Eliminating Sanctions, Securing Political Stability, and Improving Fiscal Terms Key to Western Oil Companies Boosting Production
FOR IMMEDIATE RELEASE
February 3, 2020, 9:00am
Energy, Climate Change & Extractive Industries
Washington, DC – After years of mismanagement and, more recently, crippling sanctions, Venezuela’s core economic engine–the oil sector–is in collapse. The condition of the country’s economy creates numerous challenges to recovering Venezuela’s oil sector, and it will take months or even years for substantial amounts of investment to flow in, concludes a new Inter-American Dialogue report by Lisa Viscidi and Nate Graham.
It is increasingly clear that the disputed president, Nicolás Maduro, will not take the necessary steps to revive the sector and tackle Venezuela’s economic crisis. Although the timing and nature of a political transition in Venezuela are uncertain, there is little doubt that the oil and gas industry will be the immediate linchpin of an economic recovery under a new government. Report author Lisa Viscidi notes that, “With Venezuela’s state oil company PDVSA in disarray, investment from international oil companies will be the fastest way to jumpstart the economy’s revival with a large infusion of capital.” What would it take for these companies to return to or ramp up oil production in Venezuela?
The new report, based on interviews with eight large Western oil companies, finds that the key conditions for most companies to boost investment are:
- Lifting of US sanctions;
- A favorable regulatory and fiscal framework;
- A sense of political stability;
- Solutions to address infrastructure bottlenecks, lack of human capital, security concerns, and safety and environmental hazards and liabilities;
- An assessment of conditions outside of Venezuela, including a highly competitive global supply outlook, concerns about carbon-intensive oil, and a re-balancing of oil markets since US sanctions were imposed.
In addition, nearly all of the companies surveyed agreed that there would be a higher bar to invest in Venezuela as a new country entry than to increase investment if they are already operating in the country.
The authors conclude that:
- The fiscal regime designed by a new government will have to be more flexible and reduce the breakeven price of extracting oil in the country in order to compensate for a number of costs and risks not present in other producing regions.
- A new government will have to send a signal that there will be political stability and long-term regulatory certainty.
- Given the delay of months or years between a political transition and significant oil investment, managing the population’s expectations and finding alternative revenue sources will be key.
About the Inter-American Dialogue