War advances possibility of oil reactivation in Venezuela

The prospect that the United States could ease sanctions against Venezuela’s state oil company to compensate for Russia’s isolation from global markets has observers wondering how much crude the South American nation can add to a market marred by war in Ukraine.

The most optimistic outlook from energy consultancy IPD Latin America sees production almost doubling by the end of the year if the South American country’s exports can flow freely and if it can import much-needed parts and equipment for its flagging oil industry.

Skeptics, however, say that billions of dollars of investment would be needed over several years before Venezuela can substantially increase production.

The relevance of bringing Venezuelan barrels back onto the market has come to the fore again now that sweeping sanctions on Russia isolate its huge oil industry, with US President Joe Biden saying on Tuesday that Russian fossil fuel imports will be prohibited.

In a rare meeting over the weekend, US and Venezuelan officials discussed waiving some sanctions so the OPEC nation can resume oil sales, according to people familiar with the matter.

Assuming talks with the United States ultimately lead to a swift lifting of bans on doing business with Petróleos de Venezuela SA and the government of President Nicolás Maduro, Venezuela’s production could reach 1.5 million barrels a day, David Voght said. CEO of IPD. It would mean an increase from the current 800,000 barrels.

However, IPD’s central outlook is for Venezuela to recover to a more modest 1.1 million barrels per day by the end of the year, provided it can continue to import a lighter form of oil known as condensate to help extract heavy crude. in the Orinoco region, and that contractors continue to offer support services.

“The lifting of sanctions or the relief of sanctions will require serious negotiations that pose challenges, including Chinese and Russian oil investments in Venezuela”, Voght said. “There are many conditionals. It remains to be seen whether Maduro and Biden will negotiate.”

Output of 1.5 million barrels per day would be equivalent to what Venezuela pumped in 1950, before doubling that amount in the early 1970s. Maduro said talks with US officials were cordial and the country was ready to export more. Petroleum. PDVSA is prepared to raise production to “one, two, three million barrels per day for the world”, he said Monday night.

For Francisco Monaldi, professor of energy economics at Rice University’s Baker Institute for Public Policy, Venezuela currently has the capacity to produce between 900,000 and one million barrels per day, but going beyond that will require years of massive investment.

He pointed to a plan drafted by Venezuela’s opposition oil experts, which called for $12 billion a year for five to seven years to add two million barrels a day.

“To put it in perspective, that has never been achieved in the history of Venezuela, such a rapid increase,” Monaldi said. “The best average for at least a few years was about 250,000 barrels a day.”.

Still, there could be moves to pump more oil in Venezuela if private-sector producers feel comfortable investing in the country. Each well in the Orinoco region alone costs around US$6 million to drill and can produce 1,000 barrels a day, allowing producers to recoup costs quickly, he said.

Crude oil topped $100 a barrel in New York and London after Russia’s invasion of Ukraine.

“This is a spectacularly profitable business in this price rangeMonaldi said.

Nelson Hernández, an energy consultant in Caracas, was more pessimistic about PDVSA’s prospects. Venezuela could only reach 1.5 million barrels per day in 2024 if action is taken immediately.

“That would require 50 drilling rigs running every day from today, and rigs are in short supply in the world.“, said.

But even if Venezuela only maintains production stability, it could still provide supply relief to U.S. refiners like Valero Energy Corp., Marathon Petroleum Corp. and PBF Energy Inc. if sanctions are lifted, said Jaimin Patel, senior credit analyst at Bloomberg Intelligence covering PDVSA.

“If even a part of that reaches the United States, it would make a difference“, said.