Trump’s strategy for Venezuelan oil faces tough real-world obstacles

US Seeks Control Over Venezuelan Oil: Complexities and Challenges

Recently, US President Donald Trump revealed that Venezuela’s interim government would transfer up to 50 million barrels of oil to the United States. He later stated that his administration intends to oversee Venezuela’s oil sales for the foreseeable future.

Trump criticized the current state of Venezuela’s oil industry, noting that the country now produces only a fraction of its former output. He proposed that major US oil corporations invest billions to repair Venezuela’s deteriorating oil infrastructure, with the goal of generating profits for both nations.

However, this opportunity may not be as appealing as it seems. Venezuela possesses the world’s largest crude oil reserves, surpassing even Saudi Arabia and Iran, but extracting this oil is both technically demanding and expensive.

Additionally, the political landscape in Venezuela remains unstable, raising significant risks for any foreign company considering a return. There is no guarantee that the management of the country or its oil sector will change in a way that encourages investment.

History of Nationalization and Foreign Investment

Venezuela’s oil industry was nationalized under former President Hugo Chavez in the 1990s. In 2007, Exxon and ConocoPhillips were forced to leave after refusing to accept new terms that granted the state oil company, PDVSA, a controlling stake in their ventures. ConocoPhillips is still owed approximately $10 billion as a result.

Currently, Chevron is the only US oil company permitted to operate in Venezuela and export crude to the US.

As a recent Reuters article points out, oil companies are unlikely to make major investments until Venezuela establishes a government that can earn the trust of global investors and financial institutions.

During a recent meeting with oil executives, Exxon CEO Darren Woods remarked, “We’ve had our assets seized there twice, so any return would require substantial changes.”

Trump has indicated that while the US government is willing to offer security assurances, it will not provide financial support for oil projects.

Venezuela’s Oil Reserves: Scope and Location

As a founding member of OPEC, Venezuela holds more proven oil reserves than any other OPEC nation, including the Gulf’s top exporters such as Saudi Arabia, Iraq, the UAE, and Iran.

The country’s reserves are estimated at 303 billion barrels, accounting for roughly 17% of global reserves and over five times the US total of 55 billion barrels.

The majority of these reserves are located in the Orinoco Belt, a vast region in eastern Venezuela stretching 600 kilometers east to west and 70 kilometers north to south, covering about 55,314 square kilometers.

Orinoco Belt Operations and Output

The Orinoco Belt is divided into four main production zones: Boyacá, Junín, Ayacucho, and Carabobo. Most activities in this area are managed by PDVSA, which has struggled with outdated infrastructure, lack of investment, poor management, and the impact of international sanctions.

As a result, Venezuela has been unable to fully capitalize on its oil wealth. Daily exports have dropped from a peak of 3.5 million barrels to around 1 million barrels today.

Investment Needs and Economic Realities

Massive Capital Required

Francisco Monaldi, an energy policy expert at Rice University, estimates that restoring Venezuela’s oil production to its 1970s levels would require US oil companies to invest $10 billion annually for a decade, totaling $100 billion.

According to Rystad Energy, simply maintaining current output would cost $53 billion over the next 15 years, while increasing production above 1.4 million barrels per day would demand an additional $120 billion by 2040.

Technical and Economic Barriers

Extraction Difficulties

Venezuela’s oil is classified as extra-heavy crude, which is thick and dense, making extraction more complex and expensive than for lighter grades. Advanced methods such as steam injection and blending with lighter oils are necessary to make it suitable for export.

Due to its high density and sulfur content, Venezuelan crude typically sells for less than lighter, sweeter oils. While US Gulf Coast refineries are equipped to process heavy crude, profitability is questionable when oil prices are low.

Consultancy Wood Mackenzie estimates that the breakeven cost for Orinoco Belt oil exceeds $80 per barrel, placing it among the most expensive new oil sources globally. In contrast, Canadian heavy oil averages about $55 per barrel to break even. With current oil prices around $60 per barrel, Venezuelan oil is not economically viable.

Reserve Estimates and Market Viability

There is often a gap between reported reserves and what can actually be produced. Proven reserves are those with a 90% chance of recovery using current technology and under existing economic conditions. Venezuela’s figures are self-reported and may be overstated. In 2011, OPEC declared Venezuela’s reserves the world’s largest when oil prices were above $100 per barrel. However, the Orinoco’s oil is laden with impurities, making it costly to extract and refine. Profitability is highly dependent on market prices.

Unless oil prices rise significantly, much of Venezuela’s reserves may remain untapped. Rystad Energy suggests a more realistic estimate of recoverable reserves is closer to 60 billion barrels.

Outlook: High Risks and Uncertain Rewards

For Venezuelan heavy oil to become profitable, prices would need to increase by at least $20 per barrel. Even then, US oil companies would require strong security guarantees to avoid the risk of future expropriation. The Trump administration’s willingness to protect American interests in a country with a history of nationalization remains uncertain.

Given the extreme political instability in Venezuela, foreign investment is fraught with risk. Despite optimistic rhetoric, it is unlikely that American companies will rush to revive Venezuela’s oil sector. As one observer put it, “The world probably doesn’t need more expensive, high-pollution oil. The vision of a flood of Venezuelan crude transforming the market is likely to remain a fantasy.”

By Andrew Topf for Oilprice.com

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