The Future of Venezuela’s Oil Industry: A Conversation with Carlos Mendoza Potellá

An oil expert talks about the situation of the industry under the oil embargo.


Carlos Mendoza Potellá (Venezuelanalysis)
Carlos Mendoza Potellá (Venezuelanalysis)
By Cira Pascual Marquina –
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Production has been falling in Venezuela’s oil industry for more than five years. In 2019, the US oil embargo on Venezuela added insult to injury in an already struggling industry. Carlos Mendoza Potellá, an economics professor at Venezuela’s Central University and former advisor to Venezuela’s Central Bank, discusses the present conjuncture while looking at the future of the oil industry.

US sanctions triggered an important drop in oil production. How did they exacerbate problems that were already present in the national oil industry, before the implementation of the oil blockade in 2019?

The sanctions were one of the key factors in a fall in oil production. In 2013, Venezuela’s production was at about 2.6 million barrels per day [BPD]. By the end of 2017, our production was as low as 1.9 million barrels per day. Then, when sanctions were implemented in 2019, we witnessed a precipitous drop in production. In fact, by the end of 2020, Venezuela’s oil production was under half a million BPD.

So, yes, the impact of the sanctions was devastating, although I should add the industry had been in crisis long before.

Everything points to oil production increasing now, albeit very timidly. What has changed?

Unfortunately, not everything points to a recovery of Venezuela’s oil production. In early 2021, the president stated that the goal for December 2021 was two million barrels per day. The goal was then lowered to 1.5 and finally, in September, the goal became just one million BPD.

On December 24, 2021, an announcement was made with great fanfare: Venezuela had reached one million BPD! It was the beginning of the recovery!

But, is that really so? Let’s take a look. First, the one million BPD was reached on one single day only. It is not a representative figure. Also, we have to factor in a few more pieces of information: first, average daily production in 2021 was just over half a million, and in December just above 700 thousand BPD, according to OPEC reports. On top of that, oil production dropped some 50 thousand BPD in January 2022. Both official and secondary sources reflect this January drop in production.

The key issue here is that, while there have been some efforts toward recovering the oil industry, they are far too small, too marginal, and too dependent on diluents [chemical additives] coming from Iran. To give you an example, a shipment of one million barrels of diluent that was due to come from Iran in January. The shipment didn’t arrive until February 1, which caused the January drop. This is relevant because it shows our dependence.

Government spokespeople talk about a robust recovery in the oil industry, but this is false. Although it is true that there are minor investments from small enterprises with non-sanctum funds, these investments are too marginal to really turn things around. Citizens and researchers have no information about the origins of the investments because the Anti-blockade Law fosters opacity. However, we know that there is some investment, because information has come to light about the sale of scrap metal and petroleum coke, and those funds are being reinvested in the oil industry.

Nonetheless, these investments are far less than what is needed. The resources required to recuperate the oil industry are huge. To give you an idea, there are 25 thousand inactive wells…. Imagine the magnitude of the investment needed to reactivate those wells!

Does the recent small increase in production have something to do with the relatively high price of oil in 2021, which was about 80% higher than in 2020?

No. The small increase in production does not have to do with the rising oil prices. The prices may be higher but production levels remain low overall, so revenues are likewise small.

The investment needed to raise Venezuela’s oil production to two million BPD in five years would be, optimistically, 20 billion US dollars. Those funds cannot be obtained with an output of around 600 to 800 thousand BPD. Also, most of the oil produced is of the extra heavy variety, so we need Iranian additives to get it to the market. We pay the international price for those diluents, so our profit margin is small, even with high oil prices. Remember that the cost of production of Venezuelan oil today is higher than that of Brent or West Texas.

From my perspective, the goals that are being projected by the executive are not realistic. We cannot expect to produce two million BPD in current conditions.

Unfortunately, only large corporations such as Chevron would be able to bring the kind of investment needed. Indeed, only massive investment in conventional fields could improve output significantly… but there are many ifs to make such investments viable.

To be honest, in a sanctioned country without resources, one can only set as a realistic goal the stabilization and incremental growth of its production.

There are rumors that the Office of Foreign Assets Control [OFAC] may offer more licenses to US companies to exploit oil in Venezuela. Do you have any information about this?

The hope of a change when it comes to US sanctions was based on the change of style between the Trump and the Biden administrations. But, as it turns out, the change is superficial.

Biden has made it clear: sanctions are here to stay unless negotiations between the government and the most radical sector of the opposition yield the outcome that the White House desires. The Biden administration has abandoned the more violent plans to topple the government, but the objectives remain in place. That is why we should not expect lighter sanctions.

Nonetheless, it is true that Chevron is trying to get a license to exploit the Boscán oilfield. Boscán is a huge conventional oilfield that was practically abandoned when Venezuela’s oil policy shifted toward exploiting heavy crude oil in the Orinoco Oil Belt.

The shift away from conventional oil production was a massive error. Investing in the conventional oil fields when resources were available would have ensured a steady two million BPD for 30 to 40 years. However, the decision was to shift investment to the Orinoco Oil Belt instead.

The idea was that this would allow us to produce seven million BPD. It was a miscalculation because of the massive resources needed to get started, the ongoing investment required to maintain non-conventional oil operations going, the dependency on diluents, etc.

