Maduro's Removal & The Venezuelan Oil Industry
A Sober Analysis of Nicolas Maduro's Removal, What it Means for World Oil, + a Case Study from 2003 in Iraq
Definitions
API Gravity – the American Petroleum Institute gravity scale: a universally accepted scale of the relative density of fluids that is used in fuel technology and is measured in degrees API.
Centipoise (cP) -Unit of measure for a fluids resistance to flow with lower numbers indicating lower viscosity (more fluid based) and higher values indicating less fluid content IE, more resistance to flow
Diluent – diluting fluid to help move heavy crude through the pipeline – examples include Naphta, or Condensates (produced from Nat gas)
Enhanced Oil Recovery (EOR) – alternative methods of oil production that are used to counter production specific issues which include CO2 injection, Thermal techniques to heat oil to reduce oil viscosity, Gas injection, Chemical injection via polymers and surfactants to improve mobility, Water Alternating Gas (WAG) which is a combination of water and CO2
Permeability – the capability of a porous rock or sediment to permit the flow of fluids through its pore spaces
Petroleum of Venezuela (PDVSA) – State owned oil company in Venezuela
Porosity - the ratio, expressed as a percentage, of the volume of the pore(s) or interstices of a substance, as a rock or rock stratum, to the total volume of the mass – aka how easy do fluids move through the rock
Viscosity – the property of a fluid that resists the force tending to cause the fluid to flow & the measure of the extent to which a fluid possesses this property – how easily does the fluid lend itself to be moved?
Introduction
The news of the US Special Forces attack on Venezuela and Nicolas Maduro in the early hours of January 3rd was unsurprising, yet troubling. What caused us heartburn was not the capture of Maduro, a man responsible for the death of thousands and the collapse of Venezuela’s economy for that we will shed no tears, but the immediate reaction to what Maduro’s capture would mean for world oil markets was a head scratcher to us.
The amount of misguided fallacy that came out in the hours that followed the news was truly incredible. The narrative that formed and still persists by some in the days following Maduro’s capture are that this will lead to a glut in world oil, that the US has added $17.3T in GDP overnight from capturing Venezuela’s oil reserves, and that the US was going to move in to run the country while an interim president as anointed by the US government.
There are many political, social, and cultural problems to many of the assumptions made in the wee hours following the news, but what we feel we have useful insight on is our ability to sift through the noise around world oil markets and provide a sober analysis of what this will mean in the short, medium and longer term.
To make our position clear, all mainstream consensus opinions on what the latest developments between the US and Venezuela mean we wholeheartedly disagree with. To sum up our view, we think that what happened over the weekend was the removal of a single individual, Nicolas Maduro who desperately needed arrested and is overall, an incompetent ruler responsible for the death and suffering of millions.
With that said, the assumption that his arrest is some sort of 3D chess move to end OPEC and disrupt global oil is a ridiculous leap. The removal of Maduro leaves behind him the exact same system with his cronies still involved running the nation. The only development that might come from this is a new interim president that is more sympathetic to the geopolitical whims of the United States although, what choice would there really be for whoever takes over next?
Before we end our introduction, I want to talk about the oil specific implications and what is being said in the media oil generalists and what we believe to be true by breaking out fact from fiction around the narrative that has formed.
Fictional Narrative #1: This was a move to supply US refineries with heavy crude oil
TDC in-House View: If this was about heavy crude two things would happen before using military force. The first is we would not have sanctioned Venezuelan oil like we did – if we needed heavy crude this seems a silly move, no? Second, by Trumps stroke of a pen we could have had Chevron provide any and all heavy crude that we needed for our Gulf Coast heavy refineries. We are welcome to push back on this opinion as this is literally the only half-way respectable argument, we have heard that has any grounding in energetic realities I am afraid from here it only gets stupider.
Fictional Narrative #2: The US just seized 303B in oil reserves and $17.3T in GDP
TDC in-House View: How we got from the removal of Maduro to US ownership of all oil in the country of Venezuela is truly an idiotic take and was echoed by Grant Cardone, (resident oil market expert???). This operation in our view was much more about the desire of the powers that be in the US and the opposition party in Venezuela desperately wanting Maduro out than it is about any resource rights and that is a much longer, difficult process if it even occurs.
