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 will meet with oil executives this week 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 over 300 billion barrels or about one-fifth the global stock.

Venezuela's oil production has a huge potential for?increase?. After years of mismanagement, and U.S. sanction, Venezuela's oil production has plummeted from a high of over 3.5 millions barrels per day in the 1970s when it accounted for around 8% global supply, to less than 1 million barrels per daily last year. This is less than 1% today.

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 a particularly attractive opportunity now that company boards are approving billions of dollars in investments to find new resources in the rush to increase their market share.

Trump's plan is not a sure thing.

Under-ground risks: To begin with, the majority of Venezuelan oil reserves located in the Orinoco belt are classified as extra-heavy and 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. Costs could rise further if governments begin to tax emissions or increase existing levies.

Wood Mackenzie estimates that 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 "global cost scale" 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 located in Guyana and U.S. Permian Shale Basin. Chevron also has a similar goal, and Conoco is working on a plan that will generate cash flow for the company even if oil drops to $35 per barrel. Oil is currently trading at $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 all change if the new, industry-friendly Venezuelan Government made changes to their taxation and royalties policies. That remains 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 be willing to make major commitments until Caracas is able to gain the confidence of banks and international investors. It may be attractive to buy assets at pennies on the dollars, but this is less appealing if the contract cannot be trusted.

In recent years, U.S. multinationals have gone to great lengths in order to distance themselves, and convince investors, that they are only focused on shareholder returns. The majors will not want to appear as if they are doing the president's bidding. Trump said on Sunday that "he spoke to all the major U.S. Energy firms about his plans to invest in Venezuela before and after" Maduro was captured, but company executives denied this claim.

Contradicting Trump carries risk for companies as well, and these risks could be very large at a time where government involvement in the economic is growing 'rapidly. Oil giants in the United States will likely accept this plan at least partially by signaling a willingness for them to explore Venezuelan opportunities.

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)