Earlier this month, a delegation of senior U.S. officials made an unexpected visit to South America to meet with Venezuelan President Nicolás Maduro.

The visit caused a flurry of speculation. Will the United States consider easing oil sanctions on Venezuela to replace Russian crude? Such a move could have huge ramifications for Venezuela’s oil exports but involves navigating a complicated relationship with the Maduro regime. 

For a look into how this could work, host Bill Loveless spoke with Dr. Luisa Palacios, a Senior Research Scholar at the Center on Global Energy Policy and former Chairwoman of Citgo Petroleum Corporation. 

Luisa was on the show a few months ago for a conversation about the energy transition in Latin America. She returns to discuss a paper she recently co-authored: “Venezuela Oil Sanctions: Not An Easy Fix.”

Together, they discuss the potential ripple effects of easing sanctions on Venezuela as oil prices spike around the globe.


Transcript

 

Luisa Palacios: [00:00:04] What is clear to me is that sanctions, this is a big part of constrains of future oil production, but by no means the only one. It's really a severe lack of of investments and maintenance of the of oil infrastructure. It is a huge loss of of all expertize of human capital. And these are not minor issues. [00:00:29][25.1]

Bill Loveless: [00:00:30] In early March, a delegation of senior U.S. officials made an unexpected visit to Venezuela. Since then, there's been a lot of speculation about those talks with Venezuelan President Nicolas Maduro and whether they could result in the U.S. lifting sanctions on his regime, a move that could increase Venezuela's oil production and exports. The jury is still out on whether the U.S. will take such action. That said, it's worth considering how the move could shift Venezuela's oil production. U.S. oil supplies and global oil markets. This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I'm Bill Loveless. Today on the show, Dr Luiza Palacios, she's a senior research scholar at the Center on Global Energy Policy, and she is formerly the chairwoman of Citgo Petroleum Corporation, one of the largest U.S. oil refiners. Before that, she's had a dynamic, multi-disciplinary career. She worked for Medley Global Advisors, where she headed their Latin American division. And she also served as director in the Emerging Markets Research Department for Barclays Capital. You may remember Louisa she shoes on the show a few months ago, with our co-host Jason Bordoff talking about nationally owned oil companies in Latin America. Well, she's back this time to talk with me about a pressing topic in the news, the potential easing of sanctions of Venezuelan oil issued by the United States. Louisa just coauthored a commentary on the topic alongside Dr. Francisco Monada at Rice University's Baker Institute for Public Policy. It's called Venezuela oil sanctions. Not an easy fix. Hope you enjoy. Luisa Palacios, Welcome back to Columbia Energy Exchange. [00:02:30][120.2]

Luisa Palacios: [00:02:31] Thank you, Bill. Very happy to be back. [00:02:33][1.8]

Bill Loveless: [00:02:34] Well, boy, it's been a lot has happened since you were on this show back in the fall. There's so much turmoil, you know, as we're seeing, certainly in the case of Russia, in Ukraine and elsewhere in Europe and around the world and various markets. Before we get into the topic today in Venezuela and all, I mean, just what are you making of the oil markets, which you watched so carefully around the world and how events have unfolded over these past few weeks and months? [00:03:04][30.2]

Luisa Palacios: [00:03:04] So Bill, I think feature and a lot of our colleagues have done a fantastic job at showcasing, analyzing, studying the impact of of the Russian Ukraine crisis on oil markets, on natural gas markets. I, as you know, tend to look at things from the point of view of emerging markets. And what I can see is that this is bringing already much more pressures on just the energy prices overall and from the point of view of emerging markets. This creates macroeconomic problems and and raises the point renewed the focus on energy affordability, energy security. And it does seem to me that I think from the point of view of what are the reactions to policy reactions that we're seeing across the globe, I think that also in emerging markets, there's this sense that maybe really you also have to double down on energy transition issues, not just because of sustainability or climate, it's because of affordability. Because at the end, what I can tell you from the region that I am most familiar with, which is Latin America, is that the energy prices of the renewable sources of energy are the cheapest. I saw it from an energy security perspective is from an energy affordability perspective that you're seeing a, I think, a an even more compelling case for continuation of the energy transition, even if everyone agrees. I think that's the other thing that has been very clear from the Ukraine Russia crisis is the transitional role of oil and gas and the how we need to think much more clearly about security. And we need to think about transition in a much more pragmatic way. So I think the issues that you've that other our colleagues have raised about energy transition and energy security, I think they are playing out in the emerging market world, but with a much more emphasis on affordability. [00:05:23][138.2]

