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The Trump administration has gotten increasingly aggressive in its relations
with the Nicolas Maduro government in Venezuela.
Accumulating a historic volume of US military capability in the Caribbean and
cancelling a raft of oil sector operating licenses.
Whether or not this leads to outright regime change,
it seems like we are on the precipice of something major occurring in Venezuela.
What could all this mean for Venezuela's chronically challenged but
stupendously high potential oil industry?
To help me explore this question, I'm joined today by Dr. Francisco Menaldi,
the director of the Latin America Energy Program and
the Wallace S. Wilson Fellow in Latin America Energy Policy at the Center for
Energy Studies at Rice University's Baker Institute for Public Policy.
Francisco has spent decades chronicling and analyzing Venezuela's oil sector and
brings a very welcome and encyclopedic body of knowledge to bear in our conversation.
Francisco Menaldi, welcome so much to the podcast.
>> Thank you, happy to be here.
>> Before we get into everything that's currently going on in Venezuela,
would you provide us a bit of your background, kind of how you came to focus so
closely on this on Venezuela and on the Venezuelan oil industry more broadly?
>> Sure, so I was born and raised in Venezuela from a family of immigrants from
Italy, Argentina, and I did my studies in economics and
I happened to have an internship with the Office of the Chief Economist of
the National Company, PDVSA.
And after that, I got hooked on understanding the oil sector and
also the impact of oil in the economy and the politics of the country.
And so I did my grad studies sort of focusing on those topics in the US and
eventually I went back, I created a Center for Energy Studies at a business school
there and so spent almost a decade there doing a lot of stuff.
And eventually left the country and been here in the US for
more than 12 years, the second round.
>> Very, very interesting.
So let's start with, I mean, anyone that's been following the headlines knows
that there's been a massive buildup of US military assets in the Caribbean,
the largest in decades.
Talk to me about what's currently going on in Venezuela,
what the Trump administration says it's currently doing.
>> Yeah, well, there is a lot of uncertainty exactly about what they're doing.
But as you might know, there has been sort of two different approaches within
the Trump administration over this sort of last year.
One was being negotiating with the regime led by Rick Renell and
the other one has been Secretary Rubio's push aligned with some of the other
people like Stephen Miller, etc., to sort of define the regime as a criminal regime,
as a drug trafficking and tied with gangs, etc.
And so the push has been mostly driven by drug interdiction and the like.
But of course, the amount of resources that they have deployed in the region
have signaled to a lot of experts that there's more going on,
than just the drug trafficking interdictions.
And the like but more of a regime change kind of strategy.
So how would that play out?
I mean, given that Maduro was willing to negotiate with President Trump for
Renell type of agreement to give access to US companies to the Venezuelan oil
sector and sort of limit their ties with China and Russia.
It's hard to know exactly how things are going to play out in the next few months.
But it seems likely that there will be some kinetic action and
some potential for regime change.
Yeah, so as you noted, most of the high profile events so far have been
attacks or strikes on various what the administration calls narco-trafficking
boats, various whether or not these are these are drug shipments or shipments
associated with the drug trade.
Then there is also, for instance, to your point that the line between
narco-trafficking enforcement and regime change is also thinned further by the
fact that the US Justice Department has identified Nicholas Maduro himself,
the president of Venezuela, as being some kind of kingpin in this kind of
broader organization.
They recently put, I think it was earlier this summer,
put a $50 million reward for any information or action that could
help lead to his arrest.
So again, before we go into kind of some of the oil specific,
talk about that line between the state and organized criminality in Venezuela.
Is this a convenient connection or is this just one of the realities of the
current governance structure of Venezuela that you have this kind of,
I mean, in many of these countries where you have authoritarian governments,
you have various kind of mob rule, but more in like a organized criminality rule
of these governments, is that what's happening in Caracas right now?
Like talk me through that view and how those would be connected.
Yeah, I mean, there is no doubt that increasingly over the years,
I mean, President Chavez, the predecessor of Nicholas Maduro, kicked out the DEA
from Venezuela, stopped any cooperation on narcotics with the U.S.
and with other neighboring countries.
And slowly but surely, the Venezuelan forces became involved in drug trafficking.
And it's uncertain to what extent they are integrally involved in it.
But there is this label of the cartel de los soles, meaning the cartel of the
stars because of generals being involved.
And basically, there is that perception and I think the reality
that Venezuela has become a much more important part of the whole cocaine,
in particular trafficking system around the world, not just to the U.S.,
but significantly to Europe too.
And also, there is this notion that this criminal gang called the Tren de Aragua,
which has spread throughout the region and even to the U.S.,
has some ties with the administration.
For example, in Chile, one Venezuelan military dissident was murdered by the Tren de Aragua
and the Chilean authorities have claimed that the Osvaldo Cabello,
which is sort of the second most important figure in the security apparatus of the regime
behind the president, gave the direct order to murder these individuals.
So there are some ties there.
How deep are these ties is contended.
But bottom line, there are clear elements of these arguments that are true.
The idea that the president is sort of the head of a command and control cartel,
I think is much more contended and experts are not completely convinced that that is the case.
