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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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Can Venezuela’s Oil Industry Really Rebound?

There are signs that the crisis engulfing Venezuela’s shattered petroleum industry could start to ease. In a recent televised address, Venezuela’s President Nicolas Maduro stated that Venezuela was open for oil investment from the U.S. and around the world. That coupled with earlier plans to open the Latin American country’s state-controlled petroleum industry to private control of some petroleum projects has sparked a flurry of interest in the near-failed state. These events have triggered considerable speculation that representatives of foreign energy companies are traveling to Caracas to explore the opportunities that exist in Venezuela’s broken energy sector. The petroleum-rich Latin American country is endowed with the world’s largest oil reserves, totaling 304 billion barrels, with many existing oilfields currently inactive because of PDVSA’s lack of resources. Those characteristics indicate there are considerable opportunities for foreign energy companies, especially if Maduro, as rumored, is willing to provide them with proprietary control of energy assets. A Reuter’s January 2021 article highlighted that small domestic oilfield contractors were meeting with Venezuelan officials to discuss operating fields owned by national oil company PDVSA in exchange for receiving a share of the profits. Bloomberg, in a March 2021 article, asserted that foreign oil industry executives of smaller oil companies and lobbyists are flooding Caracas to meet with Venezuelan government representatives to discuss investing in energy projects. While Russia and China have demonstrated contempt for U.S. sanctions and made their oil ambitions in Venezuela abundantly clear, claims of a foreign-led rejuvenation of the petroleum-rich country’s petroleum industry appear premature.  Moscow has acquired a raft of Venezuelan energy assets over the last decade, while China continues to import the crisis-torn Latin American nation’s crude oil in defiance of U.S. trade restrictions. It is Washington’s strict sanctions that are the main obstacle preventing Caracas from attracting the substantial foreign investment required to rebuild Venezuela’s shattered oil industry. Those sanctions not only target key individuals in Maduro’s autocratic regime but are designed to choke off the government’s access to global capital and energy markets. While they have accelerated the disintegration of Venezuela’s economically crucial oil industry, magnifying the oil-rich country’s economic crisis and nearly bankrupting Caracas, they have failed to remove Maduro’s government. If anything, they have strengthened Maduro’s grip on Venezuela and cemented his power in the crisis-ridden country.

Related: Pandemic Puts Saudi-Kuwaiti Oil Plans On Ice By the end of 2020, Maduro finally secured control of the National Assembly, which had been the only major government institution not controlled by his United Socialist Party. This is decisive development that not only undermines Juan Guaido’s legitimacy as opposition leader and international recognition as interim president but allows Maduro to change the legislation governing how oil projects are awarded. The National Assembly is the only legislative body legally empowered to approve oil projects and alter existing industry legislation, the Hydrocarbons Act 2006, which regulates how Venezuela’s petroleum industry operates. The Act requires all oil exploration and producing activities to be carried out by the state or government-controlled entities, which is national oil company PDVSA, preventing projects from being controlled by foreign or private entities. Those statutory requirements are also an additional hurdle to attracting foreign energy investment that is magnified by Chavez’s aggressive nationalization of Venezuela’s oil industry, which saw the government seize a wide range of petroleum assets between 2007 and 2010. Those included four projects in the Orinoco heavy oil belt which precipitated Exxons’ and ConocoPhillips’ decision to exit Venezuela. National oil company PDVSA has proven to be a poor partner for foreign energy companies operating in Venezuela. Years of malfeasance, poor management, and corruption coupled with a lack of skilled labor and deteriorating infrastructure were responsible for Russian oil giant Rosneft losing millions of dollars from its joint ventures with Venezuela’s national oil company. Russian and Chinese energy investors have been clamoring for some time for greater legal protections when contemplating investing in Venezuela’s petroleum industry, even before Maduro contemplated easing restrictions.

The calamitous state of Venezuela’s energy infrastructure is highlighted by Chinese contractors pulling out of an agreement to repair the country’s network of derelict refineries in exchange for oil products. The companies chose not to proceed after reviewing the installations and finding that the work required was more complicated than initially believed. Iran hurriedly stepped in to assist, but it is unclear whether any progress has been made because U.S. sanctions prevent the importation of the required parts to refurbish refineries originally built by U.S. and European energy companies. The need to rebuild Venezuela’s shattered energy sector to initiate a sustained economic recovery is underscored by petroleum production being the country’s economic backbone. Since 2014 when oil prices collapsed and Venezuela’s production started rapidly deteriorating, the country’s gross domestic product has plunged by 48% to an estimated $250 billion for 2020. The urgency with which Venezuela needs to attract foreign energy investment is further underscored by chronic fuel shortages caused by crumbling refining infrastructure causing many economic sectors to grind to a halt. Those pressures combined with Venezuela’s worsening humanitarian crisis are forcing Maduro to attract investment and find ways to rebuild the country’s devastated petroleum industry.

