Daily Newsletter

04 March 2024

Daily Newsletter

04 March 2024

Explainer: the Venezuela and Guyana oil dispute

Guyana's economic development is at risk due to Venezuela's interference with its oil exploration and discoveries. Smruthi Nadig investigates.

Smruthi Nadig February 29 2024

On 3 December 2023, the Venezuelan Government held a referendum and voted for Venezuela’s right to annex two-thirds of Guyana’s oil-rich territory, known as the Essequibo. Venezuelan President Nicolas Maduro ordered the creation of a new state renamed “Guayana Essequiba”.

The current borders of Guyana were established in 1899 when the country was under British colonial rule. The territorial boundaries were determined through international arbitration at the time, and ever since, Venezuela has been disputing the ruling as it claims the Essequibo region, prior to British intervention, was originally its own under Spanish rule.

The conflict between Guyana and Venezuela over the oil-rich territory has been ongoing for decades. However, tensions escalated in the past five years when Guyana’s oil industry flourished, making the region more economically valuable. As a result, Venezuela has taken a heightened interest in the area, reigniting years of conflict between the two countries.

A move by ExxonMobil in 2015 to explore and drill offshore fields played an important role in Guyana’s position in the international oil market. Guyana’s economy saw a rapid change since the country started commercial drilling, which ramped up its gross domestic product. The country has also seen a surge of investments in infrastructure development since the oil discovery, yielding $1bn (G$208.71bn) in annual oil revenue each year for the government, according to Offshore Technology.

“Venezuela has reignited claims over the Essequibo territory, triggered by Guyana’s substantial discoveries, estimated at 11 billion barrels of oil equivalent. Guyana is poised to [become] a major oil producer, projecting an increase from practically zero production before 2019 to nearly 1.3 million barrels of oil per day in 2027,” said Paul Hasselbrinck, upstream analyst at GlobalData.

Guyana’s sudden increase in oil production puts it on track to exceed the per capita oil production levels of the United Arab Emirates and Saudi Arabia. Despite its reported oil reserves of 300 billion barrels, Venezuela views its neighbour’s success as a “threat to its own regional oil dominance” rather than a chance to develop its unexploited reserves in the spirit of healthy competition.

On 14 December, Guyana and Venezuela came to an agreement not to use military force to resolve the territorial dispute. However, they did not reach a long-term solution.

“Whereas the two sides have formally agreed not to engage military force, and project continuity seems unfazed by increased tensions, any interruption in Guyana’s exploration and production activities could severely impact its recent economic performance,” Hasselbrinck added.

According to Hasselbrinck, oil constituted as much as 73% of Guyana’s total exports in 2021. Guyana earned $1.1bn from oil revenue in 2022, a 164% increase in its oil exports and exceeding its initial forecast of $958m, Reuters reported.

“Guyana, not an OPEC member, will aim to maximise production. Meanwhile, Venezuela, an OPEC member, constrained by legal instability and PDVSA’s [Petróleos de Venezuela, SA] severed capacity, could choose to rationalise production in these new fields, in the unlikely case they would ever hold control over the territory” he added.

The International Energy Agency said that increased supply from the US, Brazil and Guyana, as well as higher Iranian production and lower demand, have led some OPEC+ members to announce further cuts to prevent inventory build-up. Venezuela’s export revenue was weakened by US sanctions, leading to a 75-year low in oil production.

Since 2006, the US has imposed various sanctions, one of which prohibited oil imports from the state oil and gas company PDVSA and penalised individuals believed by the US Government to have subverted democratic processes or committed human rights violations. This has exacerbated the country’s economic problems, especially due to its falling oil production.

Control over oil operators in the region

According to Chatham House, an independent policy institute in London, the Maduro-led government in Venezuela, which heavily relies on oil, has faced a decline in oil production of more than two million barrels per day due to “mismanagement, corruption, and a lack of investment”.

Oil production in Venezuela has generally declined due to inadequate investment and maintenance, resulting in a drop of 2.5% in 2022. Although there was a slight increase the previous year, it reached its lowest level in decades in 2020, reports say. In 2018, the annual inflation rate surged to slightly above 130,000%, and even though it has decelerated since then, it persisted at 360% in 2023.

“With declining popularity, growing opposition support and mounting international pressure, mobilising Venezuelan voters around a long-standing grievance over Essequibo probably seemed like a perfect opportunity for the beleaguered government,” senior research fellow Christopher Sabatini said in a report by Chatham House.

