Within hours of the astonishing US intervention in Caracas this past weekend that captured Venezuelan strongman Nicolás Maduro, the Trump administration framed it as, among other things, a boon to its US “energy dominance” agenda. Citing Venezuela’s vast hydrocarbon resources—arguably the largest oil reserves in the world—President Donald Trump repeatedly promised that the next phase for Venezuela will involve US energy companies helping to restore the country’s failing oil and gas production, benefiting global oil markets with expanded supply.
But the pathway from promises to meaningful production increases is likely to be a fraught one. The Trump administration seems to recognize this, as indicated by the administration seizing two oil tankers and quickly announcing an opaque arrangement wherein the United States will acquire thirty-to-fifty million barrels of already available Venezuelan crude oil. These fast wins might help justify the expenditure of US resources to continue its naval blockade and pursue further intervention, as the administration has hinted. But these moves do not fundamentally change the dynamics above or below the ground that have wrecked the Venezuelan industry. Nor do they alter the long path to a major recovery.
Indeed, a Venezuelan oil and gas production renaissance would require, among other factors, meaningful renewed interest and investment from US and international oil companies (IOCs). This will be difficult. As the Venezuelan people look ahead to a murky future and an uncertain US-led transition, leveraging their valuable energy resources to secure the country’s democratic future may prove easier said than done.
How an industry fell apart
Decades ago, Venezuela’s oil and gas industry was a powerhouse that promised to drive the country forward. The country boasts 17 percent of global oil reserves, with an estimated 303 billion barrels of producible crude oil. In 2000, Venezuelan oil production reached a peak of 3.2 million barrels per day, enabled by joint ventures and effective partnerships between the national oil company Petróleos de Venezuela, SA, or PDVSA, and a host of IOCs.
In the early 2000s, however, the Chávez administration oversaw a nationalization of the Venezuelan oil sector that dramatically changed the terms of engagement for foreign companies. The nationalization resulted in asset seizures, international arbitration, and marked investment decline in Venezuela’s oil-producing regions by most Western companies. Following Chávez’s administration, Maduro and his officials then faced a punishing and ever-accelerating slate of US sanctions. Beginning in 2017, the first Trump administration targeted Venezuela’s oil and gas sector as the primary engine for the Maduro regime’s deepening authoritarianism.
Today, Venezuela’s oil and gas industry is in disarray. Production fluctuates below one million barrels per day, while the wider industry reels from years of underinvestment, neglect, lack of maintenance, and limited access to the engineering and technological prowess of Western IOCs. Improving this situation will require a sea change both for the Venezuelan oil and gas industry and its governing institutions; the former cannot proceed without the latter. By extension, the next steps taken by the country’s remnant Maduro-era leadership, the Trump administration, and the Venezuelan democratic opposition movement are of paramount importance to the future of the country’s energy industry.
A stable, secure transition
The ideal first step in returning Venezuela’s industry to its former heights would be enabling a democratic transition, leading to a government that would then pass new legislation, revamp supervisory institutions, and operate in accordance with the rule of law. As of now, however, it is unclear that such a transition is the goal of either the Trump administration or Venezuela’s remaining powerbrokers.
This concern is not a matter of idealism but rather of hard business realities. For any major corporation to engage in a foreign industry, especially in the oil and gas sector, that corporation must know who it is negotiating with. Contract designs and terms can vary considerably, but they must be developed by reliable partners who each understand the other’s roles and responsibilities. After all, a major factor that presaged the decline of Western companies’ engagement with Venezuela (and jump into arbitration proceedings) was Caracas’s reneging on contracts governing how the Venezuelan oil and gas assets were managed in terms of investment and eventual profits. Under the framework in place today, PDVSA has a majority stake in joint ventures. But in its bankrupt condition, it would be impossible for it to meet its capital commitment for nearly any project.
At this stage, it remains unclear who is actually in control of Venezuela and for how long. The Trump administration has indicated, for example, that the United States will remain in control of Venezuelan oil and gas assets for the foreseeable future, perhaps adjusting US licensing and sanctions policy to legitimize US-controlled sales of oil stored in tankers. It’s unclear how willing the Venezuelan regime will be to tolerate this. Moreover, US control is necessarily a short-term strategy. Selling off Venezuela oil stored in tankers and depositing those funds into blocked accounts controlled by the US government will avoid forcing PDVSA to shut in existing production, ensure useful supply to US Gulf Coast refiners, and provide the US government with a significant supply of funds it can manage. But volumes of floating storage are finite, and the Rodríguez government will not remain in power if it seems to be agreeing to sell off the government’s primary source of funds for the sole benefit of the United States or American creditors.
In addition to legal considerations, the physical risk and security outlook is crucial for any industry that requires intensive on-site, day-to-day operations. These operations must be managed by crews of skilled laborers, geologists, and engineers, to say nothing of the initial construction teams and costly repairs that will be necessary throughout Venezuela’s oil and gas regions. The Trump administration has yet to detail its plan for Venezuela’s transition process apart from the acceptance of Delcy Rodríguez, Maduro’s former vice president, as the acting president. But even as Trump praised Rodríguez on Saturday, he also warned her that a failure to cooperate with a US-led transition could result in another action from US forces.
