Mariano Browne
There have been mixed reactions to the announcement that T&T has been granted a waiver on US sanctions to facilitate the development of the Dragon natural gas field in Venezuela. The Guardian’s headline was “Mixed reaction to Dragon Gas Field Deal”. The Express article was entitled “Paul questions Dragon’s gas revenues for TT”. The Energy Chamber described the waiver as a “major opportunity” and the Prime Minister said that happy days were ahead for T&T and Caricom. In making the announcement, the Prime Minister said that the specific terms have yet to be finalised
Sanctions were imposed on Venezuela by the USA in 2019 denying it access to global energy and financial markets driving the country to the brink of bankruptcy. The sanctions affect any company or country doing business with Venezuela and remain a deterrent to foreign investment in Venezuela. No western petroleum company will risk the severe penalties which accompany those sanctions as it will jeopardise their worldwide operations, not only those in Venezuela. That holds good for NGC and the GORTT as well.
Lifting the sanctions is crucial for any company to do business with Venezuela. The sanctions have only been lifted for two years. This is not enough time to facilitate the many steps to bring this project to fruition far less to allow an investor to recover the substantial sums required to bring Dragon gas onstream. Further, in keeping with US policy, the waiver conditions are impractical and unworkable from a business perspective.
Making the Dragon project a reality is subject to many factors, including but not limited to the project’s financing requirements. These include the political, operational and financial risk, agreements between the sovereign states and their respective agencies (regulatory approvals, taxation, incentives, environmental considerations), and the commercial business arrangements between the relevant contracting parties. Under normal circumstances, there is a significant lead time as obtaining all the approvals is time-consuming.
For example, before the De Novo project could proceed over 150 approvals were required.
These all require time, money, significant negotiations and consensus among the parties. It is not an overnight exercise that doesn’t just happen because a government makes an announcement. All players must agree, agreements signed, finance sourced, and infrastructure installed. When does the waiver start? After the drilling platform and pipelines have been deployed or contemporaneously as the mobilisation is taking place, but before a cent has been earned which would not make sense. This explains why government officials requested a ten-year waiver. A two-year waiver is impractical and meaningless.
The Biden administration authorised Chevron to restart producing oil in its joint ventures with PDVSA but imposed strict conditions on Chevron. It banned payments to Caracas and limited operations to those that existed in January 2019. No company or country could expect greater concessions than those given to Chevron. The Washington Post reported, and the Prime Minister confirmed that, like the Chevron waiver, Venezuela would not be able to receive cash payments.
The Venezuelan authorities have not officially responded to the announcement. Why Venezuela would accept such an arrangement which, like the Chevron waiver, would be financially unattractive to a country needing investment to rebuild its energy infrastructure and restore production? To succeed, a deal must benefit all parties. The arrangement proposed promotes US geopolitical interests at Venezuela’s expense by increasing world energy supplies but leaves Venezuela in poverty.
These are difficult hurdles to overcome. But a project must meet several other feasibility criteria. Not only must it be technically and economically feasible and financially viable, but the political risk must also be acceptable. There are two geopolitical risks. The first is Venezuela whose political situation is far from settled. Further, Venezuela has a troubled record in dealing with foreign business partners. There are over 20 cases against Venezuela for the expropriation of the assets of foreign companies operating in Venezuela.
Conoco Phillips is the most successful of the litigants so far, obtaining billion-dollar awards from the International Centre for Settlement of Investment Disputes (ICSID) and from the International Chamber of Commerce (ICC). Conoco is enforcing the awards by liquidating CITGO in the US amongst other actions. Venezuela is therefore a known risk and insurance cover to mitigate the political risk of doing business in Venezuela is unlikely.
Similarly, whilst the Biden administration seems to be softening its stand against Venezuela, there is little evidence to suggest that this thaw will continue. The US has maintained sanctions against Cuba for over 60 years and 40 years against Iran despite several administrations signalling that the sanctions would ease. Why would US policy to Venezuela change? The energy shortage caused by the war in Ukraine is easing reducing the need for rapprochement with Venezuela.
The US conceded nothing by giving T&T a two-year waiver. The period is insufficient to allow the investment to either proceed or succeed. Venezuela receives no benefit, and the project’s risk profile remains unchanged. The project conditions remain uncertain thereby making loan financing improbable. The T&T Government may have received short-term bragging rights, but Washington remains firmly in control without giving anything.
Mariano Browne is the Chief Executive Officer of The UWI Arthur Lok Jack Global School of Business and lectures in Project Finance.