Bousso: Trump offers US oil companies in Venezuela a poisoned cup

Donald Trump, the president of the United States, is offering U.S. companies an opportunity to revitalize Venezuela's vast and derelict petroleum industry. This is an offer that they might not want to accept.

After the

U.S. military ouster

Representatives of the Trump Administration plan to meet with oil executives this week in order to discuss increasing Venezuelan oil production.

reported

Monday is a holiday.

Exxon Mobil and ConocoPhillips may find it attractive to tap Venezuela's vast reserves of oil - the largest in the world at 300 billion barrels or roughly one-fifth the global stock.

Venezuela has a huge potential to increase its oil production. After years of mismanagement and U.S. sanction, Venezuela's oil production has plummeted from a high of 3.5 million barrels a day in the 1970s when it accounted for around 8% global supply to less than 1 million bpd, or less than 1%, of today's supplies.

This opportunity has only come up a few times in recent decades. It was after the collapse of the Soviet Union, in the early 90s, that Western oil companies scrambled for cheap oil and natural gas assets. And it was again, in the decade following Saddam Hussein's fall in Iraq, when energy firms did the same. This could be especially appealing at this time, when company boards are approving?billions of investment in order to find new resources in the rush to increase their market share.

Trump's plan is not a sure thing.

There are a number of risks below ground. First, the majority of Venezuelan oil reserves located in Orinoco Belt are classified as?heavy and extra-heavy. These viscous oils must be diluted with diluent to make lighter oil that can be extracted, transported, and processed. This increases the cost of production.

This energy-intensive process increases the carbon footprint for these heavy grades.

According to estimates from Wood Mackenzie, breakeven costs for the Orinoco belt's key grades are already above $80 per barrel. This puts Venezuelan oil on the high end of the cost scale globally for "new production". The average cost to break even for heavy oil produced in Canada is around $55 per barrel. Exxon has set a breakeven price of $30 per barrel for its global oil production in 2030, largely due to low-cost fields?in Guyana and U.S. Permian basin. Chevron also has a similar target. Conoco, on the other hand, has a plan that will generate cash flow for years to come even if oil drops to $35 per barrel. Oil is currently trading at about $60.

Energy boards are increasingly supporting greater exploration, but insist that it be done in a way that is cost-effective in light of the rising global supply and the uncertainty surrounding the energy transition.

It may be difficult to convince U.S. oil majors to invest in billions of dollars to extract Venezuelan barrels that are expensive.

Carlos Bellorin is an analyst with Welligence Energy. He says, "The opportunity must compelling enough to offset substantial political risks that will persist for years to come." Venezuela does not seem to be a good fit at the moment. This could change, however, if the new, industry-friendly Venezuelan Government were to implement changes in taxation and royalties policies. That's a big if.

Above-Ground Risks

Of course, oil companies are not strangers to political risks. In the last few decades, oil companies have had to deal with sudden regime changes, social unrest, and conflicts in hotspots like Libya, Iraq and Venezuela.

Even by these standards, Venezuela's?current situation - with its highly insecure power transition – looks more trouble than it is worth.

Oil companies won't make any major commitments until Caracas is able to gain the trust of international banks and investors. It may be tempting to buy assets at pennies on the dollars, but you'll find it less appealing if the contract isn't trustworthy.

In recent years, U.S. majors went to great lengths in order to distance themselves, and their investors, from American foreign policies. They emphasized their independence, and aimed to convince them that they were solely focused on shareholder returns. Thus, they will be reluctant to appear as if they are doing the president's bidding. Trump said on Sunday he had spoken to the executives of all major U.S. companies about his plans to invest in Venezuela before and after Maduro was captured. This claim has been refuted by company executives.

Trump's opposition also poses risks to companies. These can be very large at a moment when the government is becoming more involved in the economy. The U.S. The?U.S.

Will they pour billions into a nation that has been dubbed the poster child of corruption and economic mismanagement for years? This might be difficult to accept.

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(source: Reuters)