Meanwhile, the democratic Venezuelan opposition, led by María Corina Machado, has found its role and potential future influence downplayed, with Trump saying that her movement lacks sufficient legitimacy among the Venezuelan people to be a realistic alternative. Yet another factor is the vast, complex networks of substate and illicit organizations—including violent militias and their overlords—that operate freely throughout Venezuela, have their own assets to protect, and will assuredly have opinions on who should run the country. These same stakeholders—and their foreign allies, who include geostrategic adversaries of the United States—may likewise take a dim view of the acting president’s apparent complicity in passing Venezuelan crude oil along to the United States if there are not immediate, tangible benefits for doing so outside of the remnant regime’s top brass.
Any rational business leadership would think carefully before committing itself to new investment under these conditions. For a genuine oil sector renaissance to commence, the Venezuelan government must prove that it possesses stability, legitimacy, and resilience. US promises that a conciliatory administration in Caracas (for now) can ensure these conditions will be met with justified skepticism.
Attracting private investment
Regulatory and financial certainty are essential factors for major international oil businesses when making significant investment decisions. This is especially true when oil and gas prices are already soft, at around sixty dollars per barrel, and most outlooks predict a global oversupply throughout the coming year. In other words, for Venezuelan oil and gas investment to make fiscal sense, IOCs will require a return on investment in a reasonable timeframe. Moreover, such businesses will need reasons to believe that long-term engagement (possibly thirty years or longer) in the country will ultimately be profitable based on global oil and gas market outlooks for the next decade or more.
The United States removing or making major adjustments to existing sanctions on Venezuela will be crucial to expanding oil production over the short run, as well as attracting new large scale private investment to the country. At present, both the Venezuelan government and its oil and gas sector (principally PDVSA) face a punishing tranche of US sanctions that have cut them off from money, credit access, partnerships, and technology essential to running the country’s oil and gas industry. As of now, any transactions between Venezuelan entities and any foreign company are subject to US restrictions, US Treasury sanctions designations, and lost access to the US financial system. This state of affairs makes the immediate reentrance of US or other Western companies impossible.
Ideally, IOCs would like to see a scenario where most sanctions are lifted or significantly eased, along with reassurance that a reversal would not occur anytime soon. In addition, they are looking for a revamped Venezuelan regulatory framework for its energy sector, including changes to regulations governing operations, trading and exports, terms for joint ventures, asset ownership, and legal rights. Lastly, the Trump administration has hinted at measures that would enable the repayment of companies that previously exited the country in compensation for their prior losses.
A revamped licensing process that allows existing investors to expand their operations could potentially lift production by 300,000 barrels a day over the course of a year, industry experts have suggested. Allowing smaller companies to invest in production sharing, including through productive participation contracts, could likewise incentivize participation. These adjustments could enable another 200,000 to 300,000 barrels a day in new production over the course of the next twelve to eighteen months, the industry experts estimate. Funds from that production could go into a blocked account, which would realistically need to be dedicated to humanitarian benefits in Venezuela, with perhaps a share reserved for repayment of US creditors.
For now, the Trump administration has not signaled that a major softening of the existing sanctions slate is imminent and the oil blockade remains in place. The Rodríguez leadership likewise has not signaled that a reshaping of its oil and gas regulatory framework is incoming at the behest of the United States or anyone else. Instead, the administration’s new plan for selling up to fifty million barrels of Venezuelan crude oil suggests that its focus is on growing near-term, low-hanging fruit production opportunities to prevent the industry from total collapse and shut-in of its existing production.
A positive financial and investment signal might encourage buy-in and engagement from IOCs and smaller companies. One means of doing so would be creating a new escrow account, under US control but presumably with some percentage of profits reverting back to the Venezuelan government. Such a fund could serve as the deposit site for new oil and gas profits over the near-term, ahead of a full lifting of sanctions and/or successful national elections in the future. This account could be enacted through adjustments to the existing sanctions slate, and it could provide a vehicle for early seed funds to be fed into any new Venezuelan governing institutions as a revamped regulatory design is developed. Optimistically, this fund could also serve as a test run for a new sovereign wealth fund, which could help prevent a reversion to the illegitimate use of Venezuela’s resource wealth that had been a hallmark of the Maduro regime.
For now, the Trump administration is hoping that it can deliver a strong enough signal to private oil and gas companies that there can be some compensation and long-term gains to reengagement with Venezuela, if only to enable immediate, easy repairs and infrastructure salvaging. The attractiveness of that offer, and its long-term durability and legality, are yet to be seen.
However, much more political and regulatory change will be necessary to revive the Venezuelan energy industry. Such changes will be far more difficult to achieve than handshake deals to split revenues for a handful of oil sales; moreover, these modest steps forward are far from sufficient to address the depth of the political challenges ahead. Lifting production in the neighborhood of half-a-million barrels per day might preserve what is left of Venezuelan production capacity, but it will not be enough to keep Maduro’s remnant leadership stable or meet the population’s profound humanitarian and economic needs. As a result, the entrenched challenges of migration, drug and other illicit trafficking, intensified substate violence, and perhaps de facto Balkanization of the country by various strongmen (and their domestic or foreign backers) remain palpable risks. The Trump administration, focused on resource management in Venezuela, has so far shown little interest in resolving these issues. But they will not go away, and they could derail the administration’s vision for a more stable energy industry and country.
