Happy New Year one and all! Did anyone miss me over the holidays? I know I missed you all. I hope it was a relaxing break for everyone and that batteries were sufficiently recharged. I know mine are. I put the proverbial pen down and didn’t even open up the laptop for a solid week and a half. It was glorious!
But now to the matter at hand.
DID I MISS ANYTHING WHILE I WAS OFF? DID ANYTHING CONSEQUENTIAL HAPPEN??????
I know, I know. It’s a rhetorical question. There is always something happening. So, I should probably talk about it. If only I could wrap my head around it properly. I am of course referring to the status of my Blog book, which is hitting the presses as you read this (printed in Victoria of all places, go figure).
What? Not good enough?
Okay, how about the Baltimore Ravens not making the NFL playoffs? No?
Fine.
How about Venezuela. Do you want to talk about Venezuela? Because I sure do. But not in the way that every frantically scribbling, typing and posting newly minted global oil expert in (waves arms) North America wants to. No, I would prefer to do this in my own way, informed by knowledge, tempered by cynicism and provoking of thought.
Oh, and I know that I was supposed to review my fearless forecast from last year but “events dear boy” as they say. Plus that forecast was an unmitigated disaster, so you’ll excuse me if I skip that embarrassment. That said, I will be working on this year’s forecast for next week which thankfully will be inclusive of the complete upending of the global hemispheric consensus that we have been living under for the last century or so.
On to Venezuela.
As I’m sure all of us know by now, even those living under a rock, the US government executed a covert mission last Saturday wherein they sent elite special forces into Caracas and successfully apprehended (kidnapped?) Nicholas Maduro (the president of Venezuela) and his wife and spirited them back to New York where they were indicted on various narco-terrorism related charges.
While this does seem like the plot of some Jack Ryan series on Amazon Prime, it is in fact deadly serious.
Of course it wasn’t long before everyone and their cousin was spouting opinion after opinion on the how’s, the why’s, the when’s and the wheretofore’s of this admittedly daring act which was not only stunning in its audacity but also remarkable in its efficiency. I am pretty sure that despotic sleep patterns have been severely impacted by the ease with which it occurred. If it can happen to Ole Nick, it can probably also happen to pretty much anyone to be honest. Take that Miguel Díaz-Canel and Jens-Frederik Nielsen! (those are the president and prime-minister of Cuba and Greenland respectively in case you were wondering).
Not far behind the shock and awe of the whole thing came the rationalizations and pontifications. Celebrations in the streets of Caracas and, oddly, protests in various other places outside of Venezuela.
Underpinning all of this of course is the motive. Putatively the excuse given was the scourge of the drugs that Venezuela wasn’t actually sending into the US but look, we all knew what this was when it happened. It was a power play against China, Russia and the Iran-Venezuela axis and an aggressive move to get access to a shit-ton of oil. You don’t need to be a crack commentator to figure that out by the way. Donald Trump said it.
It’s about the oil. And this is where the unhinged Canadian madness begins.
Because if there is one thing Canadians rely on, argue about, exploit for political gain, opine on, misunderstand, profit from, despise and love – it’s the oilpatch.
I believe it was no less than 30 seconds after the mission was revealed that I read the first opportunistic tweet saying that “Canada needs to start building a new oil export pipeline NOW!”. Followed shortly thereafter by others saying that we shouldn’t build a pipeline and instead double down on renewables and that this was a sign that our oil industry was in its twilight and we should just give up.
So what does it all actually mean? Well for that, you may have come to the right place. Well more of just “a” place, but I will do my best.
First off, for the record, Nicholas Maduro was a very bad man. He is deserving of everything that is coming his way (although there is a part of me that thinks he’ll be living in Russia with Assad before the year is out). I have written blog posts in prior years about what an humanitarian, economic and environmental basketcase and tragedy Venezuela had become under the “leadership” of first Hugo Chavez and then his hand-picked successor Maduro. This has never been in doubt. In the last election, the opposition garnered 66% of the vote and Maduro just ignored the result. His government was illegitimate and not recognized by any country outside of the usual gang of bad guys. So I had zero issue with him being taken out.
