Venezuela: Mostly Questions, Few Answers
More than most times, the energy market is moving on macro developments. President Trump is for low oil prices. He wants energy dominance which means ample supply. Although the White House is a big fan of the US energy sector, volumes trump profits. Trump’s first term was not a good one for energy investors. Oil was generally weak and the pandemic in 2020 was a short-term disaster with oil briefly negative as nobody traveled.
The President’s apparent goal of $50 per barrel for oil will not be cheerful news for energy executives. Moreover, Exxon and Chevron are facing pressure from the White House to invest $BNs in Venezuela to help achieve this unappealing objective. They’ll need to find a middle ground that appeases the administration while still making responsible capex decisions. On Friday Exxon said they were ready to send a team to Venezuela, while Chevron, who never left, are prepared to boost output.
Midstream is largely insulated from this calculus, since the sector operates in North America. Pipelines and related infrastructure are more aligned with the goal of energy dominance because increased volumes are good for the toll-model they operate.
There is some logic to Venezuela’s oil production restoring its links to the US. Because sanctions have limited both their output and potential customers, shipments travel halfway around the world to China. The country’s three main refineries operate at only 19% of capacity because of years of chronic mismanagement, so most of their unprocessed viscous crude has to be mixed with Iranian diluent for transportation. The US will easily replace that.
Iran has also been helping improve the performance of Venezuela’s refineries, an effort that has had a limited effect and will likely now end.
Exxon Mobil (XOM) has claims of $20BN against Venezuela. CEO Darren Woods noted last week that the company has twice suffered seizure of its property. On Friday he described the country as “uninvestable”. Conoco Philips is owed $10BN. Chevron lost $3BN but has continued to operate there. Satisfying these financial claims is likely a point of agreement in negotiations with the White House, which expects $100BN to be invested over the next decade.
The prospect of increased heavy Venezuelan crude reaching SE Texas has boosted stocks like refiner Valero but has weighed on Canadian pipeline companies like Enbridge (ENB) and Pembina (PBA). Investors are concerned that Venezuelan crude will displace Canadian production. While this is possible, Canadian crude output from tar sands doesn’t vary as easily as shale, where decline rates are fast and drillers can modulate output by altering their plans to drill new wells.
By contrast, producing tar sands often relies on Steam-Assisted Gravity Drainage (SAGD) which involves piping steam underground to warm the bitumen before it’s extracted. Such facilities generally have to keep running. Even during the pandemic when oil went briefly negative, the risk of the equipment freezing and rupturing meant that production continued even if unprofitable.
Canadian oil producers have long struggled to get their output to market. Most likely they’ll just have to accept lower prices.
Venezuela and Mexico used to provide over half of US oil imports, which is why our refineries are set up to process the heavy crude they produce. Over the past couple of decades Canadian production gradually gained market share, as Venezuela’s Hugo Chavez and then Nicolas Maduro oversaw a steady degradation of their energy industry, exacerbated by nationalization of assets owned by US companies.
Venezuela has the world’s sixth largest reserves of natural gas, with around two thirds of the reserves in the US which is #4. However, their output is under 3 Billion Cubic Feet per Day (BCF/D) versus the US at around 108 BCF/D. Most Venezuelan gas is associated with oil production, so output of both could increase together. However, it’s unlikely any of this gas would be exported – the country has a chronically unreliable power grid so could use the help. Moreover, the White House is focused on oil, and any additional gas may even be flared if installing the infrastructure to capture it isn’t a priority. US LNG exporters are unlikely to be impacted.
The long-term impact of Maduro’s removal and America managing its oil exports remains unclear. The President will be impatient to see results, which suggests Exxon, Chevron and others will deploy their resources accordingly, mindful of the election cycle.
Midstream energy infrastructure is nicely insulated from the shifting geopolitical/energy landscape. We don’t expect pipeline companies to be involved in rebuilding Venezuela’s infrastructure. There will be questions about Canadian pipeline exports, but little else to concern investors. The President’s desire to grow production can’t be bad for volume-based businesses. Pipelines look cheap.
We have two have funds that seek to profit from this environment:
Energy Mutual Fund Energy ETF
