US Bets on Venezuela Oil as Trump tries to revive the energy industry in the country

The US is becoming more reliant on Venezuelan crude, and the imports of the South American nation are at their highest point in years. However, even with the efforts of Washington to entice investment, American oil companies have been hesitant to invest heavily in the shattered energy industry in Venezuela.

President Donald Trump has been unable to convince US energy executives to spend a lot of money in Venezuela after Washington seized and arrested Nicolás Maduro earlier this year. The pressure on oil executives by the public did not yield much results and the talks with the successor of Maduro, Delcy Rodriguez, did not yield much investment that the administration had anticipated.

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The ousting of the long time leader in Venezuela was easier than restoring the oil industry in the country.

This may change after the announcement on Friday that the United States has accepted to own majority stake in a new joint oil venture with a Venezuelan energy company.

The US will have a 55 percent stake in the venture under the agreement, as a White House official put it, with the Venezuelan side having 45 percent. The deal involves a 100-year lease of an oil field that has large reserves.

The agreement would be a major change in how Washington handles the energy industry in Venezuela and may also provide US oil companies with more confidence to invest in the nation.

The Venezuelan Oil and its significance to the US

Venezuela has gained a greater significance to US energy security.

The American crude imports in Venezuela have increased drastically this year to about 600,000 barrels per day. That is why Venezuela is the second-largest importer of crude to the United States, after Canada, according to the US Energy Information Administration data.

The new venture could deepen that relationship. Venezuela has a proven crude reserve of about 303 billion barrels, and the new company would have about 65 billion barrels.

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Despite the fact that the United States is the largest producer of crude oil in the world, and a net exporter of petroleum products, it still imports large amounts of crude oil due to the fact that not all American refineries are designed to process the same type of oil.

The US crude production is mostly light and sweet, which is especially good in the production of gasoline and other refined products. Venezuelan crude, on the other hand, tends to be heavy and sour, which is why it is well adapted to products like diesel, asphalt and industrial fuels.

A large number of US refineries were either built or altered to handle heavier crude, such as Venezuelan oil. A large part of that refining capacity was built up in the days when Venezuela was a large supplier of crude to America.

More Venezuelan imports would thus enable certain US refineries to run more efficiently

The significance of those supplies has increased even more after the disruption of the world oil markets due to the war with Iran that has impacted a large part of the global oil supply. The United States has been called upon more and more to assist in supplying nations that are experiencing shortages of refined fuels, especially diesel and jet fuel.

More Venezuelan crude would also assist Washington to replenish the Strategic Petroleum Reserve, which has been at its lowest point since the early 1980s due to releases meant to counter any disruption in the world oil supplies.

The Challenge of Attracting Investment

Since the change of government, Venezuela has produced more oil, although the production is still significantly lower than the historic levels in the country.

The country is currently producing around 1.2 million barrels of crude per day, according to Luisa Palacios, a former Citgo chair and managing director at Columbia University’s Center on Global Energy Policy. That is a growth of about 150,000 barrels per day since the start of the year.

Nevertheless, production is still far short of the estimated 3.5 million barrels per day that Venezuela was producing prior to the socialist revolution in the country in the late 1990s.

Years of underinvestment, poor management and deteriorating infrastructure have severely damaged Venezuela’s oil industry. It would take billions of dollars in foreign investment over several years to restore production to previous levels.

Chevron is the US oil giant that has a long history in Venezuela, and the majority of other American energy companies have been hesitant to invest heavily in the country.

Political uncertainty, corruption, crime and weak institutions are still a big issue to potential investors

The new US accord may still offer some relief. The direct participation of Washington in a Venezuelan oil project can help to mitigate some of the legal and political risks that have deterred American firms to venture into the market.

Andy Lipow, president of Lipow Oil Associates, indicated that the arrangement has the potential to speed up investment by locating large projects under a US legal framework.

Chevron may be one of the companies that are in a good position to take advantage of the changing environment. Nevertheless, analysts warn that a significant rise in Chevron investment would not suffice on its own to revive the production of Venezuela to its previous high.

Oil companies also have to balance Venezuelan projects with investment opportunities in other countries, i.e. any significant increase in production will probably require years, not months.

The Implications of the Deal on Venezuela

Venezuela has a massive economic reason to rejuvenate its oil industry.

The economy of the country has been ruined by decades of mismanagement, falling production and political instability and the recent earthquake has further complicated the situation of the government and its people.

The Venezuelan government has liberalized the oil industry to more involvement of the private sector, yet investors still insist on more legal and political guarantees before they can invest huge sums of money.

The new deal may give the government investment and political credibility, but its short-term financial effect is unlikely to address the larger economic and humanitarian issues in Venezuela.

In the case of Venezuela, though, the oil industry is the key to any long-term recovery. The nation requires more output, foreign investment and stable oil earnings to fund the rebuilding of infrastructure and to deal with its broader economic crisis.

The US-Venezuela oil relationship is thus not just a business deal. It may turn out to be a significant test of whether Washington can assist in reviving the energy sector in Venezuela and at the same time gain a significant source of crude to American refineries.