That said, as it has since become clear that there is no intention on the part of the United States to actually follow through on removing the rest of his government – the layers of decentralized corruption and state plundering of private resources and the complicit police state apparatus, I have become quite cynical towards and skeptical of what the intent actually was.
Part of me buys into the conspiracy theory that this is indeed some form of mob style shakedown, where the US government made a deal with the VP (now president) of Venezuela that they would remove sanctions on Venezuelan oil and allow the current government to stay in place in exchange for certain promises that are now starting to be coming clear. One – the US gets “control” over the sale of Venezuelan oil and will the proceeds of those sales to buy American imports for Venezuela. Two – some minor reforms are permitted, like release of political prisoners and such. It remains to be seen whether Maduro himself was privy to these plans – he is after all on trial – but why pick up him and his wife then? Time will tell. If he was indeed privy to the plans, then his Cuban bodyguards could feasibly have been spared.
At any rate, the end game has been achieved. The US has been ceded control of oil sales and is using that leverage to make Venezuela buy American stuff. Money is to be held in an unaccountable off-shore fund. BUT – the same government of sleazeballs and country-wreckers remains in place. Meet the new gang, same as the old gang.
From a Canadian perspective, aside from the deeply unsettling message this sends about how unpredictable the US government continues to be under Trump (like maybe Mark Carney needs to stay in a different house in Ottawa for a while), the most potentially impactful part of all this is the de-sanctioning of Venezuelan oil exports, Trump’s plan to pour good money after bad into Venezuela’s stunted oilpatch and what that might mean for Canada’s oil industry.
These impacts range from “immediately existential” to “not much” depending on who you talk to and what end of the political spectrum they occupy. I can tell you one thing for sure – neither end of the spectrum is correct. The answer of course is always in the middle and uncertain and may or may not come to pass and likely not for quite a while.
To fully analyze this though, we need to have a few facts out in the open about the state of the Venezuelan oil industry, the US refining complex and how Canada fits in.
First of all – Venezuela is all about oil. If you want to revive Venezuela as a country it needs to start underground – there has been so much damage to the rest of the economy, it is indeed the only way.
Here is something I wrote about Venezuela six years ago.
Oil production accounts for 90% of exports but, starved of capital investment because of government incompetence, production has declined to less than 1.0 million barrels per day from its pre-Chavez peak of 3.5 million. This is a 30-year low and the prospects are that it will fall further. Put another way, if the rest of OPEC had not implemented any cuts at all, the collapse in Venezuelan output would likely have rebalanced the markets anyway.
As the only source of foreign exchange to pay off the crushing debt, the NOC is really the only thing standing between marginal solvency and complete collapse and anarchy. It is, as I read somewhere, an oil company with a country attached. Except not so much anymore. Last year, Conoco seized assets owned by PDVSA in the Caribbean for non payment of debt. CITGO, the country’s refinery, has been pledged as security to Russia, but there is no way the US allows Russia to own a refinery in the continental United States (note that the sale of the CITGO refinery to a predatory PE fund is finally going to close with the removal of Maduro). The country with the largest reserves of oil in the world imports gasoline from Iran. The collapse of the oil industry and the inattention to existing production is a giant flashing warning light and precursor to an environmental calamity of unimaginable scope and scale. The running joke is that you can light Lake Maracaibo. The actual joke is that it has actually happened.
Once self-sufficient and a major exporter of food, Venezuela now imports more than 90% of its food requirements largely because government-imposed price controls and subsidies (that it can no longer afford with the fall in oil prices) and nationalization of private business has discouraged production, not to mention rampant corruption and an official exchange rate disconnected from reality. Food shortages are everywhere and food rationing by government is being used as a way to control the population. Foreign aid convoys are regularly turned away at the border.
Record rainfalls during the rainy season around Caracas fills all the reservoirs, yet the city can’t consistently get running water because maintenance on the water system has ground to a halt. There are more than 5 million people in Caracas.