Bill Loveless: [00:05:24] Right, right. Yeah, certainly a big issue and certainly question of not only security, energy security, but the energy transition that so many agree needs to take place. Well, you and your coauthor here, Dr. Francisco Mann, Aldi, have taken a fresh look at one of those countries in Latin America, Venezuela and the U.S. sanctions on that country's oil. How exactly has Russia's invasion of Ukraine sparked a conversation about the U.S. sanctions on what was once a prominent South American supplier of oil? [00:06:01][36.5]

Luisa Palacios: [00:06:01] So it's interesting, right, bill, because the the Russia Ukraine crisis is sparking all kinds of resetting, maybe rethinking of a foreign policy of security policy, and one of them is Venezuela. And I think it's because as the U.S. was back. Russian oil and maybe was thinking about alternative sources of supply. Venezuela came to mind. Why did Venezuela come to mind? I mean, Venezuela has been an oil producer since the beginning of the 19th 1910 1920, and it has been a very reliable energy supplier to the U.S.. I mean, it's interesting because Venezuela's national oil company, PDVSA, acquired refining operating company here in the US, exactly because the type of oil that Venezuela produces is perfect for for the U.S. Gulf Coast, which can process the type of very heavy crude that comes from Venezuela and other places in Latin America. So you do have a long standing supply relationship between Venezuela and the U.S., in part because it's also there's also not only the type of oil is the proximity to to the U.S. Gulf Coast, that it is the very long standing commercial relationship that has existed between the two countries and where U.S. or international oil companies have invested for a long, long time in Venezuela before the the current the government took over about 20 years ago, more than 20 years ago. So and even during the the first administration of the Chavez administration, that relationship that energy supply relationship continue to be to be maintained. I would say that it was really more under the Maduro administration that the relationship became even more stranded. And and where the energy security or the energy supply situation started to be or started to change and they started to change fell because of the policies that the Venezuelan government at the time was implementing. It was implementing a policy of expropriation of changes in all contracts of of nationalization, of a weakening of property rights, and that led to a significant declines in private oil investments. And that inevitably took a toll on oil production. So Venezuela, they used to be the the second or the third most important energy or crude supplier to the U.S. started to decline in importance, in part because of the policies that it followed at home. [00:08:58][176.8]

Bill Loveless: [00:08:59] Yeah. So so when when one might ask, why might the United States be talking to Caracas about lifting U.S. sanctions? And of course, we don't know exactly what took place in those talks between the governments. It probably it's fair to say that there's just a natural attraction in the United States to oil from Venezuela because of its its quality. I mean, you mentioned that U.S. refiner, it's a U.S. refiner, Citgo on whose board you were the chairman or chairwoman for a couple of years until about a year a year ago. [00:09:29][30.1]

Luisa Palacios: [00:09:30] I would say, yes, it's it's it's a good fit and it's there and it is the proximity as well. So it's not only in good faith, is the proximity. So I would say that it I mean, if you're going to to think about all of the alternatives to Russian oil will be obviously one that will come to mind is Venezuela. But I think if we go back in time, it's because of the sanctions to do Venezuela, that Russian oil became important to begin with in the US. I mean, those 500000 barrels per day of Russian oil didn't were not as important before. In a way they did. They themselves are that that source of oil. And it was also refined products that that came to the U.S. was that a replacement of Venezuelan oil? So when Venezuela was sanctioned, then who took its place? Well, I can tell you who took his place as Canada and apart. It was a combination of things, because that's normally what happens when you have a supply shock caused by either sanctions, regulatory or whatnot. You have. It's not one source that takes place. I think in the case of the US, yes, Russia did have a role to play. But what I can tell you and I can tell you because I was sitting at Citgo, is that Canada was a big part of how this this refining company diversified Venezuelan oil and Colombian oil as well. So. So you did have different sources of heavy oil. And so it was a combination of sources. And so it made sense that the OR it's not far fetched to believe that when you're thinking, OK, who's going to replace Russian oil? I mean, the first the first thing that you would think might be Venezuela, but to me, it would also have been Latin America as a whole. That's where you find the. The oil or Canada, those those are the those are the options in the market. [00:11:26][115.9]