Even assuming Venezuela in its entirety puts up zero fight and immediately wanted to allow the US to enter and carve up the countries oil assets, there are two major problems with this happening in any period of time that matters (IE, Trumps 2nd term).
The first is the issue of skilled labor within Venezuela to produce and develop the assets, the second is even if we suppose US majors and super majors uproot other projects that they are contractually obligated to perform under, move their labor and capital to the country this is a multiple 9 figure if not 10 figure projects to undergo. US majors, supermajors and banks need significant assurances and right now there is not even someone truly in a position to run the country in a unified way.
Fictional Narrative #3: Now that the US is involved in Venezuela oil, we will use this as a mechanism to destroy OPEC and flood world oil markets into a massive oversupply
TDC in-House View: As it currently stands Venezuela produces roughly 950K boe/d which is a fraction of the 3M boe/d figure that the country produced at its peak. The narrative we are seeing form is that because Venezuela produced 3M boe/d before, overnight the country is going to be turned around and can get back to 3M boe/d in what is basically a calendar year give or take a quarter.
This is a ridiculous assumption to make for a myriad of reasons. The first point we would concede is if the US is serious about increasing output in Venezuela, they can ease sanctions and provide diluents like Naptha and/or condensates that are needed to blend heavy crude from the Orinoco Basin. If that occurs it is possible for Venezuela to increase production to 1.1 – 1.25M boe/d in relatively short order as diluents have been, and remain a bottle neck to production.
Once that initial boost in production is achieved from diluent imports, to get to 2M from there is at least a 3-year process if all the stars align. In the meantime, decline rates around the world suggest we are going to lose 9-10M boe/d over the next 2-3 years as we enter the back half of the decade all the while demand globally is set to increase by 3-4M boe/d through 2030. It is our view that the assumptions being painted in Venezuela are not going to be a source of glut but a contributing factor to the tightness that is set to take hold in world oil through the late 2020s and into the 2030s.
Fictional Narrative #4: Venezuela will be compliant, wants American involvement and will turn over tens of trillions in oil assets to the US
TDC in-House View: We think there is a major risk of opposition from within Venezuela that could even be funded proxy style from Eastern adversaries like Russia. In addition, US companies are owed tens of billions of dollars from Venezuela JVs that they were a party to pre-nationalization and though arbitration has awarded some of those funds, it is a fraction of what US companies are actually owed. Trumps interest in the oil in Venezuela very well could come from the repayment of US companies with oil leases in the country.
Venezuelan Nationalization History
On January 1st, 1976, six years after the creation of OPEC, Venezuela, among other OPEC producing countries like Iraq decided to nationalize its oil industry. Carlos Andres Perez, then president of Venezuela created PDVSA which to this day remains the National Oil Company (NOC) governing the oil industry in Venezuela.
It might surprise our readers to know that the original nationalization was a thoughtful process that saw PDVSA working through legal means that were structured to preserve the capabilities of the industry alongside other major multinationals that were compensated with many remaining in place to assist Venezuela in the transition with a goal of retaining high quality operations and expertise.
The second nationalization effort came in the 1990s which was an effort to attract foreign investment. This was done through exploration risk sharing agreements and general JVs that were mostly focused on the development of Orinoco heavy oil upgrading. For their part, PDVSA opened themselves up to more commercial “like” agreements rather than behaving like a normal NOC. In addition, Orinoco was targeted with special fiscal incentives to improve economics. These efforts, similar to the 1976 effort to attract capital would later be completely uprooted and outside investor interest squandered from unreliable Venezuelan leadership from the Chavez regime.
In 2001 Chavez enacted the Hydrocarbons Law which was an abrupt pivot back to state control. By November of 2001 Chavez passed laws focused on regaining state control which made majority ownership from PDVSA mandatory to work in the country. Not only did the equity structure change for JVs within the country, but fiscal pressure mounted as the incentives put into action in 1990s were revoked and taxes increased for oil companies’ vs non-oil companies. This move to renationalize Venezuela’s oil industry was the beginning of the end and sucked essential capital and expertise out of the country, leaving projects stranded.
If that was not enough, Chavez in 2005 forced all 1990s era foreign companies operating under agreements made a decade earlier to convert into mixed companies to align with the Hydrocarbon Law enacted 4 years earlier and along with that came threats of asset seizure from non-conforming foreign entities.
