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Inside Venezuela’s Contradictory Oil Industry

by SuperiorInvest

According to 2022 BP Statistical Review of World EnergyVenezuela has more proven oil reserves than any other country in the world. Venezuela’s 304 billion barrels of proven reserves narrowly surpass Saudi Arabia’s 298 billion barrels. Both are well ahead of US proved reserves of 69 billion barrels.

But the top 3 oil producers in 2021 were the US with 11.1 million barrels per day (BPD), Russia with 10.5 million BPD and Saudi Arabia with 9.4 million BPD. Venezuela was far down the list at 25th with 605,000 BPD.

Venezuelan heavy oil is particularly prized by US refiners. How is it that a country with so much oil produces so little? And why has the country’s oil production fallen by more than 75% over the past decade?

One of the reasons for the decline of Venezuela’s oil industry is that many countries – including the US – have imposed various sanctions on Venezuela over the years. Most recently, the Trump administration placed Venezuela’s oil sector under penalty in 2019.

But the steep decline that preceded Trump’s sanctions was largely the result of Venezuela’s own policies.

During the first decade of this century, oil prices skyrocketed. From an annual average of $26 per barrel in 2002, global prices reached $80 per barrel in 2007. Venezuela’s government, led by the late Hugo Chávez, sought a greater share of the revenue as investments by international oil companies began to pay off. The government was already siphoning a significant amount of money from the oil industry to pay for social programs, but it was not enough.

Venezuela has demanded changes to agreements made by international oil companies that would give PDVSA majority control over projects. ExxonMobil
and ConocoPhillips
he refused and as a result their property was expropriated. These expropriations were later declared illegal and both companies were compensated.

Most of Venezuela’s proven oil reserves consist of extra heavy oil in the Orinoco belt. The development of this oil requires a higher level of technical expertise that international companies have. However, the consequence was that most international companies were essentially thrown out of the country. Furthermore, in 2003 the Chávez government fired many experienced PDVSA employees and filled those positions with Chávez loyalists.

The net result of the loss of expertise, international sanctions, the inability to reinvest in the oil industry, and falling oil prices in 2015 led to the sharp decline seen in the image above.

This drop in production hit American refineries in particular. Venezuelan oil is heavy, meaning it requires further processing in refineries. But US refiners have invested billions of dollars in processing heavy crude. This oil is sold at a discount to lighter oil, and as a result refineries make more money by processing this oil into finished products.

However, the U.S. government recently eased some of the sanctions and allowed Chevron to expand production in a joint venture with PDVSA and ship that oil to the U.S. This was reported by the Reuters agency Last week, Chevron received a license from the US Treasury Department that will allow it to ship more than 100,000 BPD of Venezuelan crude to the US this month.

The deal may finally help Venezuela boost oil production after more than a decade of decline. On paper, Venezuela alone could meet global oil demand for almost a decade. At the same time, the country could become rich. But it has to do.

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