This Is What Maduro's Arrest Means for the Oil Market

0:00Markets move fast. Get the insights you need in 10 minutes with Barclays Brief, a podcast from Barclays Investment Bank. Each week, our experts analyze market themes, helping you anticipate what's next. Listen to Barclays Brief wherever you get your podcasts.

0:17Bloomberg Audio Studios. Podcasts. Radio. News.

0:33Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal. And I'm Tracy Alloway. Tracy, quite a start to the year. Yes. I mean, actually, at this point, I wasn't even holding out hope that it might be a little bit quiet, at least for the first week of the year. I've given up on that particular ambition. But you're right. We had some huge news breaking over the weekend. It's not just that it happened on a Saturday. And, of course, we're talking about the arrest of Maduro. It's not just that it happened on a Saturday. It happened at five in the morning or something on a Saturday.

1:04So I woke up and I already had DMs. They're like, are you guys going to do an episode on this? An episode on what? What are you talking about? And then it's sort of five minutes. What? He's in custody? What happened? I don't understand that at all. But yeah, it's sort of a genuine earthquake. I would say that's sort of it's a cliche that gets overused. But this feels like an earthquake. Yeah, there are a lot of firsts involved here. So like the first major U.S. intervention in South America since like, I guess, the 80s, the first time the U.S. seems to have been this explicit about going into a country because of its oil reserves.

1:42Yeah, that was surprising. Yeah, that's the super interesting thing. It's like it's not clear that, you know, in the past, at least like, oh, it's about spreading democracy. And I think one of the, I guess, funnier and I'm putting that in quotes because none of this is like particularly funny per se, but it's like there's no pretense of like, oh, this opposition leader who just won the Nobel Prize that she's going to get a shot or anything like that. it's a very strange it's so face value my interpretation is trump wanted maduro gone and got maduro gone and the idea that they're going to dress it up in some obvious ideology or principle other than maybe dominating the hemisphere does not seem to have entered the equation but but but it might not be face value and this is not what we're going to talk about today but there is a theory going around that it's not really because of the oil reserves it's because of rare earth mining in Venezuela, much of which was making its way to China through various means.

2:40Yeah, that's the thing. There's like no like, yes. You can imagine that telling Americans, you know, we've kidnapped a dictator and arrested him for drug trafficking. And the bonus is you're going to get cheaper gas prices. That probably resonates a little bit more than like, well, we really needed, you know, some rare earth like tantalum or something like that that you've never heard of. Yeah, I have like a million questions. I'm just trying to wrap my... So many people have a million questions. Also, like, I don't know, like, is this totally unprecedented in terms of just snatch a foreign leader?

3:13I'm amazed that this could like happen. It seems like impossible, like almost uneventful in the way like they just went in and took a foreign leader. You'd think that they'd be fortified with thousands and thousands of guards and some impenetrable palace. Evidently not. All just sort of still a complete mystery of like what exactly happened and what exactly it means, where it's going and all this stuff. All right. The immediate reaction, though, in markets and the global economy was, what does this mean for the oil market? Because supposedly Venezuela is the holder of the biggest reserve of crude oil out there.

3:46Something like 300 billion barrels is the number that you see, which again, places it above noted exporters like Saudi Arabia, right? But the issue is it hasn't actually been pulling much of that out of the ground for many, many years. It's been producing, I think, like a million barrels per day. Right. The numbers that people are talking about to actually improve the Venezuelan oil infrastructure are staggering. So reserves would mean nothing if you can't pull it out of the ground, if you don't have the infrastructure to do that. And then who's going to pay for it at a time when oil is below$60?

4:18I don't know how economical that is. So many questions. Anyway, we don't need to just keep restating amongst each other all the questions. We can just ask each other questions for an hour. That's why we have guests on this show, because we'd like to ask them questions. Anyway, we're excited to say we really do have the perfect guest, someone we've talked to in the past, including an episode about the oil reserves in Guyana, which, of course, is also part of this story because their neighbors and some of the reserves are contested between the two countries. We're going to be speaking, of course, to Gregory Brew, senior analyst at the Eurasia Group.

