and their families. If Chevron is forced to leave Venezuela, non-U.S. companies will fill the void and oil production will continue.”

Venezuela Sanctions

Venezuela was a top supplier of heavy crude oil to the United States for decades. Tensions between two nations grew after late socialist President Hugo Chavez nationalized oil fields leased by Exxon Mobil and ConocoPhillips in June 2007. Chavez died in March 2013. His hand-picked successor, Maduro, became interim president and held onto power in a disputed election late last year.

Plagued by political and economic crises that have created shortages of food, medicine and other basic necessities, millions of Venezuelans have fled the country, once one of the wealthiest in Latin America. Oil production was falling long before President Donald Trump imposed crippling sanctions on the Maduro regime following the election that independent observers characterized as neither free nor fair.

Crude output has plunged from 3 million barrels a day in 1999, when Chavez took office, to 885,000 barrels a day in June, according to the U.S. Energy Department.

Schlumberger, Halliburton and Weatherford have recorded a combined $2.1 billion in write downs, impairments and other losses in Venezuela over the past two years. Chevron reported a $21 million loss from its Venezuelan operations during the second quarter.

Trump administration sanctions prohibit U.S. refineries from importing Venezuelan crude — that nation’s top source of revenue. Venezuelan crude oil exports to the United States went from 587,000 barrels per day on Jan. 25 to zero in matter of weeks, according to the Energy Department.

Former Trump administration National Security Advisor John Bolton championed the sanctions but there were internal disagreements over strategy, said Monaldi with Rice University’s Baker Insitute. Bolton favored maximum pressure tactics to choke Venezuela’s oil industry while others wanted to keep an American presence there. The result, Monaldi said, were last-minute renewals for Chevron and other companies in July.

Trump fired Bolton on Sept. 10 in an unrelated matter. It remains to be seen what the administration will do next in Venezuela, but Monaldi called the current policy a “self-defeating proposition” if U.S. companies lose ground in the world’s largest oil field to foreign competitors.

Russian-owned Rosneft is participating in five joint ventures with Venezuela’s state-run oil company Petroleos de Venezuela SA, or PDVSA. After lending the Venezuela government $1.5 billion in 2016, Rosneft also holds a lien for 49.9 percent ownership of Citgo, PDVSA’s U.S. refining subsidiary headquarted in Houston.

“The Russians are basically taking over the oil sector in Venezuela,” Monaldi said. “They are exporting more than half of the oil coming out of Venezuela and getting their loansrepaid. Rosneft is becoming the largest actor in the Venezuelan oil sector.”

Holding the Line

In the meantime, Chevron, Halliburton and the other companies are navigating the narrow path between the U.S. sanctions and the Venezuelan government.

Chavez’s efforts to nationalize Venezuela’s oil fields in 2007 resulted in foreign companies going from majority owners of their leases to minority owners working in partnership with PDVSA. Chevron holds a 39.2 percent stake in the Petroboscan project in western Venezuela and a 30 percent stake in the Petropiar project in the Orinoco Belt, the heart of the nation’s oil production.

Twenty-five drilling rigs operate in Venezuela, according to the Baker Hughes. An estimated 20 rigs were contracted by PDVSA, Rosfnet and China National Petroleum Corporation while the remaining five support Chevron’s joint venture operations. Schlumberger, Halliburton, Baker Hughes and Weatherford all provide services to support those joint venture operations and would be affected if Chevron is forced to leave.

Eileen Gavin, a Latin America energy analyst with the London-based oil & gas research firm Maplecroft, believes that the Trump administration will keep renewing the licenses for Chevron and the service companies on a three to six-month basis. If and when the political situation changes and sanctions are dropped, companies already operating in Venezuela would have a advantage over new ones trying to enter.

“It would be politically difficult for the Trump administration to take that kind of action against a U.S. company,” Gavin said. “There are strong oil sector players that want to see a continued U.S. presence in Venezuela long-term.”

Looking Ahead

If the political situation is resolved, Monaldi said it would take an estimated $120 billion of investment to get Venezuela’s oil fields back to producing more than 2 million barrels per day. But that might prove difficult due to competition with other prospects in more stable places such as neighboring Guyana and U.S. shale plays.

“Every time a company decides to spend $1 in Venezuela, they have to compare it with spending an additional $1 in the Permian Basin,” Monaldi said. “That will make it harder for Venezuela to attract the dollars that it needs.”

Historically close to Venezuela, Monaldi believes that Houston will benefit from a recovery in the South American nation.

“The largest diaspora of Venezuelan oilfield workers is in Houston,” Monaldi said. “There are about 50,000 Venezuelans in Houston and most of them work in the oil sector in one way or another. If there is a recovery of the sector, that connection will strengthen even more.”

Guillermo Zubillaga, an expert on Venezuela with the New York think tank Americas Society/Council of the Americas, said any possible economic recovery in the South American nation will rely on the oil sector with U.S. and European companies at the forefront.

“The anti-corruption, transparency, environmental and labor standards of U.S. and European is far superior than the one of Chinese and Russian companies,” Zubillaga said.

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