Can the US really rebuild Venezuela’s oil industry?

0:00This BBC podcast is supported by ads outside the UK.

0:30No bouncing between tabs. And best of all, no spreadsheets. Stop managing software and start managing your business with one unified system. Try for free today at odoo.com. That's O-D-O-O dot com. Self-directed investing. Trading. Full-service wealth management. Automated investing. Financial planning. Thematic investing. Retirement planning. Phew. And to think, that's just a small taste of what Schwab offers. Because Schwab knows that when it comes to your finances, choice matters. No matter your goals, investing style, life stage or experience, Schwab has everything you need, all in one place, so you can invest your way.

1:11Visit schwab.com to learn more. It used to be the case that when the United States intervened in Latin America, they would say it was about protecting democracy. They never really mentioned natural resources and particularly not oil. This time round in Venezuela and with the Trump administration. No, it's the opposite. They are very happy to mention oil. Indeed, they talk about it a lot. They have oil that is stuck in Venezuela. They can't move it because of our quarantine and because it's sanctioned. We are going to take between 30 and 50 million barrels of oil. We're going to sell it in the marketplace at market rates, not at the discounts Venezuela was getting.

1:46That money will then be handled in such a way that we will control how it is dispersed in a way that benefits the Venezuelan people, not corruption, not the regime. The interim authorities have agreed to release that oil to the United States so it will be arriving here at home very soon. The United States government has already begun marketing Venezuelan crude oil in the global marketplace. They cannot move any oil unless we allow them to move it. Well, again, I'm not going to give you a timeline on it. We want it to move as soon as possible. But we didn't expect this. It's been three days since this happened, four days since this happened.

2:19So I understand that in this cycle in the society we now live in, everyone wants instant outcomes. They want it to happen overnight. It's not going to work that way. But we're already seeing progress. With this new deal that's been announced and more deals to follow, you're already seeing how the leverage the United States has over those interim authorities is going to begin to lead to positive outcomes. Lots of questions there at the end being thrown at those officials. We've got one overriding question. How viable is all of this? How much sense does it actually make to people who know about Venezuelan oil and indeed about the wider market?

2:53We have someone, I have someone, who I can talk to now about those very things. So welcome to AmeriCast.

3:27It's Justin in the worldwide headquarters of AmeriCast in London, England, and I'm delighted to say that I'm joined from Austin, Texas, by Robert Bryce, who's been writing about energy and the geopolitics surrounding energy for decades, is the author of quite a few books about it, and also really crucially, and this is where I came across him first, he writes a substack, the Robert Bryce substack, which is well worth plunging into if you're really interested in these matters. But you may feel that you don't have to, at least for the moment, because you've got the guy himself on the line now. So Robert, really nice to talk to you.

4:00Thank you for sparing the time to talk to us. My pleasure, Justin. There's nothing to talk about. The energy world's been so quiet lately. I don't know what's on the mind today.

4:11It's remarkable. It is truly remarkable what is happening. It's worth saying, isn't it, that when we talk about Venezuela, it matters not just because it's an important place and it's an important strategic place, but also it has the capacity to be a really incredible country and was an incredible country economically, socially, even politically. And I suppose I'm talking in the pre-Chavez era. Well, when am I talking about? Give us a sense of what Venezuela used to be. It's a great question. And a friend of mine, Robert Hargraves, made a note on the piece that I wrote on Substack the other day.

4:49He wrote about being in Venezuela in the 90s and talking about how amazing it was that the country was prosperous. He said the telephone system didn't work very well, but he said the food was great. The streets were clean. The country was, you know, was in the midst of an economic boom. Pentevesa, the country's state owned and state controlled oil company, was well run and the country was doing well. And then Hugo Chavez came in and replaced all the technocrats, the people with at Pedevesa who knew what they were doing, pushed many of them out in a massive purge, fired thousands of them at a time.