So you mentioned the two different sides to the U.S. administration's kind of diplomatic
or kind of the two different camps in Washington towards how to deal with Venezuela and the
Maduro government. I think for the purposes of this conversation, we'll call them the hawks and
the doves. When the administration first began, it seemed like there, as Trump won the election
last year, within the oil market, there was this general assumption that in many ways,
given what he focused on, what Trump focused on in terms of sanctions and in terms of rogue regimes,
that it would be some kind of bullish factor for the oil market that the Trump administration
coming in would clamp down again more firmly on Venezuela. But in the initial opening months,
it kind of seemed like that may not be happening, that there were deals and efforts to some kind
of quid pro quo related to the return of migrants or various other dealings between Washington and
Caracas that seemed more amenable. And then it seemed very, very quickly that it tipped over again
and kind of tipped back towards this hawkish disposition with people like you mentioned,
Rubio, and many of the kind of Florida Republican caucus that had been very, very firmly kind of
on this more hawkish disposition towards the Maduro government. Talk to me about those
two camps and what each is relatively after. And I think it's important just to kind of understand
viewing them kind of as their polar opposites and this shift between them based off of presumably
how Trump feels that day. Yeah, I mean, of course, at the end, the president is the ultimate
decider, but he sort of his style of management is sort of having sometimes different, you know,
groups with different ideas so that he has the margin to decide in the end. And so at the beginning,
he gave some road to, especially Amboy Rick Grenell, who is a person that has a personal
access to the president, to go to Caracas and negotiate first the release of some U.S. hostages,
then eventually the repatriation of Venezuelans that were undocumented in the U.S.
And of course, that was one of the president's priorities, the migration issue. The other things,
by the way, that he did on the migration side, stopped the flow of Venezuelans to the U.S.
anyways, but he wanted to repatriate the ones who were already in the U.S. without a visa.
And so that seemed to be sort of working out and licenses at the beginning were kept in part
because of this sort of negotiation that Grenell did. And just to pause you there,
when you're saying licenses, these are the license waiver exemptions from the current
standing sanctions. So these would be issued to companies like U.S. companies like Chevron,
which has large joint venture kind of operations with PEDA Vesa in Venezuela that allowed them
to keep operating. And those were issued in many cases by the prior by administration as part of
this attempt to ensure freer and fairer elections in the carrot, if you will. And those were still
on the books and kind of holding strong through the beginning of the Trump administration. Sorry
to cut you off. And then- Sure. I mean, and just to give a little bit of perspective,
most sanctions were implemented by Trump's first administration. Not only the sanctions to the
oil sector, eventually secondary sanctions even to Russian companies and others who bought Venezuela
oil, which made most countries, except for China, in the world, were not willing to buy
Venezuela oil. But then the Biden administration had this shifting policy that was by the way
triggered by the invasion of Ukraine, opened up sort of a space in the White House for thinking
about a different approach to Venezuela. And so they came up with these licenses. The biggest,
the most important one, as you pointed out, is to Chevron, but there were others to Repsol,
Morel and Prom, E&I, and some even a trader like Vidal got a license. So those were all in place
when Trump comes in. And even though there were some signals that they might be canceled at the
beginning because of these negotiations, they were kept. And then one day, to the surprise of
many of us, because there were no signs that it was going to happen, so suddenly the president
tweeted or sent a posting saying that they were canceled and that the US didn't need Venezuela
oil and et cetera, et cetera. And so it took a while to implement this cancellation of the
license. It was postponed at the beginning, et cetera, but eventually all the licenses that
the biting and business had given, including some to export gas to Trini, that were all canceled.
And then again, to the surprise of everybody, they announced a new license to Chevron
in July after canceling it in April. But then immediately this escalation
in terms of the military and naval deployment started sort of in parallel. So it was pretty
remarkable. And it's important to also notice that the license that Chevron was given this time
is more restrictive than the previous one, particularly they instead of being able to pay
the Venezuelan government in cash, they have to pay just by giving them 50% of the oil producing
the joint ventures with Chevron, that then the Venezuelan government needs to sell
in the black market in China. So this is a more restrictive license. And then
none of the other companies have gotten licenses except for Shell, that with Trini that they got
a license to negotiate a new deal. But so far, because the relations between Trini and Venezuela
are in very bad shape, that hasn't lead to any negotiation. So basically, right now what we
have is just one company licensed to operate in Venezuela, and that is Chevron.
So I think to understand, and I think to position ourselves when we're talking about
current Venezuelan crude oil production and exports and the role and position of
Venezuela in the global oil industry, I think it's prudent to walk back because a lot has
happened to get us to this point. You had mentioned that you started your career,
I guess that would have been the 90s, early 2000s, where at that point Venezuela was
one of the world's leading oil producers and historically has been one of the largest producers
in the world, has been one of the wealthiest countries in the world based off of this production.
And if you look at virtually any list of the world's largest reserve holders of crude oil,
Venezuela almost always sits at the very top. Now, I'm curious to hear some context and some
a little bit of nuance to that 300 billion barrel at a plus number because I think it is,
and I think you probably agree, fraught in some ways. But talk to me about how Venezuela went,
like the kind of decades that brought us to today, how it went from a massive critical
component of the global oil industry to increasingly a dysfunctional one turned an
outright pariah on the same kind of level as an Iran. Sure. So as you pointed out, Venezuela...
