The U.S. stood the energy world on its ear with the “wee-hours” takedown of the Maduro regime just as the New Year began. One of the principal aims of the administration was made abundantly clear in the press conference that detailed the stunning shift in energy geopolitics that had been effected just a few hours before. In addition to bringing Nicolas Maduro to justice, the U.S. was taking over the administration of the country’s oil sector with the express ambition of revitalizing it and increasing production. Estimates were floated by Energy Secretary Chris Wright of a quick ramp higher as oil majors, ExxonMobil (NYSE:XOM), and ConocoPhillips (NYSE: COP) returned to the country.
In the subsequent press conference that took place between high-level energy executives, President Trump and his key cabinet officials on Friday, January 9th, the initial bullishness took a step back. One by one, while these business leaders showed support for the administration's goals, they made it clear the country was presently uninvestable. ExxonMobil’s CEO, Darren Woods was quoted in a WSJ article describing the changes that would have to occur before his company would restart operations in Venezuela-
“Exxon CEO Darren Woods said Venezuela is currently uninvestable without significant changes to the country’s commercial frameworks, legal system and hydrocarbon laws. We’ve had our assets seized there twice,” Woods said. “You can imagine to re-enter a third time would require some pretty significant changes from what we’ve historically seen here and what is currently the state.”
Notably absent from this high-level meeting were representatives from Halliburton (NYSE:HAL), and Schlumberger (NYSE: SLB), the two largest multi-service oilfield service contractors globally. Had their executives been in the room, I expect they would have sounded notes of caution similar to Mr. Woods. For a significant improvement in the country’s oil output, the participation of these companies will be essential. HAL and SLB are the “workhorses” of the upstream energy industry, with the skilled labor pool and technical know-how to actually perform the work involved in fixing old wells or drilling new ones.
Halliburton packed out of the country in 2020 as sanctions took hold, leaving about $200 mm in equipment that was embargoed from removal and Petroleos de Venezuela-PDVSA trade debt of another $700 mm for the year. With losses added up from 2016-2020, HAL took about $6.5 bn in write downs. An arbitration claim was filed by the company last year to recover approximately $200 mm. The gap between the two amounts will surely come up in future conversations on re-entry to the country. For its part, SLB is owed something on the order of $2.0 bn. and will surely want compensation for past losses.
Let’s not forget the large land drilling contractors, either. Helmerich and Payne (NYSE:HP), wrote off over $100 mm in trade debt and had a number of its rigs nationalized, as this CNBC article notes. The article notes further that, Offshore-Jack Up, drilling contractor ENSCO-now a part of Valaris Corp, (NYSE: VAL) lost $35 mm in PDVSA receivables and temporarily lost control of ENSCO-69 in a contract dispute. They regained it a year later. There are numerous other companies with similar stories to tell.
But the real problems haunting a notion of increasing Venezuelan production significantly in the near term are more profound and complex than just monetary.
An essay, Can Trump Make Venezuela An Oil Giant Again by noted oil historian, The Prize, and business executive, Daniel Yergin, carried in the Wall Street Journal on Jan-9th assessed the near-term likelihood of companies returning to the country in a fairly dim light. From the article-
“For oil companies now thinking of returning to Venezuela, the immediate problem is the wreckage left by Chavez and Maduro. “The oil industry has been in a state of continuing destruction of assets and value because of lack of investment and maintenance, corruption, and political control,” said Juan Szabo, a former senior official of PdVSA.”
The article goes on to discuss the uncertainty that a number of key factors introduce into the equation that companies must consider in contemplating a return. The current climate of political turbulence leaves open the question of contract enforceability if the landscape changes further. The corrupt Maduro regime, the remainder of which is still in power despite the legal woes of its former president, poses a hurdle as well. The lack of a modern legal infrastructure, and the brain drain of key talent as the diaspora of talent over the past couple of decades, has hollowed out the ranks of capable engineers and managers, finishing out a high-level list of concerns
Yergin notes that despite these barriers to companies setting up shop again, there will be entrepreneurial companies looking to make their mark, as well as those seeking to collect on old debts. But he goes on to say-
“But none of this promises a full-scale revival of the once mighty Venezuelan oil industry. For that to happen, there will have to be a more fundamental change in Venezuela’s politics and policies and also in the readiness of companies to make a new deal with a country that, despite the ruin left by Chavez and Maduro, is still committed to the idea that it should control its own oil.”
In summary
There is no question that Venezuela sits on a subterranean “mountain” of riches. Its ability to rise above the pitfalls of the past several decades and rejoin the ranks of modern democratic and largely capitalist societies depends largely upon its people. Will they accept the U.S. controlling their oil output and, to an extent, restructuring their government? Perhaps, but the Russians and the Chinese have not yet noticeably reacted to this reordering of global oil power. It is reasonable to expect they will ultimately have something to say on this subject, and when they do speak, it isn’t likely western interests will benefit.
Given all of this, American companies are understandably hesitant about committing billions of dollars when there are so many “balls” still in the air. Particularly in a country where they’ve been burned in the past. No matter. The game is set and soon “play” will commence. In my view, progress toward the goal of higher oil production will be incremental over the next year or two, rather than a surge that would be dramatically additive to global output.
By David Messler for Oilprice.com