After the referendum in December 2023, Maduro also ordered the Venezuelan state oil company PDVSA to create a special department called PDVSA Essequibo to manage activities in Guayana immediately. Maduro also said the PDSVA and the state-owned Venezuelan metal conglomerate will proceed “to grant operating licences for the exploration and exploitation of oil, gas and mines in the entire area of our Essequibo”.

The President ordered all companies operating in the territory, including the US oil major ExxonMobil, which announced its production in the Payara field offshore Guyana in mid-November, “to withdraw from these operations” within three months, despite the International Court of Justice (ICJ) in the Hague ruling that “Venezuela shall not take any actions intended to prepare or allow the exercise of sovereignty or de facto control over any territory”.

Subsequently, Venezuela called on companies involved in an offshore gas project that has been stagnant to begin new research and operations in December. Maduro intends to revive the project through cooperation with the PDVSA and private entities such as BP, Chevron and Shell.

If Venezuela tried to enforce the referendum, Guyana warned it would invoke Articles 41 and 42 of the UN Charter, which can authorise sanctions or military action with the UN Security Council, Al Jazeera reported.

ExxonMobil’s relationship with Venezuela and Guyana

ExxonMobil has been a major contributor to Guyana’s economic development as the country’s largest oil producer. However, the relationship between the company and Venezuela poses a significant risk to Guyana’s continued growth in the international oil market. The unstable geopolitical dynamics in the region and Exxon’s significance in Guyana’s economy pose a risk of furthering tensions between the two countries.

ExxonMobil and Venezuela have had a strained relationship since 2007, when the country nationalised ExxonMobil’s oil projects. In response, ExxonMobil initiated an arbitration case against Venezuela over the Cerro Negro project, a joint venture between the government and the company.

Meanwhile, the US oil giant is now a leading oil producer in Guyana, managing the offshore Stabroek, Canje and Kaieteur blocks. Since May 2015, the company has made over 25 significant discoveries, contributing to the growth and development of not only the country’s oil industry but its economy.

Despite the volatile circumstances, ExxonMobil has insisted on continuing its operations in the region. On 8 February 2024, ExxonMobil said it would explore oil in the disputed territories of Guyana despite tensions between the two South American countries. Further, on 21 February, Exxon’s executive stated that the ExxonMobil-led consortium is weighing the possibility of its maiden offshore natural gas production in Guyana, near the nation’s maritime boundary with Suriname, reported by Reuters.

While the dispute over the borders is still under way at the ICJ, Exxon’s recent move could involve the company in the hostility between the two countries.

On 21 February, Venezuelan Vice-President Delcy Rodriguez accused ExxonMobil of seeking “to protect its illicit operations in a sea which is pending delimitation, under the war-mongering mantle of the United States in complicity with Guyana”, as reported by news agency France24.

According to the Guardian, Exxon crews have been forced out of the disputed region by Venezuelan soldiers in the past. In 2013, a Venezuelan gunboat took one of their crews hostage, while in 2019, a Venezuelan military helicopter attempted to land on an Exxon boat.

Despite the rising tensions, the president of ExxonMobil Guyana told reporters that the company will go ahead with its plans to drill two new exploratory wells off Guyana’s Atlantic coast. Citing Exxon’s recent development, Hasselbrinck says that “the legal case for Guyana is solid, and ExxonMobil’s decision to move ahead with the projects reflects their confidence in the backing of the international community on this matter”.

“However, from a strategic point of view, concerns have been raised that the timing of the announcement may jeopardise diplomatic efforts to keep the tensions low,” he added. Indeed, ExxonMobil’s plans in Guyana have aggravated Venezuela, which has wanted all companies to stop operating in the region it claims to be its own.

On the other hand, Guyana has taken a diplomatic approach, saying it won’t approve oil exploration in the disputed waters near Venezuela until a ruling is made over the two countries’ borders. Likewise, while Guyana’s messaging has focused on protecting its territory and maintaining economic growth, Venezuela’s continued claims over oil-rich areas indicate a lack of goodwill and willingness to compromise as the country seeks to exploit “its own” economic potential.

Increased international support for Guyana could result in the US and allies imposing oil sanctions, worsening Venezuela’s economy. Additionally, analysts note that to revitalise its oil sector, Venezuela would require significant investment, which would be difficult to secure due to its unstable political environment, trends in oil demand and increasing concerns about climate change.

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