Why Big Oil has a long way to go in Venezuela, the ‘fallen angel’ of global crude markets

Stocks of the world’s biggest energy operators gained on Monday as traders priced in a potential new market for the companies after the US impeached Venezuelan leader Nicolás Maduro.

Shares in major U.S. oil companies ExxonMobil ( XOM ) and ConocoPhillips ( COP ) both gained 2% and 3%, respectively, while Chevron ( CVX ), the only U.S. oil company left operating in Venezuela, rose about 6%. Oil services giants Baker Hughes ( BKR ), Schlumberger ( SCL.SG ), and Halliburton ( HAL ) followed suit, gaining more than 5% each.

But for the big oil companies and their compatriot oilfield service operators, Venezuela is unlikely to be a story of instant barrels and instead one of slow rebuilding of infrastructure that has largely been left to rot for more than two decades.

“Any significant increase in supply [of Venezuelan oil] it will be gradual, requiring political stability, the lifting of US sanctions and external investment but adding to a market where the price of oil has fallen on average for three years,” Jefferies equity analyst Mark Wilson, who focuses on the energy market, wrote in a note to clients.

Until the turn of the century and the rise of leftist leader Hugo Chavez, Venezuela was an oil powerhouse on the global stage. The South American country is on the world’s largest proven reserves of crude oil, estimated to be worth more than 300 billion barrels. In the 90s and early 2000s, Venezuela was exporting more than 3 million barrels of crude oil per day (bpd).

Twenty years later, exports have fallen below a million bpd, and have fallen even further as US Treasury Department sanctions on oil tankers have made Venezuelan crude even less attractive to global buyers. Meanwhile, the United States exported more than 4 million bpd in October.

In the two decades that separate Venezuela’s export peaks from its current levels, the country’s oil industry has been plagued by chronic underinvestment, corruption, and a model of state control that has largely left the infrastructure to rot.

In Venezuela’s oil fields, rigs have broken apart and been stolen by thieves, while the spill is not managed. In the country’s ports, the infrastructure has fallen into such bad shape that it can take up to five days to load a supertanker where it once took only one day, according to Bloomberg.

Venezuela has also suffered a large-scale “brain drain,” as a once-vibrant and specialized oil workforce has spent the past decade leaving the country for other, more stable, higher-paying markets such as Houston and the Middle East.

In short, rebuilding Venezuela’s oil industry will not be simple by any means. Looking at potential capital expenditures alone, President Trump said he expects the US oil industry to spend billions of dollars on the effort.

“If things stabilize, a new government comes, the situation really improves and there is no risk of a coup or something like that, then gradually, with a lot of investment, the country can be opened, but I don’t think it’s a matter of a few months,” Jorge León, head of geopolitical analysis at Rystad Energy, told Yahoo Finance. “I think we’re talking about years.”

The oil majors have spent the last few years in a period of deep de-risking, shrinking portfolios and shying away from new investments — especially in precarious frontiers — as oil prices have fallen and margins have shrunk.

Those companies are unlikely to enter Venezuela until they can be assured of a more stable operating environment, said Carlos Bellorin, executive vice president of energy trends and analysis at intelligence firm Welligence.

“They will be reluctant [to enter Venezuela] especially in these early months, early years of this transitional government, “said Bellorin to Yahoo Finance. “Their finances are not great, they have been trying to give up non-core areas, and they focus ultra on their portfolio – they are risk averse.”

The wild card, Bellorin said, will be if US majors receive pressure from the Trump administration to enter Venezuela as part of Trump’s stated goal of rebuilding the oil economy and start shipping those barrels. to US shores.

Upstream on land in Venezuela, oil services companies may be poised to perform well. After the US invasion of Iraq in 2003, it was the services giant Halliburton, through its subsidiary Kellogg Brown & Root, that was awarded massive government contracts to carry out the risky work of entering a war-torn environment to stabilize and rebuild Iraq’s oil infrastructure.

In Venezuela, it is likely to be the oilfield services companies that are able to assess, rebuild and upgrade the equipment to bring the oilfields and export infrastructure back to workable levels, especially if the United States intends to significantly strengthen the Venezuelan industry, Bellorin said.

“You need more than ever the Schlumbergers, the Halliburtons, the Baker Hugheses in order to increase and maintain production,” said Bellorin.

The US refining industry could also gain. Heavy, sulfurous crude oil accounts for roughly 50% to 60% of US crude imports, as most of the oil found around the US is the lighter, sweeter grade of shale gas.

Much of U.S. refinery capacity — especially along the Gulf Coast, where refining is a growing industry — is designed to handle and process heavy sour crude oil, ideal for the oil that may begin to emerge from what Mizuho analyst Nitin Kumar called “the fallen angel of global crude markets” in a note to clients.

Trump’s move to take control of Venezuelan oil could offer a cheaper substitute for Canada, which accounts for the majority of US oil imports, including most of US refiners’ crude imports.

Shares in major US refiners rose on Monday. Marathon Petroleum Corporation ( MPC ), the largest U.S. refiner by capacity, climbed more than 5%, while fellow refining giants Phillips 66 ( PSX ) and Valero Energy ( VLO ) gained more than 6% and more than 9%, respectively.

Perhaps the biggest potential winner, Bellorin said, will be Chevron, the only American oil company that remained active in Venezuela during the unrest caused by the Chavez regime. Chevron also has the benefit of vertical integration, with operations in the upstream production, midstream transportation, and downstream refining sectors.

“They played the long game, and they won,” Bellorin told Yahoo Finance.

“They have the best relationship with them [interim president Delcy Rodríguez] and the rest of the government, they know the land, they know the people, they know the geology, and they will expand their operation, at least in the beginning, and establish their production in their own projects.”

Regardless, any build-up and serious rebuilding of Venezuela it will take time, several analysts told Yahoo Finance, and it will require buy-in from the US oil industry, which is already facing deep headwinds of its own.

And all this is coming at a time when the global energy market is facing a severe oil supply imbalance – pegged at more than 3 million bpd by the International Energy Agency – which is widely predicted to depress prices and tighten margins until at least the end of 2026.

If political risks should stabilize and the major oil companies should embrace operating once again in Venezuela, the country can see its exports stabilize and recover back up to about 1 million to 1.5 million bpd in the coming years, said Bellorin.

If the situation takes a little longer to stabilize, Venezuela could be looking at a timeline of three to five years before reaching exports at the level of 2 million bpd, León told Yahoo Finance.

“I doubt that international oil companies will rush back into the country, particularly in a period currently of an oversupplied market with lower prices on the horizon,” said León.

“[Rebuilding Venezuela’s oil infrastructure] it won’t be easy, it won’t be fast, and it won’t be cheap.”

Jake Conley is a breaking news reporter covering US equities for Yahoo Finance. Follow him on X at @byjakeconley or email him at jake.conley@yahooinc.com.