Small question, yes. The short version is that Venezuela was the largest exporter of oil,
not producer, the US and Russia produced more, but largest exporter of oil in the world
between the 1930s and late 1960s. Then Venezuela's production started to decline because the
conventional sort of production, the conventional fields started to decline and research were
limited partly because Venezuela had been very confrontational with international companies
increasing their taxes, not renewing their concessions and the like. Venezuela was also a
founder of OPEC with Saudi Arabia, were the two key leaders of the creation of OPEC.
But eventually, they nationalized the oil industry in 1976. Then they had the declining
prices in the '80s. Venezuela liked the rest of OPEC's production to try to keep
prices from falling, but that didn't work. Eventually, they decided to undo all those
cuts and start to produce as much as they can. Venezuela opened up the oil sector in the 1990s.
Very successfully, to give you an idea, they added about 1.1 million barrels of capacity,
that most of that capacity, about 70-something percent, came online with Chavez already in
power, even though it was done by the previous administrations. So Chavez comes into power,
the price of oil is at the rock bottom. In fact, it's almost the width of the lowest oil price
of the Venezuelan basket. The guy gets elected, but then the prices start to recover and we have
this spectacular decade of the Chinese demand leading to an oil price boom. But Chavez in the
middle of this, because of a political conflict to control the oil industry and control the country
and become an authoritarian regime, he decides to fire half of the top employees of Fedevesa,
half of the total employees, most of the leading management and top engineers. So the best of
the best were kicked out of the oil company. And that led to a collapse of the national company,
but that was not noticed by the country for two reasons. First, because the price of oil skyrocketed
and so P times Q actually went up significantly. But also because, as I mentioned, these million
barrels of new capacity was coming online from companies like Exxon, Chevron, Total, Conoco,
that had made major investments in the country. So eventually, Chavez forcefully renegotiated those
deals and re-nationalized part of the oil industry. But this time, just to have 60 percent
government ownership of all these projects, some companies decided to leave most prominently.
Conoco and Exxon, Conoco still owed more than $10 billion by the Venezuelan government 20 years
later. But as I mentioned, for a while production didn't decline that dramatically until the price
of oil collapse in 2014 showed that this institutional system was in shambles because
Pedevesa was broke. They had increased their debt from $3 billion to $35 billion and had not invested.
And at the same time, the production of the national company had completely collapsed.
And it was mostly the JVs, the joint ventures with these private companies that were
investing, but they were owed tons of money because the largest shareholder was the national
company. And also, the service companies like Schlumberger, Haliburton, etc., were owed hundreds
of millions of dollars. And so when the price of oil collapses, nobody's paid anymore. They were
already not being paid fully, but then they were not paid. And that triggered a further collapse.
And then, of course, U.S. sanctions in 2018 and 2019 really lead to an additional blow.
It got so bad that because of COVID, Venezuela went to produce, when childs came into power,
they were producing about 3.4 million barrels of oil per day. By the time of the bottom,
they were producing 400,000 barrels. Part of it was COVID. But then the production recovered
post-COVID. And then because of the chairman license, it recovered further. 80% of the
increasing production recently was by chairman. And so today, Venezuela produces about a million
barrels of oil, which is, as I said, less than a third of what produced when Chavez came into power.
So from more, let's say, roughly 3.5 million barrels when Chavez comes into power,
you hold steady but choppy for the following decade or so between around 2.5 million barrels.
You decline a little bit. But it wasn't until, as you know, 2014, 2015, 2016 oil price collapse
that everyone sees who's swimming naked and the lack of investment that was going back into
Pe De Vesa. So just before we, again, get to this sanctions waiver and current issue,
how much of it was-- so first, you had an underinvestment from Pe De Vesa, a pretty
classic story of national oil companies that treated like a piggy bank by the central government,
not enough money to reinvest in operations. So you're just kind of a constant harvesting,
no reinvesting. And then you mentioned that there was the second level that there were
over the remaining international oil companies that still had the financial wherewithal
to operate, to invest, et cetera. But they were owed gargantuan sums of money by the Chavez
and then Murdero government that they were kind of like, well, why are we going to invest if we
can't get our money out? So there was this second kind of tranche of decline. And then after that,
you got the kind of nail in the coffin of the Trump administration's kind of sanctions and then
secondary sanctions to a level that Venezuela right now is really the only other country that
has similar levels of sanctions on the actual physical oil trade itself, as you see in Venezuela,
pushing virtually all of it to China. So now I think we've had-- we had a little bit of recovery
through COVID. We had then the Biden administration, then we come to the recent presidential election.
There was optimism. There was hope in the Biden administration that if you kind of gave some
carrots to the Murdero government in exchange for a freer and fairer election, obviously these are
all shades of increasingly dark gray. But kind of talk to me about first kind of how that election
went and if any of that optimism and or hope was kind of justified. And then talk to me about kind
of how we kind of came now and how the removal of those waivers, those licenses, is going to bear
on Venezuela's current production capacity or production level of around a million barrels a
day. Before we get to this question of kind of what's to come next, if things stayed exactly
as they are today, what would the kind of outlook of Venezuelan production be in that context?