Bill Loveless: [00:11:26] Yeah, no. In having this discussion, it's important first to understand the the state of Venezuela's oil sector today, especially since the U.S. sort of stepped up its sanctions on Caracas back in 2019. In fact, as I as I've read in the paper that you just wrote after sharp declines, initially production has actually increased recently. Help us understand what's going on there. [00:11:51][25.0]

Luisa Palacios: [00:11:52] So, so the first thing I think also to put in context is that the sanction regime in Venezuela is a very complex one, and it has taken a long, long time. We have the sanctions. The first sanctions were put in place 15 years ago. So there is a the foreign policy decisions that led to the increase in sanctions in Venezuela had to do with them, with corruption, with violation of human rights, with anti-democratic behavior. So it is a very complex set of policies that have taken place that have led to this complex, a sanction regime on Venus. It's one of the most complex set that the US has. So let's just I think let's start with that, that this is not and that's why we I think we titled the report. This is not an easy fix. I think in 15 years and and all of the the issues that underlie that were the rationale for the sanctions continue to be there. So. So I think this list of first start up there. The second thing is that benefit is not the only country that has been sanctioned, right, that there are other countries, Iran and now we have Russia, which is has its oil sector, has not been sanctioned, a like like like in the case of Venezuela. You have had the US banning Russian oil and there are different there nuances, different kinds and different kinds of of policies that just need to be understood. So I think the what I have tried to do is understand when a country sanction or its oil sector or is subject to sectorial type of sanctions, what are the policy choices that then those countries or those oil companies undertake? How do they adjust to those sanctions? And so and in the case of Venezuela, what you saw is a significant decline in an oil production at the beginning. But then and I think what we argued in the paper is that eventually these countries tend to to figure out a way to to work around the sanctions. [00:14:04][131.4]

Bill Loveless: [00:14:04] And Venezuela did [00:14:05][0.7]

Luisa Palacios: [00:14:05] that in Venezuela did that. And the other interesting thing is how in the case of Venezuela, both Russia and Iran were helping Venezuela evade, evade sanctions. So it is an expertize that that these countries and these oil companies have have developed. And so one, I think it's important to understand how they adjust because that will tell you their ability to sustain or to bring back production. Inevitably, what happens is that you can never bring back production to sanction levels you. They do have an important and important impact on the oil production outlook and then the oil investment outlook. So in the case of Venezuela, what you did see is that and we stress that in the paper is that pre sanctions, though in 2018 Venezuela was exporting was producing one point five million barrels per day. And as I was saying at the very beginning of this discussion of this conversation, this is already I mean, but when Maduro took office, the current president of Venezuela, I mean, Venezuela was closer to three million barrels per day. So what I think what is important to understand is that there had been a significant already an important decline of oil production at what before before the sanctions. So the sanctions did take place. They did impact oil production. Eventually, Venezuela was able to to put in place a ways in which it circumvented some of some of the sanctions helped by either the Russians or. And then the national oil company of Iran. And how did this happen? It's because they were able to access condensates. And what that means is that because of Venezuela's very heavy, heavy oil production, it cannot really be brought to the market is in a region in its original form. It has to be blended with another kind of either condensate, light oil or some other refining product that allows allows Venezuela to export this oil. And so that's how they eventually managed to get the the inputs that it needed. And then you did see an increase in oil production, which the government puts between 700 to 800000 barrels per day. [00:16:18][132.7]

Bill Loveless: [00:16:18] Yeah, the numbers were I mean, I was struck by the numbers you had in that report. Of course, notes the historic low for production was 500000 barrels a day in 2020 and to a yearly average of 630 6000 barrels a day in 2021, but most recently or in February. Seven hundred eighty eight thousand barrels a day. You know, still well short of the 1.5 million in 2018 that you cited, but you know, it's been going up. [00:16:49][30.4]