5:25And that began the slow decline of Venezuela because he did, in fact, kill the goose that laid the golden egg. And it has only gone from bad to worse since Chavez and Maduro just made the situation yet even worse. And so, you know, today the country is in fact a failed state. But I mean, I suppose the point is that a lot of you associate, don't you, big oil reserves often with nations that just go wrong socially and treat their own people poorly. And it's not necessarily about socialism or capitalism or whatever, but it often seems to be about oil. But Venezuela was a country that actually had oil reserves and a really high average standard of living.

6:11You're right. And that was true for a time. And I think in the 1980s and 1990s, that was certainly true. And to your point, we can also point to places like Nigeria, where the wealth has been squandered and where corruption has resulted in this country that is, in fact, a failed state now for decades. and that oil wealth has not helped the average citizen. But it's true. For a very long time, for years, a couple of decades specifically, in Venezuela it worked. The system worked very well. And hopefully the heyday can be restored, but it won't be quick and it won't be easy and it's going to cost a lot of money.

6:50How much sense is coming out of this administration in your view? And you are an impartial observer of this. You're not a Trump supporter. you're not a Trump opponent. You're someone who's trying to get to the bottom of what is actually feasible and possible and happening. What do you make of what the administration officials are saying about oil and Venezuela? Well, several things, Justin. First, I think this could be a geopolitical masterstroke or it could be a disaster. And I give it kind of even odds on, you know, I'd take either side of that bet. But I think this is also an attempt very clearly won by the United States of a venture that this is gunboat diplomacy.

7:31And this is clearly about oil, we didn't snatch Maduro because Venezuela exports bananas. It's all about oil. And that has become yet clearer in the last few days. And you had Marco Rubio talking there about oil. Well, on Sunday on meet the press, he said, I'll quote here, we don't need Venezuela's oil. I could quibble with that. But he said, what we're not going to do is allow the oil industry and Venezuela to be controlled by adversaries of the United States. So he was, of course, talking about China and Russia. So this is fundamentally about oil, the degree to which the US will be able to control the flow of that.

8:06I think that it has already shown that we can control the tankers coming out of Venezuela. The question is, ultimately, I think, and the key one here, Justin, is what will happen inside Venezuela? What is the security situation going to look like? Can the internal politics of Venezuela calm down enough to allow foreign investors to come in, not only to rebuild the oil industry, but to rebuild the electric grid. Right. We'll drill down on quite a lot of that in a second. Drill down being a rather operative word, I suppose, when it comes to oil issues. But I want to just pick up on something you said about Rubio.

8:39Sure. You said you might quibble with that question about whether America needs or does not need Venezuelan oil. Explain to us why you would quibble with it. First of all, is just the size of Venezuela's reserves. Venezuela is the Saudi Arabia of the Western Hemisphere. 300 billion barrels of oil resource. Well, maybe it's only a third of that size. It's still 100 billion barrels. So the U.S. may not need that oil today. It might not need it in five years or 10 years, but in 20 years, 30 years. Yes, I think that is a real possibility. So this could be looked at very, very simply as a long term energy security play by the United States.

9:21But there's also a more technical and fundamental rationale for that oil right now, which is that the Gulf Coast, the U.S. Gulf Coast refiners, and they're big companies that you recognize. Chevron, of course, is one of them, but other ones that are U.S.-based companies, Valero and others, their refineries on the Texas and Louisiana coast, for the most part, are designed to heavy the type of heavy sour crude that comes from Venezuela. So that's where they make their most money. And second, that heavy sour crude is ideal for making diesel fuel and jet fuel, which are key commodities, of course, in the transportation business.

9:58the light sweet oil that comes out of the u.s uh oil formations and geological formations is not ideal for making diesel fuel and jet a so this is about fundamentally about energy security and i think it i i would make the case long term the u.s will need that oil and in fact it can use that oil right now tell us more about the differences between these oils because i had all i know about oil i get from land man that wonderful series with billy bob thornton but Tell us more about why those differences in what oil is matter so much. Fundamentally, the shortest way I can say it is crude oil is not crude oil.

