Maduro defiance puts western oil companies in bind

Western oil companies with assets in Venezuela are expected to come under growing pressure in the aftermath of autocratic President Nicolas Maduro´s widely condemned re-inauguration today.

The ceremony that was shunned by most of the international community sparked fresh sanctions, deepening the Opec country´s isolation. Argentina followed Peru today in imposing travel bans and financial restrictions on senior Venezuelan government officials. Paraguay broke diplomatic relations altogether but pledged to honor its $300mn oil debt to Caracas. The Organization of American States (OAS) voted not to recognize Maduro´s second term, with the notable abstention of Mexico that has adopted a non-confrontational stance since leftist president Andres Manuel Lopez Obrador took power in December.

The US, EU and Canada already have targeted sanctions in place, and Washington has had financial sanctions on the government and state-owned PdV since August 2017. None of the sanctions directly targets Venezuela´s oil exports, the source of all of the government´s legitimate revenue. The financial sanctions have had the most far-reaching impact, but even the sanctions on individual officials could make it more difficult for foreign oil companies to operate and interact with their Venezuelan counterparts.

Oil ministry officials say tougher sanctions could also thwart the ability of some western oil companies to finance their share of joint venture investments in Venezuela, and the ability of PdV to attract new investors.

Chevron, Total, Equinor, Repsol and Eni are among PdV´s partners with assets on the ground. Shell recently sold its 40pc in an upstream oil venture, but continues to operate alongside PdV to reduce flaring in eastern fields and is poised to develop and transport offshore gas to neighboring Trinidad and Tobago.

All of the companies have maintained a low profile as Venezuela has sunk into economic ruin and many have written off chronic losses. Peers ExxonMobil and ConocoPhillips withdrew from Venezuela after their assets were expropriated in 2007. Now ExxonMobil is developing massive oil reserves off neighboring Guyana on territory that Venezuela claims as its own. And ConocoPhillips is collecting on a $2bn arbitration settlement after imposing liens on PdV´s Caribbean assets last year.

In comments to Argus this afternoon, Chevron said: "Chevron operations in Venezuela continue and the company is committed to the country's energy development in compliance with all applicable US laws and regulations. We don't comment on politics."

Maduro´s immediate challenge heading into his second six-year term is remedying the broken oil-based economy. Although state-owned PdV appears to have stabilized crude production at around 1.15mn b/d for now, the government will need to sustain and revive output in order to generate sorely needed hard currency for imports of basic goods and to service over $9bn of bond debt principal and interest due this year.

Leaner oil revenue this year will not be enough to cover food imports and honor bond debt, while maintaining oil-backed loan and barter commitments — mainly to China and Russia, Venezuela´s primary international patrons.

Maduro also faces the prospect of a parallel opposition government led by Juan Guaido, the newly elected head of the opposition-controlled National Assembly, considered the last legitimate democratic institution. The assembly is passing measures repudiating some Maduro-era oil deals and preparing for a political transition. US secretary of state Mike Pompeo called Guaido today to congratulate him and pledged to cooperate to restore Venezuelan democracy.

Maduro is counting on China, Russia and Turkey, but none of their diplomatic officials had a high profile at today´s ceremony.