Luisa Palacios: [00:16:49] So and that tells you already something about how countries end up adjusting it, that it doesn't go back to the precession levels. But they do find a way to to they do manage to get some oil production going just because of the need and the and the dependance on on oil production. But one thing that we do not have, we don't cite in the report. But but this is very much the outcome of this is that this is very discounted this oil production and therefore all exports are achieved. Yes, but at very discounted prices. So I think it is difficult to differentiate or to separate the fact that you had significant declines in oil production, particularly 2020 with the pandemic, because if the discounts are about 30 dollars per barrel, I mean, with oil prices at 50 on average, it just doesn't just doesn't make sense from an even an economics perspective to trade Venezuela and to trade Venezuelan sanction oil. So even in the context of of this illicit trades or you know this, this is a market for sanctioned oil. There is an issue with the pricing. And so I think it's difficult to differentiate between the fact that this was part of it and the oil price was that had been so depressed and you saw significant declines in oil production from every single producer, including in the U.S. So. So Venezuela was as was probably hardest hit by this. But what is has led to a revival or has led to a recovery of oil production is that more than $100 per barrel, even huge discounts from Venezuela sanction oil. I think create the right incentives, right? [00:18:36][106.9]

Bill Loveless: [00:18:37] Right. Those higher prices improve. The the risk reward is as you as you note in your in your paper of trading Venezuela's oil and trading it through opaque channels. Explain opaque. Explain what you mean by that. [00:18:49][12.9]

Luisa Palacios: [00:18:50] Well, I think that's that's one of the things that we might encounter as well with Russia oil production. And I think I would invite the listeners of this podcast to listen to the previous one. Buy it! [00:19:02][11.8]

Bill Loveless: [00:19:02] More than most of Citibank had just sat down with Jason Bourne. [00:19:05][2.8]

Luisa Palacios: [00:19:05] Yes, because he describes exactly what has happened in the case of Venezuela, where you do, you end up setting a system in which they're various? And again, I am not an expert on this, but there. But there is ways in which you end up being able to export Venezuelan oil changes, hands from tanker to tanker in the middle of that, you know, of the ocean and then it gets blended and makes and you never know exactly what type of oil you're getting if you don't even know you're getting Venezuelan oil. But I think everyone or the people that follow this, the the closest thing that it ends up in China, that that through different channels and those different channels lead to a higher discount on every in order because of the risk premium attached to trading this sanction oil at the end, the return the Venezuela, the government of Venezuela get for that oil is significantly less because it is a it's a risk premium attached to trading it and the many hands it needs to change in order to get to consumer markets, right? And so there's always an incentive for a government to be able to fetch international prices without all of the intermediary pricing or risk premium that needs to get get paid. And so from the point of view of of incentives that what I would say is that if you had the choice, you really do not want to be in the sanctions business. I mean, you do want to be able to fetch internet directly international prices for it, for your for your oil. But it is a I mean, the global markets. Iranian oil does get to two oil markets and and Russian or world will get to oil markets is just in much more complicated ways and an increasingly higher discount, depending on how difficult it is to move. And the other issue that complicates Venezuela's situation is that unlike maybe Iran or maybe Russia, if you do not have a lot of storage capacity and therefore if you cannot place this market, you have to shut down production, there's just no way to to put it anywhere else. And so it also the ability of a country to be able to withstand or work around sanctions also depends on the on the. On the oil infrastructure that he has developed, and one of the things that we mention in the in the report is the severe lack of maintenance and severe lack of infrastructure capacity in the country, [00:21:32][147.1]

Bill Loveless: [00:21:33] right? Well, it seems as though given the circumstances with the situation, the tight, the sanctions that Russia could face increasingly on its oil and other restrictions just on banking and all that that Venezuela could find itself in increasing competition with Russia in these so-called opaque markets. [00:21:51][18.5]

