Venezuela's Crude Reality

Much has been written about the Trump administration’s actions in Venezuela and the supposed implications for the global oil market, though at this early stage it is already apparent that the subject is being treated with more urgency than understanding. The situation, in truth, is still in its opening act, and what lies ahead is unlikely to be simple. A great many articles have gravitated toward the more theatrical elements of the story, yet comparatively few have paused to examine the less glamorous—but far more consequential—character of Venezuelan crude itself.

In short, we do not believe Venezuela will be able to add much in the way of production without oil prices as high as $85 per barrel.

In brief, we believe that apart from the occasional seized tanker cargo making its way to market, the recent developments are unlikely to have a meaningful impact on oil markets in the near term. Venezuela does, without question, possess enormous oil reserves—roughly 220 billion barrels by most estimates, enough to place it at the top of the global reserve table—but the act of converting those reserves into sustained production has always been, and will remain, an undertaking of formidable scale.

Venezuelan crude is, almost without exception, heavy and sour. “Heavy” in this context signifies a crude that has undergone partial oxidation underground, a process that renders it stubbornly resistant to flow and correspondingly difficult to produce. The other major source of heavy oil is Canada, where the resource is commonly known as the oil sands. In Canada, heavy oil was for many years not pumped at all but mined, using vast earth-moving machines. That practice eventually gave way to steam-assisted gravity drainage, in which wells are drilled, steam is injected to liquefy the bitumen, and the resulting fluid is drawn out through a second horizontal bore.

Venezuela’s geology permitted a different, if hardly effortless, approach. Powerful pumps were installed that, with considerable exertion, could lift the partially degraded crude to the surface. Complicating matters further, Venezuelan heavy oil is also notably sour, containing elevated sulfur content. This characteristic demands specialized handling at the wellhead and equally specialized equipment at the refinery. The process, taken as a whole, is intricate, capital-intensive, and unforgiving of neglect.

The country’s production history has reflected this complexity for decades. According to the BP Statistical Review, Venezuelan output peaked at 3.8 million barrels per day in 1970, when conventional production reached its high point and began to decline. By 1985, production had fallen to roughly 1.7 million barrels per day. Beginning in the late 1980s and continuing through the 1990s, Western oil companies invested heavily in Venezuelan heavy-oil projects, producing a sharp recovery. By the end of that decade, output was again approaching 3.5 million barrels per day.