Coming Soon – Eastern Venezuela

Venezuela has the largest proven oil reserves in the world, reported at 303 billion barrels in 2019 (BP Statistical Review of World Energy), and yet only produced 723,000 barrels per day (MBPD) in August 2022. In contrast, Saudi Arabia is a close second in total reserves at 298 billion barrels, produced 11 million barrels per day (MBPD) that month. That is, with essentially the same reserves, Saudi Arabia produces over 15 times as much oil. The history behind the collapse of the Venezuelan oil industry is a clear lesson of the failure to understand how to manage a critical natural resource in today’s complex, interdependent world economy. If we turn to Russia, before the invasion of Ukraine it was producing 11.3 MBPD and was the largest exporter of oil to the world’s markets at 7.8 MBPD in December 2021. About 60% of those exports went to European countries. Given the West’s determination to end its dependence on Russian oil coupled with the impact of Western sanctions on Russian finance and industry, it is not hard to see the collapse of the Russian oil industry and a new oil-rich but oil-dysfunctional country ensuing, one which we will start referring to as Eastern Venezuela.

Figure 1 – Venezuelan Oil Production History Since 1970

Venezuela: Peak oil production in the early 1970s was about 3.5 million barrels of oil per day (MBPD) and then declined rapidly as Venezuela began taking steps to nationalize the industry (see Figure 1). In 1976 the industry was fully nationalized and operated by the state-owned petroleum company PDVSA (Petroleos de Venezuela S.A.). By the mid-1980s oil production had fallen by 50% from its peak. Then in 1997 Venezuela made efforts to attract foreign investment and technology to develop the heavy oil reserves in the Orinoco Belt, leading to a recovery to 3.5 MBPD by 1998. But this resurgence was short-lived. Hugo Chavez came to power in 1999 and quickly changed the rules for PDVSA to extract more money from the oil industry to subsidize social programs. After the Venezuelan general strike of 2002–2003, which was called in an attempt to force a new election, failed, Chavez fired 18,000 employees of PDVSA and replaced them with employees loyal to his government.

In February 2007 Chavez decreed that all international oil projects be converted to joint ventures with a majority control held by PDVSA, which led foreign companies to begin exiting the country. However, the foreign investment was successful in pushing Venezuela production to the 3 MBPD level once again. In 2013 Nicholas Maduro was elected president after Chavez’s death, and he quickly initiated another purge to replace PDVSA’s leadership with loyalists. Maduro began to siphon even more money out of PDVSA to fund more social programs to help maintain his socialist party in power and to pay down foreign debt. As funds for PDVSA maintenance dried up, and equipment started breaking down, oil production plummeted. In 2017 control of PDVSA was handed over to the military, ostensibly to correct these problems. The internal persecutions that followed led to more than 30,000 employees leaving the company, many of them highly specialized engineers and technicians, which only made the situation worse. In another key milestone, in August 2020 the last drilling rig, operated by Nabors, left Venezuela. As of May 2022, there were still no active rigs in the country with the largest oil reserves in the world (Figure 2).

Figure 2 – Number of active oil rigs in Venezuela from 2012 to 2021 (

There are two interrelated causes that have driven the steep decline of Venezuela’s oil production. 1) loss of technical expertise to find, drill and produce the country’s heavy oil. This started with the firing of PDVSA employees in 2003, was followed by pushing international expertise out of the country in 2007 and concluded in 2017 with the purging of company leadership and technical personnel. 2) Lack of investment and expenditures for maintenance. It is estimated that Venezuela will need as much as $220 billion to perform urgent maintenance and overhauls of pipelines, refineries, and other infrastructure. Given the crippling US sanctions, this is not likely to happen.

Another significant global consequence of the disappearance of the management and technical expertise at PDVSA is that oil production now in Venezuela has devolved into “Produce at any means” without regards to any environmental considerations. Venezuelan oil that enters the market is one of the dirtiest oils produced, as spills go unplugged, refining emissions soar and regional water is polluted unabated.

Russia: Although the broader picture is different from Venezuela, there are enough critical similarities that one can see where Russia is probably headed. When the OWOE editor was working in Russia on the Shell Sakhalin-2 project, the joke around the office was that Russia was a gas station masquerading as a third-world country. The point being that the country that billed itself as the world’s second superpower, with the ambition to become the first, could not exist without the foreign currency earned through exports of its natural resources. Obviously, oil and natural gas are the most important and most valuable, but this also includes timber, seafood, gold, precious metals, diamonds, etc. It was estimated in 2019 that natural resources made up 60% of the Russia’s Gross Domestic Product (GDP).

Since the invasion of Ukraine, the following have taken place:

  • The US and Western allies have imposed sanctions on Russian banks and other businesses that severely reduce Russia’s ability to sell and get paid for its resources.
  • US and other Western companies have ceased operation in Russia, including Shell and BP. Total plans to remain in Russia but will no longer invest in new projects. Oilfield services company Halliburton has exited Russia, and Schlumberger, Baker Hughes and Weatherford International have agreed to cancel new investments.
  • Hundreds of thousands of Russians, including scientists, engineers, geologists, computer programmers, and technicians have fled to neighboring countries to avoid either the military mobilization or to find political freedom. All of these skills are critical to the complex industry of oil and gas production.
  • The European Union is looking to reduce purchase of natural gas from Russia by two-thirds before the end of the year and cease all fossil fuel purchases by 2030. A key enabler of the plan is to dramatically increase use of renewable sources of energy rather than substitute fossil fuels from other sources, which means that Russia’s production would become surplus in the world market.

In the short term, in August 2022 Russian oil exports had dropped to just under 3 MBPD, a huge drop from 7.8 MBPD in December 2021. In the long term these actions mimic the key causes of Venezuela’s decline: 1) loss of technical expertise as both Western companies and Russian technical specialists leave Russia, and 2) dramatic reduction in income from oil and gas exports which will ultimately lead to a decline in production due to lack of new investment and ongoing maintenance.

These effects won’t necessarily be seen quickly. It took a little under a decade for Venezuela to get where it is today. But the writing is on the wall. Hello, Eastern Venezuela.

Editor’s note – Eastern Venezuela is not to be confused with North Venezuela, the country commonly known as Canada, which has followed its own unique path to becoming an oil-rich oil-dysfunctional country.


Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.