10:40There are different types coming out of different geological formations. So when you look at what is coming out of Venezuela, it's called the Orinoco is the biggest oil resource there, the biggest deposit. it, it's a very heavy oil. And to move it, you either have to heat it and or add what's called diluent, which is a lighter form of oil to mix it. And so you can put it into a pipeline and then into tankers and then move it to the refiner. Well, in the United States, what the main result of the shale, shale oil revolution and the shale gas revolution has been that what is coming out of the ground out of US geological formations is light sweet oil, which is traded as West Texas intermediate.

11:28Well, that oil is it's very high quality, but it is not the kind of oil that the US refiners have been set up to handle. To use the industry term, it's called the Nelson complexity index. The Gulf Coast refiners in the United States have very high Nelson complexity indexes, They were built to handle heavy, sour crudes. That's where they make their most money. And that's where those heavier crudes are more suited, more, they produce more diesel fuel and jet fuel than do the lighter grades of crude oil. So this isn't just about crude being crude. No, there are different types of crude. It's not the game globally isn't just about crude oil quantity.

12:11It's about crude oil quality. The other thing the administration has talked about is reducing the price of a barrel of oil down to$50 or so. From the point of view of the oil companies, how does that look? It's interesting, Justin, because the oil and gas executives in the United States have been very clearly in favor of Trump, and they were some of his big supporters. To name just one, Harold Hamm out of Oklahoma, one of Trump's closest energy advisors, and one of the people who had, in fact, advised Trump to hire Chris Wright as his energy secretary. Well, these oil and gas executives all got behind Trump because they felt he was going to be better for their business.

12:56But a few years ago, when I talked to oil and gas guys here in Texas, I said, how's it going under Biden? I said, we're making all kinds of money. So the one of the real ironies here is that the more restrictive regulatory environment under Biden was in many ways better for the oil and gas industry than Trump is for the oil and gas industry. So Trump is saying we want to drive down the price of oil and oil well down at 50 bucks. A lot of these oil and gas plays in the United States are not profitable at$50 a barrel. So I guess be careful what you wish for. Okay, that's one side of it. The other side of it seems to me when it comes to the attraction of all of this or lack of attraction for the companies is if the administration is saying, go into Venezuela or go back into Venezuela, because after all, they were there right in the first place, weren't they?

13:46Go into Venezuela, sink in the dollar expenditure. And also, I suppose crucially, your people as well. And what's the administration promise? I mean, is it that they're going to look after them? It's not clear to me what the oil companies would necessarily expect to get out of going helter-skelter into Venezuela now. You make a good point. And I can't answer that at this point, Justin. One thing that has been clear now is that Chevron decided to stay in Venezuela, despite the Chavista regime under Hugo Chavez, and then Nicolás Maduro coming in. Chevron said, we're going to stick it out. Exxon said, we're out of here.

14:28So did ConocoPhillips. They ended up suing for billions of dollars, did not get all of the money that they had hoped to get through because of the assets that they lost through expropriation. But I think big oil companies are going to be very careful about putting a lot more money into Venezuela, not just because of the political risk. And it that is obvious, because they had to learn from the expropriations that occurred under the Chavistas and then later under Maduro. But it's going to be about security. And to what extent the the kleptocracy that's been in place in Venezuela now for more than two decades, to what extent that will continue and be allowed to continue.

15:09And remember that to allow oil production and oil, oil production in Venezuela to rise, it's not just going to require a lot of money, it's going to require a lot of people. And can these big oil and gas companies assure the safety and security of their people that they need to bring in to run the run the drill rigs, run the pumping stations, build the refining sections, refineries, rebuild the refineries, All of these things are going to require a stable and secure Venezuela. And is that certain? I don't think it is. What does it do to the geopolitics of oil? If Venezuelan oil is now cut off from China, from Russia, from Iran, from Cuba, how big a deal is that?

