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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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The Single Biggest Threat To Venezuela's Future

It was not too long ago that copious oil reserves such as the 303 billion barrels located in Venezuela, which are the world’s largest, were viewed as a tremendous economic benefit. That vast petroleum wealth, which quickly became Venezuela’s economic engine, was responsible for shaping the Latin American country’s destiny. By the 1970s Venezuela was the wealthiest, most developed and politically stable country in Latin America. Even after the rapid decline of Venezuela’s leviathan oil industry, economic collapse and near failure as a viable state many politicians and analysts believe that its abundant petroleum wealth will finance the reconstruction of the devastated country. Sadly, it may be too late for Venezuela to benefit once again from its substantial oil wealth. Regime change, which is the ousting of Maduro and his autocratic socialist government for an internationally recognized government, is becoming increasingly urgent. For as long as that does not occur, though U.S. sanctions will prevent Venezuela from accessing vital international energy markets to sell the crude oil it is producing or receive the capital needed to rebuild its shattered oil industry. The time for Venezuela to exploit its expansive petroleum wealth is fast running out. The emergence of peak oil demand and the growing push to decarbonize the economy to combat climate change has upended global energy markets, especially after specific targets were implemented as part of the Paris Agreement. Those developments have created a finite timeline for the demise of fossil fuels. The exact date of when peak demand will materialize is unknown, but it is expected by most analysts and industry organizations to occur between 2028 and 2035. When it does arrive, demand for fossil fuels will start declining at a steady clip placing growing pressure on oil prices, in turn causing industry investment and ultimately oil reserves and production to fall. The COVID-19 pandemic has demonstrated what happens to oil prices and production when energy demand significantly declines. The arrival of peak oil demand will make large portions of the world’s recoverable oil reserves uneconomic to exploit transforming them into stranded assets and potentially costly liabilities. Some economists and industry analysts believe the pandemic has accelerated the arrival of peak oil demand, which will trigger a notable increase in the volume of stranded oil assets. Nearly a decade ago Canada’s vast oil sands, which produce heavy sour crude oil grades and are costly as well as environmentally damaging to exploit, were described as a stranded asset. This risk was initially dismissed by analysts, but it finally materialized this year when several international energy companies, including French global oil supermajor Total, wrote-down the value of their Canadian oil sands assets by billions of dollars. There will be further impairment charges ahead, not only because of weaker oil and the threat of peak oil demand but also because of growing global demand for lighter sweeter grades of crude oil.

This is a very real threat for Venezuela and will derail hopes of rebuilding the shattered country’s oil industry as a means of reconstructing the shattered country’s economy. Internationally recognized opposition leader Juan Guaidó has stated in his plan (Spanish) to rescue Venezuela from its social crisis and economic collapse that the reconstruction of the hydrocarbon sector will provide the resources required to rebuild the nation. It is speculated that it could take a decade or longer to rebuild Venezuela’s broken oil industry. The capital required to rebuild a wrecked PDVSA and Venezuela’s energy infrastructure is immense with a Financial Times article estimating it could be as high as $200 billion. The parlous state of Venezuela’s vital energy infrastructure is underscored by a series of recent events. These include numerous oil spills, on land and into the Caribbean Sea, an explosion in the distillation unit at the 635,000 barrel per day Amuay refinery, severe gasoline shortages, and failing oil wells. If Venezuela can acquire the required investment it is estimated that production will only reach around 2 million barrels daily or roughly half of Venezuela’s 1970 peak production of 3.8 million barrels daily. Even in the best-case scenario, that means there is a long road ahead to rebuild Venezuela’s economic engine, end the existing humanitarian and pull the country back from the brink of becoming a failed state.

Related: Has Asia Lost Interest In North Sea Oil?

In a world impacted by the COVID-19 pandemic, where energy companies are weighed down by sharply weaker petroleum prices and the threat of peak demand is looming, it will be all but impossible to obtain such an immense amount of capital. The difficulty associated with obtaining the required amount of investment is exacerbated by Venezuela’s high breakeven costs, especially compared to other countries in Latin America. According to the Natural Resource Governance Institute, Venezuela’s breakeven prices average $41.97 to $56.06 per barrel of crude oil produced depending on the oil field being exploited. Such high breakeven costs make it difficult to attract the required capital from foreign energy companies to rebuild Venezuela’s shattered oil industry even after Maduro and his socialist regime is ousted from power. Regime change in Venezuela, and the end of two decades of socialist rule, will likely create an immense and potentially violent political overhang that will ratchet-up the degree of geopolitical risk associated with the Latin American country. That further reduces the appeal of investing in the petroleum industry of a country which has a long history of political instability in an operating environment where the outlook for crude oil is uncertain.

