There are considerable concerns that the vast oil reserves of Venezuela, totaling a billion barrels, could become a stranded asset. It was Venezuela’s burgeoning post-World War One oil boom which was responsible for it becoming the richest country in Latin America and one of the wealthiest per capita globally. That now appears to be an albatross around the crisis-stricken country’s neck. The push to combat climate change, reduce emissions and particulate pollution has sparked a world push to significantly reduce the sulfur content of fuels. In 2000, the U.S. EPA finalized the Tier 2 Gasoline Sulfur program which reduced the sulfur content of gasoline by 90%. During 2017 the agency introduced the Tier 3 program which lowered the sulfur content of gasoline to a maximum of 10 parts per million (ppm). Similar regulation has been introduced by other developed countries, notably in response to the targets established by the 2015 Paris Agreement to combat climate change. The latest development is the introduction of IMO 2020 by the International Maritime Organization which sets the maximum sulfur content for fuel oil at 0.05% mass by mass, which is a significant reduction compared to bunker fuel used previously. Bunker fuel or ship fuel oil is a residue from crude oil distillation and typically was extremely high in sulfur, resulting in considerable harmful emissions when burnt. The new maritime standard aims to significantly reduce the emission of sulfur oxides from ships and improve global air quality.
It is this ongoing push to ultimately eliminate harmful sulfur emissions from fuels which sparked a sharp uptick in the demand for sweet light crude oil. This is because it is cheaper and easier to refine low sulfur content fuels from light sweet oil than from heavy sour crude. Demand for light sweet crude from Asian refineries, notably from China, soared during the first nine months of 2020 as refiners adjusted their operations to meet rising demand for low sulfur content maritime fuels. This sparked a sharp uptick in the volume of Brazilian oil being imported by Beijing during the first half of 2020, partly in response to sharply weaker oil prices precipitated by the March 2020 oil price crash but also IMO 2020. China has become the primary destination for national oil company Petrobras’ light sweet crude oil produced in the pre-salt fields. The world’s second-largest economy accounts for roughly 88% of Brazil’s oil cargoes. Related: Gulf Of Mexico Drillers Shut In Production As Tropical Storm Zeta Nears
Demand for the Latin American country’s light sweet crude remains firm despite the COVID-19 pandemic and reduced global demand for energy because of the pandemic induced economic contraction. This can be attributed to strong demand for sweet light crude which is low in sulfur for refining into low sulfur content compliant gasoline, marine, and other fuels. While this has been a boon for those countries producing primarily light sweet crude, which is oil with an API gravity of 35 degrees or greater and sulfur levels of less than 0.42%, such as Brazil, the U.S., and Nigeria. It has, however, been detrimental for demand for oil from those countries producing heavier sour crude, which has an API gravity of 25 degrees or less and sulfur levels of greater than 0.5%, like Canada, Colombia, Ecuador, Saudi Arabia, and Venezuela. Growing demand for light sweet crude oil will be further met by the oil boom underway in the Guyana-Suriname Basin, where several major hydrocarbon discoveries are being exploited by international energy majors including ExxonMobil.
This development has created a new threat for Venezuela, its rapidly deteriorating oil industry and the economic viability of its vast oil reserves, which at almost 304 billion barrels are the world’s largest. The crisis-stricken Latin American country’s oil reserves are primarily composed of sour heavy and extra-heavy crude oil. Most of the blends produced in Venezuela has API gravities of less than 25 degrees to as low as 8 degrees. Sulfur content is also, on average, quite high ranging between 1 to 2.8 percent, meaning that it is particularly sour. In a world that is pushing to significantly reduce gasoline and other fuels’ sulfur content, there is every danger of Venezuela’s vast oil reserves becoming a stranded asset. The Carbon Tracker Initiative defines a stranded asset as; “those assets that at some time prior to the end of their economic life are no longer able to earn an economic return as a result of changes associated with the transition to a low-carbon economy.“
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This is especially the case when it is considered that massive injections of capital, technology and skilled labor are required to resurrect the country’s oil industry. That simply will not occur until regime change occurs and Maduro’s dictatorial government is removed from power and an internationally recognized government is installed. It will also likely take over a decade for the industry to rebuild to something resembling its pre-catastrophe level. Strict U.S. sanctions have cut Venezuela off from international financial and energy markets while making it virtually impossible for international energy majors to operate in the pariah state. In late-April 2020 the Whitehouse gave Chevron, the last remaining international oil major in Venezuela, until 1 December to wind down its operations in the country. This a major blow for Maduro and PDVSA because it removes the last lifeline for an industry that appears caught in a downward spiraling decay. Those significant headwinds are further magnified by the theory of peak oil demand. Global energy major BP, among other major energy companies and institutions including the International Energy Agency, believes oil demand will plateau by around 2030 and start to decline after that point. This indicates that there is a limited window for Venezuela to profit from the vast wealth held by its oil reserves.
Once an asset is stranded there can be considerable ongoing remediation and other liabilities required to prevent environmental damage, particularly in the case of petroleum reserves. That is a cost the near failed and almost bankrupt state can ill-afford, even if regime occurs. The disintegration of Venezuela’s oil industry means it is extremely difficult to see how Caracas can benefit from that wealth. The collapse of Venezuela’s aging petroleum infrastructure and PDVSA’s attempts to keep some crude oil flowing is creating an environmental disaster. There are claims of oil flowing freely in many parts of the country where the national oil company is or was operating, and that including calamitous oil spills have significantly damaged the local environment, causing rectification and remediation costs to spiral to levels that a near-bankrupt Caracas can ill-afford. These issues will afflict even a post-Maduro Venezuela, leaving the deeply impoverished country to clean-up decades of environmental and economic devastation wrought by the regime’s malfeasance, corruption, and determination to stay in power regardless of the cost. Maduro’s legacy will last far beyond his downfall and those vast oil reserves are fast becoming a curse rather than a benefit for a country on the verge of collapse.
By Matthew Smith for Oilprice.com
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