The same situation exists in the health care sector, where government cannot afford to provide even the most basic medical supplies. Many women cannot even buy tampons.
The individual and collective tales of human suffering are heart-breaking. Infant and maternal mortality were up a staggering 30% and 65% in 2017. Chronic malnourishment has led to the average citizen losing about 20 lbs in the last year and is expected to have knock-on effects on health of the general population for generations to come. More than 15,000 doctors have left the country in the last four years and the government refuses to accept massive donations of medicine and food from neighbouring countries.
The country’s main electricity provider can only supply power sporadically due to chronic mismanagement and lack of maintenance.
The country is among the most violent in the world and the capital, Caracas, is the murder capital of the planet with a murder rate of 130 per 100,000.
That was in 2019 and it has only gotten worse. 8 million people have fled the country. Many to the United States and neighbouring countries. This exodus includes many of the best and brightest – for Venezuela to recover they need to be encouraged to return. Money does that.
At any rate, back to the oil. Because it is all about the oil. Donald Trump clearly wants to control the oil because he thinks that helps control the hemisphere and it does. And it is doubtful that he harbours any altruistic intent toward the average Venezuelan but if the removal of sanctions and the sale of oil at market prices can create the funding the country needs to emerge from disaster, I am sure the average Venezuelan would be just fine allowing the US to scrape a little off the top. To a point.
Venezuela has the self-proclaimed largest reserves on the planet. They claim in excess of 300 billion barrels of oil, a bit less than double what Alberta has. While the claim is dubious, given that it is a figure given by a National Oil Company and not actually verified, there is no doubt the resource is massive.
At its peak, Venezuela was producing about 3.5 million barrels per day and after the collapse of the industry is eking by at about 600,000 with about half of that meeting domestic demand (which will increase if/as the country recovers). This compares to Canada’s production of about 5 million.
The oil produced by Venezuela is heavy oil. The reserves are mostly bitumen, just like Alberta. It’s a little less challenging to get because their bitumen is closer to a flowing form than ours with a large proportion recoverable in a “cold” process as opposed to a “hot” one that is utilized here. The complete oversimplification: cold recovery is basically meaning the resource doesn’t need to be heated like we do where we inject steam underground and boil the oil out or mine it and heat it to separate it. In Venezuela they can use screwpipes to bring the sludge to the surface, mix it with diluent and ship it. Mainly to the various refineries along the Gulf Coast in Texas and Louisiana that were configured years ago to process this very same heavy oil from Venezuela, Mexico and, in recent years, Canada.
Sounds easy right? And an existential threat to Canada and our oil industry. Especially if, as the media seems to be implying, it can all come on stream in the next few weeks.
Except that isn’t reality.
It’s going to cost a lot of money. An unimaginable amount of money. And it is going to take a long, long time. It took 20 + years to destroy the industry, it stands to reason it might take that long again to build it back up.
The oil and gas infrastructure in Venezuela was already degraded BEFORE Chavez took power and it is now just not relevant. The entire sector needs to be rebuilt and modernized. Cleaned up. There are no workers. The brain drain has been massive. First the purges under Chavez and Maduro to get rid of people who knew what they were doing. Then the seizures of assets that chased out all the expats who were on the ground doing the work. Giant global companies like Halliburton and Schlumberger who have previously gone into hostile environments like Iraq to help rebuild that sector have already been screwed over multiple times in Venezuela and will be reluctant to go back with security and financial guarantees that can only come from the US government and the US military.
Anecdotally, coming from people who actually know the asset base there and have been in country prior to Chavez and some who were there pre-seizure and others who have knowledge of the current situation, the idea of some easy rebuild in Venezuela is nothing more than laughable. Reality trumps politics every time. You can pledge as much money and make as many promises as you like, but there are physical realities.
The entire sector needs to be rebuilt. Venezuela’s oil industry is as street-ready as that rusted out Edsel sitting half-buried in a farmer’s field. It’s more than a project to solve with a wave of the hand.
How much will it cost? I have heard estimates from $100 billion to $1 trillion dollars to get production back to prior levels. Which one is right? Who knows. I lean higher, because it’s always higher.
