Fri, Apr 12 2024 12 April, 2024

Venezuela locks in Caribbean oil, gas despite fresh sanctions risk

Venezuela is poised to lock in oil and gas supply to Caribbean neighbours in spite of a flare-up in tensions with the United States, which is threatening to restore crippling sanctions on Caracas.

An oil tanker offshore the Caribbean island of Saint Martin (Photo credit: Adobe Stock/Jaakko)

The Venezuelan government and Western oil companies eyeing Venezuela’s vast under-exploited hydrocarbon reserves are working hand in hand to strike supply agreements with nearshore buyers. The pending state-to-state deals, along with the companies that would implement them on the ground, would be effectively immune to any revival of comprehensive sanctions on Caracas.

Heavily-industrialised Trinidad and Tobago, for example, is a major LNG producer and exporter on Venezuela’s doorstep. But a chronic domestic gas shortage has long suppressed output, affecting European buyers in particular at a time when they are moving away from Russian gas supply.

Domestic gas feedstock to the Shell and BP-led Atlantic liquefaction complex, petrochemical plants and other industrial facilities in Trinidad is routinely rationed, and one of four Atlantic trains has been shut down for years. Although a shareholder restructuring at Atlantic and new offshore developments by Australia’s Woodside, European company Perenco and U.S.-based EOG Resources are expected to help ease some of the gas deficit, Trinidad has long eyed Venezuela as a natural source of steady long-term supply. The main party to a future cross-border deal is European major Shell.

In 2018, Venezuela and Trinidad reached a preliminary gas supply agreement. Gas price negotiations stalled and the deal fizzled the following year, when the U.S. administration of President Donald Trump imposed sweeping sanctions on Caracas in response to democratic backsliding by President Nicolás Maduro. The EU and Canada threw their weight behind the U.S. “maximum pressure” campaign against the Maduro regime, but the Venezuelan leader only seemed to become more entrenched. Until recently, Trump’s successor, Joe Biden, had loosened the sanctions in a bid to nudge Maduro into holding fair elections in 2024.

With a U.S. government blessing, Trinidad’s state-owned gas company NGC, and Shell, last year obtained a permit from Venezuela’s oil ministry for exploration and production of the Dragon gas field, part of the 14.7 trillion cubic feet Mariscal Sucre complex in Venezuela’s shallow Gulf of Paria, only about 15 km from Trinidad’s Hibiscus platform owned by Shell and NGC. Notably, their ongoing negotiations with Venezuela’s state-owned Petróleos de Venezuela (PDVSA) and an eventual contract to develop the Dragon field fall under a U.S. specific license that exempts them from the sanctions at least until 2025. This is separate from the general license that the Biden administration recently vowed to revoke in April, unless Maduro allows his chief political rival to challenge him at the ballot box.

Banks and contractors are still reluctant to do business in Venezuela for fear of running afoul of the complex sanctions. But sanctions are not the only impediment to a Venezuelan gas deal with Trinidad. According to Antero Alvarado, managing director of consultancy Gasenergy Latin America, the project will take 24 months to bring to fruition. And Shell has yet to make a final investment decision.

Still, he sees Venezuela as an indispensable supplier, pending contract conditions that appeal to investors at a moment of resurgent political uncertainty.

“At a time when other parts of the world are seeing production declines and an increasing focus on climate and social issues, Venezuela can no longer be overlooked as a supply source,” Alvarado told Gas Outlook. “The Venezuelan government is more open to business now, but it will have to offer compelling terms to overcome its reputational risk,” he added, alluding to the Venezuelan wave of oil industry nationalisations that peaked in 2007.

Curaçao’s bet

Around the same time that Venezuela and Trinidad were advancing their gas supply deal at the end of 2023, Curaçao struck a separate agreement with Caracas to settle longstanding debt. Under the deal, PDVSA will service its debt to Curacao’s state-owned Refineria di Kòrsou (RdK) by supplying oil to the island’s long-idle refinery.

PDVSA operated Curaçao’s refinery from the 1980s through the end of 2019, when Venezuela’s declining crude production, diminishing cash for plant maintenance and sanctions ended the longstanding commercial relationship.