Sure. So about the elections, it was a remarkable episode, right? Because as we pointed out,
this was a regime that basically did not conduct a free and fair elections anymore,
decided which candidates of the opposition could run. But they had this massive carrot of the
Biden administration telling them, we can normalize relations with you if you conduct
elections that are sort of-- that at least have some degree of competitiveness.
Procedural democracy, right?
Exactly. And so eventually they allowed an accidental candidate, a guy and an old ambassador
who had never run for office, but that they thought that it would be easily defeatable.
They let him run and he was supported by the major opposition leader of Venezuela,
which is Maria Corina Machado, who recently won the Nobel Peace Prize.
And she achieved something unbelievable, which is that they were able to prove--
I mean, at first the regime completely miscalculated because they thought that they--
doing all the classical things that they did of patronage, mobilizing the people in their social
programs, sort of making the opposition voter feel that they will know how they voted and therefore
they could be-- And they actually tried to-- they did disqualify Machado from actually
participating in that election, right? Oh, sure. That's why I mentioned that they only
allowed this candidate that they thought it was defeatable.
Exactly. And so, but she outsmarted them by supporting this guy and organizing an amazing
mobilization of witnesses and people organizing around the election. And so they were able to
show because the system does provide a printed tally of what happened in every polling location,
and they got like 85% of the polling locations with most of the vote and they won by 70 to 30,
and they were able to prove it to the world. And the regime did something that they had never
done before, which was simply do not give any results. The webpage of the electoral council
went down, they claimed it was hacking, and they gave some results that were so ridiculous that
they were done in reverse by multiplying-- that was the first thing that some mathematician--
I remember that. Very quickly, that the number was clearly made up because it was the multiplication
of a certain percentage time the votes. And it was so bottom line, the international community,
even there were tons of actors in the world that were eager to normalize relations with Maduro,
because the argument was, we have tried this route of recognizing the head of the Venezuelan
National Assembly as the interim president. This didn't work. We have to deal with the facts on
the ground, the guys ruling the country. So the Europeans and some people in the Biden administration
were super eager to move on and have a normalized relationship with the regime, but the fraud
was so blatant that that wasn't possible. Even the allies of Maduro, like the president of Brazil
and the president of Colombia next door, said, we cannot validate this. This is unacceptable.
And so that destroyed a plan that the Venezuelan and that the Maduro administration had, which was
to open up the oil sector, to convince foreign investors that the relations with the US would
be normalized and that they could get back in with better conditions, etc., and also restructure the
debt that Venezuela has with bondholders, etc. Nothing happened in that regard. And that's how
we eventually got to the Trump administration and sort of the dilemma between the Grinnell versus
Rubio sort of approaches. We'll be right back after a short break.
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And now back to my conversation with Dr. Francisco Menaldi.
Those exports, I mean, when we got back up to a million barrels a day, roughly of production,
when you look historically, the vast majority of Venezuela's crude oil exports went to the
United States, which makes a tremendous amount of sense. It's literally across the Gulf.
It produces, Venezuela produces a heavy, a heavier, heavy, sour grade of crude that is,
you know, perfect fit for a lot of those more complex US Gulf Coast refineries. I'm just looking
at my, at the EIA here, and it looks like, you know, basically you peaked out, Venezuela peaked
out just around two million barrels a day of exports to the US in the late 90s, just before
kind of the downturn began. And now, obviously, we're back down to more or less roughly nothing
now. I think you've had some blips as the Chevron licenses came back and you got to import some,
some crude into the US Gulf Coast there as well. But talk to me about how, given the fact that
Venezuela's exports and current crude production is extremely heavy. I mean, I've mentioned before,
I'm, I'm based in Toronto. I follow a lot of the Western Canadian heavy oil market.
Venezuelan crude, Mary crude typically is the benchmark that's followed, is treated as, you
know, alongside Mexican Maya or Basra or Rocky Heavy as one of the heaviest, most sour or sulfur
laden grades that are marketed in the world that narrows the scope of potential buyers.
So when you, when Venezuela lost access to the US market, where did those barrels end up
flowing? And what did those kind of commercial relationships begin to look like?
Sure. So as you point out, you know, first when Venezuela, by the time Venezuela,
Venezuela oil was banned from the US in 2019, Venezuela was exporting a little bit more than
a half a million barrels. As you pointed out, a very significant decline from the pre-Chavez
era, but still was Venezuela's largest market at the time or very similar to the, to the Chinese
market, the Indian market was also relevant. Then that went, you know, the US went to zero.
