Can Venezuela’s Oil Market Reopen?

Select energy names rallied in early January—particularly oilfield services, US refiners and producers with historical exposure to Venezuela—as investors priced in the possibility that the country’s long-sanctioned oil sector could reopen following the arrest of Venezuelan President Nicolás Maduro.¹ With more than 300 billion barrels of accessible resource—the largest proven oil reserves in the world—markets are excited by this possibility.² We believe that any potential meaningful impact is likely to unfold far more slowly than markets anticipate given the estimated cost and complexity of such an endeavor.

Despite making up approximately 17% of global oil reserves, Venezuela produces less than 1% of global crude supply, a fraction of its capacity.³ Years of sanctions and chronic underinvestment have left production capacity severely impaired, and most of Venezuela’s oil is extra heavy crude, which is more expensive and difficult to extract, transport, process and refine. Estimates suggest that it would require tens of billions of dollars to rehabilitate Venezuela’s existing oil fields and pipelines in order boost output within a few years.⁴ The country’s entire energy complex is operating well below any comparable global resource base.

In our view, any material contribution to global oil supply would likely take two to three years at a minimum with nearly $100 billion of investments. Moreover, large energy companies have publicly expressed the need for improved fiscal terms, as well as broader security and legal assurances, which we believe reflects the broader risks of the current geopolitical landscape.⁵

Without any quick fixes in sight, we believe that select legacy energy businesses in possession of scarce, vital assets in stable jurisdictions with a record of prudent stewardship of capital may be better positioned to meet the world’s long-term energy demands.