Think how much it cost to get Canadian oilsands production up to our current 3-4 million barrels a day. Depending on when you pick your start date (1950’s or 2000) that ranges from $227 billion to $350 billion. About 2/3 of that is growth capex and the balance is maintenance. Get your output up and then continue to invest to maintain it.
Factor in inflation, in-country security risks, the lack of egress (yes, Venezuela needs f-ing pipelines) and you could easily see that required capital double or triple the historic investment in Canada. So yeah, $1 trillion.
On a micro level, one knowledgeable heavy oil expert suggested that it would cost about $30,000 per flowing BOE to jump start production. That means that each 100,000 barrel per day increase in production would cost about $3 billion. This is before you store, process and ship it anywhere. And before all the soft costs.
And at the same time you have to rebuild a country that is not self-sufficient in anything anymore. If all the oil money is controlled by the US and isn’t going back to feed Venezuelans and instead to Big Oil, you are just sowing the seeds of the next revolution.
It’s a toxic swamp of expensive goo and the United States is stepping into it based on promises of rainbows, moonbeams and easy riches.
All in an environment where the President is on record saying he wants to see oil prices below $50 (because he needs to win the midterms), a price at which your $3 billion 100,000 barrel expansion in Venezuela is not economic and neither are his actual voting constituents in the Permian.
Just so we are clear, the result of the play being suggested is invest US taxpayer dollars and military in Venezuela to bring down oil prices below $50 the result of which will inevitably be shut-in US production and rising unemployment in the US. Seems
So, what does it mean for Canada?
Well, it certainly isn’t as existential as some in the media and everyone on the right (and left) is saying. But it is a wake-up call. Despite all the challenges, there are low hanging fruit in Venezuela and it is feasible production could get to 1.2 million barrels per day in the short to medium term. And those barrels are going to be forced by the Trump administration into the Gulf refineries, displacing Canadian barrels*.
*It is worth noting that the barrels that would go to the US come at the expense of China, so the Canadian barrels destined for Galveston or the soon to be PE-owned CITGO refinery may in fact just end up at some teapot in China.
That said, it underscores yet again the dangers of being at the whim of a mercurial customer. And it doesn’t matter if it’s Trump doing his version of a mob shakedown or Biden removing sanctions to buy votes with lower gas prices during his term – each party sucks up to Venezuelan oil. It’s geographically close and have you looked at voter demographics in potential swing states like Florida?
So, we would benefit from continued effort to break our reliance on one crazy customer so that we can grow our production into a diversified customer base.
This means expanding and optimizing the TransMountain system, the Enbridge Mainline and, yes, a new pipeline to tidewater.
Do we need to run around like chickens with our heads cut off?
No.
Do we need to get on with it and have government do everything in its power to expedite the consultations, approvals, permitting and building of said pipeline?
Absolutely.
We’ve got 5 to 10 years to get it all straightened out. I think that is enough. But we all need to be on the same page and the same side and have the same sense of deliberate urgency.
In the meantime – here’s a shameless plug to all my American friends and a reminder to those Canadians (opportunistic or otherwise) who might be buying the sky is falling scenario…
We are a politically stable, EXISTING producer of the heavy oil the US economy runs on.
Up to 4 million barrels of it, every freaking day. Shipped on pre-existing egress under agreements dating back decades.
We don’t have guns. US ex-pats working in Canada don’t need 24/7 security. We aren’t forcing people to live in malaria infested jungles. We don’t have narco-terrorists (real ones) coming back over the border from Colombia now that the security situation has changed. We don’t have rampant corruption. We aren’t a country that needs to be rebuilt from the ground up. We won’t require eventual boots on the ground and massive military presence. We have never seized or appropriated assets from US oil cos. We have the longest undefended border in the world. We already sell our oil to the US at a discount. We let you win the Stanley Cup every year. We are (mostly) culturally similar. Everyone in this value chain makes tons of money and the private sector investments have by and large already been paid for.
And we don’t cost the US taxpayer a dime.
It’s a long game. But math is undefeated.
