Eve, here. With too many members of the US media exhibiting goldfish memories, it is important to keep an eye on Trump’s rants and promises and their actual or predictable consequences. At the time of President Trump’s attack in Caracas, many noted that it would take significant time and investment just to bring Venezuela’s oil production back to 1990s levels, and even more to surpass it. This post details the dire state of Venezuela’s oil infrastructure and what it means for increased production.
Written by Matthew Smith, Oilprice.com’s Latin America correspondent and investment management expert. First appearance: OilPrice
The collapse of Venezuela’s oil industry is rooted in decades of underinvestment, nationalization, sanctions and aging infrastructure. Restoring production to historic levels could require $180 billion and more than a decade of sustained investment. Environmental damage, refinery failures, and critical condensate shortages make rapid recovery extremely difficult.
After U.S. forces kidnapped President Nicolas Maduro in a daring night raid earlier this month, President Donald Trump began pressuring oil companies to invest in Venezuela’s severely corroded oil industry. The US president has urged drillers to invest in Venezuela, which has the world’s largest oil reserves and is protected by the US government. However, these proposals received a lukewarm response from energy companies in the United States and Europe. ExxonMobil CEO Darren Woods drew the ire of President Donald Trump when he said Venezuela was uninvestable, but some energy giants expressed favorable views, although no investment commitments came.
Once a staunch U.S. ally and Latin America’s bulwark against communism, Venezuela at one time was piling up more than 3 million barrels of oil a day. Oil production reached a record high of 3,754,000 barrels per day in 1970. This impressive increase in production was driven by major U.S. oil companies, which invested billions of dollars in developing Venezuela’s vast oil reserves of more than 300 billion barrels. President Carlos Andres Pérez nationalized Venezuela’s hydrocarbon sector in 1976, and the newly created state oil company PDVSA took control of industry operations, but it did little to prevent foreign investment.
However, this marked a turning point for Venezuela’s oil industry. Since then, production has declined, eventually reaching a multi-decade low of just under 1.7 million barrels per day in 1985 due to falling global oil prices. Nevertheless, production soared by the early 1990s as U.S. and European energy companies increased investment after Caracas relaxed regulations and offered lucrative production contracts. As a result, production reached its highest level in decades at just under 3.5 million barrels per day in 1997, two years before Hugo Chávez became president and launched the Bolivarian socialist revolution.
Venezuela’s heavy sour crude was once very popular among refiners on the U.S. Gulf Coast. Venezuela’s proximity to the Gulf Coast, combined with an abundant supply of heavy sour crude sold at a deep discount to Brent and West Texas Intermediate benchmarks, has made oil refining profitable. The only problem was that the refinery would have to have the additional technology needed to distill and crack Venezuela’s heavy sour crude, which is notoriously difficult to refine into high-quality fuel. As a result, the 1970s and 1980s saw a flurry of construction activity as refiners upgraded existing facilities and built new facilities to process Venezuelan oil.
For these reasons, shipments of Venezuelan heavy sour crude oil to the United States have increased since the 1980s.
Source: U.S. Energy Information Administration.
Eventually, oil shipments exceeded 1 million barrels per day by 1993, and reached an all-time high of just under 1.4 million barrels per day in 1997. The United States has become a major export market for Venezuela’s heavy sour crude oil blends and a major backer of the country’s massive oil boom. Oil payments received by the United States remained stable at more than 1 million barrels per day throughout the early 2000s, but declined after 2006 as the U.S. government instituted sanctions and chronic misconduct affected PDVSA’s operations.
The meteoric rise of Hugo Chavez, who took office as president of Venezuela in February 1999, signaled the beginning of the end for the oil industry, the country’s economic backbone. The former army officer, who staged a failed coup in 1992, launched a socialist Bolivarian revolution and adopted an anti-imperialist stance increasingly hostile to Washington and the neoliberal economy. The situation culminated in President Chávez nationalizing foreign private assets deemed vital to the economy, particularly oil operations held by U.S. energy companies, costing drillers like Exxon and ConocoPhillips billions of dollars.