4:50So, Greg, thank you so much for coming on Outlaws. Thank you so much for having me back. How did you find out? What was your Saturday morning like? So my Saturday morning started very early, as all my mornings do now, because I have a 15-month-old at home. So I was making coffee and I was doing what I always do, which is checking Twitter or X, whatever you call it. And I immediately saw cryptic, vague tweets about something that had happened that was shocking that had to do with Venezuela. And after about five minutes, I saw that, oh no, we went in and kidnapped the president, seized him, apprehended him.

5:26You know, rockets were fired, helicopters flew over Caracas. It was all very dramatic. And my immediate thought was, you know, what does this mean for oil markets? Then I remembered that it was Saturday morning and that there wasn't going to be a market reaction. You couldn't get an oil club. Yeah, for 36 hours until Asia markets open. I thought that's interesting. You know, these things always seem to happen on weekends now because whoever is pulling the trigger wants to make sure they put some space between themselves and the market reaction. Can I just say I had a blissful four hours between this actually happening and me finding out on Saturday morning because I had a friend over.

5:57We had an old fashioned sleepover, which was kind of fun. And I was serving her coffee and we were just talking. And then like I showed her the door, immediately looked at my phone and I was like, OK, well, that's the end of my nice relaxing weekend. Wait, let's talk more about that. It's incredible restraint to like spend a morning with a friend without like half paying attention to the phone. because I'm very impressed by that. I know it's unusual for you. You know for me that would be very hard. All right. Let's start with like, let's look at some of our priors here. So Venezuelan oil reserves.

6:29I have seen some debate around that 300 billion number, particularly from John Arnold, the hedge fund guy. He was saying that this was a reserve figure that seemed to be magically produced by Chavez, the previous Venezuelan leader. And before that, the proven reserves number, the one that had actually been audited, was a lot lower. So do we actually know that Venezuela has a lot of oil? Well, this conversation could get very technical very quickly. Good, please. But we can, yeah, let's dive in. What are oil reserves? So first you start with the technically recoverable reserves, i.e., what is the oil in the ground?

7:09What have you discovered through geological surveys, through drilling test wells, et cetera? From that point of view, Venezuela could have as much as a trillion barrels of oil within its territory in the Maracabo Basin to the west, but also most significantly in the Oronoco Basin in the east and southeast of the country, which is where this very heavy, extra heavy sour crude is located. It's probably the largest continuous reserve of oil in the world. Its rivals would be the tar sands of Alberta and the Gavar Field in eastern Saudi Arabia. So technically, there is maybe a trillion barrels of oil there.

7:46But when we get down to what is recoverable, the US Geological Survey did a report on this in, I think, 2009. And the figure they landed on was between 400 and 500 billion barrels of what you could pull out of the ground, not counting on price, not counting on how much money you were willing to spend. Then we get to proven reserves. And proven reserves are a function of price, profitability, available investment, security, security, assessing risks, how much you need to pay. If you're an international oil company, how much do you need to split with the national government, all of that. And that's where we get a much more fuzzy figure.

8:25OPEC, they have figures on proven reserves. The Energy Information Administration of the United States puts out proven reserve figures on various countries. When it comes to Venezuela, there is that incident of the Hugo Chavez government radically upgrading the amount of oil that they said was recoverable in, I think it was 2007. The thing about that, though, is that at the time, Brent crude prices were upwards of$100 a barrel. So the price of oil was very high. Cut to today, where adjusting for inflation, the price is very low. It's$60 a barrel. But compared to the price in 2007, it's even lower than that.

9:00So saying that Venezuela has 300 billion barrels of oil that you could pull out of the ground right now just isn't accurate. The oil is there, but trying to get it out in the current market conditions, given all the risks involved, the security concerns, the upheaval in Venezuela, and then just the amount of money you would need to upgrade the infrastructure and to drill the wells, the figure is much lower than 300 billion. It's a lot. Neighboring Guyana has proven reserves of around 20 billion barrels, and there's at least twice that in the Maracay Bay Basin in the west of Venezuela. So there is a lot of oil there.

