Trump's Venezuela Oil Plan Runs Into Hard Reality
by Tyler Durden
Authored...
Authored by Andrew Topf via oilprice.com,
Last week US President Donald Trump
announced that Venezuela’s interim authorities will turn over up to 50 million barrels of oil to the United States, before later declaring his administration will control Venezuela's oil sales “indefinitely”.
Decrying the state of Venezuela’s oil sector, including that the South American country now pumps a fraction of what it used to, Trump said, “
We’re going to have our very large United States oil companies — the biggest anywhere in the world — go in, spend billions of dollars, fix the badly broken infrastructure, the oil infrastructure, and start making money for the country.”
While that sounds like a great opportunity for the US oil majors, it’s
one they may want to refuse. Why? Because
the oil underneath Venezuela, which has the largest crude reserves in the world, greater even than Saudi Arabia and Iran,
is technically challenging to extract and costly.
Moreover,
it’s uncertain whether there would a change in the way Venezuela and its oil industry are being run, which presents a huge political risk for companies to return and operate there.
Former President Hugo Chavez nationalized the oil industry in the 1990s, and in 2007, he forced Exxon and ConocoPhillips out, after the companies refused to accept new terms that would give the Venezuelan state oil company, PDVSA, a majority share in their projects.
ConocoPhillips is still owed about $10 billion.
Only Chevron is currently authorized to operate in Venezuela and export crude to the United States.
“Until Caracas has a new government capable of gaining the confidence of international investors and banks, oil companies will be reluctant to make any major commitments,” states a recent
Reuters piece.
When Trump met with oil executives last Friday, Exxon’s CEO Darren Woods said, “We’ve had our assets seized there twice, and so you can imagine to re-enter a third time would require some pretty significant changes.”
Trump has said
the US government is prepared to provide security guarantees but not money for oil projects.
How much oil does Venezuela have?
A founding member of OPEC, Venezuela has more oil reserves than any OPEC member and top exporters in the Gulf, including Saudi Arabia, Iraq, the United Arab Emirates and Iran.
The country is estimated to hold 303 billion barrels in proven reserves, about 17% of the world’s total, and more than five times the United States’ 55 billion barrels.
Most is contained within the Orinoco Belt — a vast territory in eastern Venezuela stretching about 600 kilometers from east to west and 70 km from north to south, with an area of roughly 55,314 square kilometers.
The belt is divided into four exploration and production areas: Boyacá, JunĂn, Ayacucho and Carabobo.
Most Orinoco Belt operations are controlled by PDVSA (Petroleos de Venezuela, SA), which has faced challenges including aging infrastructure, underinvestment, mismanagement and the effects of sanctions.
Venezuela has thus been unable to fully exploit its vast reserves. While it once exported 3.5 million barrels a day, that has been reduced to about 1mbpd.
$100 billion investment required
According to Francisco Monaldi, the director of Latin American energy policy at Rice University’s Baker Institute for Public Policy, returning Venezuela’s production to its 1970s peak would require an annual investment by US oil majors of $10 billion for the next decade, or $100 billion in total.
Just maintaining Venezuela’s oil production at current levels would cost
$53 billion over the next 15 years, as per estimates from Rystad Energy, a consulting firm. Raising it above 1.4Mbpd would likely require another $120 billion between now and 2040.
Extraction challenges
Venezuela’s oil is extra-heavy crude, which means it is highly viscous and dense, making it harder and more expensive to extract than conventional crude.
Aljazeera notes that
Producing oil from this region requires advanced techniques, such as steam injection and blending with lighter crudes to make it marketable.
Because of its density and sulphur content,
extra-heavy crude usually sells at a discount compared with lighter, sweeter crudes.
While US Gulf Coast refineries have been designed to handle heavy crude like Venezuela’s and Canada’s, the product’s economic viability at low oil prices is questionable.
Reuters states:
Breakeven costs for key grades in the Orinoco belt already average more than $80 a barrel, according to estimates by consultancy Wood Mackenzie. That places Venezuelan oil at the higher end of the global cost scale for new production. By comparison, heavy oil produced in Canada has an average breakeven cost of around $55 a barrel.
That means at current oil prices of around $60 a barrel, Venezuelan oil is uneconomic.
There may also be a significant gap between potential and actual oil production. Consider: Proven reserves are defined as those with a 90% probability of recovery, based on the identified crude, and whether existing technology can extract it while remaining commercially viable.
Venezuela’s estimates are self-reported, meaning they could be exaggerated. Furthermore, according to another
Reuters piece, OPEC declared Venezuela’s proven reserves the world’s largest in 2011, when oil was over $100 a barrel. But Orinoco oil is full of impurities like sulfur and nickel, making it expensive to produce and difficult to refine. “Price is therefore crucial to its viability.”
In fact, estimated reserves may remain theoretical unless prices spike, and a more realistic estimate of Venezuelan oil reserves is 60 billion barrels, according to Rystad Energy.
The bottom line? Oil prices need to rise at least $20 a barrel to make Venezuelan heavy oil economically extractable. Even if that is enough to entice US oil majors back there, they will need security guarantees from the US government so that their projects won’t be expropriated like they were in the past. How committed is the Trump administration to protecting the interests of its oil companies operating in a foreign country with a history of nationalization?
Political risk in Venezuela is off the charts right now, making foreign investment challenging to say the least. So don’t believe the Trump hype about American companies jumping in to revive the Venezuelan oil industry. As one commentator summed up the situation, “The world probably doesn’t need a lot more high-cost, dirty oil. The dream of a transformational deluge of Venezuelan crude will probably remain illusory.”
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