Earlier in the week, U.S. President Donald Trump announced that Venezuela’s interim authorities will be turning over up to 50 million barrels of oil to the United States, before later declaring his administration will control Venezuela's oil sales 'indefinitely'. Trump has decried the state of Venezuela’s oil sector, noting that the country is producing well below its full potential. “They were pumping almost nothing by comparison to what they could have been pumping and what could have taken place,” 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,” he added. According to the Trump administration, proceeds from the oil sales will go into U.S.-controlled accounts and will be released back to Caracas at the discretion of Washington.
It’s quite clear that Trump intends to pump as much Venezuelan crude as he can and ship it back to the United States, but it’s more about global dominance through energy than it is about simply “stealing Venezuela’s oil”.
But on the surface, the oil looks like a good bargain, even if the past strategy in Washington has been to decimate it. Now, the reverse is being demanded. Venezuela’s oil is not only relatively cheap, largely due to its sticky, sludgy texture that requires significant refining, but also due to the fact that many U.S. refineries were constructed to process Venezuela’s heavy oil. Venezuela is estimated to hold around 300 billion barrels of proven crude oil reserves, making it the largest on paper in the world at roughly 15–18 % of total global reserves under current reporting. Much of this oil is extra-heavy and costly to extract, and observers caution that a significantly smaller portion is economically recoverable without massive investment and technology upgrades.
The South American country pumped more than 3.5 million barrels a day at its peak in the 1970s, but currently produces less than a third of that. However, revamping Venezuela’s oil sector could prove to be a Herculean task that will not only take years to accomplish but also need heavy investments underpinned by solid legal assurances.
Indeed, Venezuela’s low-hanging fruit is rather limited: According to Norwegian energy consultancy Rystad Energy, only 300-350 kbpd can be quickly restored with minimal spending from the current clip of 800,000 bpd-1 million bpd, with production beyond 1.4 mbpd requiring heavy, sustained investment. Rystad estimates that Venezuela will require $53 billion over the next 15 years just to keep production flat at 1.1 mbpd, but could need up to $183 billion over the same period to ramp up production to over 3 million bpd, roughly equivalent to the entire North American land capex for one year.
Analysts at satellite intelligence company Kayrros have described Venezuela's energy infrastructure as being in a “catastrophic state” following decades of under-investment, disrepair, and cannibalization of equipment. According to Kayrros, numerous oil storage tanks at the Bajo Grande and Puerto Miranda terminals are out of order due to corrosion and a lack of maintenance. But this is an industrywide problem: Kayrros estimates that roughly a third of Venezuela’s storage capacity is currently inactive, reflecting unusable storage tanks, reduced refinery operating rates, and declining oil production. Meanwhile, operations at the large interconnected Amuay and Cardón refineries are running below 20% of capacity, essentially turning them into “de facto storage centres” according to the experts.
Not surprisingly, Venezuela’s pipeline network is in a similar state of disrepair: A leaked document from PDVSA in 2021 revealed that the country’s oil pipelines had not been updated in 50 years, with Venezuela’s National Oil Company estimating it would take a staggering $58 billion to get them back in peak condition. Recent estimates have placed the figure in excess of $100 billion. Venezuela's operational oil pipeline network has a total length of 2,139 miles (approximately 3,442 kilometers). For some perspective, the UAE, which produces approximately 3.2 million bpd, has ~9,000 km of oil pipeline.
The serious descent of Venezuela's energy sector into the abyss began after Hugo Chávez's government nationalized the oil infrastructure and assets of ExxonMobil (NYSE:XOM) and ConocoPhillips (NYSE:COP) in 2007, after the companies refused to accept new terms that would give the Venezuelan state oil company, PDVSA, a majority share in their projects. The nationalization process was initiated in early 2007 through a presidential decree and a new Hydrocarbons Law.
Indeed, Venezuela’s low-hanging fruit is rather limited: According to Norwegian energy consultancy Rystad Energy, only 300-350 kbpd can be quickly restored with minimal spending from the current clip of 800,000 bpd-1 million bpd, with production beyond 1.4 mbpd requiring heavy, sustained investment. Rystad estimates that Venezuela will require $53 billion over the next 15 years just to keep production flat at 1.1 mbpd, but could need up to $183 billion over the same period to ramp up production to over 3 million bpd, roughly equivalent to the entire North American land capex for one year.
Analysts at satellite intelligence company Kayrros have described Venezuela's energy infrastructure as being in a “catastrophic state” following decades of under-investment, disrepair, and cannibalization of equipment. According to Kayrros, numerous oil storage tanks at the Bajo Grande and Puerto Miranda terminals are out of order due to corrosion and a lack of maintenance. But this is an industrywide problem: Kayrros estimates that roughly a third of Venezuela’s storage capacity is currently inactive, reflecting unusable storage tanks, reduced refinery operating rates, and declining oil production. Meanwhile, operations at the large interconnected Amuay and Cardón refineries are running below 20% of capacity, essentially turning them into “de facto storage centres” according to the experts.
Not surprisingly, Venezuela’s pipeline network is in a similar state of disrepair: A leaked document from PDVSA in 2021 revealed that the country’s oil pipelines had not been updated in 50 years, with Venezuela’s National Oil Company estimating it would take a staggering $58 billion to get them back in peak condition. Recent estimates have placed the figure in excess of $100 billion. Venezuela's operational oil pipeline network has a total length of 2,139 miles (approximately 3,442 kilometers). For some perspective, the UAE, which produces approximately 3.2 million bpd, has ~9,000 km of oil pipeline.
The state oil company, PDVSA, officially took operational control of the Orinoco Belt projects on May 1, 2007. Chávez, as part of his "socialism of the 21st century" agenda, aimed to regain national control over the country's vast oil reserves and funnel the profits into social programs. The government demanded that foreign companies transfer a majority stake (at least 60%) in their heavy oil projects to PDVSA.
Most foreign oil companies, including Chevron (NYSE:CVX), BP Plc (NYSE:BP), TotalEnergies (NYSE:TTE), and Equinor, accepted the new terms and remained in the country as minority partners. However, ExxonMobil and ConocoPhillips rejected the new structure, deeming the changes an unlawful expropriation without fair compensation, and subsequently pulled out of Venezuela by the fall of 2007.
The departure of the two U.S. giants led to prolonged legal battles in international arbitration tribunals. Both companies were awarded billions of dollars in compensation for the seized assets by various international bodies; however, Venezuela has only paid a small share of the total debt owed amid economic turmoil and U.S. sanctions. The expropriations resulted in a significant loss of investment, technical expertise, and operational capacity within Venezuela's oil sector, which contributed to a sharp and ongoing decline in oil production in the years that followed.
By Alex Kimani for Oilprice.com