9:34But whether it approaches 300 billion barrels is a subject of much debate. When the oil market opened on Sunday night, there really hasn't been much of a reaction. And I think it's sort of intuitive, which is that you could come up with any number you want, 100, a trillion, 300 billion, 100 billion. In the medium and short term, what matters, I presume, is capacity to pump barrels and sell them. And one of the things that we've seen, we've seen these charts of how Venezuelan oil production over the years has dropped off quite precipitously and their various sort of potential drivers, including maybe price, maybe sanctions, but also the story that the socialist government that nationalized a lot of the oil infrastructure has let the oil infrastructure deteriorate.

10:22Give us your read. I know we don't literally have a chart here, but if you could have that chart in your mind. Everyone imagine a chart of a line going down. Mostly down. Why don't you like tell us the story of that chart? Sure, sure. I love describing charts. And I'm also, you know, as Joe well knows, Trace, you probably know as well. I'm a historian by training. So I love to go back in time and start at the beginning. And the beginning for Venezuela oil is over 100 years ago. Venezuela is one of the oldest oil producers in the world. First began to commercially produce crude in the 1920s, 1930s.

10:54For a while, you know, close to 30 years, It was arguably the second most important oil producer in the world and in the Western hemisphere because it was so close to the United States. It was sending a lot of its crude to the US. This was before the Middle East became a major concern in the 50s and 60s. Venezuela has been around for a long time. It's pumped a lot of crude. When we think about the chart for Venezuela oil production, it's actually, you know, it's less of a collapse in the last 20 years. If you look at it, it's more of a W. Venezuela crude output goes up and up and up from the 20s all the way up to the early 70s, where it exceeds 3 million barrels a day.

11:31That is, I believe, the historic peak for Venezuela output. In the mid-1970s, Venezuela production starts to fall. It falls quite sharply. There are a lot of reasons for that, one of which is the Middle East. They were facing much stiffer competition from cheaper producers. Investment was being cut. They had to drop production. So production falls from the 70s into the 80s. In the 90s, it starts to climb again. And this has to do with PDVSA, the Venezuelan national oil company. For a long time, PDVSA was kind of unique when it comes to national oil companies. You know, we talk about Aramco in Saudi Arabia, the Iraqi petroleum company, the Kuwaiti petroleum company, you know, almost every big oil producer in the world has a national oil company.

12:13Venezuela's PDVSA for a long time was run like a capitalist enterprise. It was run on the basis of securing profit. In the 90s, it was very good at making deals with the international oil companies, both from the West and elsewhere. So in the 90s, about 30, 35 years ago, Venezuela output starts to climb again. And in the early 2000s, it gets close to 3 million barrels a day, just as prices are peaking. Venezuela is making a tremendous amount of money in the early 2000s. It's, I think, got the highest per capita income of any South American country at the time. It's extremely wealthy. It's making a lot of money.

12:50In comes Hugo Chavez and Chavismo, you know, this political ideology built around a very large socialist welfare state, lots of public enterprise national companies, but also a lot of authoritarianism, a lot of corruption, a lot of kleptocracy. And Chavez pushes further nationalizations of the oil industry. The oil industry had already been nationalized. Now, we could go down another rabbit hole and talk about the history of resource nationalism in Venezuela, but the industry had been nationalized in the 70s. What had been done in the 90s was more joint deals with international companies, bringing in international capital.

13:26Chavez closes that door and demands that all companies operating in Venezuela give PDVSA a 60 % share. He demands much higher royalties, pulling much more money out of the existing deals. And as a result, production starts to fall because suddenly the investment is drying up. International firms aren't as interested in operating in Venezuela. They're pulling back. In the meantime, PDVSA is turning from a pretty well-run oil company into basically a piggy bank for Chavez and his government. When it turns over to Maduro, it gets even worse. There's more mismanagement, more corruption. Meanwhile, Venezuela's oil fields, which are tricky to manage given the nature of the crude, the technical problems that you encounter, you know, the industry falls into disrepair.

