(Bloomberg) -- 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 move follows failed attempts to obtain $800 million in financing from suppliers, payable with crude and fuel, the people said. PDVSA is still offering to pay in crude or fuel, they said, but sanctions complicate such transactions and nothing has been decided.
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.
The prospect of worsening shortages, increasing international isolation and growing social unrest has PDVSA grappling to revive a refining network crippled by years of mismanagement and pillage by criminal gangs. Boosting production and processing of light crude from Monagas is the country’s best shot at securing some measure of domestic fuel supplies.
The producer has already started dismantling some facilities to try to sell scrap, one of the people said, but it’s unclear what and how much has been sold.
PDVSA declined to comment on discussions with contractors.
Output from Monagas could become even more important for Maduro in the coming months if further U.S. sanctions target Venezuela’s barter for gasoline and diesel with its remaining clients in Asia and Europe. Without those suppliers, Venezuela will rely almost entirely on a dwindling group of sanctions-dodging traders for any gasoline imports.
The Trump administration has gradually tightened sanctions on Venezuela’s oil industry to facilitate regime change, a prospect that has become more elusive with Venezuela’s opposition divided on whether to participate in congressional elections in December. Any success in reviving -- or simply stabilizing -- oil fields and refineries will give Maduro additional leverage to remain in power.
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From a high of almost 1 million barrels a day in 2008, Monagas’s output has slumped to 114,000 barrels at the end of August. It accounts for about a third of the country’s output. While Chinese and Russian partners continue to help with extraction in the Orinoco region, the crude in Monagas is so easy to produce that PDVSA has never sought help from foreign companies.
Sanctions have forced Venezuela to take steep discounts when selling or bartering its remaining crude production. Diosdado Cabello, the vice president of the ruling party, said the country hasn’t gotten any actual cash payments from oil since late 2019.
“You have a government that got almost $100 billion from oil, and now only gets $1 billion,” said Francisco Monaldi, a lecturer in energy economics at Rice University’s Baker Institute for Public Policy, and an expert on Venezuela’s oil industry. “I expect production to continue to fall, but it could go up when enforcement of sanctions isn’t as tough.”
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