With the Trump administrationzing Venezuela’s oil tankers, demanding the “return” of oil and other goods and threatening war against the Maduro regime, the fate of the world’s largest proven oil reserves is once again in doubt.
As a result of US sanctions, Venezuela is already frozen in the international oil market, despite having more known oil than Canada or Saudi Arabia.
If the oil would start to flow again – as happened before the arrival of president Hugo Chavez and his successor, Nicolas Maduro – can have profound consequences for Canada.
This is because Venezuelan and Canadian oil have been closely linked for half a century, since Chavez came to power in Caracas.
“The bitumen in the Orinoco Belt is the same as the bitumen in Alberta. It’s the same,” said chemical engineer Lino Carrillo. He should know, having worked for 22 years at Venezuela’s state oil company, PDVSA, followed by years in Fort McMurray.
But Venezuela enjoys some advantages, due to its climate and geography. The high low temperatures make its heavy crude flow freely, allowing it to be extracted instead of mined. Both its solid deposits (concentrated along the Orinoco Delta) and its conventional oil (found mainly around the Maracaibo Basin) is much closer to seawater than the Canadian oil sands.
The Venezuelan government says the US seizure of an oil tanker off the coast of Venezuela is ‘a blatant theft and an act of international crime.’ US Attorney General Pam Bondi says the FBI, the Department of Homeland Security and the US Coast Guard have issued a warrant to seize the vessel, alleging that it was transporting oil permitted from Venezuela and Iran.
The problems plaguing Venezuela’s oil industry are caused by it.
Carrillo was a senior manager at PDVSA’s joint project with Total Oil when Chavez’s Socialist government fired 23,000 workers at PDVSA in 2003 following a strike – a loss of talent and expertise the state-owned oil company has never recovered from.
Venezuela’s loss was Canada’s gain.
“Suncor Energy knew about all of our firings,” Carillo said. “So they’re looking for people who know the Venezuelan oil industry, because there was a lot of development in Alberta at the time.”
Carrillo was one of the first 25 Venezuelan engineers to immigrate to Canada in 2004, with many managing projects and operations. “By the end of 2008, there were about 400 Venezuelan families working in the oil sands.”
Canadian oil replaces Venezuela
Venezuelan crude has been partially refined in the US, where many Gulf Coast and Midwestern refineries have reworked to handle bitumen- and sulphur-heavy Orinoco crude. As Venezuela’s production began to decline, Canadian oil began to fill the gap.
“Historically, Venezuela has been one of the biggest suppliers besides Mexico’s Maya, another grade of crude, of these sour barrels on the US Gulf Coast,” said Rory Johnston, an oil market analyst who teaches at the University of Toronto and is the founder of market research firm Commodity Context. “Canada really just entered this US Gulf Coast market.”
As Canadian manufacturing grew in the first decade of the century, Johnston said, Canada first saturated nearby Midwest refineries, then spilled into Gulf refineries and eventually produced so much oil that some of what it sent to the Gulf was completely re-exported to the US.
At the time, Canada became a victim of its own success, and was forced to accept higher price differentials (markdowns) by refiners who clearly enjoyed the consumer market.
Venezuelan oil disappeared from the scene entirely, and pipelines that once flowed north from the Gulf were rerouted to bring Canadian oil south, a process that continues almost to this day.
Self-destruction in Venezuela’s oil fields
Meanwhile in Venezuela, political firings and the drain on talented engineers, combined with the incompetence of the Chavez and Maduro governments, have had potential consequences for the industry, Carrillo said.
“The infrastructure has been destroyed. I believe that since 2011-12, they stopped repairing the big things.”
Low wages drove away those professionals who remained, and who could earn more elsewhere.
“That’s why we went to Saudi Arabia, Mexico, Brazil, Colombia, Canada, the US,” Carrillo said. “We are all over the world, you know, most of us used to work in the oil industry, once [Venezuelan] the infrastructure is in a very bad state.”
Carrillo says that the collapse of Venezuela’s pipelines has led to oil being transported long distances by trucks, which tend to be unstable. The ports are also in a sorry state.
