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After coming into office, the administration of President Donald Trump has eliminated licenses for oil companies to operate in Venezuela, despite initial hints that it would continue them, with presidential envoy Richard Grenell’s visits to Caracas. This means that sanctions on state-owned PDVSA are fully back on. Chevron, the main U.S. corporation on the ground, is back to having only a secret license for minimum maintenance and security, as it still a shareholder in four joint ventures.

In the last few months, this has sparked a question. Is the U.S. government leaving the South American country at the mercy of Beijing? Could Chinese companies replace Chevron in Venezuela?

There are two short answers. In terms of oil exports, yes. And this has already happened. Before the first round of economic and financial sanctions hit in 2017, the U.S. took almost 800,000 barrels per day from Venezuela. This figure went all the way down to zero in 2019, with the highest level of restrictions known as “maximum pressure.” This happened again in May of this year, as Chevron, Repsol and others were blocked by the Treasury Department’s Office of Foreign Assets Control (OFAC).

So, where does all the oil go? In past years, Caracas was able to strike agreements with Rosneft or with Indian buyers. But as the U.S. introduced secondary sanctions, and now secondary tariffs, there was only one buyer left, the only one that does not fear Washington’s threats: China.

Reuters has already reported that crude that was produced in joint ventures with Chevron has been on its way to East Asia. And the Chinese market does have the capacity to absorb Venezuelan oil. The only problem is how much PDVSA gets paid, when there is only one buyer on the block—a monopsony.

When it comes down to Chinese companies taking over Chevron’s operations, this is unlikely to happen in the near to medium term. More than anything else, because it does not need to happen for Beijing to expand its influence and control. The same goes for Moscow or Iran.

First, investors have plenty of options before them, from greenfield opportunities to mature fields that only need repairs. Venezuela has thousands of square kilometres with billions of barrels of oil underneath. And most joint ventures are effectively dormant: just 20 out of 64 areas of operation are producing more than 10,000 barrels per day of crude, while most are stuck at 0 or below the 1,000 mark.

Second, regime officials will prefer to keep the fields where Chevron invested for themselves. 240,000 barrels per day is a great business opportunity. This means millions of dollars in contracts for goods and services, that used to be managed by a foreign corporation—not anymore, courtesy of President Trump.

Can Chinese companies take over Chevron’s oil fields?

Now, Chinese companies entering Chevron’s former operations can definitely happen. Let us start with Productive Participation Contracts (known as CPP for their initials in Spanish), which are a form of production-sharing agreement coupled with exclusive rights to contract goods and services.

Hong Kong-based China Concord Petroleum (CCP) has started working in oil fields which are part of a joint venture with Belorusneft, using a CPP. Given that “Petrolera Bielovenezolana” was not productive—with an average output of just 200 barrels per day—the Venezuelan government effectively put it up for rent.

The Venezuelan government is not just signing production sharing agreements in areas where there are joint ventures; it is even figuring a way to normalise this framework. This could include that not just PDVSA, but the other shareholders in the joint venture get paid dividends as well by the CPP company.

Thanks to the minimum maintenance license, Chevron is still a partner to PDVSA. But with no way to pay, the Venezuelan government feels entitled to remove it from operational control. In the coming years, it should be no surprise if a new company—Chinese or from any other country—effectively takes over.

Here is another point that cannot be overlooked: CPPs are negotiated and signed in secret, since they were created under a special law to bypass sanctions. So far, we only know that CCP, Anhui Guangda Mining Investment and Kerui Petroleum Group have been eyeing up opportunities in Venezuela, but there could be more companies out there that we just do not know of yet.

While Anhui Guangda has signed a deal for a greenfield project in the Orinoco Oil Belt—the Ayacucho 2 block—there are reports that these firms have also shown interest in the joint ventures where Petrobras was involved.

China’s mineral monopsony

Oil is only one part of the story. In the mining sector, China and Iran are the only major foreign states. Initially, many U.S. and other Western companies left due to expropriations, especially during Hugo Chávez’s expropriation spree between 2007 and 2012. But now, while there is more openness to foreign capital, the OFAC is sanctioning the gold sector, which makes the entire mining industry riskier. India’s Jindal Steel & Power was nonetheless able to start up at the Cerro Bolívar iron mines last year.

For some minerals, China is the only game in town. An example is cassiterite, a type of rock which contains tin (about 65%) and smaller quantities of tantalum, platinum and other rare minerals. Buyers are keeping production at arm’s length, which is mostly done by artisanal mining. But they nonetheless have an outsized influence on the sector—this is a monopsony—and the same is happening with oil.

By Elias Ferrer for Oilprice.com