The most damning impact here was the psychological shift and the forced migration out of the country. No one wanted to do business and spend billions in a place where contract terms could be scraped overnight. The following year, 2006, Chavez and his cronies passed an extraction tax which lifted Venezuelan government ownership and in effect boosted royalties on foreign operators. If that was not bad enough, domestic oil companies within the state were paying nearly 50% in taxes.
The final death blow to the Orinoco being developed is the 2007 decision that PDVSA should own no less than 60% of all projects in country. This is the final straw for both Exxon and ConocoPhillips who exit the country as a result of this new ruling. As a result of this bone headed move by Chavez and PDVSA Conoco and Exxon both went for arbitration with Conoco being awarded $8.7B + interest expense in March of 2019 and Exxon winning an award as well that was later the subject of annulment.
Venezuelan Historical Production Overview
Below you will find two helpful visuals to follow the trend of Venezuelan oil production. The first is an explanation of production, date range, most prolific field at the time and key events or things to note during that time period with the second visual being a chart of yearly oil production in thousands of barrels dating back to 1965.
Venezuela Oil Geology
Oil in Venezuela is characterized by its heavy to super heavy production profile and the need for Enhanced Oil Recovery (EOR) methods to produce assets in situ. In order to provide appropriate context, and in an effort to make this paper digestible, I will speak to the American Petroleum Institute (API) Gravity Standards, Viscosity, Type of Reservoir Rock, Porosity, Permeability, Depth, and how it is classically produced for not just oil in Venezuela, but for US Shale, US Conventional, Canadian Tar Sands, Saudi Arabia, and Russia to provide additional understanding for those who are as well versed in “oil speak”. (See Definitions section).
While below provides some additional context vs other key oil producing regions, since this is a discussion of Venezuelan specific production, I want to spend some additional time discussing the oil assets the country possesses. To begin, Venezuelan oil is found in Tertiary-age reservoirs that allow for excellent source rock properties with the production of the oil itself being the sticking point.
While the rock is almost sponge like and conducive to high flow rates, oil in regions like the Orinoco Belt are an extra heavy, highly viscous resource that is hundreds of times thicker than water with the crude itself being almost molasses in nature. Given the challenges in producing ultra heavy crude that Venezuela is known for, without EOR recovery rates are exceptionally low. Outside of the Orinoco Belt, basins like the Maracaibo in Western Venezuela are a more conventional crude yet they too lean toward a heavier product and need EOR for flush production.
To get around the limitations of the oil itself, Venezuelan production requires blending with lighter hydrocarbons otherwise the bitumen like product will not move through a pipeline. The country built four diluent plants in the Jose industrial complex where the goal is to take 8-10 API gravity oil and desulfurize it into a 26-32 API gravity end product. Petroleum of Venezuela, PDVSA is the state owned entity that produces a Dilute Crude Oil (DCO) by combining high API gravity oil with imported naptha or other lighter hydrocarbons that allow the oil to be transported with the typical DCO blend from PDVSA being 10-15% diluent by volume. While some of the other fields like El Furrial or parts of Maracaibo offer API in the low 30s, this is a fraction of the total 300B barrels of oil reserve with the vast majority located in the Orinoco Belt that we discussed in depth above.
API Gravity
Viscosity
Reservoir
Porosity
Permeability (in Darcies)
Depth (in Feet)
What Controls Production
Field Overview & Major Projects in Venezuela
Venezuela has a number of large reserve fields with 99% of proven reserves located onshore. The most common field in Venezuela discussed is the Orinoco Belt which is broken out by the following four areas, Boyaca, Junin, Ayacucho, and Carabobo which themselves are further divided by many blocks.
The Orinoco was originally discovered in the 1990s – 2000s via joint ventures with Exxon, Conoco, Chevron, Total, Statoil and many others prior to nationalization efforts from Chavez. The vast majority of the countries’ production today comes out of the Orinoco with 540K boe/d of the countries roughly ~900K boe/d total volume coming from this heavy crude belt. Financing issues and a failure to do basic infrastructure maintenance have led to a dramatic production decline with upgrading capacity from the four facilities underperforming nameplate capacity of 600K by 100K boe/d prior to US sanctions.