And eventually when Biden gave them the license, Chevron was able to export all their production
about 250,000 barrels. So to give you an idea, the first quarter of this year, Venezuela was
exporting about 850,000 barrels of which 55% went to China, 30% to the US, and the rest
to India, Europe, and Cuba. Then with the cancellation of the licenses, by June and July,
99% was exported to the black market in China. And about the rest, about 2%, to Cuba, which is,
you know, an ally of Venezuela, the Venezuela gives sort of free, free oil. But then with the new
Chevron license, they, the Chevron is able to export about half of what they used to export
about 120,000 barrels. So today we have a little bit more than 10% of Venezuela's oil
goes to the US to, to Chevron refineries and Valero and others. But the vast majority, 83%
goes to China. It's important to notice that as, as you point out that this type of heavy oil,
Marais 16, which is API 16 grade, is not suitable for most refineries. And the only reason why the
Chinese independent refineries, the so-called tipot refineries, buy that oil is because it's
heavily discounted. If they, if it wasn't heavily discounted, you know, they will, they will not
buy it because they need to blend it with, they call it bitumen there, even though it's sort of a
you know, definition is slightly off. But bottom line, it is something that is not,
you know, the, the ideal for that market. In fact, now URLs, which is a higher, you know,
lighter oil is flowing to those same refineries. And they of course require Venezuela to give a
bigger discount than the Russian oil because it's Venezuela is less attractive. So the paradox is
that today, most of Venezuela's oil is going to refineries that are not the ones who really wanted
that. Therefore, not only for that reason, but of course, because of the risk of the black market,
they are heavily discounted. And the other market that was really eager for Venezuela and heavy was
India. The Indian companies, particularly Reliance, which was the best, the largest buyer of Venezuela
and oil have been worried about secondary sanctions from the US. And therefore, they only did it when
they had a license. And since they don't have a license, now they are not buying it. By the way,
the Modi administration has argued that if the US is going to pressure them into not buying Russian
oil, they at least need to give them some other alternatives. And Venezuela is one of those.
And that those are being, you know, part of the discussion. So this is, as you point out, a very
interesting situation because the US has three countries that are oil producers that are a
sanctioned Russia, Iran and Venezuela. Venezuela, of course, the lesser one, the less important,
the least important one. But these all interact together because also one of the big objective
of the Trump administration is reducing the price of gasoline in the US, which means reducing the
price of oil. And so they keep sort of pushing some bottoms here and there, and they need to
evaluate how did that impact the market and recalibrate a little bit of their policies.
Yeah, I mean, that's one of the things we've seen with Indian refineries. In the past, they used to
be large importers of Iranian crude. We saw that kind of sanctioned sensitivity play out very
dramatically following the Trump administration's withdrawal from the JCPOE, the Iran nuclear deal.
They kind of, it was a dead stop in their purchases. And ironically, again, to kind of
illustrate the different intensity of the Iranian and Venezuelan sanctions versus the Russian
sanctions, then India kind of started hoovering up as many Russian barrels as they could get,
I think, just to kind of show that, you know, I think India is actually one of my favorite
heuristics for the kind of the intensity of the realized intensity or perceived intensity of
sanctions. What's interesting, so my one question is how deep discounts would kind of barrels of
Mary delivered to Chinese independence? What kind of discount would that yield? And the other thing
I'm thinking here is the irony you mentioned that Trump isn't actually, he'll obviously think in
terms of crude oil, because that's the easiest price to look at. But really what he cares about
are pump prices or refined product markets. And one of the ironies of shifting heavy, sour Venezuelan
crude from refineries that want that blend in the US Gulf Coast to refineries that don't necessarily
want it in China, but will do it if they get cheap enough, is that you're actually getting
less yield of those products at a moment where we're seeing global, middle, distillate, diesel
prices, et cetera, kind of. So I think the first question is, how deep do those discounts get?
Because you're mentioning they kind of, it falls on the bottom of the stack below say, euros.
Yeah, I mean, it's hard to know exactly and it varies depending on all these factors that we are
discussing. But we have seen discounts as significant as 30% over rent. And by the way, that's not the
only problem, because that's what the independent refiner pays. But for Pedevesa, the issue is,
then how do they get their money back? And they used to do it through Russian banks, then there
were sanctioned. So they don't get the whole thing back. They have to also lose a little bit and
sometimes a lot by laundering, let's call it that money, back to Venezuela. And so in some periods,
there has been evidence that Venezuela was receiving almost half of what they
rent, or even if you wish, close to half of what they could have sold that crude oil in the United
States. So it is a big problem for Venezuela. I mean, my colleagues who study sort of prices
in the US say that in the end, the biggest factories in general, the price of oil in the
market. But as you point out, Venezuela was a very important supplier of heavy. And the problem is
that Mexico's Maya is also declining. The heavier grays in Brazil are declining. The Canadian oil
that was supposed at some point to get through Keystone XL never materialized.
We're going west now. So bottom line, exactly. So bottom line, the fact is that these refineries
in the Gulf Coast are really interested in getting more Venezuelan oil. And in part, I think
that explains why even in the middle of this crazy push military buildup,
before they did that, they did give federal license to at least get 120,000 barrels of Venezuelan
crude to the Gulf Coast. So the other aspect of we were talking about the heaviness, the density
of Venezuelan oil, one of the other factors that that has a bearing on is the kind of egress or
midstream necessity of getting that through a pipeline onto a tanker into market, which requires
diluent or lighter grades of crude or NGLs or condensates or whatever you want to use. Now,
Venezuela produces some of that diluent domestically. But obviously, given the fact that Venezuela's
overall industry has atrophied over decades, it's, you know, Venezuela's increasingly dependent on
imports of these lighter hydrocarbons in order to kind of even maintain that million barrels
a day rough of production. So one of the advantages of these Chevron waivers in particular
was that Venezuela was able to import US diluent, which is very secure right across the border,
really cheap because US and GL markets are deeply oversupplied. When Venezuela lost
that diluent supply, the two places that it's turned more red, actually, it's three places,
some combination of China and Chinese NAFTA, Russian NAFTA and Iranian condensate. So
how, given that those are all come splotchier sources of supply, more sporadic, less secure,
kind of, when you look at the import numbers, they're very bumpy compared to the United States.
