Big 'Ifs' on Venezuelan Oil Sector Revival

Written by Daniel Graeber for IIR Energy (Sugar Land, Texas)

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Summary
The Plaquemines facility, which became the eighth export terminal for LNG in the U.S. in late December, helped lead to a surge in the sector last year. That could be contributing to a global glut, however.

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Is Venezuela Ripe for Growth?

It's possible the Venezuelan oil sector will return to its previous glory from the mid-1970s, but it will require substantial investments and decades-long commitments, analysis from IIR Energy found.

Facing criticism from the U.N. secretary general and NATO allies, U.S. President Donald Trump said his government would "run" Venezuela following the controversial arrest of Venezuelan President Nicolas Maduro and his wife in Caracas on narcotics charges.

Speaking to NBC News, Trump said U.S. oil companies could be "up and running" in Venezuela in less than 18 months, though he acknowledged it would require "a lot of money."

Venezuela is a founding member of the Organization of the Petroleum Exporting Countries (OPEC) and sits on top of the largest oil reserves in the world. Oil production peaked in the 1970s at 3.7 million barrels per day (BBL/d), though secondary sources reporting to OPEC economists put production at 934,000 BBL/d in November.

The decline is due to factors ranging from chronic under investment, to poor management and sanctions limiting its export potential. To that end, U.S. oil companies, including long-term Venezuelan player Chevron Corporation (Houston, Texas), could find opportunities to revive the industry and gain access to the Orinoco Belt, the largest oil reserve in the world, said Jesus Davis, a vice president for energy services at Industrial Info.

Major Long-Term Commitments Needed

To safely restart and increase production would likely cost billions of dollars. From leaky pipelines to aging storage tanks, the task won't be easy. But the real cost, Davis said, would be in the upgraders for Venezuela's delipidated refineries.

"The last upgrader proposed to be built in Venezuela was expected to cost over $2 billion, and it was canceled several years ago because it was not economically viable," he said. "For reference, costs for recent upgrader expansion projects in Canada range from $6 billion to $20 billion for a brand new one."

That would take up nearly all the $18 billion in spending outlined for next year by Chevron, which was at the low end of its guidance. Data from Industrial Info, meanwhile, show recent investments are paltry at best.

Industrial Info's Global Market Intelligence (GMI) is tracking Venezuelan oil and gas facilities, petroleum refining facilities, and other petroleum investments reaching a total of only $207.5 million.

Apart from the diluting agents needed to lower the viscosity of Venezuela's heavy crude enough to move it through pipelines, upgraders are needed before the oil can be refined into useable petroleum products. Venezuela has four upgraders, but only three are operational. Combined, the three units have 670,000 BBL/d in throughput.

"It is highly unlikely that any of these units are capable of operating at full capacity and will need significant investments to allow them the run at normal operating rates," Davis said.

By the Numbers

• 934,000 BBL/d from Venezuela in November
• 3.7 million BBL/d in the 1970s
• $207.5 million in confirmed investments in the country

It's unclear if energy firms are upbeat enough to sink major capital into Venezuela anytime soon. In outlining the spending budget for this year, Mike Worth, the chief executive officer of Chevron, said the focus was on capital discipline. And with the market already oversupplied due in part to the lackluster demand spurred by Trump's erratic trade policies, many energy companies are somewhat pessimistic about the future given a lower-for-longer outlook for crude oil prices.

That mood, in turn, could spoil the appetite in Venezuela. Davis at Industrial Info said that skilled labor could be a looming concern in whatever post-Maduro regime emerges.

"There will definitely be a need for general labor across the facilities and fields, but there will also be a huge need for skilled tradespeople that oil companies, engineering and construction firms and equipment suppliers here in the U.S. are currently having trouble finding," he said.

Given recent developments, the fog may be too dense to make any accurate forecasts about the future. Tamas Varga, an analyst for London oil broker PVM, said in a Tuesday newsletter that the U.S. history with regime change is "far from impeccable." It's uncertain, he added, that whatever regime emerges next will be squarely in line with U.S. interests.

Venezuela continued delivering crude oil to U.S. refineries despite ongoing tensions. Based on U.S. federal data, Venezuela was the fifth-largest exporter by volume over the four-week period ending December 29. Many U.S. refineries are tailored to run heavier crudes rather than the light, sweet oil found in domestic shale basins.

Key Takeaways

• Venezuela's oil future highly uncertain
• Nation-building is tough work
• U.S. refiners still took in Venezuelan crude, despite recent tensions

About Industrial Info Resources
Industrial Info Resources (IIR) is the leading provider of industrial market intelligence. Since 1983, IIR has provided comprehensive research, news and analysis on the industrial process, manufacturing and energy related industries. IIR's Global Market Intelligence (GMI) helps companies identify and pursue trends across multiple markets with access to real, qualified and validated plant and project opportunities. Across the world, IIR is tracking more than 200,000 current and future projects worth $17.8 trillion (USD).