Venezuela: Closer Ties to Iran

China and Russia have long supported Venezuela. It now looks like Iran is also coming to their help. Before exploring that topic, I came across this Bloomberg via Yahoo (Sep 11) article that discussed how the country is tearing up their oil pipelines to sell as scrape. The headline is correct, but leaves out an important point that can be read in the article: 

Venezuela’s capacity to produce some much-needed gasoline and diesel of its own hinges on a single oil play. To tap it, the Nicolas Maduro regime is willing to cannibalize the country’s crumbling energy infrastructure to pay contractors with scrap metal. 

Unlike the tar-like crude from Venezuela’s Orinoco region, the light oil from Monagas state is the only kind that’s easy to process into fuel at the country’s aging refineries. It’s also the only area where production doesn’t require the help of sanction-wary partners. 

So, with the U.S. considering further steps to curb the country’s fuel imports, cash-strapped state producer Petroleos de Venezuela SA is offering to pay for major repairs at pumping stations and compression plants in Monagas with scrap metal and parts from idled oil facilities, people familiar with the situation said, asking not to be named because the information isn’t public. 

. . . The country so far has relied on shipments from Iran to ease a fuel shortage that often forces Venezuelans to queue for hours and even days to fill up, with many gas stations in Caracas shutting or rationing fuel. 

This seems to me to be a short-sighted strategy when it comes to your oil industry: destroying your Orinoco region just to shift resources to the Monagas state. Of course, there are internal politics in play. Maduro wants to stay in power. The country has a shortage of gas and diesel, which is causing internal discontent so in order to stay in power you destroy one part of your oil industry to support the other part.

The problem will come in the future when you need to rebuild the Orinoco region.

The last quote of the article mentions that Venezuela has relied on Iran to provide modest relieve when it comes to gas and oil. Associated Press (Sep 30) reports further on this connection between the two countries:

The second of three ships loaded with gasoline from Iran approached fuel-starved Venezuela on Wednesday amid simmering social unrest over a lack of goods and services that’s sparked protests across the South American nation.

 
. . . The Iranian tanker Forest arrived Tuesday at a Venezuelan port carrying 275,000 barrels of gasoline, and the Fortune vessel pulled into Venezuelan waters on Wednesday, said Russ Dallen, head of the Miami-based investment firm Caracas Capital Markets, who tracks Venezuela shipments.

. . . The Faxon — the third Iranian tanker en route — is expected to reach the South American nation this weekend, Dallen said, adding that the flotilla is delivering an estimated 815,000 total barrels of fuel. 

The article points out a couple other data points. Earlier in the year Iran sent over 1.5 million barrels of fuel and additives. So in total Iran has shipped 2.3 million barrels in 2020. Perhaps Iran will send more at the end of the year. The article goes on to say that Venezuela consumes 100,000 barrels a day so Iran has sent about 23 days worth of oil and gas. 

Foreign Policy (Sep 17) writes that Iran may also be teaching Venezuela how to cope with sanctions. Before taking that quote from the article, I thought this was another interesting way on how Iran is helping Venezuela:

Over the past few years, Venezuelans have seen thousands of shops shuttered, with business after business failing under the weight of a massive economic depression and crippling economic sanctions. So it was somewhat of an event when a huge new supermarket opened in eastern Caracas in July. Yet what was even more unusual was that shoppers who flocked to the store had a hard time understanding what they were buying: many of the products’ labels were in Farsi, not Spanish. 

Here's what Foreign Policy believes Iran is teaching Venezuela in how to cope with economic sanctions.

It is not yet clear whether Venezuela will fully embrace Iranian-style resilience to sanctions by eschewing the populist notions of isolation and import substitution for the pragmatic pursuit of new sources of foreign exchange revenue. But the possibility raises important questions about the efficacy of the Trump administration’s sanctions policy on both countries. 

Proponents of maximum pressure act from the premise that the inevitable consequence of raising pressure beyond a certain point will be to force the sanctioned regime to abandon power, or at the very least change its conduct . . . Yet as many observers have pointed out, this approach begs the question of what to do if the regime in question survives the pressure and becomes more resilient.

This is interesting, but I don't fully agree that Iran has something unique that it can teach Venezuela. I kind of feel like Venezuela can also learn from Cuba. But it is an interesting question to consider: what if Venezuela continues to survive just like Cuba and Iran? 

In terms of U.S. policy towards Venezuela: if Joe Biden becomes the next president, I'm not sure if much will change from the U.S. perspective. President Obama also implemented sanctions against Venezuela. 

In terms of oil: right now, the world doesn't need oil from Venezuela due to COVID-19. Yet, will that always be the case? U.S. shale has shown to be unprofitable. When COVID-19 passes, will Wall Street be willing to continue investing in U.S. shale? Due to COVID-19, capital investments have also declined, meaning there will be less oil discovery. In the future, the world might need Venezuela's oil, but the continued sanctions will have caused great damage to their oil industry. If you're selling parts of your oil infrastructure off as scraps, are you able to just replace those parts or do you need to just do a total rebuild?