Luisa Palacios: [00:21:52] Yeah, that's that's the thing. What I think the the way we thought about this is, OK, what are the incentives that we already laid out? Why would even the U.S. go to Venezuela in this during this crisis to see, you know? And we already explain why it was a good fit. But why would Maduro have any or what would the Venezuelans have any incentive to do this? And. And so in addition to what I just mentioned that you want to be able to realize, I mean, from a country perspective, you want to be able to realize international prices without the cuts or the the risk premium that has to be paid in order for this oil to be to be moved. But the other thing is that it's not clear to me how Venezuela is going to fare in the in the context of maybe being able to get a deal with Iran. And therefore, if that is the case, Iranian oil coming back to the markets because if Iran has been key in allowing Venezuela to increase oil production through the supply of refining products or condensates in order for Venezuela to increase exports, I mean, are the Iranians going to continue doing that? So it's not again, it's just not clear to me. But the second thing which you pointed out is that now we have a growing market for this kind of, you know, not sanctioned oil because Russian oil is not sanctioned, but less desire oil or more problematic oil that fetches that discount than that people do not or a bank or a group of companies do not for reputational purposes and do not want to touch. And so. And so if that is the case, then you are going to have a rerouting of of oil trade flows. And so that while that takes place, the only the only loser that I can see here is Venezuela. Because if that if Venezuela sanction oil ends up in in China as the as the as people analysts, I believe, well, the the place where probably unwanted Russian oil is going to end up in China as well and probably replace or displace the Venezuelan oil, which is probably less suited for benefit for Chinese refineries and fetches a much higher transportation costs. So I think Venezuela is not, you know, Russia already displaced some of Venezuela or replace some of Venezuela in the US market is seemed very easy to believe that this Russian unwanted Russian oil is probably going to impact Venezuela, sanction oil and therefore making it more difficult for the Venezuelans to continue in this the way or continue with the system they have set up. [00:24:45][173.0]

Bill Loveless: [00:24:46] Right, right. And you know, speaking of Russia, there's a sizable Russian presence and Venezuela's oil sector as as as you note. What does that involve? And now with the Ukraine war, how might that Russian involvement complicate Venezuela's oil recovery? [00:25:02][16.0]

Luisa Palacios: [00:25:03] So in thinking about, as you mentioned in thinking, you know, the U.S. government goes to to Venezuela, I guess, to to try to reset foreign policy or to see if Venezuelan oil could be a replacement for Russian oil imports into the U.S.. I think the one thing to understand is, well, you know, there's not negligible Russian presence in Venezuela still in production. This presence dated back to Rosneft assets in Venezuela. Rosneft had five joint ventures and became, along with China, one of the largest foreign investors in Venezuela's oil sector, and because of secondary sanctions imposed in 2020. Given the role that Rosneft was having in trading or subsidiaries of Rosneft were having in trading Venezuelan oil, which helped up in his bid to circumvent the sanctions. I think Rosneft took the decision to to divest its oil assets in in Venezuela, and so it divested this all assets to a Russian state owned agency. And so now you have. That there are five joint ventures, some of some of which are highly desirable joint ventures in the Orinoco Belt, which is where the vast majority of Venezuelan oil reserves are located that have Russian production. So there was a report by Bloomberg that estimated that Russia's oil production in Venezuela could represent 15 percent of total oil production. And so the whole point of bringing Venezuela oil back to the U.S. is to circumvent Russian oil production. It just seemed that that I think we do have to understand the context. Venezuela's oil sector, I understand the complexities surrounding the the sector [00:27:14][131.3]

Bill Loveless: [00:27:15] right and the financial ties right and the banking and all of that that is involved in doing business is all the more complicated now, given the circumstances with the Russia's invasion of Ukraine and the actions of the U.S. and others have taken. [00:27:29][14.2]

