Texas Border Business
Despite a wealth of natural resources, Venezuela has been facing prolonged upheaval, punctuated by hyperinflation, corruption, and a resultant humanitarian crisis. Recent developments, including the US removal of Nicolas Maduro, offer hope for meaningful improvement, though the situation is still evolving. Given the country’s vast oil reserves, the changing dynamics have also naturally raised questions related to the implications for global energy markets.
With more resources than any other country—some 300 billion barrels—Venezuela represents an important potential source of future oil and gas. There are various ways to measure reserves, and Venezuela tops them all.
However, significant challenges must be confronted before production can meaningfully increase, and it will take years to overcome a variety of issues. One problem is that the necessary infrastructure is insufficient, outdated, and extensively damaged. Substantial capital investments would be required, and energy-related infrastructure is but one of many aspects of the economy and society requiring immediate attention.
The government also remains somewhat unstable, with various factions attempting to gain power. In addition, critical structural aspects of the economy are currently problematic, particularly currency and the banking system. This substantial uncertainty will deter major long-term private investments for any type of meaningful infrastructure.
Drilling and production outlays (including by US oil companies) will also take time to implement due to difficulties with property rights and the legal environment. Major energy firms have extensive and adverse prior experiences in Venezuela, including the loss of billions in private assets as fields and production were nationalized. Until confidence rises that the commitments will be protected, such activity remains unlikely. The risk-adjusted shareholder returns are not yet sufficient to attract resources as compared to other deployment alternatives.
The situation is evolving, and it is unclear whether it will be possible to substantially enhance oil and gas activity in the immediate horizon. Over time, it is possible that obstacles can be resolved and resources can be tapped, but given the measured pace of increase, major market reactions appear unlikely. Particularly relevant to the Texas energy sector, the crude in Venezuela is largely of the “heavy” variety, which is not a viable substitute for the oil produced in the Permian Basin and most other areas in the state. It could be beneficial to refineries in Texas, however, as many of them are designed to use this type of oil as one part of their mix.
There are pressing needs in Venezuela to address shortages of basic necessities, and developing oil and gas reserves can provide much-needed capital inflows. However, it will be a long and likely bumpy process to ramp up production, and major effects on oil markets will tend to be muted in the near future. Stay safe!
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Dr. M. Ray Perryman is President and Chief Executive Officer of The Perryman Group (www.perrymangroup.com), which has served the needs of over 3,000 clients over the past four decades.