Another field of note is the Maracaibo Basin in the western part of the country. This began as Venezuela’s oil hub with 1920 – 1980 discoveries leading to fields like the Bachaquero, Langunillas, Tia Juana that yield medium to heavy sour crude with API gravity ranging from 18-30. Given how long these fields have been producing declines have occurred but in 2010 Maracaibo still provided almost half of all Venezuela’s crude output. Within the Western geology, the Boscan field stands out as exceptionally prolific with a shallow/heavy product that had a vast reserve life. When Chevron had a joint venture known as PetroBascon production was around 100K boe/d and break evens were in the range of $15-16 per barrel. As Venezuela’s oil industry was ran into the ground from the early 2010s on, no additional capital is being dedicated to these western fields and decline rates are estimated at 10-15% per year in many of the western assets.
In the Eastern part of the country notable fields outside of the Orinoco include El Furrial, Carito and Pirital which were discovered in the late 1980s and by the 1990s El Furrial produced 120K boe/d of 30 API gravity crude oil. The fields in the eastern part of the country require pressure maintenance via gas injection. In addition to El Furrial, Jusepin-Quiriquire produces a medium crude and was historically operated by Respol and Eni.
While the majority of Venezuela’s reserves come from onshore geology in the Orinoco, what kind of offshore oil analysts would we be if we did not at least mention what the country has to offer? The largest offshore oil field Venezuela has is the Corocoro Field that lies in shallow water in the Gulf of Paria in the east. The formation was discovered in 1999 by ConocoPhillips and has an estimated 210M recoverable barrels of medium 24 API gravity crude. Production in the field began in 2007 and ramped to 37K boe/d by 2010 before US sanctions in 2019 led to the asset being idled as offtake and partnership became challenging given this was a JV between PDVSA and Eni. There are a few other fields like the Pedernales heavy oil project but capital constraints and overall mismanagement of the oil industry in Venezuela leave many of these projects mothballed.
Production Economics
According to state owned PDVSA average production cost in Venezuela in 2016 was $18 per barrel with 1990s break evens in the $10 range given the light oil production the country exported through the decade. Fast forward to the present day and we think cost per barrel for new wells is probably over $30 per barrel. For those who might not know, operating leverage and scale economies are exceptionally important in oil production so the low to mid-teens figures being assumed by some based on past production profiles fails to account for the volumes lost over the decades and how this changes the cost structure. When we talk about cost per barrel in Venezuela the inputs we are thinking about are the following:
· Upstream Lifting Cost -$12
· Processing/Upgrading Expense $11.25
· Logistics/Transport $6 -$8
· Labor $0.50 - $1.00
· Total Cost Per Barrel: $30.00
Lifting costs are going to be fairly low in Venezuela as oil in Orinoco is not deep in the ground and can use simple pumps aided by gas drives to bring oil to the surface. We estimate $10-$12 in lifting cost for new wells. One caveat that we are still working out is if artificial lift or steam injection is required, costs will be higher than stated but for now we feel comfortable estimating $12 of lift but due to the unknown condition of much of the aging equipment and shortages of critical raw materials and spare parts this could change lifting cost profiles.
Processing/Upgrading Expense is the diluent that we spoke of earlier which will add to cost two-fold. The first is by the physical purchasing of the diluent but also for the product loss of roughly 10-15% from the higher value crude oil that is removed in the blending process to make the DCO PDVSA sells. We assume roughly $10-12 in diluent costs steady state and get to that figure by assuming $70-80 per barrel of diluent with 10-15% on a per barrel basis needed to blend the oil. If we assume $75 per barrel of diluent and 15% blend rate that gets us to roughly $11.25 in diluent cost per barrel.
Logistics and Transport costs should be modest given the extensive pipeline system that the country has. The issue is the network is mismanaged and in desperate need of maintenance as it is leak prone. When the pipeline leaks this ends up requiring oil to be trucked which adds substantial cost especially for large volumes and is inefficient. As it stands, sanctions on the country force a dark fleet to be operated that takes the oil to Asian nations which incurs significant freights costs and or discounts as there is substantial risk downstream which will reduce your net backs per barrel. For Logistics and Transport we assume $6-8 per barrel but this is honestly a shot in the dark, given how beat down the infrastructure is and how poorly the operations are managed there is likely low hanging fruit to improve the logistical network although this would take time and significant capital to repair the pipeline system.