Luisa Palacios: [00:27:30] So one of the things that that I think are some of our other colleagues at the center have stressed is how effective have been the the sanctions to the Russian central bank, right? So Venezuela's central bank is also sanctioned and that, yes, they're extremely effective because they do significantly constrain the payment system. So one one of the ways in which Venezuela adjusted or circumvented old-fashioned was through the Russian oil system. So if now the Russian oil system, it's not all of it, but that you have the central bank and some state of Russian banks are sanctioned. One of the issues that was highlighted by other news reports is that along with those sanctions for those banks and the Russian payment system, you're going to end up impacting Venezuela's payment system as well, or the the way that the national oil company of Venezuela and the Venezuelan government have been circumventing sanctions because they have been using Russian financial system. And so that that already also complicates the Venezuela situation [00:28:43][73.4]

Bill Loveless: [00:28:44] because you touched on this a minute ago in talking of lack of storage and oil and Venezuela, but there's simply been such deterioration in the in the facilities, the various facilities for exploration and production in that country, a country that holds what the world's largest reserves of crude oil. Not to mention the loss of personnel over the years and that sort of thing. I mean, the the, you know, from your experience and at Citgo and from being an observer of that of Venezuela for so many years now, it has it's only grown worse. [00:29:14][30.2]

Luisa Palacios: [00:29:15] So I think that is the question, right, though? Let's say that that let's for the sake of argument, let's say OK for because of U.S. energy needs, there is a desire to to reevaluate the, you know, sanctions towards the oil sector in Venezuela. I think it's it's about being realistic in terms of Venezuela's capacity to deliver oil, further increases and further recovery of oil production. And so. And quite frankly, there's huge uncertainty because one of the things that happens when countries and oil sectors are sanctioned is that you lose complete visibility because of it. Now, in order to circumvent the sanctions, you have to become completely. The lack of transparency is part of the of the dynamic that, of course, there's simply no visibility about exactly where oil production in Venezuela stands at this moment. And oil production is a function of the infrastructure of the investments of the of project capacity. And so it's I mean, there are some that put it at the one million barrels per day other than put it at less as some others a little bit more than that. But what is clear to me is that sanctions, this is a big part of of constrains of future oil production, but I by no means the only one. And I think you were hitting at some of those before. It's really a severe lack of of investments and maintenance of the abort infrastructure. It is a huge loss of of all expertize of human capital. And these are not minor issues. When you look at that, for example, what shale oil producers in the U.S., they are constraints for future oil production. It's about lack of human capital. It's about the lack of of further rigs or the way you know, it's that infrastructure and human capital are all. Ready to fight in the most advanced and rule based countries. So just tells you how difficult this is going to be, and in addition to this, it's it's I would say bill to me. I think the Russia invasion of Ukraine has highlighted many issues related to ESG, which just we've been talking about how climate has redefined are climate risks and climate change have led to revisions of the social license to operate of the oil and gas sector. To me, the Russia Ukraine invasion has, has is leading to also some revisions about the social license to operate of national oil companies from emerging markets. I mean, really, I it's it's difficult for me not to not to see the link between a the shareholder of the of of the Russian oil companies, which, you know, there is a significant dependance on oil and gas, both from a fiscal perspective and from an external revenue perspective. And so I think this is also, you know, putting in the forefront the energy security issues are putting into the forefront. Do we really want to depend from the European in the US perspective, we really want to depend on on countries that are using their own resources to invade other countries. So I'm just putting it in this context because I do not think that this is, although I understand there's completely different things. It it showcases whether this this crisis is not only putting into into context that where you source your oil not only from the point of view of climate, but from the point of view of who produces that oil, what are the values behind that oil? What kind of a how is that? How are those oil revenues used? Isn't that also what this crisis this is kind of showcasing? And so I just think that from that perspective, it's it seems difficult for me to believe that you are going to put significant amount of capital to work in a country like Venezuela without significant and fundamental institutional reforms of all types, both on environment, on corporate governance, on on social aspects. This is a country that is experiencing one of the worst humanitarian crises that the Western Hemisphere has ever seen. And so and that's that's why the sanction discussion is so complex is because it's anxious to have unintended consequences and do have collateral damage. And so it is difficult to see this in a country that is suffering a humanitarian crisis. But on the other hand, it's difficult to see that you are going to be able to attract significant amounts of capital to a country that does not abide by the minimum standards of ESG. [00:34:39][324.1]