15:57Let's start with Cuba, because of all the countries on the planet now, the one country that is going to be affected the most by what happened on Saturday is Cuba. For about two decades, roughly 50 ,000 barrels of Venezuelan oil has been flowing from Venezuela into Cuba. This is what has kept the what are now the remnants of the Castro regime in power. And remember, Fidel took power in Cuba in 1959. But they've really been kept afloat in the last few years by this Venezuelan fuel coming into Cuba essentially free of charge. Well, the Cuban electric grid runs essentially completely on Cuban oil.

16:46And the Cuban grid is already very fragile. The blackouts have been extensive, ongoing. In fact, there was a day long blackout on Saturday, the day that the U.S. went in and kidnapped Maduro. I'm using kidnapped because that's the word that Trump used. So clearly Cuba is on the edge and Trump has made no secret about this. Rubio clearly wants regime change in Cuba. But we could see and I hope it doesn't turn out this way, but there are 11 million people living in Cuba. We could see a humanitarian crisis in Cuba if the lights go out and stay out for extended periods of time. How do you keep food fresh?

17:23How do you how do you keep the lights on? How do people you know, what about the water systems, all of these things? The backbone of modern society is the electric grid. And Cuba's electric grid is on the verge of total collapse. Okay, that's Cuba. What about Russia and China? This is developing. Talak Doshi had a good piece on Substack that I thought was really insightful. And he makes the point that this is a big challenge to China and to Russia. not only are China and Russia, you're not going to be welcome in the Western hemisphere in dealing in Venezuela and other areas. We're going to control the flow of oil and gas out of this.

18:02The U.S. will control the flow of oil and gas out of this hemisphere. You're not welcome. So how do China and Russia react to that? How does OPEC react to this? Because Venezuela has now been effectively cleaved off from OPEC by making this move, that the Venezuelan crude is going to be controlled not by OPEC and the OPEC ministers and or limits on production by OPEC. Instead, it's going to be decided by the United States of America. I want to play you a clip from Donald Trump's news conference that he gave shortly after all of this kicked off because it introduces another subject and it's still a Venezuelan energy subject, but a slightly different one.

18:43Let's listen to what he said. All Venezuelan military capacities were rendered powerless as the men and women of our military working with U.S. law enforcement successfully captured Maduro in the dead of night. It was dark. The lights of Caracas were largely turned off due to a certain expertise that we have. It was dark and it was deadly. I just want to ask you, Robert, about keeping the lights on rather than turning them off, because it's something that you just assume this is all about oil and the administration talks a lot about oil. But if the administration, as it says, now runs Venezuela, then one of the kind of crucial things, and you were making this point just now, weren't you, about Cuba and what can happen if electricity goes off?

19:36They've got a challenge now. Never mind turning the lights off. They've got to keep them on. Let me put this into perspective for you, Justin, about electricity in Venezuela. So Hugo Chavez took power in 1999. He died in 2013. During Chavez's regime, electricity production in Venezuela increased steadily. And when he died in 2013, electricity production in Venezuela peaked. Well, it has been declining ever since Maduro took power. And so since, in fact, since 2013, electricity generation in Venezuela has declined by nearly 40%. And I just looked up the IMF numbers and I wrote about this on my substack on Monday, that according to the IMF, Venezuela's GDP peaked that same about that same time in 2012, it peaked at about$370 billion a year.

20:27It's now or 2024, rather, it was just 120 billion. So as a country's electric grid goes, so does its economy, electricity and economic growth go hand in hand. And under Maduro, the kleptocrats have run rampant. And of course, sanctions have had an impact. But the idea that the US is going to go in and just increase oil production, it's going to have to fix the electric grid first, you can't produce more oil and gas and move it around oil production, oil refining, oil pumping, all needs electric power, and the grid in Venezuela is in terrible shape. And by snatching Maduro, the US in fact bombed part of the grid near Caracas, that's going to have to be repaired.

