The silver lining for oil in Venezuela's crisis

Country may disappear as a significant factor in the oil market for years

View of Caracas from the Petare neighbourhood in Caracas, Venezuela. The country’s future is uncertain. Getty

In his tale of the last days of Simón Bolívar, liberator of Venezuela from colonialism, Gabriel García Marquez has his character say, “the United States is omnipotent and terrible, and its tale of liberty will end in a plague of miseries for us all”. The US’s latest attempt at decisive action in Venezuela’s politics is intended to end such a plague, using its power over oil.

The US has recognised opposition politician Juan Guiado as the duly-elected president, instead of Nicolas Maduro. Unlike its action on Iran, Washington is supported this time by the European parliament and several other governments. How things play out now is uncertain. Mr Maduro may swiftly be toppled, there may be a protracted and damaging civil conflict, or he may survive with military support as the economy crumbles further.

To undermine the Maduro regime, the White House has imposed sanctions preventing American parties from dealing with national oil firm Petroleos de Venezuela SA (PdVSA). Citgo, its US refining and marketing subsidiary, can continue operations but cannot remit funds to PdVSA. Venezuela could possibly still sell to the US, its key market, via intermediaries, and buy the light oil it requires for blending with its own heavy crude for export. But, as with the sanctions on Iran, banks, insurers and shipping firms are likely to over-comply with sanctions and severely restrict business with Caracas.

The loss of up to 1 million barrels per day will affect the world market. Though there is plenty of spare capacity elsewhere, because of Opec’s cuts, US refiners prefer heavy Venezuelan oil to blend with domestic light sweet crude. Of the other producers of heavy, high-sulphur oil, Iran is already under sanctions, and other Opec countries, Russia and even Canada are restricting their output to rebalance the market.

There is pessimism over how fast the Venezuelan oil industry would recover under a new government. There will first be a messy and complicated default, with the new administration likely seeking to repudiate much of the debts incurred under Maduro and his predecessor, the architect of the “Bolivarian Revolution”, Hugo Chavez, who died in 2012.

Official reserves of 303 billion barrels are the highest in the world, but consist mostly of the Orinoco extra-heavy crude. Still, some 70 billion barrels of conventional oil are not far short of the reserves of Russia or the UAE.

Under Mr Chávez, PdVSA was politicised, with mass firings of workers who participated in the general strike of 2002-3, loaded with debt and entrusted with widespread social missions, and petroleum service companies were nationalised. Production fell from about 3.3 million barrels per day to about 2.3 million bpd, but then stabilised and even increased a bit from 2009 to 2013.

But it was under Mr Maduro that collapse really set in, with a plunge from 2016 onwards to just 1.15 million bpd in December. Power shortages became endemic, along with an economic plummet that led to mass malnutrition, the world’s second-highest murder rate, empty supermarkets and a lack even of toilet paper. The country’s main oil refineries barely function, pipelines leak, equipment is looted, and creditors have sought to seize its oil terminals in the Caribbean.

A new Venezuelan government may come in with substantial international goodwill, but will have no money. China has made $70 billion of oil-backed loans, Russia $17bn, with part from state oil firm Rosneft secured against a 49.9 per cent stake in Citgo, which is used as an outlet for Venezuela’s heavy oil. Beijing will probably adapt itself to any new situation; Moscow, as a staunch supporter of the current regime, and with less to offer, may not be so welcome.

So international, mostly western, investment will be vital. Inevitably service companies such as Halliburton and Schlumberger, then the US supermajors ExxonMobil, Chevron and ConocoPhillips, will seek to return given their long history there.

This will be politically controversial, given the appearance that the US is only intervening in the country for its oil. The Trump administration, with its disdain for human rights and its fossil-fuel interests, is not a disinterested observer, and it is not likely to support national reconciliation. But Mr Maduro’s bumbling kleptocracy has opened the country to such interference, particularly from the Kremlin, which has its own cynical power game to play.

Venezuela’s crisis might ease the pressure on the rest of Opec for now. It could disappear as a significant factor in the oil market for years.

Yet, if a new government comes to power relatively peacefully, establishes its control, reconciles former Chavistas and manages to balance the interests of business and the poor, it would avoid the war damage and factional fighting that have bedeviled post-revolutionary Libya. Many skilled Venezuelan professionals, who have left to work in the oil industries of Colombia, the US and Canada, would return to a resurrected PdVSA.

Under these circumstances, Venezuela’s output might recover relatively quickly to around 2 million bpd, the level of 2016, through basic maintenance and restoring proper electricity, export operations and light oil for blending. Boosting production much further would take longer. Lighter oil fields, such as the giant El Furrial, have suffered badly, while the heavy oil operations of the Orinoco Belt actually performed well until recently.

This may be the last chance for Venezuelans and their oil: a few more years of Mr Maduro will wreck the country and its petroleum industry irreparably. A relatively peaceful transition to a new government offers the chance for recovery. Then, from within their own ranks, other Opec states would face a powerful rival.

Robin M. Mills is CEO of Qamar Energy, and author of The Myth of the Oil Crisis