As the international community seeks answers with regards to the failed armed incursion into Venezuela that took place May 4, allegedly with the immediate participation of former US military veterans, President Maduro has once again proved to be a masterful survival artist. Notwithstanding the umpteenth round of US Treasury sanctions, oil prices falling below breakeven level for Orinoco production and global demand shrinking, the failed plot allows the embattled leader to strike a national chord of national unity against the ever-aggressive enemy. More importantly, Venezuela’s exports to China seem to be picking up, giving a further twist to the troubled fate of Latin America’s most oil-prolific nation.

Even before the incursion, things were really intense in Venezuela. Former vice president Tareck El Aissami was appointed the new oil minister, a seemingly innocent piece of news, were it not for the fact that El Aissami has been investigated by the US Drug Enforcement Administration for money laundering and drug trafficking since at least 2015. El Aissami replaces General Manuel Quevedo, marking an end to his 3-year tenure which was generally perceived as the military taking over the oil industry (Quevedo was simultaneously oil minister and head of PDVSA). From now on, it is the intelligence agencies controlling the general oil policy whilst PDVSA will go to Asdrubal Chavez, Hugo Chavez’s cousin and former president of the US refiner Citgo.

The temporary loss of most Chinese demand and the concurring drop of oil prices below production costs (estimated to be in the $10-15 per barrel interval) have hit Venezuelan exports hard, however there are early indications of recovery being around the corner. After the US Treasury sanctioned the Swiss-based Rosneft Trading for conducting oil trade with the Venezuelan regime, no major oil company wished to fill in the void. As a consequence, Mexican companies previously unknown to the world of oil trading became leading exporters of Orinoco crude – firms like Libre Abordo and Richeart International are supplying water and water treatment equipment parts in exchange for crude, thus bypassing any need for dollar-denominated bank transactions.

 

As difficult as it is to follow a Venezuelan cargo en route to China – officially no tanker is declaring China as its discharge location, opting for the foggy concept of Singapore OPL (outer port limits) instead – VLCC movements from the José Terminal to Singapore indicate a potential increase in May-June. On the other hand, exports to India, having averaged 6-7 million barrels per month in Q1 2020, have decreased by almost two-thirds, attesting to the constraints the Indian downstream sector has been experiencing on the back of coronavirus paralyzing the South Asian nation’s economy. Yet with Chevron effectively banned from producing in Venezuela and Rosneft leaving the country’s upstream sector, too, PDVSA’s potential in terms of ramping up output is severely limited.

Cognizant of the challenges that an even lower production level entails, Venezuela has propped up its efforts to revamp the country’s decrepit downstream sector. Iran, Venezuela’s traditional peer as a target of US sanctions, has flown in several refinery parts as well as skilled specialists to effectuate the repair works in late April – a fact that was first discovered by media outlets noticing flights from Teheran directly to the Paraguana peninsula where the PDVSA’s CRP refining complex is located (nominal throughput capacity 940kbpd) and later confirmed by the new oil refining deputy minister Jorge Sicatt. It seems that PDVSA’s primary goal is to have both the Cardon and Amuay refinery’s fluid catalytic cracker repaired so as to provide a quick fix for the pervasive fuel shortages that have sparked public outrage.

 

There is good reason to invite Iranian downstream specialists to Venezuela as their refineries were also primarily configured for ExxonMobil and Shell technologies, however the dire condition of PDVSA refineries might be a tough nut to crack even for the most ingenious engineers. Not only were the incorrectly utilized FCC units fixed up from parts scrapped from elsewhere, only to be idled for too long afterwards, the task of repairing Amuay and Cardon is also compounded by the sheer size of the refining complex, the largest in the Western Hemisphere. Therefore, it would be somewhat too optimistic to expect any quick fixes with the downstream revamp – as demonstrated by a recent incident where 4 workers got burned whilst attempting to dismantle a furnace valve.

The coronavirus-triggered depression has compelled Maduro’s Administration to reverse one of its main economic policy moves of past years, namely the November 2018 lifting of price and foreign exchange controls. The Venezuelan government capped the prices of 27 staple foodstuffs, impacting all the leading agriculture and foods companies remaining in the country – from April 24 onwards these products will be under government-mandated quotas both in terms of scope and distribution. This might be due to President Maduro wanting to maintain the loyalty of the military echelons, all the while the fuel shortages and dearth of groceries increase the possibility of large-scale looting.

In an ideal world, Venezuela would now do its utmost to produce as much crude as it can, availing itself of the immense oil reserves it boats. Yet Caracas today is far from being in an ideal state and the COVID-19 pandemic has only underscored Venezuela’s fragility. PDVSA has embarked upon an array of genuinely necessary initiatives – the modernization of its refinery system, a flaunted reform to boost the role of private companies in the upstream sector – yet as long as the economy is daunted by hyperinflation, intermittent electricity access (a major factor in terms of damage done to refineries and crude upgraders) and military-sector interventions, President Maduro’s survival tactics continue to prevail over long-term recovery.