The Venezuelan oil industry after GL44

José Ignacio Hernández G. / 06-06-2024

Source: The author

When OFAC issued GL44 on October 18, 2023, many considered that the sanction policy adopted in 2019 was over. This precipitated conclusion proved wrong, not because the United States Government (USG) changed its policy but because it was misunderstood. 

GL44 was, in theory, the most significant change in the sanction policy towards Venezuela. In practical terms, however, it was more a symbolic gesture. That license was granted for a six-month nonrenewable period. The lack of an automatic renewable clause indicates that GL44 was nothing more than a limited measure. In addition, the renewal was conditioned to the fulfillment of the Barbados agreements and, particularly, the ability of the Unitary Platform (UP) to endorse a unitary candidate. 

The most significant constraint was that PDVSA, under Maduro’s control, could not conduct transactions in the U.S., not due to the sanctions, but because Maduro was not—and still is not—the recognized government of Venezuela in that country. PDVSA-Maduro could not sign any agreements governed by U.S. law, including oil sale agreements.

Despite these constraints, GL44 clearly indicated how PDVSA’s situation could change if Maduro decided to fulfill the conditions set by the U.S. government.

But the Maduro Government decided not to fulfill those conditions, systematically blocking Machado and Yoris, the substitute candidate. The USG had only one option: to honor its promise by not renewingGL44. However, to maintain incentives for political negotiations with GL44A, it decided to extend GL44 until May 31 based on a wind-down condition. Beyond that limited extension, any prohibited oil transaction should be based on individual licenses. 

The wind-down clause restricted new oil agreements but at least allowed the deals already signed before April 18 to be maintained. It was an intermediate solution that kept the possibility—at least, in theory—of a renewal of the wind-down period to facilitate the transition to an individual-based license. 

However, once again, the Maduro Government did not show any particular interest in honoring the Barbados agreements when it unliterally revoked the European Union’s invitation to monitor elections. As a result, GL44 and its open authorization expired on May 31. 

Therefore, since June 1, 2024, the sanctions against PDVSA in place since 2019 will work as follows:

  • Chevron can keep its operations based on GL41. Indeed, Chevron is considered the main driver of the Venezuelan oil industry. 
  • Halliburton, Schlumberger Limited, Baker Hughes Holdings LLC, and Weatherford International Public Limited Company maintain their limited authorization to operate until November 15, 2024, based on GL 8N.
  • Any other prohibited oil transaction with PDVSA must have an individual license. 

As a rule, individual licenses are not subject to publication, meaning there is no public information about them. Although there was no official policy about those licenses, the USG seems to prioritize oil and gas firms that already maintain operations in Venezuela and are creditors of PDVSA. Consequently, individual licenses will facilitate debt recovery, reducing the cash the Government of Venezuela receives. 

Following media reports, those are the individual licenses already granted: 

  • On May 6, Maurel & Prom announced that OFAC granted an individual license “about its 40% consolidated interest in the mixed company Petroregional del Lago (“PRDL”), which operates the Urdaneta Oeste field in Lake Maracaibo in Venezuela“—the license lapses on May 31, 2026. 
  • On May 23, the media reported that Repsol obtained an individual license to continue and expand its oil and gas operations in Venezuela. On April 16, 2024, the 2020 National Assembly approveda resolution extending the oil rights of the joint venture Petroquiriquire, in which Repsol is a minority shareholder. 
  • On May 23, the media reported that Global Oil Terminal obtained a two-year license from PDVSA to buy bitumen
  • As the media reported on May 29, BP and the National Gas Company of Trinidad and Tobago (NGC) obtained a license from the Cocuina-Manakin gas project. 

There are some oil and gas transactions announced before May 31 that, however, have not been authorized by an individual license, at least based on the public information available: 

  • In January 2023, Shell and NGC obtained a license to negotiate and develop the gas project Dragon. The license was modified in October 2023, extending its validity until October 2025. However, in April 2024, news reported that Shell requested a broader license—but there are no reports about issuing that new license. 
  • On April 24, LNG announced that on April 17, one of its subsidiaries signed a hydrocarbon’s productive participation contract (CPP, for its Spanish acronyms) with a PDVSA subsidiary. There is no information about individual licenses granted to maintain operations beyond May 31. 
  • On April 16, the 2020 National Assembly authorized the creation of a new JV, Petrolera Roraima, with the private partner A&B Oil and Gas, C.A. (regarding the former Petrozuata). Assuming the JV agreement was signed before April 18, there is no information regarding an individual OFAC license. 
  • As reported by news on May 6, Reliance requested an individual license to maintain oil imports. It is not known whether the individual license was granted. 
  • At the end of 2023, the media reported that Eni could be engaged in negotiations to increase its oil operations in Venezuela, but there is no news about any individual license. However, regarding its gas operations, Eni obtained a “comfort letter” that declared that sanctions do not prohibit those operations. 

International companies that signed oil and gas agreements with the Government of Venezuela under the scope of GL44 will not be able to continue operations after May 31 because GL44 has expired. The purpose of GL44A was to establish a transitional period for the winding down of operations. Only companies with individual licenses can perform prohibited transactions. 

Due to the sanctions against PDVSA and the Government of Venezuela, individual licenses are only required for prohibited transactions. Generally, oil and gas transactions that do not involve U.S. individuals and occur outside the U.S. are not subject to the sanctions policy. However, there is a risk of ‘secondary sanctions’ under Executive Order No. 13884. This risk has led firms, primarily from Europe, to seek ‘comfort letters’ from the State Department. These letters play a crucial role in confirming that the sanctions will not hinder the transactions carried out by these firms.

The lack of public information about new individual licenses could suggest that the USG still considers those licenses conditioned on political events in Venezuela. Therefore, violating the Barbados agreements based on the revoked EU invitation could have influenced a temporal suspension in the individual license policy. 

However, even regarding companies with individual licenses, oil production activities face another binding constraint: the lack of a stable, clear, and sound institutional framework for private investment. The CPPs are not based on the Organic Hydrocarbons Law but on the dubious Anti-Blockade Law, meaning there are serious doubts about their validity. In addition, the Anti-Blockade Law favors opacityin the oil business, which creates further risk, particularly considering overcompliance and de-risking. 

Therefore, without a regulatory reform that brings transparency, accountability, and legal certainty, private investment will not have the incentives to conduct the massive CAPEX investments needed to recover the oil industry. 

Regulatory reforms must be part of a broader policy to reinstate the rule of law and rebuild the state´s capability. Another variable to tackle is the external debt: creditors will find innovative legal ways to attach PDVSA´s incomes and assets, even regarding CPPs. 

Without those comprehensive reforms, OFAC individual licenses will provide some specific reliefs, particularly regarding PDVSA´s creditors. Beyond that, there will be no institutional incentives to favor the oil industry’s recovery.