By the mid-2000s, Venezuela’s oil production was once again in decline as US sanctions, lack of capital investment, corroding infrastructure, and a lack of skilled labor severely impacted operations. This trend accelerated as the US government gradually tightened sanctions, and oil prices collapsed towards the end of 2014. By the end of the 2020 pandemic, Venezuela’s energy infrastructure was in chaos. As a result, production plummeted to a historic low of 500,000 barrels per day in 2020. Coupled with ever-tighter US sanctions, oil prices have fallen to negligible levels. Decades of fraud, endemic corruption and lack of capital spending have brought Venezuela’s oil industry to its knees.
Investment from China and Iran, including upgrading aging oil infrastructure, and Chevron’s approval from the U.S. Treasury Department to drill for oil in Venezuela have boosted production, but output remains well below levels seen in the 1970s and 1990s. According to data from OPEC, of which Venezuela is a member, the country’s near-bankrupt oil production will be around 1 million barrels a day in 2025, less than a third of its peak in the mid-1990s. President Trump has aggressively encouraged U.S. energy companies to invest in Venezuela’s severely corroded oil industry, but there has been considerable speculation about whether the country will be able to rebuild its infrastructure quickly enough to justify the significant increase in production.
Professor Francisco Monardi, director of the Latin American Energy Program at Rice University’s Baker Institute for Public Policy, believes the damage is so severe that he estimates that spending $10 billion a year over 10 years will be needed to restore production to historic levels. He said the White House needs to spend more if it wants to accelerate the recovery of Venezuela’s energy infrastructure. Some analysts argue that bringing Venezuela’s production back to around 3 million barrels per day will require investments of more than $180 billion over at least 15 years.
The poor state of Venezuela’s oil infrastructure is illustrated by the significant environmental damage caused by corroded and deteriorated pipelines, storage facilities, wellheads, derricks, and refineries. Numerous facilities in the heavy oil-producing Orinoco Belt, which accounts for much of Venezuela’s oil production, have been idle for a decade, many of which have seen them cannibalized for spare parts or looted by scavengers by the near-bankrupt PDVSA or worse. This further increases the cost, complexity and time required to bring production back online. These events intensified as Venezuela’s economic collapse accelerated, forcing starving people to scavenge for whatever supplies they could to survive.
The disastrous collapse of Venezuela’s oil industry is highlighted by the environmental catastrophe occurring in and around Lake Maracaibo, Latin America’s largest body of water. Crude oil is constantly leaking from a vast network of corroded pipelines, storage tanks and derricks that crisscross the body of water. With more than 10,000 oil-related facilities scattered around Lake Maracaibo, aging pipelines, derricks and storage tanks are extremely difficult to track, let alone repair or remove. The severe deterioration of maintenance records and corporate memory within PDVSA means that the authority is unaware of the existing infrastructure in the area, further exacerbating this problem.
Corrosion from decades of neglect is further illustrated by the Amuay and Cardon refineries that make up the Paraguana refinery complex in the province of Falcón. Both facilities are believed to be operating at less than one-fifth of their operating capacity, indicating that their use as de facto oil storage facilities is increasing. The Anuay and Kardon refineries also suffer from frequent mechanical breakdowns, fires, explosions and oil leaks, leading to extended shutdowns. Both are key to processing the super-heavy, ultra-sour crude oil produced in Venezuela’s Orinoco Belt before it can be shipped and used as refinery feedstock. Renovating the Paraguana facility is estimated to cost between $500 million and $1 billion, adding to the cost and complexity of restructuring Venezuela’s oil industry.
Condensate is a light hydrocarbon that is essential for mixing and fluidizing very heavy crude oil, so that the oil can be processed and transported for use as a refinery feedstock, so a reliable supply must be procured. Gas oil and condensate production in Venezuela has been decimated by a lack of investment and badly corroded drilling infrastructure, making it nearly impossible to secure. The amount of condensate pumped by OPEC countries is estimated to be less than 20,000 barrels per day, and heavy oil production in the Orinoco belt relies on imports of low-density, high-API-gravity hydrocarbons. Until recently, Iran supplied Caracas with naphtha, a condensate derivative. For Venezuela’s oil production to expand to the levels envisioned by the White House, Washington will need to procure a reliable supply of condensate.