Five years later, Venezuela is seeking to mend its Caribbean relations, using oil and gas as a wedge. For Curaçao, the Venezuelan crude supply boosts the odds of fully restarting the refinery, which used to account for hundreds of local jobs, as well as the once-lucrative Bullen Bay storage terminal that services oil tankers. Part of the refinery is already set to restart in May under an asphalt deal with a U.S. oil trader.

But the thaw in Venezuela’s relations with the Dutch Caribbean is opening opportunities for new investors too. One of these newcomers hails from Qatar, the gas-rich Gulf state which quietly brokered political talks between the U.S. and Venezuela last year. Oryx, an oil company owned by Doha-based Ghanim Bin Saad & Sons Group, is currently carrying out due diligence on Curaçao’s refinery and oil terminal after signing a preliminary agreement with RdK last year. Oryx is expected to decide on the investment by the end of March.

The commercial success of restarting the refinery hinges on securing gas supply to run it efficiently, refining experts say. That gas could come from Venezuela’s 17 trillion cubic feet offshore Perla field run by Cardon IV, a joint venture between Spain’s Repsol and Italy’s ENI in the Gulf of Venezuela.

Both firms are believed to be eager to reach new export agreements that would allow them to recover PDVSA’s unpaid debts. Neither company responded to requests for comment.

Another gas supply deal they could pursue lies with Venezuela’s neighbour to the west, Colombia, where the government of President Gustavo Petro has pledged to accelerate a transition away from fossil fuels. Venezuela and Colombia already have a cross-border gas pipeline that has been out of service for years. This 224 km line could be repaired and reactivated to allow Venezuelan gas to reach Colombia, if the two sides can strike a new state-to-state deal. At the same time, Petro is encouraging Colombia’s state-controlled Ecopetrol to work with PDVSA to produce oil and gas in Venezuela.

Climate implications

Venezuela’s re-emerging Caribbean supply role bears environmental implications for the fulfilment of national commitments to cut emissions. While Venezuela remains on the margins of the U.N.-based system of international climate cooperation owing to its long isolation on the global stage, the countries that are seeking its oil and gas are not.

Trinidad, which derives 40 percent of its GDP and 80 percent of its export earnings from the energy sector, is among the Small Island Developing States (SIDS) that are considered especially vulnerable to climate change impacts such as rising sea levels, flooding and drought.

Environmental initiatives include a 2022 green hydrogen roadmap which projects that by 2065, Trinidad could produce four million tonnes per year of green hydrogen, based on 25 GW of offshore wind generation to power electrolysers. To get there, the roadmap, issued by the Inter-American Development Bank, urges Trinidad to establish enabling policies, a regulatory framework and institutional support. So far Trinidad has made limited progress on renewable energy and the government seems more focused on lining up more gas than in transitioning away from fossil fuels.

Climate progress in the Dutch Caribbean is more uncertain. During COP28 in Dubai in December, Curaçao became one of the latest islands to join the Blue Planet Alliance that commits to ending the burning of fossil fuels by 2045. On the fellow Dutch Caribbean island of Bonaire, which unlike Curaçao is a special municipality of the Netherlands, a group of citizens recently joined with Greenpeace Netherlands to sue the Dutch government for falling short on climate action, a move that could foreshadow greater activism in Curaçao that is subject to the same climate hazards.

“It’s the Dutch government’s duty to protect all of us from the consequences of the climate crisis. Bonaire is being hit hard by rising sea levels, heat waves and the deterioration of its coral reefs,” Andy Palmen, executive director of Greenpeace Netherlands, said in a Jan. 11th statement. “The government must reduce global warming as much as possible, and right now it’s failing to do so.”

As for Colombia, a myriad of critics have called out Petro for “incoherence” by pledging to phase out oil and gas exploration inside the country but encouraging a deal to import it from next door in Venezuela. Former finance minister Juan Camilo Restrepo said the approach “contradicts what has been the repeated formulation of the Petro government from the start: that it’s not good to continue exploring for hydrocarbons here.”

The aspiring nearshore gas and oil importers will be tapping an environmentally-grim source of supply. The Venezuelan Observatory of Political Ecology (OEP) registered 86 oil spills in Venezuela last year alone, of which 40 were concentrated in the western state of Zulia that borders Colombia. Half of the eight fires and explosions associated with PDVSA in 2023 also occurred in Zulia, the group says. Venezuela has no credible environmental regulations or institutions.