On Friday, U.S. President Donald Trump rounded up several oil executives in Washington. He goaded them to announce the type of big bets on Venezuela’s ailing oil industry. Venezuela is now producing less than 1 million barrels of oil a day. This is an unexpected plunge from its long-term production record given that the country holds some of the largest oil reserves in the world. The meeting served to shine a light on the multifaceted challenges of re-entering this market. It has suffered from decades of disinvestment and mismanagement, leaving behind dangerous liabilities.
Venezuela’s oil production has dropped to under 1% of the world supply. This is a stunning reversal from where it stood just a few short years ago in the global oil market. Governmental mismanagement is the single largest factor in this precipitous decline. Combined with crippling U.S. sanctions that have almost completely shut Venezuela out from international markets, these effects have intensified. Here’s the good news. Though Trump is under fire on many fronts, all hope is not lost. He’s counting on the world’s big oil companies investing a combined $100 billion—at least—to turn around Venezuela’s derelict oil sector.
Much of the fear expressed by industry leaders about the risks of Venezuelan investments came up during the meeting. As Darren Woods, chief executive of ExxonMobil, said last week, a fear exists in most companies about coming back renewed to the market.
“We have had our assets seized there twice and so you can imagine to re-enter a third time would require some pretty significant changes from what we’ve historically seen and what is currently the state.” – Darren Woods, Exxon’s chief executive
In fact, the U.S. government already is working to create a viable sales process. This proposal would put the revenue generated into U.S.-controlled accounts, creating greater oversight and security over any investments made in Venezuela. Still, analysts like those at BTIG note that few firms will want to commit to checking off big-ticket items just yet. Because of the ongoing uncertainty, they foresee investments only staying near the $50 million level.
While financial investments certainly contribute to a healthy democracy, they raise important concerns. Political dynamics have a strong impact on the reality and future of Venezuela’s oil industry. As soon as the U.S. apprehended Venezuelan leader Nicolás Maduro from his mere presence on foreign territory, he too would find himself arrested in New York. Now, Maduro’s vice president Delcy Rodríguez has intervened as the interim president. This political upheaval complicates the relationship between Venezuela and international oil firms, which have grappled with fluctuating regulations and government policies since oil was first discovered in the country over a century ago.
Bill Armstrong is president of an independent oil and gas exploration and production company. He’s particularly excited about entering the Venezuelan market, despite its many difficulties.
“We are ready to go to Venezuela.” – Bill Armstrong
David Goldwyn, president of Goldwyn Global Strategies, provided a tempered view. He noted that U.S. interlocutors are bringing some urgency to efforts to create a welcoming environment for investment. Industry participants continue to express a notable hesitation to participate.
“They are being as polite as humanly possible, and being as supportive as they can, without committing actual dollars.” – David Goldwyn
That’s when he laid out as well the industry’s reasons for not wanting to return to talks. For him, the political and economic climate just is not right.
“It’s not really welcome from an industry point of view.” – David Goldwyn
As these conversations continue, one thing is undeniably true: stimulating Venezuela’s oil sector is a big opportunity. Important obstacles need to be cleared before that happens. Sanctions, political instability and an unfortunate legacy of animosity between the Venezuelan government and foreign IOCs complicate the landscape even further. This complexity creates significant uncertainty for future investments.