On 28 January 2019, in the context of the Venezuela Sanctions Regulations, through a determination adopted under Executive Order 13850, the United States of America (‘US’) imposed strict economic sanctions on the Venezuelan oil&gas sector. What next Venezuelan economy?
On the one hand, the US had thus prohibited participation in any transaction relating to that sector; on the other, they imposed asset freezing measures on any person or entity operating in the Venezuelan oil&gas sector, thus effectively blocking said assets. However, on 18 October 2023, the Office of Foreign Assets Control (‘OFAC’)– the Office of the U.S. Government administering and verifying the application of sanctions regimes adopted, together with other similar provisions, the General License 44, i.e. a general derogation which to date authorises the following operations otherwise prohibited by Executive Order 13850:
- the production, lifting, sale and exportation of oil or gas from Venezuela, as well as the provision of services related to such operations;
- payment of invoices for goods or services related to the oil and gas sector in Venezuela
- new investments in oil and gas operations in Venezuela
- the delivery of oil and gas from Venezuela to the creditors of the Venezuelan government, including the creditors of Petroleos de Venezuela S.A. (PDVSA), for thepurpose of debt repayments.
STUDIO LEGALE PADOVAN, from right to left Marco Padovan, Giulia Socci, Giacomo Piacentini
The General License 44 marks a process of reopening the Venezuelan oil&gas sector not only to the US market, but also to the European market. It must not be forgotten that the US sanctions have an (at least de facto) effect that extends far beyond the territory of the United States and the so-called US persons. The US restrictive measures apply whenever a commercial transaction has a link with US jurisdiction (so-called US nexus: involvement of US citizens, payments in US dollars processed by US financial institutions, goods or technology of US origin), but also have, in some cases, an extraterritorial dimension: in fact, the US administration claims some of its own sanctioning programs (so-called “secondary sanctions”) apply to anyone in the world, even where the operation in question has no jurisdictional connection with the US themselves.
Therefore, both the closure of the Venezuelan market by the United States and its reopening have a significant effect on worldwide trade with the Latin American country.
The impact of these measures can be understood by looking at the official data published by the European Commission through the “Acces2Markets” tool: while the European Union imported Venezuelan petroleum products (raw oil, other petroleum oils, coke and bitumen, pitch and similar processed products) in 2019 for a value of more than EUR 1.6 billion, about three years after the US sanctions came into force, the same value in 2022 has fallen to just over EUR 500 million, thus decreasing roughly by 66 %.
At the same time, EU exports to Venezuela related to the oil&gas sector also declined significantly over the same period: in 2019, the EU exported tubes and other instruments to the Latin American country (e.g., drilling pipes) for the transport and extraction of oil and gas for a value of EUR 1.77 million, while in 2022 the same exports reached the value of only EUR 45,500, with a 97% decrease.
That being said, it is reasonable to expect that the easing of US sanctions on Venezuelan oil and gas will result in an increase in Venezuela’s trade with several global partners, with much needed beneficial effects to the country’s economy (Venezuela’s GDP in 2022 reached just 87.2 billion euros). To give some perspective on this, the recovery alone in exports of oil&gas products to the EU at 2019 levels could potentially lead to an increase of around 1.25 % of Venezuelan GDP. The comforting perspectives above, however, must be balanced with some fundamental limitations related to General License 44.
First, the easing of US sanctions is temporary, because the derogation in question allows the aforementioned activities in the Venezuelan oil and gas sector to be carried out until 18 April 2024. The licence was granted only on condition that the Venezuelan government indicts free elections in 2024: therefore, should such elections not take place by the date of revocation of General License 44, and should there be no positive signs to that effect, the U.S. administration will not renew General License 44, leaving it to expire. As it is almost self-evident, the precariousness of the authorization is discouraging foreign investors from undertaking medium and/or long-term projects in Venezuela’s oil&gas sector, in which it is difficult to think of operating sporadically or in the short term. In other words, until the 2024 elections become more likely to take place, there can be no widespread and important benefits for the Venezuelan economy under General License 44. To date, foreign and Italian operators seem mostly interested in exploiting the authorisation to offset debts and credits previously arose in relations with Venezuelan subjects and never resolved due to
the sanctions imposed by the US, or to provide Venezuelan customers with components or machinery already in stock or in any case achievable in a few weeks or a few months.
In addition to the above, there are further limitations affecting the application of General License 44. First, that license does not authorize all conducts prohibited under Executive Order 13850. For example, the General License 44 does not apply to operations in the oil and gas sector that are prohibited by other executive orders (e.g. Executive Order 13827, which restricts activities related to debt instruments issued by the Venezuelan
government). Moreover, among the various limitations, the constant reference to coordination with restrictive measures against the Russian Federation certainly stands out. In particular, the authorisation does not apply (i) to the export of goods or services and to new investments to a Venezuelan company owned or controlled by Russian entities and (ii) to new investments made by a person located in Russia or an entity owned or controlled by them. It follows, therefore, that any resumption of investments in the Venezuelan oil and gas sector, even if the validity of General License 44 is consolidated, can only take place on condition that transactions related with Russia are excluded. This condition will reasonably have a significant impact on the direction of development of the Venezuelan economy, which will be pushed to move closer to the so-called “Western bloc”, potentially directing the economic choices of Venezuelan operators towards the US, EU, UK and allied countries.
In conclusion, the General License 44 opens a glimpse into the possible recovery of investments and commercial transactions in the Venezuelan oil and gas sector, with the opportunity to see the Latin American country reconnect with the “Western” states. However, it will be necessary to wait for the internal political course of the country with reference to the elections expected for 2024, to assess the actual impact of this measure on the Venezuelan economy.
A version of this article in Italian language has already been published by RiEnergia – ambiente e risorse, punto per punto on 16 November 2023 and can be consulted by clicking here
GET TO KNOW THE AUTHORS: Marco Padovan, Giulia Socci, Giacomo Piacentini
