Despite exporting less than 1% of the world’s supply of oil, Venezuela has been a key focal point in the energy market for decades.
Why? Because the country claims to have the largest reserves of crude oil in the world.
According to figures widely cited throughout the media and the oil industry itself, Venezuela is sitting on around 300 billion barrels’ worth of “proved” oil, meaning barrels that have, in theory, been confirmed as commercially viable by conclusive testing or actual production.
This compares to Saudi Arabia’s proved reserve estimates of around 260 billion to 270 billion barrels and the much more meager 45 billion barrels in the US.
This is a self-reported figure, however, and is published — but not verified — by the Organization of Petroleum Exporting Countries, or OPEC, of which Venezuela is a founding member. Holistic and conclusive evaluations by independent experts have never been conducted.
And up until 2007, Venezuela’s self-reported proved reserves sat at around 100 billion barrels, according to data reported by OPEC. By 2013, that figure was updated after a reclassification of fields controlled by the country’s state-run Petróleos de Venezuela, S.A. (PDVSA). Venezuelan production was roughly flat during the same period.
“Venezuela has not audited the reserves, only the resources in place,” said 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 production viability.
In reality, Monaldi said in a LinkedIn post, Venezuela’s recovery rate for its oil 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.”
‘The market does not need new barrels’
Venezuela, once the strongest oil-producing nation in the world by volume, has seen its industry crumble under the leadership of Hugo Chavez and Maduro, especially following Chavez’s total nationalization of the industry under PDVSA.
Corruption, mismanagement, brain drain, and a lack of repair and upkeep work on critical infrastructure, including throughout Venezuela’s flagship Orinoco Heavy 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 a lack of electricity availability pose significant hurdles,” according to energy analysts at Jefferies.
The reclassifications that roughly tripled Venezuela’s proved reserves happened when oil was at or near $100 per barrel, making any oil discovery more attractive than today, when Brent crude (BZ=F) — the international pricing benchmark — is trading in the low $60s.
“The market does not need new barrels right now,” said Robert Yawger, director of energy futures at Mizuho Securities, adding that “the big oil majors may be hesitant to increasing production” when West Texas Intermediate (CL=F), the US crude benchmark, is changing hands below $60 per barrel.
President Trump said he expects the US oil industry to spend “billions” to rebuild Venezuela’s infrastructure.
But to return Venezuela to its production highs of the early 2000s of around 3 million barrels per day would likely take around $180 billion in extra funding between now and 2040, according to energy intelligence firm Rystad Energy.
And Rystad estimates that international investors and operators would need to commit at least $30 billion to $35 billion of that capital within the next two to three years. The firm estimates that more than $50 billion of investment would be needed over the next 15 years just to maintain Venezuela’s current output.
“Seizing oil reserves that are in the ground is completely different than actually producing those reserves and getting it to market,” Andy Lipow, president of energy consultancy Lipow Oil Associates, told Yahoo Finance.
In Rystad’s view, the 300 billion barrel estimate for Venezuela’s reserves is “almost irrelevant as there are almost no global energy system scenarios where this entire amount needs to be produced in future.” More than two-thirds of those reserves would also require prices above $100 a barrel to be viable, the firm added.
To be sure, it’s not that Venezuela isn’t rich in the right geological formations for oil. The Orinoco Heavy Oil Belt, in the country’s central region, takes the spotlight as the largest formation. Outside geologists have largely arrived at a consensus that the Orinoco is one of the largest hydrocarbon deposits in the world.
Venezuela also boasts the Maracaibo and other basins in the east of the country. Outside experts have estimated that those areas also contain plenty of oil, but they remain untapped at the scale of the Orinoco.
“These are real opportunities for companies who 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 is there in the quantity Venezuela says it is, it might not matter for Big Oil.
An additional problem is the kind of oil extracted from Venezuela’s reserves, which is largely a heavy, sulfurous or “sour” grade that doesn’t flow as nicely up the well bore to reach the surface and, because of its high sulfur content, more quickly corrodes equipment. Once this oil is out of the ground, it’s too thick in its natural state to be transported through pipelines, so it must first be converted to liquid.
This makes refining the oil a more complex, more time-intensive, and more expensive process than what is required for the lighter, sweeter variants like the ubiquitous WTI grade in the US.
Even for Chevron (CVX), the only US oil company that has consistently operated in Venezuela for the past decade, the path to legitimate success in Venezuela is likely to be a long one.
“[Chevron] is seen as a key beneficiary of the potential ‘takeover’ of Venezuelan oil reserves,” Mizuho energy analyst Nitin Kumar wrote in a client note.
Yet, he added, “additional growth in volumes may require capital investment that, while at the lower end of the global supply curve, still requires a better financial framework to assure competitive returns for the company.”
President Trump has tasked Secretary of the Interior Doug Burgum and Secretary of Energy Chris Wright with pitching Venezuelan investment to US oil companies, asking the US majors to spend more money and take more shots in the dark during a period of de-risking and severe capital discipline for the US oil majors.
It’s likely to be a tough sell.