Will Chevron get an OFAC license to invest in Boscán and exploit the field? We don’t know. In any case, the overall sanctions scheme will remain the same.

What do you make of the attempts to reform the legal framework for exploiting hydrocarbons?

The attempt to reform the Hydrocarbons Law has its roots in the government’s desperate attempt to secure resources.

The 2001 Hydrocarbons Law is a progressive piece of legislation. For years now the opposition has tried to push a legal reform that would reduce both oil royalties and the participation of the state in mixed enterprises. Now, both the opposition and the government are talking about the same package of reforms.

In fact, there is a piece of legislation that opens the path for abrogating the existing laws and constitutional framework: the Anti-blockade Law.

The Anti-blockade Law has opened the door to increasing private participation in joint ventures. In the current situation, this is understandable, but these changes should not be hidden: they should be explained to the citizens. Glossing over the concessions that are being made helps nobody.

What are the private investment models that the government is looking into?

The investment model is basically opaque. What happens is that small contractors with non-sanctum funds are investing minor sums to repair oil wells and buy diluent and other additives. The results are proportional to the size of the investment: production has gone up by some 200 to 300 thousand BPD in 2021.

One might wonder about Chinese and Russian interests. Could they offer a solution to the bottleneck? Unfortunately, they are not able to participate openly in the oil business, because doing so would jeopardize their economic interests in the US. In fact, this is what happened with Rosneft, which closed its operations in Venezuela in 2020.

Venezuela is now refining roughly 120 thousand barrels of gasoline per day. This represents about 10% of the installed capacity – about 1.3 million barrels per day, but much closer to meeting demand. What are the obstacles to increasing production in the country?

Actually, I believe the numbers are as follows: right now 120 thousand barrels of crude are refined daily. That yields 80 thousand barrels of gasoline and 40 thousand barrels of nafta.

This is, indeed, about 10% of capacity which is 1.3 million barrels per day. We lost our refining capacity long ago because of a failure to do maintenance. Refineries require a full shutdown at least once a year to change panels, sandblast rust, combat metal fatigue, repair pipes and turbines, etc.

For example, the Puerto La Cruz refinery, which began producing in 1950, was shut down for maintenance every year for many years, but eventually, a “milking” logic was implemented: no stoppage, no maintenance, no investment!

In fact, when the Puerto La Cruz refinery was designed in the mid-40s, its projected capacity was about 1.5 million BPD. Now, with the accumulated wear and tear, all we can hope for is to reach 200 or 300 thousand BPD in two to three years.

Why can’t we recover the original installed capacity? Years of poor management, lack of planning, and poor investment choices – particularly shifting investment from conventional oil exploitation to extra-heavy oil exploitation in the Orinoco Oil Belt – proved to be a very bad choice. The pharaonic dream of getting to seven million BPD led us to purchasing refineries abroad and building new refineries here. Meanwhile, we didn’t maintain the existing conventional oil refineries.

The “expansionist” ideology – the shift from conventional to non-conventional oil exploitation – dates back to the “Oil Opening” [1992-99] when the dream of the Orinoco Oil Belt project began to emerge. However, this expansionist logic really begins permeating the oil policy in more recent years. And I should add that not only are the existing refineries being “milked” without maintenance; many conventional oil fields have been abandoned as well.

Venezuela has been producing conventional oil for some 80 years, and well-planned, relatively modest investments could have assured us production of conventional oil for 30 to 40 more years. Instead, the option was to expand [into heavy crude oil], and we are paying the consequences now.

Of course, the sanctions and other management problems have also devastated the industry.

Can you give us some pointers regarding PDVSA’s real operational capacity and the possibilities there are for increasing oil production in the upcoming years?

This question is linked to the very issues that we have been talking about. Daily refining operations can reach 200 thousand BPD. However, with the currently available resources, the sanctions, and the situation of the refineries, we cannot expect a more sizable increase.

Now, even if sanctions were lifted, recuperating the oil industry would require working with international corporations, with large capital, i.e. with those businesses that control technology and markets.

This, of course, is no simple matter and it would come only with tough negotiations. It would require making concessions while ensuring the sovereignty of the nation.

In 2020, Bloomberg polled eight large transnationals about Venezuela’s potential for oil production. The report, called “Reviving Venezuela’s Oil Sector,” boils down to the following: an investment of between 190 and 210 billion US dollars is needed to raise Venezuela’s production to about 2.6 million BPD by 2026. The polled corporations also claimed that this could only happen with a legal framework favorable to their interests.

Unfortunately, this is an overall correct assessment. It is obvious that with small infusions of money by small-time investors the situation is not going to be turned around significantly.

The tools, mechanisms, and options that the Venezuelan government has now won’t turn things around. It is not just about having the desire and the drive to get out of the hole. It is obvious that we are not in the condition to produce 1.5 to 2 million BPD, which is the stated goal for 2022.

The situation is pretty dire, and that is why attempts to turn things around with legislation such as the Anti-blockade Law are alive and well. There are also efforts to negotiate with Turkey, China, and Russia, but they are also affected by the sanctions and impose their own conditions.