Production has dropped from 3.4 million barrels a day to just one million, and most of it is sold on the black market in China at low prices, due to US sanctions. (About 15 percent go to the US under a license agreement with the oil giant Chevron.)
The skilled workers left in Venezuela, Carrillo said, cannot fix the problems without massive foreign investment.
“They work under pressure, they are guarded by the police, by the soldiers who force them to do unsafe things and that is why they have so many accidents.”
Venezuelan oil will have easy access to Gulf refineries
The strong parallels between Venezuelan and Canadian pollution, and the way tankers can move pollution between Venezuelan ports and refineries on the US Gulf Coast, suggest that if Venezuelan crude production can return – and sanctions go away – Orinoco heavy crude could likely reduce Canadian pollution at refineries in Texas and Louisiana.
“The most natural market for Venezuelan barrels is the refineries that sit along the US Gulf Coast,” Johnston said. “They won’t need any more pipes or anything else. Basically, you’ll just pull a tank, unload and compete directly with Canadian barrels.”
Finding oil in the Midwest, where most of Canada’s oil is refined, can be difficult, Johnston said.
“That will take [a] It’s a big kind of pipe repair,” he said, to restore the water from the south-north that was reversed many years ago.
Francisco Monaldi, a Venezuelan-born expert on Latin American energy policy and director of the Baker Institute at Rice University in Houston, Texas, agrees that Ven.ezuela will be in a strong position to replace Canada in the Gulf.
“Because the Keystone XL pipeline was supposed to deliver 800,000 barrels of oil. [a day] from Canada to the Gulf was never built, only half of Canada’s oil goes to the Gulf.” So they are hungry for big oil that can’t be delivered by Canadian oil given the infrastructural limitations of getting it down.
He said “Venezuela will have a lot of potential to increase production and find a market.”
The investment required can be substantial
But Monaldi says more investment will be needed in Venezuela, “especially in reusing some of the wells, digging new wells and reducing the constraints.”
The investment required to meet the demand for Venezuelan crude could reduce the cost of the transition to the US.
“For Venezuela to produce four million barrels a day in ten years, it will require north of $100 billion,” he said. “For that to happen, it will require private investment and the conditions to attract that private investment, because the national oil company is poor and the country itself has a foreign debt of more than 150 billion dollars.”
All analysts agree that although Venezuela presents a low geological risk, it is a very different story when it comes to political risk.
A history of coups, strikes, annexations, high rates of violent crime and the presence of armed groups all make Venezuela a challenging place compared to Canada.
Trump’s threats and demands that Venezuela “return” the oil stolen from the US only add to the uncertainty. One of the few points on which Maduro’s government and the opposition agree is that Venezuela’s oil belongs to Venezuela, not the US.
But with an important underground resource, there will be huge incentives for Venezuelans and international partners to get the industry back on track if the Maduro government falls.
In that case, VenEzuela can count on another important resource: its people overseas.
“There are a lot of Venezuelans who are petroleum engineers, geologists, etc., all over the world, including Canada, because of their expertise in big oil,” said Monaldi. “And that diaspora will have to be used if the oil industry is to return to Venezuela, because there are few left in the country.”
One of those who said he would be ready to help is Lino Carrillo.
“I will go back. I mean that. I don’t doubt it, even though my children are married, and we have our grandchildren here in Canada who are Canadians. So maybe they won’t come back, but I will come back and help for two or three years.”
Another reason to build the West
Johnston says the power of a new competitor from the South should refocus Canada’s attention on building infrastructure to carry Canadian oil to new markets, away from the US.
“This is one more reason to say that there are more reasons, besides the ones in front of us right now, to go West. And I think the most important thing here is that it increases our options right now, because if it wasn’t for the expansion of TransMountain, we only have one way to go with our crude oil,” he said.
“When people talk about energy security, they’re talking about energy security of supply. But since Canada is a major exporter, what we’re most interested in is energy security of demand. And the only real security need you can find, as a supply side, is diversity.”
