Europe To Drop Over-Compliance In Venezuela Over Natural Gas?

The European Union and energy firms from the continent are embarking on ambitious projects to develop Venezuela’s natural gas sector. Beyond the economic benefits, there is an essential environmental element. The run-down energy infrastructure has turned the Latin American country into a top polluter in terms of greenhouse gas emissions and ecosystem degradation.

Europe will nonetheless need confidence. Since the White House started imposing sanctions –mainly between 2017 and 2020–, third-country multinationals have been scared away from the country. European corporations are mostly taking small steps, taking comfort in authorisation letters from Washington DC.

Beyond emissions, there are many other environmental concerns. Activists and experts are pointing out that pipelines and storage tanks are routinely spilling into the ground. Mangroves in national parks, essential for offsetting greenhouse gas emissions, are contaminated by leaks. In the far west of the country, Lake Maracaibo has been uninterruptedly enduring spills and other forms of pollution for decades, dating back to the rise of the oil industry in the country.

Gas flaring: Burning cash

The run-down infrastructure of PDVSA is causing a severe environmental problem: it is flaring an estimated two billion cubic feet per day of natural gas. In 2022, the country became the 17^th largest emitter of methane from flaring and leaks, according to the International Energy Agency (IEA). The process of flaring is common in oil production. However, while Venezuela and the US burn through a similar volume of gas, the former produces around 700,000 barrels per day (bpd) and the latter around 12 million. Venezuela alone burns as much gas through flaring as Colombia consumes in a year.

The infrastructure was already facing problems before sanctions were implemented. The government of Hugo Chavez diverted PDVSA funds into social spending. While this allowed for the financing of ambitious programmes for health, education, and housing, the oil firm became over-indebted and under-invested in its operations. In 2012, 40% of PDVSA’s sales went to the state; even while global oil prices rose, the firm saw free negative cash flow. Corruption was also a key factor in the deterioration of the oil industry, before Washington DC ramped up pressure.

The novelty is that European firms intend to enter a virtually untapped sector, in partnership with a now eager government in Caracas. The main hurdle remains the extraterritoriality of US sanctions, given its broad reach in global finance and trade, even though it is illegal. Even companies from the US and other regions could also become interested if economic sanctions are lifted. After Chevron
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was given a licence to resume operations, others in the sector are lobbying to get the same rights, such as Texan refiner Valero Energy
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Corp.

This year, the EU has been proposing to boost Venezuela’s natural gas production with funds from the “Global Gateway”. The initiative is Brussels’ response to China’s “Belt and Road”. Although there are not many details available to the public, the stated goal is the “reduction of methane and CO2 emissions to tackle climate change, improve environmental preservation and energy efficiency in the State of Monagas.” Already in April, at the Bogota conference, the EU’s Josep Borrell pointed out the missed opportunity with gas, and the need to rescue the sector. This would have to take place within a larger deal guaranteeing fair elections in 2024, according to Borrell.

The project would require $1.5bn, and participants would include Eni, Repsol and Maurel & Prom, also using funds from the Global Gateway initiative. A pipeline would need to be constructed linking inland fields in Monagas to the sea at Güiria, in Sucre state, close to Trinidad. It would then be taken by sea to the island’s extensive facilities. According to Bloomberg, it would cost about “$350 million and would take about 36 to 48 months from research until construction.” Sources close to the matter have confirmed this information to Over the Hedge.

In Trinidad and Tobago, the natural gas would be liquefied by a joint operation between Shell and the local National Gas Company. There are other points of collaboration between Venezuela, the island nation, and the British-based multinational. The three parties are close to agreeing on a deal to develop the Dragon gas field. On September 14^th, Shell finally gave financial approval for the development of the Manatee gas field, shared between Trinidad and Venezuela. Estimates say there are 10 trillion cubic feet of natural gas, with 7.3 in the Venezuelan side and 2.7 on Trinidad’s.

On the Caribbean coast, there are two crucial, almost untapped offshore natural gas blocks: Cardon IV in the West and Dragon to the East, overlapping with Trinidad and Tobago. Within Cardon IV, Eni and Repsol jointly operate the Perla gas field. Following comfort letters from Washington DC. From there, PDVSA has been allowed to buy 550 million cubic feet per day (mmcf). After an upgrade announced in late August, output would rise to 800 mmcf. PDVSA estimates there are 9.51 trillion cubic feet in the Perla field, and more than 4 trillion in Dragon.

Investment conditions changing?

During the “commodities boom”, the bonanza allowed for the chavista government to set the rules. Extraction projects were frequently expropriated; ExxonMobil
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left after some of its assets were nationalised in 2007. Natural gas was neglected, according to inside sources, since it did not offer sufficiently high revenues to the state compared to oil.

“Natural gas sourced from oil production was always burned, or reinjected into the ground” said José Chalhoub, a political risk and oil consultant for Venergy. “It was not produced for the local market or exported. There just wasn’t any investment”.

Now, this same regime needs all the investment it can get. Maduro has announced the creation of special economic zones (SEZ), which are to learn from China’s example. They would need to materialise and, not just have a favourable regulatory framework but equally importantly the necessary infrastructure. For instance, Margarita Island, which would be one such SEZ, suffers from frequent water and electricity shortages. The employers’ union, Fedecámaras, is also demanding more guarantees on private investment and institutionalisation, so that the economy can grow sustainably.

The government in Caracas is still laying down one condition: it wants cash. Washington DC has made multiple waivers for firms to recoup debt owed to them with oil and gas shipments, inconveniently for Venezuela’s cash-strapped state. European energy corporations have thus far needed comfort letters to upgrade their relationship with Venezuela.

“Production and export of natural gas, looking towards the EU market, will be the key to unlock the blockade on Venezuela” said Victor Hugo Majano, editor at La Tabla. The hypothesis is that after sanctions were put in place against Russia, Europe is in desperate need of alternative sources of gas and other resources. Consequently, it could drop overcompliance, and venture into a legal yet risky territory. The Office of Foreign Assets (OFAC) has punished firms from third countries for breaching its blacklists, in a legally questionable move. Banks such as BNP Paribas, ING, Credit Suisse, Commerzbank, Societe Generale and others have paid fines for dealing with Cuba and other targeted states.

Pollution problems have been neglected for decades, and significantly worsened since the economic and humanitarian crisis hit the country. However, we now stand at a potential turning point: foreign firms are willing to enter the scene and invest in renovating infrastructure, and the government seems ready to welcome them. The EU, in particular, is seeking to develop natural gas in a way that will considerably reduce greenhouse gas emissions. On the other side, the Venezuelan government is changing its attitude towards foreign capital, as it attempts to recover a damaged economy.