Analysis by Energy Workforce President Tim Tarpley
Late Saturday night, the US conducted a midnight raid of Maduro’s compound outside of Caracas, snatching the wanted international felon and successfully taking him and his wife outside of the country, first to a US ship offshore and then to New York, where they were both charged with international drug trafficking crimes. The next day, Venezuelan Vice President Delcy Rodriguez was sworn in as President, given Maduro’s absence.
While there have been somewhat conflicting explanations as to the current situation on the ground in Venezuela and who is in charge by the US Administration, it appears that for now, Rodriguez is exercising some control over the Government and the United States has created a blockade around the country which it plans to use to ensure that Rodriguez follows a governing path subject to US approval. While there have been sporadic reports of violence and unrest, the situation on the ground appears relatively under control for now.
Aside from the geopolitical interest, what does all this mean for us? First, there is a clear desire from the Administration, especially the President, to rebuild Venezuela’s oil and gas infrastructure and resume exports. In fact, the Administration has tasked Secretary Wright with establishing a working group with industry to explore this possibility. This will be no easy task. While Venezuela has the largest proven oil reserves in the world at 303 billion barrels of crude, it is currently producing only a fraction of that amount. This number represents 1/5 of the world’s oil reserves. There is clearly a very significant opportunity for development. The United States has many refineries along the Gulf Coast that are designed to accept heavy crude, such as that from Venezuela, so there could be additional imports into the United States.
However, starting in the late 90’s, the Chavez regime began to expatriate much of the profits from the Venezuelan state-owned oil company, PDVSA, and divert them to other projects rather than reinvesting in infrastructure or further development. The result is that estimates indicate that at least $100 billion in investment is needed to get the Venezuelan energy system up and running to the level necessary to realize the potential fully. Getting US companies to make this kind of investment, given that companies like Exxon and ConocoPhillips were essentially ejected from the country in 2007 after failing to comply with many of Chavez’s unfavorable contract terms. These companies have not, in many cases, been fully compensated for their losses. Many US service and equipment companies are still owed large sums from this period that need to be collected. We also must remember that PVDSA still controls the majority of leases, so joint ventures would likely be necessary in most cases. All of these factors complicate the situation for investors as they evaluate opportunities.
For all of these reasons, it appears unlikely that US companies will quickly rush in to make large investments. Additionally, the political situation is still fluid, and many questions remain. Will the current President continue to play ball with the US, or will she face internal pressures to revert to Maduro’s anti-American position? Will she be able to hold on to power, or could the country enter a period of continued conflict, or even civil war? None of these answers are known as of now, but large investments will likely be few and far between until we have some of these answers.
Worth considering are the long-term implications of Venezuelan oil returning to the market. While impacts, even with the most aggressive timeline considered, will likely be years away, bringing such a large amount of crude onto the market could have significant price impacts. Additionally, right now the majority of Venezuelan crude is bought by China; should the US take a greater role in these decisions, that could change, tipping the global energy balance. For EWTC companies, opportunities could certainly exist should the country stabilize and take a more pro-US position; however, many questions remain, and it is very important that the US investments and losses made in years past also be made whole as this process moves forward.
Tim Tarpley, Energy Workforce President, analyzes federal policy for the Energy Workforce & Technology Council. Click here to subscribe to the Energy Workforce newsletter, which highlights sector-specific issues, best practices, activities and more.
