Despite exporting less than 1% of the world's oil supply, Venezuela has been a key player in the energy market for decades. However, this is a self-declared figure, published but not verified by the Organization of Petroleum Exporting Countries, of which Venezuela is a founding member. No holistic and conclusive assessments have ever been carried out by...
BY JAKE CONLEY
Despite exporting less than 1% of the world's oil supply, Venezuela has been a key player in the energy market for decades. Why? Because the country claims to have the largest crude oil reserves in the world.
According to figures widely cited in the media and within the oil industry itself, Venezuela has around 300 billion barrels of "proven" oil, meaning barrels that have been confirmed as commercially viable through conclusive testing or actual production.
This contrasts with Saudi Arabia's estimated proven reserves of between 260 and 270 billion barrels, and the much leaner 45 billion barrels in the United States.
However, this is a self-declared figure, published but not verified by the Organization of Petroleum Exporting Countries (OPEC), of which Venezuela is a founding member. No holistic and conclusive assessments have ever been carried out by independent experts.
Until 2007, Venezuela's declared proven reserves were around 100 billion barrels, according to OPEC data. By 2013, that figure was updated following a reclassification of the fields controlled by the state-owned company Petróleos de Venezuela, S.A. (PDVSA). Venezuelan production remained virtually unchanged during the same period.
"Venezuela has not audited reserves, only existing resources," explains Francisco Monaldi, director of the Latin American Energy Institute at Rice University's Baker Institute, referring to the total amount of hydrocarbons in the ground, not their viability for production.
In reality, Monaldi said in a LinkedIn post, Venezuela's oil recovery rate is less than half of what the country claims, so "a reasonable and conservative estimate of reserves would be closer to 100-110 billion barrels."
DOWN THE DRAIN
Venezuela, once the world's largest oil producer in terms of volume, has seen its industry collapse under the leadership of Hugo Chávez and Maduro, especially after Chávez's total nationalization of the industry under the control of PDVSA.
Corruption, mismanagement, brain drain, and a lack of critical infrastructure repair and maintenance, even across Venezuela's flagship Orinoco Oil Belt, have made operating without significant investment nearly impossible, according to several analysts.
In the fields along the western edge of the country, "infrastructure constraints and lack of electricity availability pose significant hurdles," according to energy analysts at Jefferies.
The reclassifications that nearly tripled Venezuela's proven reserves occurred when oil was at or near $100 per barrel, making any oil discovery more attractive than today, when Brent crude--the international price benchmark--is trading at around $60.
"The market doesn't need new barrels right now," said Robert Yawger, director of energy futures at Mizuho Securities, adding that "big oil companies may hesitate to increase production" when West Texas Intermediate, the U.S. benchmark crude, is trading at less than $60 per barrel.
INVESTMENTS
President Trump said he expects the U.S. oil industry to spend "billions" to rebuild Venezuela's infrastructure.
But for Venezuela to return to its early 2000s production highs of around 3 million barrels per day, it would likely need around $180 billion in additional financing between now and 2040, according to energy intelligence firm Rystad Energy.
Rystad estimates that international investors and operators would need to invest at least $30 billion to $35 billion of that capital over the next two to three years. The firm estimates that more than $50 billion in investment would be needed over the next 15 years just to maintain Venezuela's current production.
"Accounting for underground oil reserves is completely different from producing and marketing them," explained Andy Lipow, president of energy consulting firm Lipow Oil Associates.
UNFEASIBLE
In Rystad's opinion, the estimate of 300 billion barrels for Venezuela's reserves is "almost irrelevant, as there are virtually no scenarios in the global energy system where it would be necessary to produce this entire amount in the future. " More than two-thirds of those reserves would also require prices above $100 per barrel to be viable, the firm added.
It is certainly not that Venezuela is not rich in geological formations conducive to oil production. The Orinoco Oil Belt, in the central region of the country, stands out as the largest formation. External geologists have reached a general consensus that the Orinoco is one of the largest hydrocarbon deposits in the world.
Venezuela also has the Maracaibo and other basins in the east of the country. External experts estimate that these areas also contain abundant oil, but remain unexploited on the scale of the Orinoco.
"These are real opportunities for companies that really want to make a difference," said Carlos Bellorin, executive vice president of energy trends and analysis at intelligence firm Welligence.
But even if the oil were there in the quantities Venezuela claims, it might not matter to the big oil companies.
An additional problem is the type of oil extracted from Venezuelan reserves, which is largely heavy, sulfurous, or "sour," and does not flow as smoothly through the well to reach the surface and, due to its high sulfur content, corrodes equipment more quickly. Once extracted from the ground, its natural density is too high to transport it through pipelines, so it must first be liquefied.
This makes refining the oil a more complex, time-consuming, and costly process than is required for lighter variants, such as the ubiquitous WTI grade in the US.
Even for Chevron (CVX), the only U.S. oil company that has operated consistently in Venezuela over the past decade, the road to legitimate success in Venezuela is likely to be long.
"Chevron is seen as a key beneficiary of the potential 'takeover' of Venezuelan oil reserves," Mizuho energy analyst Nitin Kumar wrote in a note to clients.
However, he added, "additional growth in volumes may require capital investment that, while at the lower end of the global supply curve, still requires an improved financial framework to ensure competitive returns for the company."
President Trump has tasked Interior Secretary Doug Burgum and Energy Secretary Chris Wright with promoting Venezuelan investment in U.S. oil companies, asking major U.S. companies to spend more money and take more shots in the dark during a period of risk reduction and severe capital discipline for major U.S. oil companies.
The plan is likely to be difficult to sell.