How the US is taking direct control of Venezuelan oil

NEW YORK – While Venezuela is not the powerhouse oil producer it used to be, the country nonetheless has some of the world’s largest oil reserves.

When the US seized then-Venezuelan President Nicolas Maduro on Jan 3, US President Donald Trump was clear that the raid was as much about oil as it was about the narco-terrorism and drug charges levelled against the strongman leader now being held in a federal jail in New York City. 

In the months since, the Trump administration has conditioned support for interim President Delcy Rodríguez’s government on a series of measures to open Venezuela’s oil sector to US investors and cede significant control over the industry to the US government.

In late August, the US announced an agreement with Venezuela for the US to take control of more than 65 billion barrels of the nation’s crude reserves. The deal is prompting warnings that the Latin American nation will become a modern-day resource colony akin to the so-called banana republics of a century ago. 

Here is what you should know about Venezuela’s oil industry and how the US is seizing access.

How will the US-Venezuela oil deal work

The arrangement gives a private company, North American Blue Energy Partners (NABEP), rights to develop a huge swath of Venezuela’s oil reserves, while giving the US government a stake in the company and broad rights to buy its crude.

Here is how it works: Venezuela’s interim authorities have granted NABEP 100-year concessions to operate 17 oil fields with proven reserves of about 65 billion barrels.

NABEP plans to invest as much as US$100 billion (S$127 billion) in new infrastructure and boost production from its operations in the Lake Maracaibo and Orinoco Belt regions.

The Pentagon’s Office of Strategic Capital will take a 35 per cent equity stake in NABEP’s corporate parent, which the White House says could represent hundreds of billions of dollars in value and dividends.

US taxpayers will not finance the venture; NABEP will instead be able to raise private American capital.

The State Department will have the right to buy 20 per cent of the oil produced from NABEP’s current and future fields at the cost of production. The US said the crude could be used to refill the Strategic Petroleum Reserve.

The US will also have the first opportunity to buy the remaining 80 per cent of the oil.

Washington will also have veto power over appointments to NABEP’s board, and a majority of NABEP’s members must be US citizens. The agreement will be governed by US law and subject to US courts.

How does the deal benefit the US and Trump?

Trump said the arrangement would more than double US oil reserves and in turn lower petrol prices.

While it will take time to ramp up Venezuelan oil production, the administration is betting that expectations of future supply can help put downward pressure on prices now.

The Trump administration is keen to demonstrate political wins ahead of the midterm elections – the president’s ratings are at a low following the unpopular war in Iran and its impact on affordability.

The potential flows of crude to the US, underpinned by an expected surge in Venezuelan production, will be used to refill the Strategic Petroleum Reserve, according to a White House release. It also stands to boost business for US refineries and oil field-equipment makers.

The deal will likely help the US further secure its energy independence and dominance in world markets. Venezuela’s importance in global oil markets has increased since the outbreak of the Iran war, which has constrained supplies from the Persian Gulf.

Venezuelan oil can reach key markets without passing through some of the world’s most volatile maritime flashpoints, including the Red Sea and the Strait of Hormuz, adding to its appeal.

What does the deal mean for Venezuela?

NABEP’s investment in new oil infrastructure will help drive economic growth and support thousands of jobs in Venezuela. 

Over the first quarter century of the 100-year deal, it is expected that NABEP will pay US$200 billion in royalty and tax payments to Venezuela.

Rodriguez cast the agreement as a way to turn Venezuela’s vast underground reserves into “well-being, prosperity and happiness” for its people. 

But government loyalists and opposition figures alike criticised the deal, which may strengthen Rodriguez by giving the US a greater stake in her administration’s continuity.

Hard-line supporters of Chavismo, the political movement founded by the late president Hugo Chavez and built in part around state control of Venezuela’s oil, called the deal an abdication of the country’s sovereignty. Some commentators said Venezuela had effectively been forced to give away oil under US threat. 

Francisco Rodriguez, a Venezuelan economist and professor at the University of Denver, said Venezuela is “functioning as a protectorate of the US in all but name”.

This arrangement “isn’t furthering the interests of Venezuelans. It’s about securing the economic and security interests of the United States”.

A State Department official rejected the idea that the Trump administration’s efforts in Venezuela were colonial. The move would benefit the country’s people, the person said, while disadvantaging US geopolitical foes Russia and China, whose entities previously controlled some of the fields to be operated by NABEP.

How much oil does Venezuela have?

The Organization of the Petroleum Exporting Countries (OPEC) estimates Venezuela sits atop nearly 304 billion barrels of oil, or the equivalent of 20 per cent of the world’s crude reserves – more than Saudi Arabia.

But some analysts claim the real number is about a third of that, or around 100 billion barrels. While the figure may not be as colossal as OPEC’s estimate, it is still nearly double the combined reserves of the US, Canada, Mexico and Chile. 

Venezuela currently produces around a million barrels a day, less than 1 per cent of global output. Oil production will take decades to return to its 1990s peak of more than three million barrels a day, even as a deal with the US prompts a boost in near-term output, according to Rystad Energy.

Despite the sector’s decline, at least 95 per cent of Venezuela’s overseas revenue comes from oil sales.

Under the US deal, NABEP said it plans to boost production from its operations in Venezuela’s Lake Maracaibo and Orinoco Belt to more than 1 million barrels of oil per day.

Under Trump, what role has the US taken in Venezuela’s oil industry?

Trump has described Venezuela as the 51st state and said the US will “rebuild” the country’s underproducing oil industry.

In January, Trump appeared to threaten Rodríguez’s life if she did not comply with the US’ priorities.

“If she doesn’t do what’s right, she is going to pay a very big price, probably bigger than Maduro,” he said in an interview with the Atlantic.

Under US pressure, Rodríguez has succeeded in enacting new hydrocarbons and mining laws that favor investors and ditch decades of tight state controls.

The US Treasury is easing sanctions on the state oil company Petroleos de Venezuela, or PDV, and expanding licenses for more US and international firms to do business with the state-owned company.

Washington has kept close oversight of the process while controlling the country’s oil revenues, which it is holding in US Treasury accounts.

It had allowed around US$3 billion to flow into the economy as at mid-April and has promised that independent audits run by professional services firm KPMG will be published. It’s unclear when the reports from the auditing firms will be released. 

Crude and gas production has not significantly ramped up yet.

While most oil majors have left the country in recent years, a handful have held on, including Chevron – the only American company still operating in the country – Italy’s Eni and Spain’s Repsol.

Trump’s efforts to attract producers to return to the country yielded no new investments for the first seven months after Maduro’s ouster.

But in early September, Chevron finalised a deal that will significantly expand its operations in Venezuela by adding two giant oil fields in the Orinoco Belt territory. Chevron accounts for about a quarter of Venezuelan oil production. Other deals with US companies are expected to follow. 

In a sign of the US’s deepening role in Venezuela’s oil industry, Venezuela is considering whether it should quit OPEC, which it helped found in 1960, according to people familiar with the matter, and is discussing the possibility with US officials.

What has been the role of US oil companies in Venezuela?

US oil companies were the main architects of Venezuela’s oil industry starting a century ago, building the country into a leading US supplier. 

The industry was nationalised in the mid-1970s and reopened to foreign investment in the 1990s.

Chavez, Maduro’s predecessor, expropriated major US oil projects in 2007.

Exxon Mobil and ConocoPhillips pulled out and later won sweeping international arbitration awards for the seizure of their assets. BLOOMBERG