Bill Loveless: [00:34:40] Right, right. You said environmental, social and governance issues for that. For that topic, the Russia Ukraine crisis is is truly a test, you know, despite all these challenges. You know, there are three international oil companies operating in that is not operating, I should say, but have holdings in Venezuela, Chevron, Repsol and any Chevron, which has joint ventures, they're proposed to the U.S. government a license to allow the company to use oil production from its joint ventures to pay down accumulated debt. Chevron's current license, as I understand it from reading your paper and other things, is set to expire in June, and that has allowed the company to only to keep and maintain its assets. You said that may be a potential, you know, given some leeway here to Chevron, maybe a potential pathway to oil sanctions relief. Why is that so? [00:35:41][61.4]

Luisa Palacios: [00:35:42] So Bill what has happened is that the U.S. government has been renewing Chevron's license every, you know, every three months at the beginning now, every six months. And so it's it's been like that since early 2019. The cost of renewal, renewal of that license. So I think what? Chevron, at least that's what transpired in the in the news reports was that Chevron was proposing to have a license that was a little bit more comprehensive that. Outlet to operate, even if it's in a joint venture with the national oil company of Venezuela, PDVSA, so that it can recoup the the huge said that it has that it has been accumulating in that in the last years. And so in that way, I think the argument will be is that if you allow oil production to flow to the U.S. through Chevron, through the joint venture that Chevron has with with the national company and it I guess the idea is that the Chevron can pay down its debt while at the same time bringing oil production or diverting some of this oil that has been going through, you know, illicit routes to a more transparent market like the U.S.. So I mean, I think it's it's good to to mention something here, which is that I think that Venezuela does provide an opportunity to understand how to how to think about sanctions from the point of view of creating more flexibility. So let me just give you an example. In the case of Citgo, which is 100 percent owned also by PDVSA Citgo, which is the fifth largest independent refinery of the U.S., the license that Citgo has because it is also and that's another thing about the way the sanctions work, is that what is sanctioned in Venezuela is the national oil company. Let me be very clear. The national oil company that is sanctioning Venezuela. And so what that means is that every asset [00:38:07][144.9]

Speaker 2: [00:38:08] that the national oil company has in which it has more than 51 percent, therefore that it has an operating a majority operate operating control of it's also a sanction entity. And so because of that, that's why Chevron needs a license because it is in a joint venture as a minority partner. And that's why Citgo needs a license. In the case of Citgo, what the U.S. Treasury did was give Citgo a eight month evergreen license. What that means is that every month, Citgo is able to access to operate the the function as an informal company because it has an 18 month evergreen license that every month it renews automatically the license for another 18 months. And in the case of Chevron, has a has a different license. He has a license that you have to renew whatever every six months. So there has to be an active, active decision. And so I think the the fact that you already thought about licenses in order to be able to manage the sanctions regime in Venezuela allows you for a way to think about how to maybe change behavior in a very controlled way because the amount of information that you have to provide in order to get licenses renewed. And so there is a way in which you can monitor very clearly what is what is going on. And so what we thought in the paper is that given given the significant weakening of institutions in the country and given the fact that probably the majority of oil production in the country right now is being is flowing through illicit means, which is then creating even more a lack of transparency in the country, even more opportunities for corruption that if the U.S. administration were to think about how to if the conditions were met. And we put very clearly there a framework in which to how to understand the easing of sanctions. And so we thought that in order to ease sanctions in Venezuela, in our view, you have to think about how this easing of sanctions eases the humanitarian crisis in Venezuela, how it improves governance, how it improves transparency, how it improves human rights. And so you do need a framework. It's not. Why would that regime get a free pass? You do, and there are incentives. So there you know, you spend one year in negotiations with Iran. OK. There's there's a room here. There's incentives on both sides. There's the opportunity for negotiations that encompasses many stakeholders. Are that and so I think there are. So if you're going to think about a way in which you can ease sanctions in the oil sector, provided that changes in behavior are achieved, provided that the conditions are met. This is the way the one way in which you can think about it is through first through licenses, because then you have the licenses you need to renew them. You can, you have a lot of visibility and you can have a lot of. All about whether there's a change in behavior where there's not a change in behavior, so I just think that it provides Venezuela could provide an opportunity to think about how do you accept sanctions in a in an orderly and in a in a way that maybe you illicit the behavior that you wanted to elicit when you when you impose sanctions in the first place? [00:41:44][215.9]