Labor costs are tricky for Venezuela as hyper inflation essentially erased wages in local dollar terms but on the other hand this means the best labor has fled the country. Venezuelan oil experts have moved out of the country years ago and work in Saudi or the UAE while what remains is bottom of the barrel operators. In addition, there is a sort of inefficiency cost that comes from multiple layers of social programs and government bureaucracy, corruption and low skilled labor but on an absolute basis we estimate a very small figure for labor in the country as it stands realizing that if US companies do enter those labor costs will increase substantially (we assume).
Infrastructure Challenges in Venezuela
In the boom years of the Venezuela oil rush miles upon miles of pipeline were constructed, hundreds of tank farms, gas/oil separation plants, 5 domestic refineries and export terminals built on both coasts as well as upgrading/blending complexes we have noted. The issue with this infrastructure is it is old and unkept with PDVSA admitting the pipeline is over 50 years old and has significant deferred maintenance which is made worse by the abrasive nature of the crude the country possesses.
PDVSA estimated in a report to the EIA that it would cost north of $8B USD just to upgrade the pipeline network. This makes no mention of the rest of the countries infrastructure that has fallen into disrepair in the last few decades. In addition, much of the countries operations like refining capacity for export and domestic use are idled or simply inoperable. In the boom years Venezuela could do about 1.3M boe/d in refinery capacity through Amuay, Cardon and El Palito but because of the disregard of the care needed to keep these assets in working order the country not only cant meet nameplate export capacity but it has trouble meeting even domestic fuel needs. For a comprehensive analysis lets look specifically at Upstream Infrastructure and Midstream/Export infrastructure and just for fun, a note on the Natural Gas/LNG industry in the country.
Upstream Infrastructure
Drilling rigs in the country are in an abysmal state and production equipment is scarce. Rig counts in the country have literally fallen into the single digits with just 2-3 rigs operating at times as PDVSA could not pay contractors and companies ran for the exit. In addition it got so bad rigs and oil field services tools were torn apart for their internal parts. The entire energy complex in Venezuela will require massive retooling efforts which means importing new drilling rigs, workover equipment, pumps, compressors, you name it.
Once you get the physical equipment in country then the problem of powering it comes into play. The majority of the Orinoco field uses the national grid but similar to the oil infrastructure the electrical grid lacks basic operational capabilities and is in need of repair and even causes black outs in the country like in 2019 when a power outage stopped all production in the Orinoco field.
Midstream & Export Infrastructure
Upgrading facilities are a must have and if the capacity is not expanded then more blending facilities and diluent import infrastructure will be needed to handle growing DCO volumes. As it stands PDVSA’s ports are a massive choke point for the oil industry at large. Export terminals in Jose (Caribbean) and Punta Cardon (GoV) are operating subscale due to sanction fear and the inability to secure ship insurers and port services. In addition tanks and berths that are on location would need an overhaul to handle any growth in input capacity to get to 2M boe/d there would need to be a large de bottle necking effort as well as new storage tanks added for the segregating of various crude grades.
Natural Gas / LNG Infrastructure
Though a huge amount of associated gas is produced in Venezuelan oil fields the majority must be flared or reinjected because the country lacks the ability to capture and market natural gas. There is also a lack of pipeline infrastructure to move the gas for domestic or export use because plans discussed never materialized. Not only does this matter due to natural gases flexibility and end use in electricity, but gas reinjection is required to sustain output in mature fields and unless capital is spent to build out new compressors or pipelines reservoir levels will continue to fall in the countries older, declining fields.
Iraq – A Case Study
History is a critical guide for understanding our recent actions in Venezuela and how these events in in 2026 might play out over the next decade or so. Iraq is a perfect parallel and likely the best example to use as the same rhetoric was used before, during and after the invasion of Iraq and the removal of Saddam Hussein’s regime. Before we dive into political overlap in the two conflicts I think it is important to set the table with a brief overview of the situation in Iraq pre-Kuwait.
As Venezuela opened its boarders to outside capital in the 1980-1990s, Iraq did exactly the opposite. The country was constrained by roughly $40B in Gulf Arab debts from the 1980-1988 Iran v Iraq war. Saddam’s regime and Iraq broadly needed oil revenues to keep the country solvent at a time where oil traded sub $20 a barrel and Kuwait was overshooting its OPEC quotas by a large margin.
