The Crude Facts About Venezuela’s Impact on Canadian Oil

Over the weekend, the United States took control of Venezuela’s oil assets. Given Venezuela’s vast oil reserves, it has naturally raised questions about whether Canadian oil producers should be concerned.

On paper, Venezuela’s oil reserves are enormous. The country holds close to 17% of the world’s oil reserves, roughly 300 billion barrels, more than Saudi Arabia and well ahead of Canada. However, having oil in the ground and being able to produce and sell it are two very different things.

Most of Venezuela’s oil is heavy crude, similar to what Canada produces in Alberta. Heavy oil needs to be refined into diesel and other products, and many refineries along the U.S. Gulf Coast (where 10% of Canada’s oil exports to the U.S. flow) are specifically designed to process it. This has led to speculation that Venezuelan oil could compete directly with Canadian supply to those refineries.

The key question for investors is whether Venezuela poses a threat to Canadian oil companies any time soon. In our view, it is not.

U.S. Oil Companies Still have Investment Inertia

While President Trump has stated that U.S. oil companies will spend billions to repair Venezuela’s broken oil infrastructure, there is little evidence that companies are eager to do so. Oil companies have spent the last several years doing the opposite of what Venezuela would require — cutting capital expenditures and returning cash to shareholders through dividends and buybacks.

Too Much Political Uncertainty

At present, Chevron is the only major U.S. oil company with an active presence in Venezuela. Other firms, including ExxonMobil and ConocoPhillips, exited the country in 2007 after Hugo Chávez forced foreign oil companies to renegotiate contracts on unfavorable terms. Re-entering Venezuela would require long-term political certainty, and there is no clarity yet on what a new regime would look like. Investors need only look at the Keystone XL pipeline, which spent two decades as a political football in Washington, to understand how expensive political uncertainty can be.

Who’s Going to Pay for the Infrastructure?

Even if political certainty were achieved, the cost of rebuilding Venezuela’s oil industry would be immense. Wood Mackenzie estimates that restoring just 500,000 barrels per day of production would require between $15 billion and $20 billion of investment. To return to its production levels twenty years ago, $100 billion of investment would be needed. Collectively, ExxonMobil, Chevron, and ConocoPhillips spent a combined $56 billion on all their capital expenditures last year. (Disclosure: Jeff Pollock and Sunni Schneider have no financial interest in any of these companies).

If not the companies, could the U.S. government fund the investment? Executive orders from the president cannot create new spending authority; they can only direct how existing funds are used. Right now, the predictions market is betting with 80% odds that the Republicans lose the House later this year, and we doubt the Democrats would support something like this.

Iraq and Libya

History also provides a cautionary tale. The U.S. has not had much success rebuilding oil industries following regime changes. In Libya, oil production remains roughly 25% below pre-Gaddafi levels more than a decade later. In Iraq, it took nearly ten years after 2003 just to return production to levels seen before Saddam Hussein was removed — and today it is largely Chinese companies that are extracting Iraqi oil.

Oil Market has Too Much Supply

Finally, there is the issue of price. Oil markets are currently well supplied, with West Texas Intermediate trading around the high-$50s per barrel. In an environment of ample supply and moderate prices, there is little incentive for companies to commit tens of billions of dollars to risky, politically sensitive projects. Large-scale investment typically requires higher prices and long-term confidence that capital will not be expropriated or stranded.

The bottom line for investors is that Venezuela’s situation, while geopolitically significant, is unlikely to disrupt oil markets or Canada’s role as a key supplier any time soon. Big reserves do not automatically translate into big production, especially when infrastructure is broken and expensive to replace, and political risk is high.

From a portfolio perspective, this is a story to monitor over the long term but not a reason to make drastic changes to our client holdings in Canadian energy stocks today. 

-written by Jeff Pollock