ROI-Trump plan risks derailing Venezuela oil recovery: Bousso

The plan of President Donald Trump to gain direct U.S. entry to Venezuela's vast reserves of oil could end up derailing the long-awaited revival in the South American country's energy industry by stifling the competition, distorting the markets and deterring foreign investment.

Washington would acquire a 35% stake in North American Blue Energy Partners, a private oil company controlled by Alejandro Betancourt, a Venezuelan businessman. The company would be granted a?100-year lease on 17 Venezuelan oilfields with estimated reserves of 65 billion barrels.

The?U.S. The?U.S.

NABEP would become the second largest private oil company in the world by reserves behind Saudi Arabia's National Oil Company. NABEP currently produces 170,000 barrels of oil per day. It says that it wants to increase production to over 1 million barrels per days in the near future.

The Trump administration claims that the agreement is an important part of their "three-part program of stabilization and reconstruction" for Venezuela following its removal of Nicolas Maduro as president in January. The White House says that the agreement will allow the U.S. to create "new robust and strategic supply chains" throughout the Western Hemisphere. This will enable Washington to replenish its depleted strategic oil reserves, reduce fuel costs, and promote "revitalization".

Venezuela's opposition, as well as Democrats in the U.S. have already criticized the proposal. Some call it modern-day colonialism while others argue that the proposal resembles election-year policies. Trump is under increasing pressure to address cost-of-living issues ahead of November's crucial midterm elections.

It's obvious that this proposal is fraught with political, legal, and commercial dangers, including the risk of sabotaging the recovery?it seeks to encourage.

A TWO-TIERED SYSTEM

The U.S. never had direct control over the oil resources of another country. Baghdad was still in charge of oil decisions even after the 2003 U.S. invasion.

Currently, it appears that such an arrangement is difficult to implement. The U.S. lacks the legal mechanisms to purchase and sell crude oil at prices below market.

A determined administration may try to rewrite rules, create new purchasing structures or government-backed trading systems to facilitate this arrangement.

The greater problem is that such a framework might hinder the development of Venezuela's broader?oil industry.

Washington could create a two-tiered Venezuelan market by granting NABEP privileged commercial terms.

The companies competing with NABEP would suffer a structural disadvantage, as they would have to purchase and sell crude oil at the current market price, while the preferred competitor would get privileged access to the market.

Investors might wonder if future projects are going to compete on the basis of economic merit, or based on political connections. They may also question if the rules will change as Washington and Caracas' leadership changes. Oil companies that are considering large-scale investments will avoid this kind of distortion.

Chevron, along with several other energy companies from around the world, are expected to sign new agreements this week to develop projects in Venezuela. These investments are based upon the country's current hydrocarbon framework which was revised in order to attract foreign capital following Maduro’s ouster.

This new source of insecurity could dampen the investment appetite just as Venezuela is trying to reestablish its status as a major producer of oil.

Here Today, Gone Tomorrow

It will not be easy to restore Venezuela's oil sector. After the nationalisation of the oil sector in 2007, Venezuela's production plummeted due to years of underinvestment and operational mismanagement, as well as?corruption. The U.S. sanctioning also contributed to this decline. The country's oil production has dropped from 3.5 million barrels per day in the 1990s, to around 1 million barrels per day today.

According to estimates by ROI, production is initially likely to return to 1.5 million bpd in the next two to three years as investments pick up and existing fields get revived. This would represent just a little over 1% global supply today.

According to Rystad Energy's consultancy, Venezuelan production is expected to exceed 3 million barrels per day by 2050. The majority of this growth will come from the Orinoco Belt, which has a wealth of natural resources.

But expanding production is just one part of the problem.

After decades of neglect, the country is unable to provide the necessary processing facilities, pipelines and storage terminals as well as the export capacity, power infrastructure, and export capability required for a large-scale recovery. Today, many facilities are in a state of complete disrepair and require costly renovations or reconstruction.

It will take tens or hundreds of millions of dollars to rebuild those assets. And, it is essential that multiple international companies are willing to invest capital over several years.

The introduction of a new layer political 'uncertainty' in Venezuela, a country which has nationalized its foreign oil assets two times in the last decade, could make it more difficult to secure financing.

The plan to speed up the recovery of one the world's biggest oil reserves could actually slow it down.

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(source: Reuters)