President Joe Biden’s decision to authorize U.S. supermajor Chevron to recommence lifting crude oil in Venezuela breathed hope into President Nicolas Maduro’s plans to rebuild the country’s shattered oil industry. The harsh January 2019 sanctions imposed by Biden’s predecessor Donald Trump cut Caracas off from global energy and financial markets, nearly bankrupting Venezuela. That caused petroleum production to spiral lower and Venezuela’s economic as well as humanitarian crisis to accelerate, further impacting Caracas’ finances. For these reasons, the national oil company PDVSA is incapable of mustering the immense amounts of capital required to rebuild Venezuela’s heavily corroded energy infrastructure. This will impede efforts to tap into the substantial wealth held by Venezuela’s vast petroleum reserves, which at 303.5 billion barrels are the world’s largest, and rebuild a shattered economy. There are fears, as the devastating environmental catastrophe unfolds in Venezuela, those immense hydrocarbon reserves will become a costly stranded asset.
In as little as two decades, Venezuela’s petroleum output has collapsed. Political purges, an exodus of skilled labor, chronic malfeasance and corruption, harsh U.S. sanctions and a dire lack of capital are all responsible for Venezuela’s oil industry falling into wreck and ruin. After peaking at an annual record of 3.1 million barrels of oil per day for 1998, prior to Hugo Chavez’s presidency, the OPEC member’s petroleum output has plunged to levels not seen since before World War Two. Annual average production plummeted to an 80-year low of 569,000 barrels per day for 2020, while a year later, it only averaged 636,000 barrels daily and remains at around that level, with Caracas reporting 693,000 barrels per day for November 2022. This means Venezuela’s oil output is around a third of the 2.04 million barrels per day pumped during 2017, which was the last year where output exceeded that amount.
As a result, Venezuela’s oil exports, which are one of Caracas’ few sources of hard income, have foundered. This is because Trump’s 2019 sanctions prevent Venezuela from shipping petroleum to the U.S., a key market that was receiving over 40% of the OPEC member’s oil exports. By 2021, Venezuela’s oil exports had plummeted to a multi-decade low of 448,000 barrels per day, most of which, according to OPEC data, were shipped to Asia, where China is a key buyer regardless of U.S. sanctions. This brutally impacted Caracas’ fiscal income and further exacerbated Venezuela’s economic collapse because petroleum is responsible for 99% of export income and a quarter of gross domestic product. For 2019 alone gross domestic product contracted by a catastrophic 27.7% and then by a ruinous 30% during 2020.
This triggered a severe financial crisis for Caracas, causing any available capital for repairs to Venezuela’s heavily corroded infrastructure to all but dry up, further weighing on plans to expand oil production. That is not only responsible for weak production volumes but also PDVSA’s inability to hit the targets set by Maduro, thereby preventing Caracas from exploiting Venezuela’s tremendous oil reserves to generate the tremendous funds required to rebuild a shattered economy. Indeed, the condition of Venezuela’s petroleum infrastructure is so dire that pipelines, storage facilities and intermittently running refineries regularly spew oil and noxious fumes into the environment. Various sources claim PDVSA, due to a chronic lack of resources and malfeasant management, makes little effort to clean up spills, further aggravating the unfolding ecological disaster. The environmental harm is so severe it will take billions of dollars and years to clean up existing spills, with the damage in many places, such as Lake Maracaibo, considered irreversible.
These events are adding to the tremendous burden associated with rebuilding Venezuela’s energy infrastructure so that production can be restored, and the country can benefit from its vast petroleum reserves. Estimations vary, but external experts believe it will take $110 billion to $250 billion invested over a decade to rebuild Venezuela’s energy infrastructure and restore production to over 2 million barrels per day. Then there is the need for skilled labor and crucial parts that, along with that substantial capital, can only be provided by Western oil supermajors which, because of U.S. sanctions, are prevented from investing in Venezuela. Even Washington’s decision authorizing Chevron to restart lifting oil at its joint ventures with PDVSA will fail to lift production and generate the tremendous investment required. You see, there are strict conditions imposed on Chevron including banning payments to Caracas and expanding operations beyond those that existed in January 2019.
Plans to exploit Venezuela’s considerable oil wealth are further complicated by around three-quarters of the country’s reserves being predominantly comprised of very sour extra-heavy petroleum, which with an API gravity of 8.5 degrees, does not flow when extracted. This type of oil must be upgraded, where it is mixed with diluent, a form of ultra-light petroleum so that it can flow to be transported and processed. For these reasons, lifting extra-heavy oil consumes copious amounts of energy, making it highly carbon-intensive to extract. The Carnegie Endowment rates Venezuela’s Merey grade, which is the primary export blend, as one of the most carbon-intensive oil varieties produced globally, emitting 604 kilograms of greenhouse gases per barrel produced. Venezuela’s Tia Juana and Hamaca grades produce even more greenhouse gas emissions to extract, with only Canada’s oil sands ranked as more carbon-intensive.
Heavy sour crude oil blends like Merey, which has an API gravity of 16 degrees and 2.45% sulfur content, are costly, complex and carbon-intensive to refine into high-grade low emission fuels. Only refineries specifically configured to process those types of petroleum can accept its as feedstock, thereby limiting the market. As a result, heavy and extra-heavy sour crude oil is becoming increasingly unpopular in a world where governments are aggressively decarbonizing their economies and oil companies are seeking to become net-carbon neutral. It is for these reasons, along with strict U.S. sanctions, that energy supermajors TotalEnergies and Equinor chose to exit Venezuela during mid-2021 despite the decision incurring substantial losses for both companies. Those factors will deter foreign oil companies from considering whether to invest in Venezuela, which is already considered an extremely risky jurisdiction.
While there are signs that the Biden White House intends to take a more nuanced approach to a Maduro-led Venezuela, existing tough U.S. sanctions remain the key deterrent to foreign energy investment. No western petroleum company will risk the severe penalties which accompany those sanctions. That, along with existing geopolitical hazards, notably a corrupt autocratic regime with a history of nationalizing oil assets, essentially makes Venezuela uninvestable for foreign oil companies. This means the pariah state will not receive the hundreds of billions of dollars and technical expertise crucial to rebuilding a shattered hydrocarbon sector. PDVSA lacks to the capital needed to refit ramshackle industry infrastructure, making it near-impossible for a state-controlled oil company to grow petroleum output above current volumes. Any efforts to rebuild Venezuela’s petroleum operations are complicated by the immense environmental crisis unfolding in Venezuela and threatening an ecologically sensitive region. For these reasons, Venezuela’s substantial oil reserves could very well transition from a source of considerable wealth to become a costly stranded asset that will leave a legacy of environmental destruction for decades to come.