For almost two decades trade between the U.S. and Venezuela has been deteriorating. But that hasn’t deterred Chevron from staying in Venezuela and seeking long-term trade security.
The latest announcement by the Treasury Department’s Office of Foreign Assets Control (OFAC) to temporarily lift sanctions on Venezuelan oil and natural gas exports vindicated some of Chevron’s hopes that production in the South American country might recover at some point. Analysts view this as a positive signal that trade with Venezuela may normalize, but they emphasize that more needs to happen so companies, including Chevron, can increase production in the country.
Venezuela has the world’s largest oil reserves among member countries in the Organization of the Petroleum Exporting Countries (OPEC), including Saudi Arabia and Iran, and the seventh largest natural gas reserves.
”Chevron has a ton of resource there and it is unlikely to invest much money anytime in the near foreseeable future because the risk profile is really, really high,” Ryan Todd, senior research analyst at Piper Sandler & Co, said.
Unlike other companies, among them ExxonMobil and ConocoPhillips, Chevron stayed in Venezuela after the country nationalized assets including oil and natural gas in 2007 under President Hugo Chavez, who died in 2013. Sanctions by the Trump administration on PDVSA, Venezuela’s estate-run energy company, halted all of Venezuela’s oil exports to the U.S. and Chevron’s operations in the country in 2019. The move was an attempt to oust Venezuela's president Nicolás Maduro.
In the same year, the U.S. issued a license for Chevron and four other international energy companies that allowed transactions necessary for the “safety and preservation of assets.” Thanks to the license, Chevron could take part in board of directors and shareholder meetings; operations to ensure the safety of personnel, operations and assets.
“During the pandemic they kept a minimal number of personnel,” Jesus Arcila, supervisor of the instrumentation and control engineering area at PDVSA, said in Spanish referring to the effects of U.S. sanctions on Venezuelan exports. “We kept working with the exception that we didn’t sell to the U.S. but to other clients.”
On Nov. 22, 2022, a new license backed by a debt-for oil deal helped Chevron resume oil and gas production to recover roughly $3 billion in debt owed by PDVSA from sales in its joint operations. The deal allowed Chevron to use the profits from oil sales to pay taxes and royalties on its operations in Venezuela and repay part of what the country still owes the company in oil sales. It also prohibits PDVSA from receiving money from the Chevron operations.
The permit was important to increase production without infrastructure improvements or significant investment because it reopened the door for Chevron’s supply of naphtha, a diluent that reduces the viscosity of Venezuela’s heavy crude to facilitate its transportation. The country produced 733,000 bpd in September, according to OPEC, but further production increases will require additional investment.
“We have had access to the diluent since Chevron was authorized,” Arcila said, referring to the company’s special license from 2022.
However the most recent permit, issued by the OFAC with an expiration of April 18, 2024 unless it’s renewed, basically expands Venezuela’s trade with other countries so it “doesn’t materially change” Chevron’s operations said Mike Wirth, the company’s chief executive officer, during the third-quarter earnings call with analysts on Oct. 27.
But, allowing more countries to trade with Venezuela is rather an initial step towards more stable trade with the country, something that’s key to ramp up oil production. Private companies, including Chevron, will need assurance that they are permitted to stay in Venezuela beyond what the OFAC allows them for at the moment in order to invest the capital required to ameliorate the country’s energy infrastructure and increase oil production.
“This is a first good step,” Roger Read, senior energy analyst at Wells Fargo, said, “[but] this is not something that gets fixed in nine months or anything.”
According to a document by PDVSA titled “Investment opportunities,” roughly $58 billion is required to bring crude production to 3.4 million barrels per day (bpd), the country’s production levels in 1998. Years of disinvestment led to the decay of Venezuela’s energy facilities and production.
“I think the bigger problem lies in how much they can find financing and investments,” Kunro Irié, researcher at the Energy Security and Climate Change Program at the Center for Strategic and International Studies (CSIS), said. “We still have to watch how the political, the elections procedures will proceed and how the U.S. will react to them.”
But the latest developments have not been promising. Venezuela’s Supreme Court nullified the results of the country’s Oct. 22 primary, which could’ve been seen as a violation of the OFAC’s condition to hold a fair presidential election.
Venezuela’s highest court decision automatically disqualifies the winner of the primary election, Maria Machado, as the challenger for president Nicolás Maduro in the 2024 presidential election. Machado had been barred by the Venezuelan government from holding public office since June 30, citing her support for sanctions against the Maduro government and her backing of former opposition figure Juan Guaidó.
“It basically told 2.5 million of people your vote is not valid,” Cesar Parra, former president of the Venezuelan Oil Chamber in the Zulia province, said.
Despite the uncertainty, Chevron may continue to operate in the country under its own special license granted at the end of 2022 if the Biden administration re-imposes the sanctions.
A Chevron’s spokesperson in the U.S. did not reply for comment and a spokesperson in Venezuela declined to comment citing the “sensitivity of the topic.”
Since 2007, Chevron has been cautious with its investments in Venezuela. In the latest earnings call, Wirth said the company would increase production in Venezuela without significant capital increases until the company sees “how the longer-term sanctions environment plays out,” echoing the words of his predecessor David O’Reilly in 2007. That year, after the announcement of the oil industry’s nationalization, O'Reilly said the company would determine its appetite for investment based on the terms of its partnership with PDVSA and restrictions from the Venezuelan government.
“They’re not going to use their incremental money until they know that they can recover that money,” Nitin Kumar, equity research senior analyst covering oil and gas at Mizuho Financial Group, said, “not just from an economic standpoint, but from a political standpoint over time.”
In the meantime Chevron has suffered after-tax cash flow losses from its operations in Venezuela worth approximately $0.56 billion from 2015 to 2017 according to Global Data; invested $115 million in social programs including education, entrepreneurship and health; and even lobbied the U.S. Congress in 2022 on several issues, including “Venezuela Energy Issues,” according to lobbying disclosures. In the last earnings call, Chevron’s chief financial officer, Pierre R. Breber, said the company’s operations in Venezuela makes up about 1 percent of the company’s cash flow, implying it made around $970 million there in the third quarter.
Chevron remains one of the largest U.S. oil companies, generating $18.2 billion in the first 3 quarters of 2023, down from $28.7 billion last year in the same period. The recent acquisition of Hess gave Chevron access to Guyana and its 11 billion in offshore oil reserves, an important asset that would generate years of production, but significantly less than Venezuela’s 304 billion oil reserves.
Chevron’s stock hit an all time high on January 26 at 187.81 basis points, 4.6% higher on a year to date in 2023, but has dropped since then. Chevron’s shares closed at 144.04 points on Nov. 21, 19.8% lower on a year to date basis and underperformed the S&P 500 index, which is up by 18.7 %.
The potential for Venezuelan resources may keep Chevron in the country for an undetermined period of time as long as it doesn’t suffer considerable losses for several years.
“You could sustain losses if you can operate in the country long-term and, let’s say, you recover your costs and then over time it becomes profitable,” Kumar said. But Kumar added that uncertainty for long-term operations, the threat of U.S. sanctions and the risk that the Venezuelan government could seize assets, may discourage companies like Chevron from staying in Venezuela.