UNITED States President Donald Trump is giving US energy companies the opportunity to revive Venezuela’s massive, derelict oil industry. It’s an offer they may want to refuse.
After the US military’s ouster of Venezuelan President Nicolas Maduro at the weekend, representatives of the Trump administration plan to meet with oil executives later this week to discuss boosting Venezuelan oil production, Reuters reported on Monday.
Tapping Venezuela’s vast oil reserves — the world’s largest at over 300 billion barrels, or roughly one-fifth of the global stock — may be a tempting prospect for Exxon Mobil, Chevron and ConocoPhillips.
The potential to increase Venezuela’s oil production is enormous. Following years of mismanagement and US sanctions, the Latin American country’s production has slumped from a record of over 3.5 million barrels per day (bpd) in the 1970s, when it made up around eight per cent of global supplies, to below one million bpd last year, less than one per cent of today’s supply.
An opportunity approaching this scale has only been seen on a handful of occasions in recent decades.
It could be particularly appealing now, as company boards have been green-lighting billions in investment to locate new resources around the world in a rush to increase market share.
But Trump‘s proposal is far from a slam-dunk.
To start, most of Venezuela’s oil reserves, located in the Orinoco belt, are classified as heavy and extra-heavy. These highly viscous grades must be blended with diluent and upgraded into lighter oil to be extracted, transported and processed. All this raises the production costs.
Breakeven costs for key grades in the Orinoco belt already average more than US$80 a barrel, according to estimates by consultancy Wood Mackenzie. That places Venezuelan oil at the higher end of the global cost scale for new production.
By comparison, heavy oil produced in Canada has an average breakeven cost of around US$55 a barrel. Exxon’s breakeven target for its global oil production by 2030 is US$30 a barrel.
Chevron has a similar target, while Conoco has a long-term plan to generate free cash flow even if oil prices fall to US$35 a barrel. Oil currently trades at around US$60.
Convincing US majors to invest billions to extract pricey Venezuelan barrels may, therefore, be a rather hard sell.
“The opportunity must be compelling enough to offset the substantial political risk that will persist in the years ahead,” according to Carlos Bellorin, an analyst at consultancy Welligence Energy.
As it stands, Venezuela doesn’t seem to fit the bill. Of course, that could change if a new industry-friendly Venezuelan government were to make changes to taxation and royalty policies, greatly reducing the average cost. But that remains a big “if.”
Oil companies are no strangers to political risk, of course. Over the past few decades, they have often had to navigate abrupt regime change, social unrest and conflicts in hotspots such as Libya, Iraq, Angola and Venezuela, just to name a few.
But even by these standards, the current situation in Venezuela looks like more trouble than it’s worth.
Until Caracas has a new government capable of gaining the confidence of international investors and banks, oil companies will be reluctant to make any major commitments.
Buying assets for pennies on the dollar may be tempting, but it’s a lot less attractive if you can’t trust the contract.
What’s more, US majors have in recent decades gone to great lengths to distance themselves from American foreign policy, emphasising their independence to convince investors that they are focused solely on shareholder returns.
They will, thus, be loath to be seen as doing the US president’s bidding. Trump claimed on Sunday that he had spoken to all of the major US energy firms about his plans for investing in Venezuela “before and after” Maduro’s capture, a claim company executives refuted.
Contradicting Trump also carries risks for companies, however, potentially very large ones at a time when government involvement in the economy is increasing rapidly.
The US oil giants will likely acquiesce to the White House’s plan, at least in part, by signalling a willingness to explore opportunities in Venezuela.
But will they agree to pour billions of dollars into a country long considered the poster child for corruption and economic mismanagement? That might be hard to swallow.
The writer is from Reuters
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