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Since the Bolivarian Revolution came to power in Venezuela through Hugo Chávez’ election in 1998, its oil industry has been plagued by a myriad of political and security risks which have prevented it from developing to its full potential.
Overall, it’s estimated that the Orinoco Belt (the Venezuelan territory overlying its petroleum deposits) holds around 280 billions of barrels of heavy and extra heavy crude oil, according to the U.S. Geological Service and many international auditing and certification processes permitted by the Venezuelan government. Up until now, this had been the top reserve in the world, surpassing those of Saudi Arabia as well as Canada, the other big leaguer of non-conventional oil.
Unfortunately, though a very attractive venue for flocks of IOCs and NOCs (international and national oil companies), it has not been easy to set up shop with major investments as was once expected – all in all, current production at the Orinoco Belt doesn’t even reach 1,000,000 barrels a day. Most of the reasons for this are related to political risks which so far have no end in sight.
Oil Multinationals: Vulnerable in Venezuela
Specifically, this includes: threats to personal security for foreign expats working in the country; increasing rates of delinquency and criminality; the ongoing political turmoil and the recurrence of strikes; public demonstrations by either government or opposition sympathisers; increasing levels of hunger and scarcity of basic products; and the many loopholes for foreign personnel working for international oil companies in Venezuela to get access to the local currency.
Altogether, these problems have caused many companies previously interested in Orinoco Belt projects to decide to keep away from Venezuela. To name the most prominent: Petronas, from Malaysia, left in September 2014; Lukoil, the largest private Russian oil company left in December 2014; and Petrovietnam left at the end of 2015. Exxon and Conoco, meanwhile, have been forced to leave their former projects under the threat of having their assets nationalised and decided to take their respective cases to the international courts.
With the ongoing persistence of political and security risks in Venezuela has come financial and economic turmoil both at the macroeconomic and at the grassroots microeconomic level. There is also a painful lack of a stable and clear legal framework to fall back on amongst continuing government seizure of oil facilities and nationalisation of assets. These have made it incredibly difficult to keep up a healthy and sustainable level of oil and natural gas production in the country.
Struggles on the Home Field
Sustained political turmoil between governmental authorities and opposition parties striving for power, meanwhile, has guaranteed the decay of national oil company Petróleos de Venezuela (PDVSA) – whose production has plunged in the last decade to the point where it barely reaches 2,200,000 barrels a day, down from 5,000,000 barrels daily seen 20 years ago.
In general, the operational situation of PDVSA, the iconic company which has long been the financial tool of the Bolivarian Revolution, is worrisome. Far from a recovery, it is heavily indebted to creditors like China, Russia, and Iran, to name the most prominent. Ironically, these ‘close allies’ are now reluctant to be involved in Venezuela’s situation and are claiming for full payments of their debts to the administration under Nicolas Maduro.Internationally, Venezuela and PDVSA have not been able to fare well, even within OPEC. Because of its decaying oil production, it stopped being a voice to be heard inside the oil bloc, as it once was. The Government is now heavily dependent on high oil prices to keep sustaining big spending on social programs and the continuation of the Bolivarian Revolution, led by current president Nicolas Maduro.
Could Venezuela Get a Could Shoulder?
As for one of its main clients, the United States: even if Venezuela keeps on exporting around 750 to 800,000 barrels a day to the US, it falls way short of the 1,500,000 barrels a day it was once shipping off to US ports and terminals. This is in no small part because of the longstanding political and ideological strife between the two countries.
Now that the US has moved towards being a net shale oil and gas producer, the day that the US no longer needs Venezuelan oil at all could come sooner than expected. This will be a huge issue for Venezuela since the US has long been the biggest buyer of Venezuelan oil and also has its best-suited refineries – well-equipped for Venezuelan heavy and extra heavy oil.
It remains to be seen how this relationship evolves now under the Trump administration. With Rex Tillerson as Secretary of State the former CEO of ExxonMobil, there could be more of a bad taste in the US’ mouth: ExxonMobil was pushed out of Venezuela during Chavez’ rule, with its assets in Venezuela being nationalised and taken under international arbitration. This underscores the huge importance of political risk factors in Venezuela in the past and how could it factor in for the IOC’s still involved in Venezuela, and this is sure to influence the upcoming political dynamics in the country.