What to know about oil production in Venezuela

If you thought the first weekend of the new year would be restful from an international news perspective, you, dear reader, were sorely mistaken: On Jan. 3, U.S. President Donald Trump announced the capture and arrest of Venezuelan President Nicolás Maduro. He is expected to make his first court appearance on Monday as he faces narco-terrorism charges.

One of the things central to the American invasion? Venezuelan oil. For more context on this, “Marketplace Morning Report” host David Brancaccio spoke with Fernando Valle, managing director of energy for the investment firm Hedgeye Risk Management. The following is an edited transcript of their conversation.

Fernando Valle: It really shows you that the issue with oil today is really more centered around demand than it is around supply. And really, in the short term, the impacts of Venezuela are going to be very limited. It's a country that produces less than a million barrels a day — so less than 1% of global supply today — and it doesn't have the pathway to grow that production very quickly, in a short period of time. I think it's demand that's really the big constraint here.

David Brancaccio: Yeah, demand — global demand for the stuff. And there's friction there. Now, to your point, though, about if Venezuela's oil infrastructure were to get developed, it would take a long time. What is that a decades-long process, a couple years' process?

Valle: Well, to get to 2 million barrels a day from the current 1 million barrels a day, you're probably talking about 18 months to three years, probably closer to the three-year mark. The infrastructure has been held together by string and gum, as we say, so it will require a lot of capital and time and certainty around the sanctity of those contracts and the ability to extract capital in order for that to progress. So I think probably closer to three years to double production from here.

Brancaccio: Just about every story written about the Venezuelan oil industry will have that line in it about "it holds the world's largest oil reserves." You are skeptical about the numbers that go with that claim.

Valle: It's really recent history if you look at it. Back in 2006, Venezuela had about 80 billion barrels of reserves, and even those are debatable. And then under Hugo Chávez, they started growing it in 2007 to 100 [billion] and then eventually getting to 300 billion barrels. Reserves are what is actually recoverable. It's not just oil in the ground; it's what's recoverable, and that includes an economic test. So if you recall, in 2007, oil prices were above $100 a barrel. Today, they are $60 for Brent. So just by definition there, what was recoverable then is not recoverable now.

Brancaccio: And so where does that leave us, when you have the U.S. President Donald Trump talking about billions of dollars worth of investments in Venezuela — some of that's in the oil industry, presumably. The president later said, we would "get reimbursed for all of that." We're going to get reimbursed for everything that we Americans spend. What do you make of a statement like that?

Valle: It's going to be a lot longer if he's banking on oil, which is, of course, their primary source of revenues. Venezuela does have gold and other natural resources. But with oil today, it would probably be a decade-long, if not multidecade, payback on the American capital.

Brancaccio: The stock price of some oil companies are jumping today. Some of it may, do you think, have to do with, for instance, Exxon and ConocoPhillips, they still seek compensation for what happened to them after having to leave Venezuela, I think it was back in 2007. Do you think investors are betting those companies might get compensation now?

Valle: I think it's about potentially looking at a new government that will try to make nice with the U.S. You may recall that PDVSA's Citgo, which are U.S.-owned refining assets, is under creditor control now. One of those creditors is ConocoPhillips, and so potentially, in order to expedite the investment by the USA you referenced earlier, they would make a deal with the U.S. creditor companies in order to create that pathway towards getting Venezuela back on the side of development.