Another factor complicating the ability to attract the urgently required investment is that Venezuela predominantly produces grades of crude oil which are sour and heavy.

Many of Venezuela’s crude oil blends have API gravities of 11 degrees to 24 degrees making them especially heavy crude oil varieties. They are also particularly sour, with sulfur contents ranging from 2% to 2.9%. This reduces their attractiveness to refiners because of the extra costs and complexities associated with processing them into high quality low sulfur fuels and refined products. That is further magnified by the global push to reduce sulfur emissions which is seeing gradually stricter regulations regarding the sulfur content of fuels being introduced. The latest requirement being IMO2020 which cuts the sulfur content of maritime fuels from 3.5% per weight percent to 0.5%. Due to the maritime industry being responsible for 50% of global fuel oil demand, that measure is expected to have a significant and lasting impact on the production and pricing of those fuels.

For these reasons, there is a limited window available for Venezuela to exploit its prodigious petroleum reserves. As time passes and the push to decarbonize the global economy gains greater momentum and the adoption of electric vehicles expands increasingly larger portions of Venezuela’s oil reserves will become uneconomic to extract. It is estimated that in an environment where the carbon intensity of petroleum extraction is factored into investment decision making and the factors discussed are considered, up to 300 billion barrels of Venezuela’s oil reserves will become uneconomic to extract. This means if oil production returns to 2 million barrels daily, or more than five times greater than Venezuela’s October 2020 daily average of 367,000 barrels, the country only has four years of production. For these reasons, it is unlikely that Venezuela’s oil industry will ever return to the size where it can generate the tremendous income necessary to reconstruct Venezuela’s shattered economy and end the distressing humanitarian crisis that has emerged.

By Matthew Smith for Oilprice.com

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  • Mamdouh Salameh on November 29 2020 said:
    The author is absolutely wrong about the claims he makes. His claims aren’t only flawed but also verge on fantasy and political prejudice.

    The author claims that it may be too late for Venezuela to benefit once again from its substantial oil wealth. He goes on to say that regime change is becoming increasingly urgent. Whilst the very harsh US sanctions have managed to exacerbate the hardships and the misery of the Venezuelan people, they have failed miserably to effect a regime change. The reason is the Venezuelan people, the descendants of Venezuela’s national hero Bolivar who liberated South America from Spanish oppression will never accept a puppet regime headed by Juan Guaid. He will only make it easier for the United States to get its hands on Venezuela’s oil wealth, the largest in the whole world. The United States has been for years casting envious eyes on such unbelievably huge oil wealth.

    John Bolton, President Trump’s former national security advisor openly said on national TV that “the sanctions will make a big difference to the United States economically if we could have American oil companies really invest in and produce the oil capabilities in Venezuela. It would be good for the people of Venezuela. It would be good for the people of the United States. We both have a lot at stake here making this come out the right way. A decimated oil industry in the nation with the largest proven oil reserves in the world would appear to serve some alternative interests beyond democracy and human rights.” There you have it.

    The author seems to be joining the fantasies and the hallucinations of a group of analysts, investment banks, militant environmental activists and hydrocarbon divestment campaigners about the so-called approaching peak oil demand projected by them to occur between 2028 and 2035. Well let me disappoint them all by saying that there will neither be a post-oil era nor a peak oil demand throughout the 21st century and far beyond. Moreover, the notions of an imminent global energy transition from oil and natural gas to renewables and zero emissions are illusions. Oil and gas will continue to be the core business of the global oil industry and the fulcrum of the global economy well into the foreseeable future.

    If anything, the COVID-19 pandemic has irrevocably proven how inseparable oil and the global economy are. By destroying one you also destroy the other and vice versa. The global economy will continue to run on oil and gas well into the future. In view of this, Venezuela’s oil wealth estimated at 303 bn barrels not only will be rebuilt but it will also be a pillar of the global economy well into the future. Even at a current low oil price of $45 a barrel, Venezuela’s oil wealth is estimated at $13.635 trillion so spending $200 bn to rebuild it isn’t a heavy price to pay.


    And despite the fact that Venezuela produces heavy crudes, these crudes are very much in demand by US refineries and refineries around the world specifically because of their sulphur content and API. This explains why US refineries are currently buying increasing volumes of Russian heavy Ural crude as a replacement for the sanctioned Venezuelan crudes.

    And despite the intrusive sanctions, Venezuela is exporting almost 1 million barrels a day (mbd) openly and also via different improvised methods. Venezuela, like Iran, has perfected the art of evading US sanctions. However, it doesn’t see any need to declare the size of its exports so as not to invite more sanctions.

    Dr Mamdouh G Salameh
    International Oil Economist
    Visiting Professor of Energy Economics at ESCP Europe Business School, London

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