THE ECONOMIST: Venezuela presents a big headache for big oil

Donald Trump is an idiosyncratic figure. This has not stopped hobbyist historians from rummaging America’s past in search of analogues.

His manufacturing nostalgia hints at the 1950s. His love of tariffs points to the 1930s. His imperialist streak smacks of the 1890s. A press conference on January 3 harked back to the 1820s. Hours after American special forces snatched Venezuela’s dictator, Nicolás Maduro, from his bedroom in Caracas to face drug-trafficking charges in New York (which he denies), Mr Trump brought up that era’s “Monroe doctrine” of American hegemony over its hemispheric backyard.

The president also brought up oil — 20 times. Venezuela sits on 300 billion barrels of the stuff, more than Saudi Arabia, but owing to years of mismanagement pumps a piddling 1 million barrels per day (b/d), less than war-torn Libya. Now, Mr Trump declared, “We’re going to have our very large United States oil companies … go in, spend billions of dollars, fix the badly broken infrastructure, the oil infrastructure, and start making money for the country.”

This vision of the oil business is, to add Schumpeter’s two cents to the history parlour game, straight out of the 1940s-60s. Back then the industry and American foreign policy were joined at the hip. American power helped the “Seven Sisters” — forebears of ExxonMobil, Chevron, Shell and BP — control the global petroleum trade. In return the companies literally helped fuel American might, both military and economic.

Apparently Mr Trump did not seek oil bosses’ opinions about his vision for Venezuela. Chevron, the only American major which stuck around after Mr Maduro’s predecessor nationalised the industry in 2007, says it “had no advance notice of the recent operation”.

Only now is the White House hastily calling meetings with American oil executives to discuss ramping up output. Given that the oil firms’ share prices jumped in the wake of Mr Maduro’s apprehension, Mr Trump may be counting on gratitude. Instead he is likely to encounter scepticism as heavy as Venezuela’s bituminous crude, including from Chevron and its chief, Mike Wirth.

That is because Mr Trump’s promise of a Venezuelan bonanza looks misaligned with the reality of modern-day big oil. For starters, after the second world war the world was not as awash with the stuff as it is today. Oversupply is pushing down crude prices, which were last this low when people were shaking off COVID-19 five years ago. Oil firms’ profits have sunk as a result. Chevron made a net profit of perhaps $US13 billion ($20b) in 2025, the worst result since 2020 and down by over 40 per cent from the average in 2021-24.

With global demand soft and the possibility of it peaking as early as 2030, the supermajors have become pickier about which projects to pursue. These days any old barrels won’t do: they should be low-cost and low-risk. Venezuelan ones are neither.

Wood Mackenzie, an energy consultancy, reckons that the breakeven price for the main Venezuelan projects exceeds $US80, well above the $US50 or so a barrel fetches in the market. Chevron does not disclose breakeven prices in different parts of the world. But its production costs (which exclude depreciation, tax bills and some other expenses) in the Americas outside the United States stood at $US14 per barrel, according to its latest annual report. That was half as much again as its global average, and almost certainly pushed up by its vestigial Venezuelan operations.

Pumping heavy, sour crude in Venezuela to sell at a discount looks even less appealing when Chevron can tap lighter, sweeter stuff in next-door Guyana, which it can extract more cheaply and peddle at a premium. Last year the American firm completed its $US60b takeover of Hess, a smaller rival with big assets in Venezuela’s neighbour to the east. According to Hess’s pre-merger filings, its production cost per Guyanese barrel was less than $US7.

A month ago Mr Wirth said that Chevron would invest $US7b in offshore projects in 2026, of which Guyana is by far the biggest, out of a total capital budget of $US18b-US19b. Rystad Energy, another consultancy, estimates that reviving Venezuelan production to 2m b/d, a level last attained in 2018, would require annual investments of $US12b up to 2032. Even if Chevron shared this burden with ExxonMobil and ConocoPhillips, two American rivals which left after 2007, it would be a heavy lift with an uncertain payoff.

This is not what shareholders want. The owners of the seven swashbuckling sisters may have brooked geopolitical risk. Those of their supermajor offspring shun it. Dan Yergin, the oil industry’s pre-eminent historian, describes today’s giants as “complex, capital-disciplined organisations run by engineers and lawyers”.

Houston, we have an opportunity

This is not a new development. In his book The Quest, Mr Yergin quotes a Western CEO’s doubts about going into Iraq after America toppled Saddam Hussein in 2003. “Tell us about the legal system, tell us about the political system. Tell us about the economic system and about the contractual and fiscal systems, and tell us about arbitration. And tell us about security … Tell us all those things, and then we’ll talk about whether we’re going to invest or not.” It took more than six years for those questions to be answered to the supermajors’ satisfaction. Their eventual investments often far underperformed expectations.

Investors’ early calor (heat) is already cooling. On January 6 Chevron’s shares gave up much of their 5 per cent bump the day before. The remaining gains may owe more to the reduced danger of Venezuela annexing Guyana’s oil patch, which Mr Maduro had threatened.

Those of ExxonMobil and ConocoPhillips may reflect improved odds of recovering some rather than none of the arbitration damages awarded to the duo over the 2007 expropriation. Neither signals a Venezuelan oil boom in the making.