The Petrocaribe oil financing scheme began in 2005 under former Venezuelan President Hugo Chavez. Petrocaribe was conceived as a means of securing political allies among Caribbean and Central American states that depend heavily on fossil fuel imports. From the start of Petrocaribe, Venezuela offered financing that varied according to the international price of Venezuelan crude oil. The amount financed by Venezuela drops as the price of oil falls and rises as the price increases. For example, when Venezuelan oil prices equal or exceed $80, the buying nation pays 50 percent of the total cost of each oil shipment agreed upon, and the remainder is payable over 25 years at a 2 percent yearly interest rate. Under the current terms of Petrocaribe financing, member states must pay 40 percent of each shipment’s cost up front, and 60 percent can be paid off over 25 years. Venezuela has accepted food, services and goods as payment for the oil, leading to undisclosed accumulated debts from pending payments.

Venezuela’s Export Priorities

Overall, Petrocaribe is a small part of Venezuelan oil exports. In 2013, the outflow of oil products to Cuba, Petrocaribe and an additional preferential deal with Argentina totaled only about 240,600 barrels per day of the country’s 2.1 million bpd of overall exports. Petrocaribe that year accounted for nearly 112,000 bpd. Because many Petrocaribe client nations lack the refinery capacity to effectively process Venezuela’s heavy crude oil, more than half of products shipped to Petrocaribe countries are more expensive refined products such as fuel oil, diesel or gasoline. Since 2002, Venezuela has maintained an agreement with Cuba that currently provides the island with 99,000 barrels of oil and refined products per day — more than half the country’s oil consumption. The energy relationship with Cuba is crucial to the security of the Venezuelan government and is a higher priority than the Petrocaribe shipments. Unlike Petrocaribe, most of what Cuba receives is crude oil. In 2012, 85,000 of the 91,000 bpd that Cuba received were crude oil.

Venezuela continues to supply oil and refined fuels under the Petrocaribe scheme because those shipments do not significantly burden state-owned energy firm Petroleos de Venezuela, which is known by its Spanish acronym, PDVSA. However, Venezuela’s depleted public finances and declining energy production have cast some doubt over the company’s future willingness and ability to continue providing these shipments. Because of the fear of public backlash, Venezuela is unlikely to take decisive economic measures to alleviate the financial pressure on the energy sector anytime soon. Venezuela likely will continue Petrocaribe for as long as it can but will not hesitate to raise prices or reduce shipments if they threaten supplies to Cuba or its domestic market.

Domestic Financial Difficulties and Petrocaribe

The Venezuelan government’s growing need for cash could eventually force Caracas to decide on the future of Petrocaribe shipments. Venezuela’s reduced public finances mostly resulted from the ruling United Socialist Party of Venezuela’s using Petroleos de Venezuela to fund high levels of social spending. This has placed significant pressure on the company, which has increasingly required transfers from the central bank to plug gaps in its finances. Despite reducing direct social spending from $30 billion in 2011 to $13 billion in 2013 and having Venezuelan oil prices steady at around $100 per barrel for most of 2013, the company still required assistance from the Venezuelan central bank. For 2013, the company posted a $15.8 billion net profit, of which about $12 billion appeared to be a direct transfer from the central bank.

Petroleos de Venezuela President Rafael Ramirez has promoted a series of economic reforms to turn around the company’s deteriorating finances, one of which is cutting down on cash transfers to off-budget funds. However, the government has shied away from implementing more decisive measures, largely because of Venezuelan President Nicolas Maduro’s reduced popularity, caused by rampant inflation and growing food shortages. For several months, Ramirez has promoted economic adjustments, such as raising the price of subsidized gasoline, which costs Petroleos de Venezuela about $12.5 billion yearly. However, key members of the country’s economic Cabinet — such as Vice President Jorge Arreaza, Foreign Minister Elias Jaua and Central Bank President Nelson Merentes — oppose major decisions because of their potential to cost the party public support ahead of the December 2015 legislative elections. With no decisive economic measures on the horizon, reductions in Petrocaribe shipments could free up cash to benefit the public sector.

The most immediate impact of a reduction in Petrocaribe shipments would be energy supplies rapidly becoming more expensive for small states. Because of their extreme dependence on Petrocaribe for energy, Nicaragua, Jamaica, the Dominican Republic and Haiti likely would be the most affected by such a measure. Of the four countries, the Dominican Republic and Jamaica appear to be the best positioned to withstand a reduction or cutoff of Petrocaribe shipments. The Dominican Republic relies on Petrocaribe supplies for about 23 percent of its imports, and Jamaica relies on the discounted energy from Venezuela for about 32 percent of its imports. The other two receive more than 90 percent of supplies from Venezuela. In case of changes to Petrocaribe financing or volumes, these countries would be able to procure oil from the United States, although it would be at full price.

In the case of Nicaragua, the removal of Petrocaribe pricing or supplies would likely result in the loss of a significant source of off-budget funds. The ruling Sandinista National Liberation Front relies on Petrocaribe to fund Albanisa, a joint venture held by Petroleos de Venezuela and the government of Nicaragua. In 2013, Nicaragua paid Venezuela $1 billion for imports of crude oil and refined products and received half that payment back in the form of a direct transfer to Albanisa. Under the terms of Albanisa, 40 percent of this total can be employed directly by Nicaragua, and the remainder is used for projects approved by Petroleos de Venezuela. This arrangement likely left Nicaragua with at least an additional $200 million in 2013, and with Nicaraguan budget expenditures for 2013 at $2 billion, the infusion of cash from Petrocaribe likely provided the ruling party with an additional financial cushion. The loss of this financing would force Nicaragua to finance public spending using government revenue and the undisclosed amounts saved in Albanisa accounts.

Petroleos de Venezuela likely will continue supplying Petrocaribe energy supplies under the current terms for as long as it can. A reduction in Petrocaribe shipments probably is not imminent but will become more plausible if the Venezuelan government does not relieve the financial burden on Petroleos de Venezuela. Some of the financial measures under consideration, such as moving dollars from off-budget funds to the country’s foreign reserves, could give Petroleos de Venezuela room to continue Petrocaribe, but such moves will not have a decisive effect on Venezuela’s overall decline. If Venezuela experiences problems in maintaining oil exports under its political agreements, it is likely to reduce supplies to Petrocaribe members before it chooses to reduce similar shipments to Cuba.