14:15In the 2000s, the price collapses, the oil price collapses in 2014, 2015. This coincides with lots of protests against the Maduro government, you know, street uprisings, violent repression, Maduro is cracking down, and Venezuela oil production just tanks. And at the same time, the US is putting sanctions on Venezuela, considerable sanctions in connection to Maduro's repression. So all of this coalesces into a story that has its peaks, that has its valleys. But when we get to 2025, Venezuela is sitting on this giant oil industry that has fallen into disrepair. It's producing a little bit, less than a million barrels a day.

14:57It ostensibly has this massive reserve of crude oil that American companies actually have a lot of experience with dealing with Chevron, Exxon, the oil services companies, smaller US mid caps, all of them have been involved, or many of them have been involved in Venezuela over the last century. So they know what's at stake down there, but they also know the risks, the costs. And I think they're going to be very wary of getting involved again, particularly as the situation remains so uncertain.

15:32Thank you.

16:02Barclays Brief Podcast can help you make smarter decisions today. Stay sharp. Stay briefed. Find Barclays Brief wherever you get your podcasts. Joe, I'm going to start a rival band called Heavy Sour Crude. It's going to be the complete opposite. What kind of music are you going to play? I don't know. Pop? No, I don't really want to do that, but I'm going to think about it. It could be my side project. You could be in it. Yeah, I could be a spin-off. You have a good voice. Heavy Sour Crude. Tracy has a good voice, by the way. Thank you. I really don't. I only say karaoke. Yes, you do. I've done karaoke with you several times.

16:35You have a very good voice. Okay, off topic. Greg, okay, here's a basic question. Given all the risks involved in Venezuela, and I remember my husband actually went to Venezuela once when he was a teenager, and the stories he told me were a little bit hair-raising, including as soon as he landed, someone tried to steal his bag, and then he remembers going to a movie theater, and they were selling life insurance alongside the ticket to the movie theater. Again, all anecdotal. I can't exactly vouch for those. But given the risks of operating in Venezuela and the fact that you do have this heavy, sour, crude that's difficult to refine, one question I always wondered, why is Chevron even still there?

17:15So I'll start by saying the oil industry, it has a pretty expansive approach to time. Things take a long time. When you discover a field, when it's in greenfield stage, where you drill test wells, where you expand and explore how big the reserve is, from that point to actually producing oil in commercial quantities, it can be a decade plus, particularly if it's maybe like an offshore field, like in Guyana or elsewhere. Then if you're a big, relatively integrated, vertically integrated international oil company, you're going to have places that you want to send that crude. You're going to have refineries and downstream assets that you're going to send the crude to.

17:54And when it comes to heavy sour from Venezuela or from Canada, refineries need to be built and optimized to take that crude. Because otherwise, it's not going to be efficient. Your refinery utilization isn't going to be where you want it to be. Your margins are going to be tighter. So Chevron spent a long time developing their position in Venezuela, which from various points of view does go back, I think, to the 1940s is where Chevron first began to expand its operations in the Western Basin, the Maracaibo Basin. They've built refineries in the US Gulf Coast that are optimized to take Venezuelan crude.

18:31So the cost, the sunken cost for them is considerable. And that's where it kind of always comes down to, right? Other IOCs were willing to pull out of Venezuela, cut their losses, go elsewhere. Chevron wasn't. And part of that was due to how much money they had spent. Part of that was due to their success at convincing the US government to allow them to remain, granting them sanctions waivers, granting them special licenses to continue to operate. At the same time, they were able to leverage their position with the Venezuelan government and say, you need us, you need us to stay, because at some point, things are going to get better and you are going to get increased international interest and investment.