21:14So none of this is going to be cheap, quick or easy. It's going to take billions and billions of dollars. And they're going to have the US and the rebuilding and the Venezuelans as part of the rebuilding, they're going to have to address the electricity issues first and foremost. Do you think the administration understands what it's bitten off? I hesitate to speak for them. You know, I think Trump in many ways, I've said it before, I think he's kind of a lunatic. But I also think on when it comes to energy, I think his instincts have been pretty much right on target. This is a big bet. I mean, let's be clear, this is one of the biggest risks of Trump's presidency now that, you know, things could really go south in Venezuela, there is that potential.

21:56But it could also be a geopolitical masterstroke in terms of showing China and Russia, we're not going to allow you to play in our backyard. We're going to control the flow of this oil. This oil is going to be determined by U.S. interests, not Chinese or Russian interests. Of course, all periods of time are matter. But I think the next month or two are really going to be critical to see how this shakes out in the very near term. It's easy to talk about getting oil investment and moving money around and the rest of it. But the kleptocracy that has been in place in Venezuela, once corruption gets rooted in a society, it is very hard to to eradicate it.

22:40And this is now a deeply corrupted society that is impoverished. And it's going to take years to make these reforms happen and to get the energy flowing in the ways that we expected in the West. But when you look at what the administration has done, I suppose one of the things that we think that we assume about it is that they looked at what happened in Iraq and said, we're not going to do that. We're not going to get rid of not just the top man, but all his henchmen and everyone who knows everything about how everything works, because that didn't work in Iraq. It was a disaster. We're going to do things differently this time round.

23:15So in a sense, there's an argument there, isn't there, for what they've done. They haven't just introduced a whole new group of people and an opposition, etc., etc. They're kind of stuck with these people. And I suppose the question, I mean, I guess it's unanswerable, isn't it? But you know more than most about these things and particularly about the mechanics of what has to happen is whether keeping these people in place this time round might give them a better chance of doing things like keeping the lights on. I hope that is correct. And I hope that assumption is correct. Because trying to switch out the entire regime is completely impractical.

23:51It would, in fact, require boots on the ground. And this is something that Trump doesn't want to do. I think what Rubio and maybe Chris Wright and some of the other Americans who've been talking with the Venezuelan leadership have just said is, look, we have you. I'm going to use a double entendre here. We have you over a barrel. We will control the flow of your revenue. And you either play ball with us or you don't play ball. And observing the comparison to Iraq, I think, is appropriate. And I made this point in the piece I wrote on Monday on Substack. was that the key problem in Iraq after the U.S.

24:31left, after the second Iraq war, was that the corruption just went rampant. I mean, it just went nuts. And the Iraqi electric grid has never recovered. Their oil production has grown. They've become more of a player in the global oil market. But a lot of the money that was meant for rebuilding just simply got siphoned off. Now, Iraq is not Venezuela. There are a lot of cultural differences. So I hope I hope for a lot of reasons for your humanitarian viewpoint, most of all, that the Venezuelan society can calm down and that the American influence there can be one that says, look, we're going to we're going to do the best we can here.

25:14We're we're not going to have a lot of boots on the ground, but we want you to run this in a business like way. And I hope that can happen. But again, I think the next two months are really going to be critical. Final thought, because it's fascinating when you talk about the importance of oil there. I think for a lot of us, we've kind of been lulled into a sense of oil being yesterday's energy source and actually doesn't matter so much anymore or is about not to matter anymore. And from everything you've been telling us, my goodness, it matters an awful lot still. Yes. Yes. You don't have to like it.

25:51You can hate it all you like. Oil is the world's most important commodity. If oil didn't exist, we would have to invent it. There is nothing else that comes close to oil when it comes to energy density, ease of handling, cost, scale, and flexibility. We can use it for everything from making tires and shoelaces to powering jet liners. So oil was the strategic commodity that defined the 20th century and really allowed the allies to beat the Axis powers in World War II. It was a strategic commodity for all the 20th century. It's going to continue to be the world's most important and most strategic commodity in the 21st century.