How does that bear on Venezuela's productive capacity? And is that even again, before we get
to this question of regime change and what comes next, in the current status, is there any concern
about being able to source necessary diluent? Or it's more, you know, modeling through, there's
some domestic inventories at this stage that they built up during those years, those moments of
access to the US markets. Talk to me a little bit about diluent requirements.
Sure. As you point out, and the, I mean, the Orinoco belt, which is this massive, you know,
reservoir of extra heavy oil, it varies from like seven to nine grade API, and it needs to,
you know, be either upgraded. They have four
upgraders in Venezuela, which are sort of refiners that, you know, bring that oil,
some from eight to 16, some, even, there was one that got it to 32 that was managed by Total
and the Norwegians. And only one of those is working. Only one of those four is working,
and that's part of the problem. Because if you have those upgraders working,
the amount of extra heavy oil that Venezuela produces today will almost all be processed there,
and you will not need diluent because they have a sort of a closed circuit that you could.
But because of these upgraders not working, only the Chairman one working,
which is called Petropiar, and processes about 100,000 barrels, all the other, you know,
almost half a million barrels that they produce of heavy oil need some diluents. And they were
importing almost 100,000 barrels as you point out mostly from the U.S. while there were licenses.
And not only Chairman, but occasionally others like traders, Repsol, E&I brought also some,
either NAFTA, lighter oil, et cetera. And the first time around with the Trump administration,
when they caught that, they basically, the supplier became Iran. They had a buildup of
condensate inventories, and they were willing to do that with Venezuela. By the way, at a very,
they were charging Venezuela a lot, almost one barrel of condensate that required almost two
barrels of Meret 16. So it was a very bad deal, but, you know, they didn't have sort of an alternative,
a great alternative. This time around, Russia is the one supplying mostly NAFTA.
But the Russians is different from the Iranians, one cash, hard cash, you know, prepaid because
Venezuela, of course, never pays. So this is a problem. This is a big problem. And now the new
license doesn't even allow Chevron to bring diluents for their own production. So that means
that Pedevesa has to take some of the diluents either from domestic production. And by the way,
the lighter oil in Venezuela, a significant part has to be used for the domestic market of,
you know, of produce. So Venezuela refines about 200,000 barrels a day. By the way, that's another
massive collapse. Venezuela used to refine a million barrels of oil. So, but bottom line,
this is one of the bottlenecks of the whole system right now. And besides the lack of investment,
that's the other one. And so that's why the Venezuelan government is trying to attract,
they have given a series of new contracts, including for example, to a blacklisted market,
a company called China Concord that is sanctioned by the US because of trading of Iranian oil.
That company is, even though they do not operate oil fields, they are investing in Venezuela in
order to get more lighter oil in order to use it for diluents that then they can export to China.
But that's one of the reasons why I do not think that it's possible for the Venezuelan government
to increase production by the way they were increasing it before. It is the issue of diluents.
And of course, the fact that, except for Chiron right now, no other company has a license to invest
in Venezuela. So let's shift to the more speculative kind of end of this end of this conversation,
which is, as we were discussing earlier, that the more hawkish camp in Washington is currently
kind of winning out in the Trump administration. You've built up considerable volumes of military
assets in the region. It either looks like the mother of all bluffs attempting to push out
scare Maduro into some concessions or to leaving, if not a kind of the prelude to some kind of
broader, as you think you mentioned, more kinetic regime change in Caracas. So the first question is,
let's say that happens. Let's say Maduro leaves office. Is there any evidence so far from anyone
that's spoken officially from the US government that there's any conception of a plan for what
would come next, kind of post-regime change? Well, they haven't laid, because remember,
there is a lot of objections within the base of the Trump administration, the MAGA movement, etc.
to not try to do regime change. No new wars, right? That's the whole riot cry.
And so for that reason, I think they have very, very hesitant to lay out any sort of plans for
transition. We can see and we can hear from different sources that they are thinking about
Maduro getting out and then convoking new elections. It's unclear what happens in the
Interregnum in terms of how the country is going to be managed. It is hard to know if it's possible to
have organized or orderly transition in Venezuela. How would it look like? Would the military
remain, which are the ultimate sort of power behind the regime? Will they remain sort of
intact and organize and sort of negotiate themselves any transition or not, or have a much more
disorganized and potentially unstable transition? And so when we try to build sort of scenarios
of what might happen in Venezuela, you have the great scenarios in which everything goes smoothly.
There is regime transition. There is a new elections and opposition, a government led by
maybe Madicorino Matal and people of that group. They open up the oil sector. There is political
stability and they bring back some of the big players around the world to make the big investments
needed to recover oil production. And that's a scenario sort of, I think it's a very unlikely
scenario with all these ifs. But let's say it happens, Venezuela could add maybe two million
barrels in about five years, perhaps a little bit more, but it will require massive investment and
everything has to align, the politics, the stability, etc. Then you have of course scenarios
that are more status quo scenarios in which production basically stagnates and maybe declines
a little bit with Chairman still in Venezuela, but without significant additional investments.
