Venezuela faces uphill battle to revive oil industry even if opposition wins presidential election

Maintaining continuity of oil operations, restructuring the debt of state-owned PDVSA, and protecting assets and exports from creditors would be the immediate objectives of the government of Edmundo González if he wins the presidential elections in Venezuela on July 28, according to sources.

While González is currently polling ahead of President Nicolas Maduro, the chance of a González win appears slim, considering that the ruling party has control over Venezuela's government and electoral authority.

Still, a González win would put Venezuela's roughly 303 billion barrels of oil reserves in the hands of the opposition, along with an oil and gas infrastructure that has fallen into disrepair following decades of low investments.

"If the new government is subject to blockades by creditors, Venezuela does not get out of the ditch. It is necessary to reach agreements with partners in joint ventures, creditors and governments of other countries," said Lino Carrillo, a chemical engineer and graduate of the University of Oklahoma, who is part of the group of energy and oil specialists on the González team.

With the right investments, Venezuelan oil production could increase significantly, according to Carrillo. "We estimate that an increase in production of between 500,000 b/d to 1 million b/d ... is possible in a period of two years," Carrillo said.

S&P Global Commodity Insights analysts are less optimistic about growth, expecting production to remain at around 800,000 b/d through 2025, although that forecast does not assume a González victory.

PDVSA's consolidated financial debt totaled $34.7 billion at the end of 2023, according to official information. The total debt from bond issues, lawsuits, plus commercial debt, is opaque because there is no updated data.

Creditors are still after PDVSA assets. At the beginning of July, a federal judge of Delaware in the United States, Leonard P. Stark, postponed until September 19 the forced sale of the Citgo Corporation refinery, property of the Venezuelan state-owned PDVSA, to compensate creditors and plaintiffs.

"The most important thing will be to maintain operational continuity, within [US Treasury] licenses, because we have to work with the current legal framework and the current tax regime, as no changes will be possible in the immediate term with a National Assembly against it," Carrillo said.

Elections to renew the National Assembly are scheduled for 2025, with the new legislative period beginning in 2026.

Period of negotiation

The July 28 elections will elect a president for a six-year term starting Jan. 10, 2025.

 "If Edmundo González wins the elections we can expect a period of negotiation with the outgoing government, until his swearing in as president, when a transition process would begin that will not be easy because Nicolas Maduro would still have, at least during 2025, total control of the rest of the branches of government," said Dolores Dobarro, professor at the Metropolitan University in Caracas, a specialist in hydrocarbons law.

Venezuela has experienced a sharp drop in oil production and exports. Venezuelan production rose to 880,000 b/d in June, up from 760,000 b/d in October when the US temporarily eased oil sanctions, according to the Platts OPEC+ production survey by S&P Global. That is down from a peak of more than 3 million b/d in the late 1990s.

According to official data, Venezuela has proven reserves of 303 billion barrels and 200 trillion cubic feet of natural gas.

"Applying internationally accepted parameters in the calculation of recoverable resources, we could maintain that Venezuela has more than 100 billion recoverable barrels of crude oil and around 45 TCF of free natural gas. Additionally, there is abundant gas associated with oil production, which represents a high volume," Carrillo explained.

Specialists working with González estimates that approximately $10 billion will be needed to repair the oil production infrastructure, not including PDVSA refineries, which continue to operate well below capacity.

"Lack of maintenance and accidents have severely reduced that production capacity. The most difficult infrastructure to repair or replace are compression plants, gas extraction and separation, gas injection infrastructure, and refineries," Carrillo said.

According to Carrillo, investment could boost production from "drilling and workover activities and recompletion of wells to recover deferred production in production areas operated by PDVSA and in those in joint ventures involving Chevron, Repsol and Maurel & Prom."

Those three companies have special licenses from the Office of Foreign Assets Control (OFAC) of the US Department of the Treasury to operate in Venezuela.

In June, the joint ventures contributed 58% of Venezuela's total production, rising to 530,400 b/d, an increase of 60,000 b/d from June 2023.

Challenging investment environment

Whoever wins the election will have a difficult time luring investors considering the opportunities seen in neighboring countries, such as Guyana, Brazil and Argentina.

Commodity Insights "ranks Venezuela's above-ground competitiveness for E&P investment as the worst out of 111 countries and territories," said analysts Pedro Martinez and Ford Tanner in a July 22 report.

The analysts cited "uncompetitive upstream fiscal and contractual terms" and "high levels of corruption" as two of many reasons for the low rating.

While investors are considering opportunities in Guyana and Brazil, Venezuela's geography still makes it an appealing option, Carrillo said.

"All of Venezuela's oil fields are onshore or in shallow waters, such as Lake Maracaibo, unlike others in the region that involve deepwater exploration and exploitation, the use of expensive associated technologies, and additional infrastructure for production disposal.

The country has the infrastructure to handle 4 million b/d, Carrillo said. The costs of repairing that infrastructure will have a relatively low impact on the final cost of producing a barrel of oil in Venezuela, he said.

"Venezuela has some advantages that everyone knows, the lifting cost is the lowest in the whole region and it has no exploratory risk," he added.

For Carrillo, even under the country's current fiscal and legislative system, the fact that there is a new government that respects the laws, existing contracts will be of great value for both national and international businessmen.

"Investments will return when there is legal security and respect. We will sit down to renegotiate contracts, with respect, in a win-win relationship," Carrillo said.