Much has been written about the Trump administration’s actions in Venezuela and the supposed implications for the global oil market, though at this early stage it is already apparent that the subject is being treated with more urgency than understanding. The situation, in truth, is still in its opening act, and what lies ahead is unlikely to be simple. A great many articles have gravitated toward the more theatrical elements of the story, yet comparatively few have paused to examine the less glamorous—but far more consequential—character of Venezuelan crude itself.

In short, we do not believe Venezuela will be able to add much in the way of production without oil prices as high as $85 per barrel.

In brief, we believe that apart from the occasional seized tanker cargo making its way to market, the recent developments are unlikely to have a meaningful impact on oil markets in the near term. Venezuela does, without question, possess enormous oil reserves—roughly 220 billion barrels by most estimates, enough to place it at the top of the global reserve table—but the act of converting those reserves into sustained production has always been, and will remain, an undertaking of formidable scale.

Venezuelan crude is, almost without exception, heavy and sour. “Heavy” in this context signifies a crude that has undergone partial oxidation underground, a process that renders it stubbornly resistant to flow and correspondingly difficult to produce. The other major source of heavy oil is Canada, where the resource is commonly known as the oil sands. In Canada, heavy oil was for many years not pumped at all but mined, using vast earth-moving machines. That practice eventually gave way to steam-assisted gravity drainage, in which wells are drilled, steam is injected to liquefy the bitumen, and the resulting fluid is drawn out through a second horizontal bore.

Venezuela’s geology permitted a different, if hardly effortless, approach. Powerful pumps were installed that, with considerable exertion, could lift the partially degraded crude to the surface. Complicating matters further, Venezuelan heavy oil is also notably sour, containing elevated sulfur content. This characteristic demands specialized handling at the wellhead and equally specialized equipment at the refinery. The process, taken as a whole, is intricate, capital-intensive, and unforgiving of neglect.

The country’s production history has reflected this complexity for decades. According to the BP Statistical Review, Venezuelan output peaked at 3.8 million barrels per day in 1970, when conventional production reached its high point and began to decline. By 1985, production had fallen to roughly 1.7 million barrels per day. Beginning in the late 1980s and continuing through the 1990s, Western oil companies invested heavily in Venezuelan heavy-oil projects, producing a sharp recovery. By the end of that decade, output was again approaching 3.5 million barrels per day.

When Hugo Chávez came to prominence in the early 2000s, Venezuela moved to nationalize its oil assets, prompting most Western producers to withdraw. The national oil company, PDVSA, then experienced a debilitating strike in 2002–2003, which sharply curtailed production. After the strike ended, output staged a temporary recovery, reaching approximately 3.3 million barrels per day by 2006. That year marked another turning point: contracts were rewritten or voided, capital spending collapsed, and skilled labor began to leave the country. By 2015, production had slipped to 2.8 million barrels per day, before entering a far steeper decline. According to the most recent IEA data, Venezuelan production now stands near 800,000 barrels per day—nearly an eighty percent drop from levels seen in 2000.

In light of recent events, many investors have begun to ask how quickly Venezuelan production might rebound once more. We regard this line of thinking as premature. Much of the infrastructure installed during the late 1990s and early 2000s has since been dismantled or stripped for scrap as the country descended into severe poverty. During the PDVSA strike two decades ago, the disruption was brief and occurred while the broader economic fabric remained somewhat intact. As a result, infrastructure survived largely untouched, allowing production to recover. Today’s circumstances bear little resemblance to that earlier episode.

Restarting Venezuelan heavy-oil production would require capital investment on an extraordinary scale. As one illustrative example, an older industry document indicates that supermajors spent approximately $23 billion in 2010 to bring 600,000 barrels per day of heavy-oil capacity online—roughly $40,000 per flowing barrel. More recent rules of thumb for Canadian heavy oil suggest figures closer to $100,000 per flowing barrel, implying that adding one million barrels per day could require on the order of $100 billion once the cost of an upgrader—an essential component of heavy-oil production—is included.

We will return to Venezuela in a future letter, but as a preview, we do not believe that a Venezuelan heavy-oil project could reasonably generate a ten percent return on investment, given the magnitude of the upfront capital required. When one further considers that investors would almost certainly demand an additional premium to compensate for geopolitical risk, the case becomes weaker still.

What oil prices are needed to bring back Venezuelan production? We estimate that $70 per barrel would be the absolute minimum required to bring back online 2-300,000 b/d of brownfield production and generate a 15% rate of return. To bring on anything more than that would likely require WTI to trade for $90-100 per barrel, and take several years.

Rob Conners arrives at a similar conclusion in a recent post on his Crude Chronicles Substack, observing that for Venezuelan heavy oil to be economically viable, it would require either extraordinarily generous fiscal terms or substantially higher oil prices. Given the political risks inherent in offering such favorable terms, the more plausible conclusion is that, absent much higher prices, Venezuelan production is unlikely to increase materially—and even then, only after a period measured in years rather than months.