By July of 1990 Iraq was openly accusing Kuwait of intentionally oversupplying world oil markets and costing Iraq essential revenue by lowering prices below Iraq’s required $25 oil price to balance its budget. In addition to overproducing, Iraq accused Kuwait of overproducing in their shared field the Rumalia. By August of 1990 Saddam moved on Kuwait and subsequent US and UN sanctions crippled Iraqi production knocking it from its 3.5M boe/d high before the war in Iran to just 700K – 1M boe/d.
A critical difference between Iraq and Venezuela is when these sanctions hit and the threat of disrepair was evident; Saddam prioritized the protection of critical oil infrastructure and in 2000 they even opened a secret pipeline to Syria pumping something like 150K boe/d just to keep oil flowing and some revenues coming in. The efforts of Saddam made it so that by 2000 Iraqi production had increased to nearly 2.5M boe/d thanks to some UN sanction relief and a pivot from the Saddam regime.
The important distinction to make here, and our in house view is Iraq was in a much better place from an oil infrastructure perspective than Venezuela and it truly isn’t close. The reason the edge goes so far in Iraq’s favor goes back to the old saying, show me the incentives and I will show you the outcome.
Saddam and his cronies needed the oil industry in Iraq to boom in order for him to retain his power and by extension his life, therefore, oil infrastructure and the industry at large was of strategic national importance and was the backbone of the regime. On the other hand, Venezuela through Chavez and Maduro used the oil industry to line their pockets as a political cash source.
As a result of these polar opposite incentive structures Iraq’s oil infrastructure was in a much stronger place in 2003 when we invaded the country than Venezuela’s is in 2026 as we have laid out in the sections above. The reason we see this as a fundamental detail is we promised in 2003 just as we are today to carve up the country, produce its oil and bring democracy to the people of Iraq – which echos the same promises we are making around Venezuelan oil today. Iraq cost us trillions of dollars and 100K boots on the ground and we did not advance American interests at all and we certainly did not take over their oil industry. It is going to be more of the same with Venezuela except besides the push back that will come from those trying to fill the power vacuum that is left post Maduro, the US is also combatting hundreds of billions of dollars in infrastructure spend in what is a failed state.
Concluding Thoughts
In conclusion, I believe the American media narrative that has formed post Maduros removal as it relates to oil is completely misguided and shows just how little the general public understands about the very resource that powers their day to day lives. It is my view that the US will not control Venezuelan oil production in any meaningful way besides potentially keeping it out of the hands of Russia and China or, at least trying. It is also my view that the type of viscous, heavy and ultra heavy sour crude being produced in the country presents further challenges to production ramping and though we think 1-1.25M in the shorter term is achievable, to grow meaningfully from there is going to take significant capital investment and time if all the stars align and the country is willing to go belly up and allow us to carve up and lease out their industry ( I highly doubt it).
On top of all of this, while the narrative in capital markets is this is great for majors like Exxon, Shell, and Conoco, etc the only guarantee that these companies will have is the “privilege” of spending billions of dollars in capex, in an unstable nation, with oil prices at multi decade lows on an inflation adjusted basis – how is this incrementally bullish or interesting for any of these companies to invest?
The other piece to this is capital competes between projects. Exxon, Chevron, Shell, Total, Eni are all contractually obligated to projects as it stands, with billions needed to develop key offshore deep-water projects in Namibia, Guyana, Surinam, Brazil, etc. My question then is, what projects will be scrapped or pivoted away from to fund this new venture in Venezuela? What banks are going to fund the tens of billions of dollars to go and do these projects abroad?
My point in all of this is, as happens often in the human experience sober analysis is secondary or tertiary to the next “big thing” which is further exacerbated by a current sitting president that loves to speak in hyperbole with a “say it now, figure out how” later attitude.
We do think the development of Venezuela would present a massive opportunity should it occur, that US companies having access to a field like the Orinoco would lead to incremental benefits with most (hopefully) trickling down to the people in Venezuela who have suffered under the thumb of Chavez and Maduro. The truth of the matter is an 8M people exodus and your brightest oil minds in diaspora is not corrected overnight if it is even fixable at all – as we think the country might be too far gone at this point to ever be a constructive place to live and do business.
Exhibits
Sources