The production today is about half operated by PDBSA, 25% operated by Chairman, about 10 to 11%
each by the Russians and the Chinese and a tiny bit, the rest is in the hands of European companies
that are not allowed to operate. And so basically the only part of the Venezuelan oil production
that in which there is some investment, there are only two oil rigs in operation drilling new wells
and those are in Chairman hands. Then they have this new type of contracts. There is a local sort of
crony businessman who is doing some investment and increasing a little bit production in one field
and then potentially this Chinese concord that I mentioned. So I think this is unlikely to offset
the decline in PDBSA's fields, but basically you have a picture of sort of stagnation with some
decline and then you have of course a scenario in the middle in which Trump uses the pressure to
negotiate a deal, a grenade less kind of deal, uses all this push to say to Maduro you have to
sort of marginalize the get rid of the Russians, which is a problem because the Russians have some
of the best real estate in the in the Orinoco belt. They have three very large blocks that were
supposed to produce a million barrels and are producing about 100,000 and then the Chinese
and bring American companies. But which American companies besides Chairman are going to be willing
to invest in that scenario, which could be a very unstable scenario, right? Because first the people
like in South Florida pushing for regime change in Venezuela, that's going to stay there, right?
And there could be a change in government in the United States. And so there are plenty of
considerations that we are not sure how might happen in that scenario. But I think that scenario
could be some increase in production. And what about downside risks? So I think, you know,
I think everyone talks about and I'm curious to have one more question about kind of some of those
upside potential. But there's obviously also a massive downside potential, things can always
get worse. I think I literally have a book on Venezuela titled Things Can Always Get Worse,
which I think is talking all about the history of Venezuela's oil industry and how things can
always get worse. So what if there is an attempt at regime change, and you see a broader fracturing
of governance, security, organization, both in Caracas and broader across Pate Vesa and any of
these kind of international firms that still work with the government on these projects?
Yes, I think there are two sort of really bad scenarios, which I don't think have a high probability,
but I have to be consider. The first one is the one you mentioned. There is a disorderly
transition. By the way, we don't know to what could be to a messy situation in which we have
different parts of the military fighting each other. So that could disrupt actually oil production.
I don't think, I mean, no site has incentive to actually damage the facilities. I don't think
that we are likely to see Venezuela is not a country with either ethnic or religious cleavages.
So I think it's less likely to see a Libya or Syria kind of scenario. It's a very low probability
event. But we could have some significant disruption of oil production in a scenario in
which there is no clear control over the country. And even if I take a while for foreign companies,
I mean, Chairman might take their employees out. We might have a situation in which international
players want to wait until things are pretty clear and settled before they bring back their
employees. And so that is a bad scenario. And that could lead to a declining production. It's
hard to predict but say half of what it is. Then we have the scenario in which the U.S.
decides to, there is no bridging change and Maduro is still there. And they decide to pressure him
even more on the oil side, like for example, a tradition of tankers and the like.
A full blown embargo basically. A full blown embargo or pressing the Chinese
further to not buy Venezuelan oil, something of that nature. I think that's also a low
probability scenario. But that could also lead to some significant declining exports. In that case,
without any impact to the facilities. But the problem, you know, in Venezuela, when you close
production, is that this is not like in Saudi Arabia that you can close production and pretty
much you don't lose the capacity. In Venezuela, when you close production, you tend to lose
production capacity. You are never able to fully recover the production when you close the oil
well. So at the beginning, try to accumulate inventories. But at some point, you have to close
wells and that's a problem. So those are sort of the bad scenarios.
Okay. And then talking about the good scenario, the optimistic scenario, I think there are no
shortage of, again, because on the list, 300 billion barrels plus of reserves in Venezuela
versus barely at many times a million barrels a day of production. Theoretically, sky's the limit.
So you can have lots of people say like, you know, they could produce 10 million barrels a
day more or whatever else. Talk to me kind of realistically. You mentioned two million barrels
a day more in a decade. Or I think it was by the end of the decade. So talk to me about kind of what
it would look like for like one year out, two years out, five years out, what kind of capital
investment would be required? Are we like, we're talking tens and tens of billions of dollars? I
presume. And I think finally, you know, Chevron has given us an impression that a lot of where it
could increase production would be like, you know, taking off cobwebs, tightening wrenches,
kind of really low hanging fruit, debottlenecking and maintenance of these facilities that have
been neglected. How much of that two million barrels would be that kind of work versus,
you know, actual like full blown reinvestment, re-exploration, you know, work on the
upgraders? Like talk me through what that actually would look like. Sure. So there was a plan made
by the, you know, when the Venezuelan opposition took over the PDB outside of Venezuela, basically,
you know, CIPCO, and they were sort of planning to, you know, to see what they will do if they,
you know, came back to Venezuela. There was a plan that included sort of different stages. And as
you point out, it depends on how, what's your focus? Because the plan that they had included,
you know, environmental remediation, you know, rebuilding the infrastructure in a serious sort
of, you know, with a long term perspective, et cetera, including, you know, increasing recovery
factors. Those are the kinds of things that you will do if you have sort of a longer term horizon.
