Venezuela's vast oil reserves draw US interest, but experts warn of major hurdles

What the US wants from Venezuela’s oil

Venezuelan state oil company PDVSA said it is in negotiations with the US government for the sale of crude oil. The Energy Department said the administration “selectively” removed sanctions to enable shipping and sale of Venezuelan oil worldwide, with proceeds settling in US-controlled accounts and being disbursed to American and Venezuelan populations.

Trump cited former Venezuelan President Hugo Chávez’s 2007 nationalization of hundreds of foreign-owned assets — including oil projects run by ExxonMobil and ConocoPhillips — as Venezuela having stolen US oil. He floated a plan for American companies to return and rebuild Venezuela’s oil industry, and said he believes the industry could be rebuilt in less than 18 months with US support.

Venezuelan crude is heavy, sour oil — the grade processed by US Gulf Coast refineries, and one that is in shorter supply relative to the light, sweet crude produced domestically. Kevin Book, managing director of ClearView Energy Partners, said the administration appears to have two objectives.

“There seem to be two objectives. The first is to overall lower energy prices by adding to global supply, and second is to produce more of the heavy, sour crude that is currently in short supply relative to other grades,” Book said. “The first generally benefits end-users everywhere because lower prices reduce transportation and energy costs.”

More Venezuelan crude would not necessarily benefit US oil producers. Additional supply can lower oil prices, reducing profitability for domestic companies.

The long-term supply picture

Energy analysts say Venezuela’s appeal to oil companies lies partly in the scarcity of new discoveries elsewhere.

“Venezuela has enormous reserves,” said Claudio Galimberti, global market analysis director and chief economist at Rystad Energy. “If you ask any oil company around the world, go to their exploration team, their geologists, and ask them where is oil going to come from in the 2030’s and 2040’s, their answer is a rather scary, ‘We don’t know.’ So there is going to be a problem of finding oil in the next few years.”

In the short term, global oil supply exceeds demand, making increased Venezuelan production less immediately critical. The International Energy Agency estimates that under current policies approximately 25 million barrels per day of new oil supply projects will be needed by 2035 to keep markets in balance.

Unlike other parts of the world where geologists must search for untapped reserves, Venezuela’s oil is largely mapped and known, experts said. The country currently produces only about 1% of the world’s oil because of badly damaged infrastructure and years of underinvestment.

Scale of investment required

The financial and logistical obstacles are substantial. Rystad Energy estimates it would take $54 billion of oil and gas investment over 15 years just to keep Venezuela’s production flat at around 1.1 million barrels per day. An additional two to three years of investment could add roughly 300,000 barrels per day. Exceeding 1.4 million barrels per day would require an additional $8 billion to $9 billion per year, Rystad said.

Amy Myers Jaffe, director of the Energy, Climate Justice and Sustainability Lab at New York University, described the physical state of Venezuela’s oil infrastructure.

“There was a lot of chaos and looting, and so therefore there’s a tremendous amount of damage to the surface equipment for producing oil all around the country,” Jaffe said. “There are a lot pipelines that are leaking, and it requires a massive cleanup, there’s just a lot of physical devastation.”

Jaffe said fuel shortages and frequent electricity blackouts across Venezuela pose further obstacles, adding that “to really produce oil, you need to have a stable grid.”

Political stability and investment confidence

Millions of Venezuelans left during the Chávez and Maduro years, and “there has been tremendous brain drain,” said Daniel Sternoff, senior fellow at Columbia University’s Center on Global Energy Policy.

Companies will also need assurance that assets will not be seized again by a future government, Sternoff said. After Chávez’s 2007 nationalizations, international arbitration panels ordered Venezuela to repay billions of dollars to both ExxonMobil and ConocoPhillips, but those debts remain uncollected.

“You need to start with basic political stability before you’re going to have companies that are interested in making those kinds of investments,” Sternoff said. “We have more questions than answers over what the government of Venezuela will be.”

Sternoff noted that there is no historical precedent for a regime change in a major oil-producing country leading to a rapid production increase. In Iraq, Iran, Libya, and the former Soviet Union, output fell significantly — often for years — before returning to prior peaks.

“One of the lessons from Iraq is that the companies did go back, but that it was very difficult to operate when there was a difficult political and local backdrop that can range from insurgency to governance issues and corruption to infrastructure challenges,” Jaffe said.

ConocoPhillips said through a spokesman that the company is monitoring developments in Venezuela and their potential implications for global energy supply and stability, calling it “premature to speculate on any future business activities or investments.” ExxonMobil did not respond to a request for comment.