No one really knows how the situation in Venezuela will unfold over the next few years following President Trump’s audacious kidnap of its former leader Nicolas Maduro. It may or may not be legal. It might restore democracy or it might just pave the way for another dictator. But one point is certain: America looks set to reinvent the country’s oil industry. It is hardly surprising that investors are already jumping on that bandwagon.
Oil shares have been soaring ever since the news broke over the weekend of America’s raid in Caracas, propelling the FTSE-100 – which is dominated by giants such as Shell and BP – to record highs. President Trump has already promised to restart Venezuela’s oil industry, and is even offering subsidies to encourage a wave of investment.
There is no doubting the size of the opportunity. Venezuela has the largest oil reserves in the world, with around a fifth of the global total. The industry collapsed amid the mismanagement of Hugo Chavez’s socialist regime. But it is still in the ground and as valuable as ever.
This is a huge opportunity for the oil industry
Venezuela’s oil could transform the industry in three ways. The country’s reserves are proven, and while it was a founder of the oil cartel Opec, it will be making decisions with Washington instead of Riyadh. The oil majors don’t have to spend a lot of money on high-risk exploration: they know where the oil is, and they just have to repair the drills and pipelines to extract it. Next, it will be very profitable. Venezuelan oil is relatively cheap to extract, and President Trump won’t be imposing the windfall taxes that are common in the rest of the world. Finally, it is close to major markets. Its dense and sticky oil is far heavier than the US shale variety and can supply American refineries while much of the US’s own production is exported.
Add it all up, and this is a huge opportunity for the oil industry. It has been in the doldrums for years, battered by the hugely expensive transition to green energy, as well as by rising production costs and taxes. Shares in Shell, for example, have only managed to rise from £21 to £27 over the last quarter century, while BP have fallen from slightly over 600p to less than 450p over the same time period. It has been a dismal 25 years.
Regime change in Venezuela may not bring back the 1950s and 1960s glory years of fossil fuels. But it will certainly transform the prospects of the oil industry. As investors have started to work out, it will finally start making proper money again.
