Trump’s plan to seize and revitalize Venezuela’s oil industry faces major hurdles

President Donald Trump’s plan to take control of Venezuela’s oil industry and ask U.S. companies to revitalize it after capturing President Nicolas Maduro in a raid is not expected to have a significant immediate impact on oil prices.

Venezuela’s oil industry is in poor shape after years of neglect and international sanctions. It will therefore take years and major investments before production can increase dramatically. But some analysts are optimistic that Venezuela could double or triple its current production of about 1.1 million barrels of oil per day to return to historic levels relatively quickly.

“Although many argue that Venezuela’s oil infrastructure has not been damaged by U.S. military actions, it has been deteriorating for many years and it will take time to rebuild it,” said Patrick De Haan, senior oil analyst at GasBuddy.

American oil companies will want a stable regime in the country before they want to invest heavily, and the political situation remained uncertain on Saturday, with Trump saying the United States was in charge, while the current Venezuelan vice president asserted, before Venezuela’s High Court ordered her to assume the role of interim president, that Maduro should be restored to power.

“But if it looks like the U.S. is successful in running the country over the next 24 hours, I would say there would be a lot of optimism that U.S. energy companies can step in and revitalize the Venezuelan oil industry fairly quickly,” said Phil Flynn, senior market analyst at Price Futures Group.

And if Venezuela manages to become an oil-producing powerhouse, Flynn said “that could cement a long-term decline in prices” and put more pressure on Russia.

As oil was not traded over the weekend, there was no immediate impact on prices. But a major change in prices is not expected when the market reopens. Venezuela is a member of OPEC, so its production is already counted there. And there is currently a surplus of oil on the world market.

Venezuela is known for having the largest proven reserves of crude oil in the world, approximately 303 billion barrels, according to the U.S. Energy Information Administration. This represents approximately 17% of all global oil reserves.

International oil companies therefore have reason to be interested in Venezuela. Major companies, including Exxon Mobil and Chevron, did not immediately respond to requests for comment Saturday. ConocoPhillips spokesman Dennis Nuss said by email that the company is “monitoring developments in Venezuela and their potential implications on global energy supply and stability. It would be premature to speculate on future business activities or investments.”

Chevron is the only one with significant operations in Venezuela, where it produces around 250,000 barrels per day. Chevron, which first invested in Venezuela in the 1920s, operates in the country through joint ventures with state-owned Petróleos de Venezuela SA, commonly known as PDVSA.

But even with these massive reserves, Venezuela produces less than 1% of the world’s crude oil supply. Corruption, mismanagement and U.S. economic sanctions have led to a steady decline in production, from 3.5 million barrels per day pumped in 1999 to current levels.

The problem is not finding the oil. It’s a question of the political environment and whether companies can count on the government to honor their contracts. In 2007, President Hugo Chávez nationalized much of oil production and forced major players like ExxonMobil and ConocoPhillips to withdraw.

“The problem is not just that the infrastructure is in bad shape, but it’s more about how to get foreign companies to start investing money before having a clear perspective on political stability, the contract situation, etc.,” said Francisco Monaldi, director of the Latin American energy program at Rice University.

But infrastructure requires significant investment.

“It is estimated that for Venezuela to go from one million barrels per day – which is what it produces today – to four million barrels, it will take about a decade and about a hundred billion dollars of investment,” Monaldi said.

Venezuela produces the type of heavy crude oil needed for diesel, asphalt and other fuels for heavy equipment. Diesel is in short supply worldwide because of oil sanctions from Venezuela and Russia and because lighter U.S. crude cannot easily replace it.

Years ago, U.S. Gulf Coast refineries were optimized to process this type of heavy crude at a time when U.S. oil production was declining and Venezuelan and Mexican crude were plentiful. So refineries would like to have more access to Venezuelan crude, because it would help them operate more efficiently, and it tends to be a little cheaper.

Increasing Venezuelan production could also ease pressure on Russia, as Europe and the rest of the world could get more of the diesel and heavy oil they need from Venezuela and stop buying from Russia.

“The collapse of Venezuela’s oil industry was a big advantage for Russia. And the reason is that it was a competitor on the world stage for that oil market,” Flynn said.

But Matthew Waxman, a law professor at Columbia University and a national security official in George W. Bush’s administration, said the takeover of Venezuela’s resources sets the stage for additional legal problems.

“For example, the big question will be who really owns Venezuela’s oil? Waxman wrote in an email. “An occupying military power cannot enrich itself by seizing another state’s resources, but the Trump administration will likely claim that the Venezuelan government never rightfully held them. »

But Waxman, who served in the State and Defense departments and on the National Security Council under Bush, noted that “we have seen the administration speak very dismissively about international law when it comes to Venezuela.”

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Associated Press writers Matt O’Brien and Ben Finley contributed to this report.