But in the short term, you know, Venezuela is like a massive brownfield, right? Very deteriorated
infrastructure, but with almost no geological risk. And, you know, and of course, some
infrastructure that is fair, because even though it is deteriorated, remember, this is a country that
produced, you know, just a few years back, more than 2 million barrels. So there are a lot of low
hanging fruit. There are, the example of Chevron showed us that without drilling new wells, they
were able to increase production significantly. So I think after, you know, some period of
wait and see, you know, the companies will might take a while. And by the way,
the only sort of actor really there is Chevron. So you need to ring others.
I think Conoco is a major candidate because, you know, they are all $10 billion and they
want to get it paid back. And so they just matter. Exactly. And so European companies are not that
interested anymore in extra heavy because of environmental considerations and decarbonization
so I don't know which other big players, western big players are going to be willing to put the
amount of money. But if you look at only the upstream, we're talking about to increase those
2 million barrels in about five years, you would require about $80 billion of investment.
Of course, you can maybe reduce that a little bit if you don't invest in upgradeers, which in the
long run is a good idea, repairing the upgradeers. But in the short run, you can deal with it by
importing diluents, making less money. But if the companies are worried about sinking, you know,
investment in a country that they are fearful about, then you might see companies not willing to
invest in that kind of project, but more willing to, you know, have lower margins but with less
investment. So we have to see the mix. But there are some, you know, friends that are great technical
people who believe that it's even possible to increase even faster than that. I am very
skeptical of those ideas in that. I think they typically do not consider all the other above
ground, you know, considerations, difficulties. You know, Venezuela is a country that has
severe electrical problems that need to be solved. It has severe problems in the
infrastructure in general, including an environmental situation in some of these fields
that is very problematic. So there are plenty of, I mean, a lot of people have to come back
and you have to convince them to get back in. So I think we will not see the optimal
scenario that is technically possible. As you pointed out at the beginning, Venezuela, by the
way, Venezuela, the proven reserves are clearly not the ones that you will get from a company
auditing the reserves. Venezuela extracts about 7-8% recovery rate from the extra heavy.
And they use like 20-22% to estimate those reserves. But still, for all purposes, you know,
as you pointed out, Venezuela has 100 years of reserves or more at a production higher than the
one we have today. So plenty of extra heavy oil, a lot of potential issues. I mean, one area in
which you will want to explore is to get more light oil, because you will need it as a diluent.
Because without a doubt, the most significant potential is the development of the extra heavy,
and so you will need to try to add a lighter oil. By the way, one element that is rarely spoken is
that next door, we have tons of light oil from Guyana. Venezuela and Guyana had a good relationship,
you know, that could be a great source of diluence for their inoculum, but of course,
politically unlikely. But so you have a lot of different pathways, but I think there is no
imagine the scenario in which oil demand does not peak in the next 10 years, as some have argued.
In that scenario, I see Venezuela playing a major role, of course, if conditions are
aligned. But Venezuela has an opening in that scenario for increasing production
in a very significant way without opaque, you know, pushing them back. Because of course,
that has been the other, I mean, the two limits of in the history of Venezuela for increasing
production. One has been above ground issues, you know, basically, not geology, but above ground
issues. The other one has been, you know, opaque, sometimes when Venezuela aims too high, the Saudis
have reminded them that that's not the way the game is played, that they have lower costs and
that they can punish Venezuela. So that body in a scenario of increasing demand, I think the Saudis
will not press Venezuela because there will be space for both. And so that is a possible
sort of near-vanise scenario for the Venezuelan oil sector and which will lead the Venezuelan economy
to recover. Well, Francisco Minaldi, thank you so much for joining us. This was a fantastic
conversation. I learned a lot, which I love learning about Venezuela because it is a fascinating
industry and I think has many parallels with Western Canada's heavy oil industry, with
Upgraders and Diluents and everything else. So I really, really appreciate you taking the
time and sharing with us all. Before we let you go, is there anything else that you think the
audience should be watching for on this conflict or in any of your other work? And can you remind
the audience where to find some of your work? Sure. So you can go to my webpage in the Baker
Institute at Rice University and you will see my work. I've been working on other places in
Latin America too. I think Canada has a lot of interesting lessons for Venezuela, particularly
on the technical side. To increase the recovery rate in the extra heavy, no doubt that Canada
has done amazing work there. And I imagine that some Canadian companies or companies that are
operating in Canada, both the operators, but also the ones with the technology would be very
interested in doing stuff in Venezuela. So even though Canada and Venezuela are competitors
in that market, there will be also some potential business happening. So that's, I think, another
interesting angle that we should look at, because as I mentioned, European companies will be hesitant
to operate in Venezuela. And finally, I do think that the next few months could lead to either,
I think, three outcomes that might be relevant in terms of oil impact. One is possibly regime change
and that could be a major news for the upstream oil sector in the world.
The second one is a negotiation, not the opposite, basically Trump negotiating with
Maduro, some opening. I think this is a much less, the scenario is with much less upside,
because these ideas that you get access to reserves, in the end, people have to risk money
up to over there. And I don't think much is going to happen, but still will grab a lot of
headlines. And of course, in the middle, you could have some big hiccups that,
if combined with events in other parts of the world, like the sanctions to Russia,
could be grabbing headlines in terms of the impact in the oil market.
Well, Francisco, thank you so much for joining us.
Thank you.
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