Bill Loveless: [00:41:44] Well, I think you raise such an interesting point there, too, is that, you know, so much of the discussion right now is at least, you know, in the public's mind or in the news reports. And all of that is is, you know, how can the United States, for example, replace oil that it no longer will receive from Russia? So it becomes, you know, an oil supply United States type issue not necessarily taking into consideration the issue that's been haunting U.S. Venezuelan relations for years, and that is simply the conditions in Venezuela, humanitarian and otherwise. You know, how how do you address each of both of those situations? At the same time, [00:42:23][39.3]

Luisa Palacios: [00:42:25] so because you do have U.S. oil production that can increase, you do have Canada for Canadian production that can increase its not. You do have the possibility that if all sanctions to Venezuela were to ease, you could divert oil exports that go through, you know, illicit routes towards the U.S. and that's not nothing. I mean, that is something it's not to me. It's not necessarily that you want to increase oil production is that you're going to divert our exports are going somewhere else into into the US now. But for that to occur, I just think that if we can be more purposeful about how to do this in a way, given I mean, the Russian and our colleagues have mentioned this, the Russia invasion of Ukraine have put sanctions as a very important foreign policy tool. So I think we are going to be writing about sanctions and sanctions and how to think about sanctions because it is it has been a clearly very, very widely used or used in this context. Venezuela is a sanctioned country. It's national oil companies, a sanction entity, and there has been already in the same case with Iran. And I think it provides an example of can we think about this country as a way to also change behavior as a possibility of anything, as a way to change behavior? Not sure. I'm not an expert on sanctions. I'm not a lawyer, but I I've I've seen from I was at the board of a company that has property of sanction and they had to deal with sanctions. So I don't know what it's like to operate under a sanctions regime with licenses. We and I know how effective they can be at eliciting change in behavior, how they manage, how you can be very transparent. You have to provide a lot of information in order to get the licenses to get them renewed. I mean, it's not. It's it's it's an interesting license. This still means an interesting way to think about maybe eliciting just changes in behavior that you don't have otherwise not seen. [00:44:54][149.3]

Bill Loveless: [00:44:54] It's such a good point to raise right now and help us understand this. And of course, you know, just given all the, you know, finding any sort of solution here between the United States and Caracas is difficult just amid, you know, there's as as we know, the strong opposition to any relief for Venezuela with the current regime, given that opposition exists in the Venezuelan community, in the United States and its political supporters. But it is something that is getting increasing attention here right now. [00:45:25][30.4]

Luisa Palacios: [00:45:26] But bill for good reason. I mean, this is a complex issue. Venezuela is a very complex place. It's it's it's that the humanitarian crisis is self-made. So it's it's understandable, a complex situation. And so and you have to deal with a lot of stakeholders and that and it's not going to be easy. It should not be easy, by the way, [00:45:52][26.5]

Bill Loveless: [00:45:53] we understand it a little bit better thanks to this conversation that you and I are having right now. Appreciate you taking the time to join us here on the Colombia Energy Exchange. [00:46:00][7.5]

Luisa Palacios: [00:46:01] Thank you, Bill, for your time as well. [00:46:02][1.2]

Bill Loveless: [00:46:07] Thank you again, Luisa, and thank you for joining us on Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia University's School of International and Public Affairs. The show is hosted by Jason Bordoff and Me Bill Loveless. The show is produced by Steven Lacy, Jamie Kaiser and Alexandria. Her from PostScript Audio. Additional support from Torre Lavelle, Kirsten Smith, Daniel Propp, Natalie Volk and Kyu Lee. Sean Marquand is our sound engineer. For more information about the podcast or the Center on Global Energy Policy, visit us online at Energy Policy Dot Columbia Dot Edu. Or follow us on social media at Columbia. You energy. If you like what you heard, consider giving us a rating on Apple Podcasts. It helps the show reach more listeners like yourself. We'll see you next week. [00:46:07][0.0]

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