ROI-Trump plan risks derailing Venezuela oil recovery: Bousso
The plan of President Donald Trump to gain direct U.S. entry to a large portion of Venezuela's oil reserves may end up derailing the long-awaited revival in the South American country's energy industry by stifling the competition, distorting the markets and discouraging foreign investment.
Washington would acquire a 35% stake in North American Blue Energy Partners (NABEP), a private oil company controlled by Venezuelan Alejandro Betancourt. The 'company' would be granted a lease of 100 years on 17 Venezuelan oilfields with estimated reserves of 65?billion?barrels.
The U.S. in exchange would receive a guaranteed 20 percent of the production at cost, and retain a first refusal right to purchase any remaining output.
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 a day 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" within 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 it is a policy for an election year. Trump is under increasing pressure to address cost of living concerns in advance of the November midterm elections.
It's obvious that the proposal is fraught with political, legal, and commercial risks. Not to mention the threat of halting the recovery that 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. Government lacks the legal mechanisms to purchase and dispose crude oil at prices below market.
A determined administration may try to rewrite rules, create new purchasing structures, or create government-backed trade mechanisms to facilitate this arrangement.
A framework like this could impede the development of 'the wider Venezuelan petroleum sector.
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 be forced to purchase and sell crude oil at the current market price, while the preferred competitor would receive 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 on the country's 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. This was compounded by U.S. sanction. 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 likely to initially recover to?around 1,5 million bpd in the next two to three years as investment picks up and existing fields get revived. This would be just 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.
Years of neglect has left the country without the necessary processing facilities, pipelines and storage terminals. It also lacks the export capacity, power infrastructure, and export capability to support an extensive recovery of output. 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 a period of several decades.
A new layer of political uncertainty in Venezuela, a country which has nationalized its foreign oil assets two times in the last decade, could make securing necessary funding more difficult or costly.
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)