Related: 13 Million Barrels Of Oil Could Be Affected By Suez Canal Blockage

Attracting the substantial investment and expertise required to refit corroding energy infrastructure and decaying refineries, as well as revitalize dilapidated oilfields is key to any recovery. For Venezuela to experience a sustained economic recovery it is estimated that the country will need to pump two million or more barrels per day, which has not been achieved since 2016 when the country produced on average almost 2.2 million barrels daily. That is quite a leap for a country which according to OPEC only pumped 521,000 barrels per day for February 2021 or less than a fifth of the 3.1 million barrels produced in 1998 before Chavez became president and initiated his Bolivarian revolution. There is considerable speculation regarding the investment required to rebuild Venezuela’s dilapidated petroleum industry and return production to pre-2017 levels of over two million barrels daily. Chevron’s former president of Africa and Latin America exploration and production, Ali Moshiri, believes it could take a little as $20 billion to $25 billion. That amount is significantly lower than the estimates of economists, industry specialists, and members of Juan Guaido’s interim government. Yon Goicochea, director of Guaido’s economic recovery plan thinks it will take at least $200 billion to return production to pre-Chavez levels of over 2 million barrels per day. Francisco Monaldi, Director of the Latin America Energy Program at the Baker Institute, believes the amount to be at least $110 billion. It is difficult to see how smaller energy companies can provide the investment, skilled labor, and technology required.

Essentially, it is only western oil majors which possess the necessary resources, technology, and skilled labor required to rebuild the country’s oil industry. That means international energy supermajors, like Chevron, and large U.S. oilfield services companies such as Schlumberger, Halliburton, and Baker Hughes are key to reviving Venezuela’s energy sector. It is difficult to see smaller foreign energy companies risking precious capital on investing in such an uncertain, unstable and hazardous jurisdiction with a long history of oil nationalism at a time when oil prices are weak as well as highly volatile. Clearly, until U.S. sanctions are eased it is virtually impossible for private energy companies to operate in Venezuela without being exposed to damaging and punitive actions from Washington. For these reasons, any foreign-led revival of Venezuela’s shattered petroleum industry is unlikely to occur in the immediate future.

By Matthew Smith for Oilprice.com

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  • George Doolittle on March 27 2021 said:
    Columbian coal still remains far more valuable than any energy product modern day Venezuela can produce...which given that Venezuela is ahem "claimed to have the World's largest oil reserves" ahem I think makes as with for example the entire City of New York et al straight up un-investable.

    Anyhow *the current complaint* is that Columbia isn't ahem "fighting fair" ahem in what is beyond any doubt Venezuela's War against "da 'hood."
  • Mamdouh Salameh on March 27 2021 said:
    There is no doubt in my mind that Venezuela’s oil industry can and will rebound. But for this to happen, three pivotal conditions have to be met.

    The first is that Venezuelan President Maduro keeps his word about opening his country’s oil industry to foreign investments and allowing them proprietary control of energy assets.

    The second condition is lifting of the US sanctions or at least easing them significantly to enable foreign oil companies with decades of operating experience in the country such as US oil giant Chevron and also large US oilfield services companies such as Schlumberger, Halliburton, and Baker to resume operations in the country.

    The third condition is rapprochement between the United States and Venezuela thus enabling foreign investment to return with confidence to Venezuela.

    Sitting on the world’s largest proven crude reserves of 303.8 billion barrels estimated at $19.75 trillion based on current Brent crude price of $65 a barrel, Venezuela will always be a focal point for global oil investment with major oil companies hoping to get a slice of its spectacular oil wealth.

    If the above conditions are met, Venezuela’s oil production could rise to 1.5-2.0 million barrels a day (mbd) within 2-3 years. By opening its oil industry to foreign investment and employing the latest production technology Venezuela is capable of producing ultimately up to 4.0 mbd.

    If US sanctions are lifted or eased significantly and President Maduro kept his word of opening his country’s oil industry to foreign investment, this will go a long way to de-escalate tension with the United States. Moreover, allowing American oil companies to operate anew in Venezuela might enhance the oil trade between the two countries particularly that Venezuela owns a few refineries in Texas specially equipped to refine the extra-heavy Venezuelan crude. It will also help resolve legal issues over the Venezuelan-owned refinery CITGO and other assets in the United States.

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

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