U.S. Officials Negotiate with Venezuela to Quadruple Oil Production * This material is not intended for Retail Clients *

 

U.S. Officials Negotiate with Venezuela to Quadruple Oil Production * This material is not intended for Retail Clients *

 

 

After years of very low production, just like Iran did, Venezuela is adapting to OFAC sanctions and recent events could finally make the future of Venezuelan oil brighter.   As we discussed in our Venezuela 2022 outlook issued at the beginning of the year, Venezuela’s oil production is increasing despite U.S. sanctions: in December 2021 production averaged 871,000 b/d and 755,000 b/d in January 2022 compared to an average production of 570,000 b/d in 2020. Indeed, despite the sanctions, China doubled down on imports of Iranian and Venezuelan crude in 2021. To make its extra heavy oil exportable, Venezuela is using Iranian condensate and earlier this year the Latin American country received its first cargo of Iranian diluent. Venezuela swaps its extra heavy crude for the condensate and then exports its oil to China on tankers that turn off transponders. As a result of this adaptation, Venezuela GDP was already expected to increase in 2022 before the war in Ukraine started and oil prices reached the current very high levels.   Russia's invasion of Ukraine is having a significant impact on the oil and gas market. Russia is the world's third-largest oil producer and a ban on Russian oil would require other producers to replace Russian output. After rumours the U.S. might sign a deal with oil-rich Iran to ease sanctions so they can provide the crude Russia was previously exporting to the U.S., last weekend, senior U.S. officials travelled to Venezuela, home of the largest proven oil reserves, for rare talks with President Nicolás Maduro's government, reportedly to wean Venezuela off Russia's support in the aftermath of Vladimir Putin's invasion of Ukraine. In what was the first such meeting in years, White House and State Department officials met with Maduro representatives in Caracas on Saturday.   The offer from the U.S. on the table is the following: The U.S. asks Venezuela for an oil opening process in which its companies fully control the processes, investing without the participation of PDVSA; The U.S. asks Venezuela to adjust oil royalties; The U.S. guarantees an investment package capable of raising national production to 3,000,000 b/d in record time compared to an actual average production of 750,000 b/d and an average production of 570,000 b/d in 2020; The U.S. demands that Venezuela expel Colombian irregular groups from the country and cooperate in their continued expulsion; The U.S. offers reinstatement of Venezuela to the SWIFT system and targeted sanctions relief; The U.S. requires electoral guarantees for the 2024 presidential election, similar to those of 2012. Maduro on his side, asks for the following: Maduro requires the full lifting of sanctions barring Venezuela's oil exports; Maduro asks for the removal of sanctions against him and other Venezuelan official; Maduro wants the return of PDVSA's U.S. subsidiary Citgo Petroleum to state control; Maduro calls for the repatriation of Colombian businessman Alex Saab (as a matter of national pride). So far, no agreement has been reached. But the fact the U.S. is re-engaging with the Maduro administration plays in favour of the de-facto recognition of Maduro. Venezuelan and Iranian oil are now more valuable due to the war in Ukraine; Iran already has plenty of barrels (in storage) that could be released and flow directly in the market to replace Russian short-term supply and in the mid-term a ramp-up of Venezuelan oil production could partly replace Russian oil. The U.S. negotiating with the Maduro administration could be a major hit for the U.S. recognised interim president Juan Guaido and for the protection of the Venezuelan foreign assets that are frozen. Many Venezuelan opposition political leaders will oppose the deal, among other things, because it would imply a failure of the political strategy that they pursued, however; the fact the opposition is essentially dependent on U.S. support for its survival makes it possible for the U.S. to get their formal support. These negotiations seem to address strictly specific licenses for oil majors,  at this stage of the talks, it’s unclear what could be the potential treatment for bondholders and creditors.   The Canaima Global Opportunities Fund PCC Limited (“Canaima”) offers non-U.S. investors the opportunity to gain exposure to the Venezuelan market. U.S. sanctions prevent investors from buying Venezuelan or PDVSA assets and/or debt. The combination of the current attractiveness of Venezuelan oil and gas assets given the current very low prices of PDVSA and Venezuelan bonds creates a window of opportunity for investors to subscribe on what can be viewed as significantly advantageous terms. Also for current bondholders, joining Canaima would allow them to participate to creditor negotiations including debt for equity swap transactions which have already been done by non-U.S. bondholders who managed to swap Venezuelan and PDVSA bonds into a PDVSA stake in a Dominican refinery. The deal implied a 24 cents on the dollar recovery for the bonds: compared to current trading prices, this implies a return of 8x for PDVSA bonds and 4x for Venezuelan bonds. These returns can be seen as benchmarks by investors; meanwhile Canaima seeks to try and achieve recovery of at least such levels for its shareholders. Canaima investor subscription deadline is 29 March 2022 in order to subscribe at this end of month NAV.