19:11And we were here first. And we want to maintain this privileged position. So all of that has combined to keep Chevron in Venezuela when other companies were willing to pull back. And there's already been, I think, a response from Chevron following the Maduro operation. They're talking about sending their teams back in. They're talking about expanding their profile They're still very conscious of the security risks and the risks to personnel that exist, but they want to hold on to what they have and they want to expand it. And considering the cost, putting that to one side, Venezuela is still geographically a very attractive place to operate if you have lots of US downstream assets.

19:50If you have refineries in the Gulf Coast and you want to get heavy, sour crude to them, Venezuela is a great place to get that crude. Well, give us your read on the political situation, I guess, because I don't know exactly what the sort of political science definition of the term regime change is. We went in and took out the president, but the party, it looks like at least for now, his vice president, Delcey Rodriguez, is assumed at least on an interim basis to the presidency. I mean, I thought it was really remarkable. Trump didn't even sort of like make a nod to like, oh, the democratically elected leader in exile or whatever.

20:28And yet the administration seems cool with like his people still being there. And as you just mentioned, the company is like, all right, we're already ready to send people back in to get back to work. I assume everything's so fluid, I suppose. But what's your read on like this sort of short to medium political situation now in Venezuela? So I think it's become very clear that from the US point of view, getting Maduro out was the goal. Yeah. Overtaking the government, knocking the government down, having it replaced by a completely new power apparatus, completely new regime, bringing in the opposition, the democratic opposition.

21:00that I don't think was ever on the cards. This was about removing Maduro. And I think, you know, you could make the argument that some of it was personal for President Trump. He didn't like Maduro. Maduro had been driving a hard bargain because they've been negotiating for months about what the US can get from Venezuela and what kinds of concessions that Maduro could offer. And Trump apparently lost his patience and decided to do something pretty risky, but it turns out was very successful. The government that Maduro led, which incidentally he inherited from Hugo Chavez is still there. It's led by Delcey Rodriguez and others.

21:34It still controls the military. It still manages most of the country. Parts of the country are slightly out of its control on our run by essentially drug cartels and militias further inland. But the capital, the major cities, the oil fields are still under control of the government that used to be led by Maduro. What happens next, I think, depends on what kind of modus vivendi is reached between Washington and Caracas. And some of that comes down to what it is that Trump actually wants out of this. I think the first goal was demonstrating US power. And I think they've done that, signaling to the rest of the world, but particularly the Western hemisphere, that the US is now willing to use its power much more assertively and aggressively than it has in the past.

22:16But that's not much. What else could the US gain from having done this? And obviously, now it's all talk about gaining access to the oil reserves and bringing in US companies, But that's going to be very, very difficult to do. So I think in the short term, the first thing that Caracas is going to want to see from the US is lifting the oil blockade and allowing tankers to move. Most of those tankers are going to want to go to China because that's who's been taking most of Venezuelan oil. That might not be too difficult for Trump to accept because Trump also wants to reach a modus vivendi with Beijing.

22:46He wants to have a better relationship with Xi Jinping. That's also something that the administration has been trying to prioritize. But this political situation in Venezuela, absent Maduro, doesn't appear to have changed at all. The regime is still there. It's not regime change. It isn't even regime decapitation, because Maduro was replaceable, and they filled his shoes with somebody else. And the administration seems perfectly fine with that. What kind of chatter are you actually hearing from the oil majors setting Chevron aside? What would it take to get like an Exxon, who I understand is still owed money by the Venezuelan government back into the country?

23:26What are they looking for? So I think you can think of it in stages. So the first would be lifting the blockade. They would have to see that. They would have to see the U.S. saying publicly Venezuela can export oil again because no one's going to want to go in and spend money in Venezuela if they can't be guaranteed access to foreign markets. I think the US has been trying to signal that the blockade is about stopping sanctioned tankers, but it's been indiscriminate in the sense that it hasn't been specifically connected to what the US is clearly trying to do in Venezuela, which is remove Maduro and exert more pressure on the government.