- The Writer holds an MSc in Eurasian Political Economy & Energy from King’s College London and also an MA in European Studies from Sabancı University. 

As a founding member of the Organization of the Petroleum Exporting Countries (OPEC) and one of the largest oil producers and exporters of crude oil, Venezuela’s economy has been battered over the last three years. With 298 billion barrels of proved oil reserves, Venezuela’s reserves are the largest in the world, followed by Saudi Arabia and Canada with 268 and 173 billion barrels, respectively, according to the U.S. Energy Information Administration.   

The sharp drop in oil prices, which began in mid-2014, along with severe financial crises has further deteriorated the already decade-old problems facing Venezuela’s oil sector. Despite being blessed with the world’s largest oil reserves, a combination of both internal and external factors, such as the lack of maintenance, underinvestment and the sharp drop in revenues caused difficulties in efficiently extracting and trading oil as well as combating the economic downturn in the country.

Economic challenges in Venezuela are intrinsically linked with the oil industry. Consequently, the recovery of the oil industry is of vital importance for the future of economic prosperity and sustainable growth. Oil revenue amounted to US$94 billion back in 2012, but the collapse was accelerated with the fall in oil prices in 2014 that caused total oil revenue to drop to $27 billion in 2016. Additionally, the subsidized local consumption of around 500 thousand barrels per day (bpd) has dropped back from 800 thousand bpd just a few years ago.  

During the oil boom era, the majority of oil revenue was spent on social programs rather than in investing in exploration, production or in renewing old infrastructure.  Therefore, tremendous opportunities were lost. From the peak levels in the 1990’s, production levels dropped as much as one-third to 2.69 million barrels per day in 2016.

Since 2000, oil production has dropped by a quarter from 3 million bpd to an estimated 2.2 million as of May 2017, according to OPEC figures.  It should be noted that the state oil company, Petroleos de Venezuela, known as PDVSA, releases data on a consolidated basis, which does reflect an accurate picture of the full extent of the damage inflicted on the oil industry following the economic downturn. 

Despite its decline in production, Venezuela is still considered one of the top exporters of crude oil in the world, ranking as the fifth largest producer in the Americas and the 12th in the world.

By international standards, Venezuela’s oil is heavy and sour, meaning that oil produced there has to go through both domestic and international refineries. This inevitably increases the burden on the oil industry. Considering the majority of Venezuela’s oil fields are already mature, additional investment is required to maintain the current level of production.

Given the country’s overdependence on the oil industry, a sustained production growth, supported by an effective and credible institutional framework, is key to rebuild Venezuela’s economy. According to the Fraiser Institute Global Petroleum Survey, Venezuela ranks the least in the list, in terms of quality of its institutional framework. A restructuring of the country’s state run oil and gas company PDVSA has been suggested with the aim of regaining its autonomy at a financial and operational level.

Following the nationalization of PDVSA, it became the largest employer in the country with close to 140 thousand workers. The company accounted for a considerable part of the country’s gross domestic product and export earnings. After the election of the Hugo Chavez back in 1999, PDVSA’s overall royalty and tax increased, and he mandated that the PDVSA take part in the ownership of all oil projects in the country.

Some industry experts claim that the hydrocarbon law enacted in 2001 instigated a more advantageous position for oil companies than the preceding law. However, they argue that modification to the 2001’s law is not required since the law is not an impediment for the investment environment, but rather they cite that macro economic uncertainty is the major obstacle to further investment. Others argue that reform in the hydrocarbon law is a prerequisite to pave the way for new investments. Given the financial obstacles faced by PDVSA, 51 percent of the ownership clause is still considered detrimental to opening up the oil market.  

Among the various problems encountered in the country, the major focus needs to be placed on debt restructuring. With overall interest bearing debt of $120 billion, Venezuela’s financial status is destined to be left in the red. While PDVSA’s foreign debt was around $3 billion back in 2005, it increased to $44 billion in 2015. The debt burden has already limited the company’s investment capacity and hampered the realization of new projects in over a decade.   

Major transformation is needed to increase investment and reinvigorate the upstream sector in the years ahead. Therefore, a minor facelift will not save the oil industry in the country and eventually, the country’s heavily oil-dependent economy will suffer. Despite the wide range of challenges facing Venezuela, to curtail the inevitable decline and reinvigorate the industry, which will take years, it is critical to support this industry to help the country get back on track.

- Opinions expressed in this piece are the author’s own and do not necessarily reflect Anadolu Agency's editorial policy.