Venezuela is a resource-rich country that now stands to benefit tremendously from the recent ousting of the corrupt former president, Nicolas Maduro. Following the success of Operation Absolute Resolve, Maduro has been removed from power, and Venezuela has found itself on the path toward reintegration into the global economy with the help of the United States. With the world’s largest proven oil reserves, Venezuela stands to gain significantly in the coming years, provided that proper investment and management are implemented. Challenges abound, and there are no shortcuts to reaching the historic levels of mass oil production in the 1970s and 1990s of upwards of 3.12 to 3.71 million barrels per day, since much of Venezuela’s oil is heavy crude, known for its extraction and refining challenges. As the interim government of Venezuela decides its path forward, it is imperative that political reform not only occur, but also become permanent so that future investments are protected.
Venezuela’s Oil and Its Challenges
Crude oil is generally classified by its density, whether it is light or heavy, and its sulfur content, referred to as sweet or sour; the sweeter the grade, the less sulfur present, which makes refining simpler. Light crude is known for being more accessible, making it more desirable and potentially more valuable. One of the primary challenges Venezuela faces, or more specifically, those willing to invest in the extraction of Venezuelan crude, is that the vast majority of the proven reserves are heavy crude, concentrated in what is known as the Orinoco Oil Belt. Located in the eastern part of the country, the Orinoco is over 370 miles long and 40 miles wide, encompassing a total area of 21,000 square miles. The rest of the country’s oil reserves are spread between the Monagas oil basin in the east, which is close in proximity to the Orinoco but contains a lighter crude, and the Maracaibo basin in the northwest, which was one of the first places the industry developed and produces approximately one-fifth of Venezuela’s oil.
The problem of accessing and bringing to market Venezuela’s vast oil reserves is not limited to the fact that most of the oil is harder to extract and refine. Bringing more Venezuelan oil to market will require rebuilding and expanding the nation’s infrastructure, which is plagued by significant disrepair, abandonment, and, in certain cases, has been stripped entirely for parts. The decrepit condition of the country’s oil infrastructure is the result of decades of underinvestment, terrible mismanagement by PDVSA, the state-run oil company which owns majority control of the nationalized resource, corruption throughout the government, and the loss of expertise, which resulted from the nationalization of the industry and the replacement of oil workers with political loyalists. Additionally, although Chevron has been present in Venezuela for decades, there are outstanding debts owed to Exxon Mobil and ConocoPhillips, whose oil assets were nationalized in 2007 by former President Hugo Chavez, which, if not reconciled, could dissuade further investment by oil majors. This real concern was exemplified by Exxon Chairman and CEO Darren Woods’ White House address, where he stated that:
“If we look at the legal and commercial constructs—frameworks—in place today in Venezuela, today it’s uninvestable. And so significant changes have to be made to those commercial frameworks, the legal system, there has to be durable investment protections, and there has to be a change to the hydrocarbon laws in the country.”
Furthermore, although Operation Absolute Resolve demonstrated that the US military can operate within Venezuela with impunity, Secretary of Energy Christ Wright stated that, “we [the United States] are not going to get involved in providing on-the-ground security.” Without security guarantees, it remains uncertain what immediate or even long-term changes will stick in Venezuela. Although interim President Delcy Rodriguez has stated that Venezuela will enter a new era of tolerance and cooperation, it is highly uncertain that the political reforms under discussion will last.
Sanctions on Venezuela’s Oil
Venezuela’s oil sector has been specifically targeted by sanctions since 2019, with earlier sanctions on individuals dating back to 2015. As the largest share of the government’s GDP, oil revenue was key to both Chavez’s and Maduro’s ability to maintain control of the country. Therefore, the United States imposed a series of sanctions that limited Venezuela’s ability to sell its oil through legal channels. This action led to the expansion of a shadow fleet of generally uninsured and unregistered vessels destined for countries such as China and Cuba, which have no qualms purchasing discounted and illegal oil; this shadow fleet is utilized globally by other sanctioned nations such as Russia and Iran to circumvent American sanctions.
Building upon the national security emergency declared by Executive Order 13692 (2015), and the existing sanctions established by Executive Order 13808 (2017), Executive Order 13827 (2018), and Executive Order 13835 (2018), Executive Order 13850, first released in November 2018, was expanded in January 2019, to include those operating within Venezuela’s oil sector. This immediately impacted the distribution of upwards of 500,000 barrels of Venezuelan oil, a sizable portion of the country’s annual production, given its decreased output, which resulted from socialized control.
These sanctions have significantly affected Venezuela’s ability to export its oil to the global market, which has been beneficial; however, if the United States intends to oversee Venezuela’s future production and sales of oil, lifting these sanctions may be required. However, lifting the sanctions may occur only after certain political and economic guarantees are agreed upon. Such examples include, but are not limited to, ensuring that transparent democratic processes are established and protected, there is a legitimate effort to curtail political corruption, and an end to the extensive human rights violations and continued oppression that have plagued Venezuela under the recent regimes.
Conclusion
With the world’s largest proven oil reserves, Venezuela has the potential to become a significant oil producer. Decades of corrupt socialist control left the people of Venezuela impoverished and abused, while sending the nation itself, its infrastructure specifically, into ruin and disrepair. Removing Maduro from power has opened the door to a free and prosperous Venezuela with proper, transparent stewardship. The reality of accessing Venezuela’s oil and bringing it to market in a meaningful way has sparked an important debate. Although the country’s oil is abundant, the majority of it is heavy crude, making it technically challenging to extract and refine. Furthermore, although Maduro has been removed from power, it remains to be seen whether or not the nation will embrace a new path or fall victim to past and destructive socialist habits. Additionally, although there are sizable pockets of light-to-medium crude that can be extracted more easily than heavy crude, the infrastructure to do so is severely dilapidated, and the capital required to fix it will be extensive. This challenge is a major factor in American oil majors’ decision-making, along with the realistic timeline given the political uncertainty.
The problem of accessing Venezuela’s oil isn’t whether or not it will be in three or seven years, it is that the required capital investment, infrastructure repair, and resource extraction, will only take place when the new government demonstrates that is is in fact transparent and trustworthy and is willing to pursue genuine reforms, which, given Venezuela’s history, is difficult to predict. The only way to guarantee many of the requirements the private sector is asking for on an expedited timeline would be for the United States military to establish a permanent presence in Venezuela, which would likely be very unpopular; the current administration has already said it is not looking to do so.
