Caracas Chronicles

Just a few minutes after we saw pictures of Gerardo Blyde and Jorge Rodríguez, leaders of the opposition and government delegations, shaking hands after signing the Second Partial Agreement tied to the Mexico talks, OFAC issued a new General Licence for Chevron authorizing certain activities and transactions in Venezuela. As we mentioned in the blog and as we’ve been flagging in our weekly Political Risk Report (PRR), the issuing of the expanded sanction by Chevron was tied to this agreement, which has been the product of months of ongoing negotiations. As a source told us a couple of weeks ago: Mexico is the Notary.

1. Production and lifting of petroleum or petroleum products produced by the Chevron JVs, and any related maintenance, repair, or servicing of the Chevron JVs;
2. Sale to, exportation to, or importation into the United States of petroleum or petroleum products produced by the Chevron JVs, provided that the petroleum and petroleum products produced by the Chevron JVs are first sold to Chevron;
3. Ensuring the health or safety of personnel or the integrity of operations or assets of the Chevron JVs in Venezuela; and
4. Purchase and importation into Venezuela of goods or inputs related to the activities described in paragraphs (a)(1)–(3) of this general license, including diluents, condensates, petroleum, or natural gas products. Note 1 to paragraph (a)(4).

The Licence has its limitations, of course. It says that Chevron cannot pay royalties or taxes to the government of Venezuela or dividends to PDVSA. It also says that Chevron is not authorized to expand its activities into new fields and that its JVs are only allowed to sell petroleum and petroleum products to the U.S. These itemized prohibitions are important because, as we’ve understood from our coverage of the oil industry through well-informed sources, these matters all have been discussed by Chevron representatives with the government and PDVSA. One key matter, which has been important for other PDVSA partners as well, is to obtain more independence and a larger stake in the business. For this to happen, Chevron requires the capacity to expand its activities, to negotiate concessions and service agreements that would require them to pay royalties, and obviously the ability to pay taxes in Venezuela. Our view is that these are clearly carrots being dangled in front of Venezuela (or Chevron, so they try to keep Maduro & Co. in line).

The license is also causing confusion because from a first read it may be apparent that the JVs are not allowed to pay taxes or dividends. But this makes no sense because it is something that is completely out of the control of OFAC—not only in practice but legally as well. I believe the confusion resides in the first paragraph, as the license refers to Chevron and its activities managing the JVs in which it is involved in Venezuela—and not directly to the operation of the JVs. In fact, when it refers to the JVs the letter explicitly says “Chevron JVs.” So we could assume that this prohibition (paying taxes or royalties to the government of Venezuela or dividends to PDVSA) only applies to Chevron and its subsidiaries, not to the JVs.

This license surely helps Chevron invest in its JVs allowing them to possibly add over 200 kbd to their output in the short/medium term. This is significant for Venezuela—as it has been stuck in the 600 kbd range for a while. Keep in mind that some experts—like Francisco Monaldi—believe this threshold to be two years away, we have sources that have it at six months, but projections in Venezuela are subjected to the limited amount of information that we can scrape from government blocks.

We have still to dive into the nitty-gritty of the partial agreement, but from what we can gather it all points to the touted UN-managed trust to use frozen assets for humanitarian purposes, as well as the beginning of a conversation where certain ground rules can be set for the upcoming electoral events.

As we mentioned in yesterday’s PRR, we remain skeptical about whether these agreements will help build a path out of this mess or if they will (again) just buy time and oxygen for Maduro. Of course, granting the government the benefit of skepticism feels a bit like naivité at this point, but one has to keep an open mind for the big ideas. This is just an excerpt of what we said in the PRR:

“As always, the most difficult part is understanding Maduro & Co.’s incentives. While we may think that their goal is to reach some form of “normalization,” the reality is that this only makes sense to them as long as it allows them to remain safely in power and control of Venezuela’s sources of wealth. For now, it seems that normalization is a useful narrative tool for madurismo. They are enjoying a good streak and they are reaping the fruits of the failure of the maximum pressure strategy. The international community appears to be giving Maduro another chance, a kind of forced benefit of the doubt. Forced because we are currently in a place where there aren’t many other options, as we’ve learned from the last few years, Maduro was quite comfortable at the bottom of the pit.

What will happen when the government of Venezuela starts blocking or sabotaging the programs funded by the UN trust? Or when it meddles in the organization and results of the opposition primary? Or when it becomes clear how uncompetitive the presidential elections will be? It is likely that we will continue to sail on this same path. None of the conditions that involve Maduro in the chain of command that committed crimes against humanity or that have him commanding one of the most corrupt governments on the planet have changed. The real question we have to ask is: what will happen once normalization and the government’s incentives are not aligned anymore?  

We’ll see.”