"TRUMP WANTS VENEZUELAN OIL" NARRATIVE DOES NOT HOLD WATER
KEY CONCEPTS IN OIL PRODUCTION
Liftimg cost (production or operating cost)
This is the cash cost to extract 1 bbl of crude oil - these are direct cost such as wages, power, maintenance, chemicals etc.
Full-cycle breakeven (All-in cost)
Includes lifting cost + capex + taxes + royalties + debt service
Fiscal breakeven
This is the price a government needs to balance its budget from oil revenues.
Netback
This is Revenue minus transport, blending, middlemen costs. This is effectively the cash received by the producer.
Pointers:
1. If sales price can't even cover lifting cost, shut it down.
2. Economic viability depends on whose point of view:
- For company/investor: "Full-cycle breakeven", "netback" and "capex" matter.
- For a government: "Fiscal breakeven" matters.
An illustration working with numbers:
Sales price= US$55
Lifting cost = US$15
Full-cycle cost = US$50 (capex-US$20, Taxes-US$2, Royalties-US$5, debt servicing-US$8)
Fiscal breakeven = US$20
Netback = US$46 (Transport + blending + middlemen = US$9)
1. From investors' point of view: (Net back)-(full-cycle cost) = US$46-50 = US$4 loss.
2. From cashflow point of view: (Netback)-(capex) = US$46-20 = US$26. It is still generating positive cashflow, still worth to continue production in the short term to ride out price downturn.
3. From government's point of view:
Suppose before taxes and royalties, the government's budget deficit is US$20,000,000 and production capacity is 1,000,000 barrels per year. The Fiscal Breakeven is 20,000,000/1,000,000 = US$20. The taxes and royalties bring in only US$2 + 5 = US$7. Revenue from oil is insufficient to balance the budget.
TYPES OF OIL
Let's look at oil production economics with Brent crude currently at US$60 per bbl and lifting/different full-cycle costs.
Light-Sweet:
* Saudi Arabia - US$5-10. Very profitable. Can flood market with extremely low cost.
* Iraq, UAE, Kuwait - US$10-15. Very profitable.
Medium-Heavy: Russia - US$15-25. Profitable.
Medium-Heavy-Sour: Iran - US$10-30. Still profitable despite selling at discounts due to sanctions. Iran has geology advantage and a great threat to OPEC price discipline.
Light-Medium: Nigeria, Angola - US$20-30. Profitable.
Light-Medium-Offshore: Norway - US$25-35. Moderately profitable.
Tight-Light-shale: US - US$34-35. Selectively profitable.
Heavy-pre-salt-deepwater: Brazil - US$30-40. Moderately profitable.
Heavy-bitumen-oil sands: Canada - US$35-50. Low profitability.
Medium-heavy-offshore: UK - $40-60. Marginal profitability. Matured fields, profitable due to capex fully recovered.
Extra heavy: Venezuela - US$15-30 Operating at a loss / marginal profits
ECONOMICS OF SANCTIONED OIL
The claim "Trump wants to choke China's oil supply" makes no sense because China does not use Venezuela oil for fuelVenezuela oil is one of, if not the, lowest grade in the market. It has always been sold at deep discounts to Brent crude. Not all refineries can process Venezuela's sludgy oil into fuel such as kerosene, diesel gasoline. Some purpose-fit is necessary and there is no volume. Pre-sanction, main buyers of Venezuela heavy-sour crude were US whose Gulf Coast coking refineries were perfect fit; India whose mega complex refineries, and Europe whose dedicated systems in the Mediterranean refineries, can handle it; and China which uses some Venezuelan oil as asphalt/bitumen and petrochemical feedstock.
After sanctions (2019) all except China stopped buying from Venezuela. Venezuela sells 99% of their oil to China at even greater discounts to Brent crude. Now here's what almost all those voices talking of Trump wanting to choke off oil supply to China has no idea at all. When sanctioned oil is reprocessed into fuel, it is traceable, making sanction breach apparent. China has no worries about this because the oil is used as industrial feedstock, no conversion to fuel. But to use it as industrial feedstock, the oil has to come very cheap. Sanctioned oil comes with extra cost due to higher insurance and using sanction middlemen. Thus Venezuela has no choice but to sell at extremely distressed price to China.
ECONOMICS OF VENEZUELA OIL PRODUCTION
Venezuelan oil is under distressed production. This easily kills the "Trump oil-grab" narrative.Current key data (averaging out across different grades):
Invoice price - about US$35-40
Lifting cost - US$15-30
Full-cycle break-even cost: Irrelevant (note 2)
Fiscal breakeven - US$60-70
Shipping & insurance (US$3-5) + diluent & blending (US$2-4) + middlemen/risk premiums (US$2-3) = about US$7-11
Netback - US$24-33
Three things are glaring here:
1. Venezuela is selling at barely cash-positive at the margin, often cash-negative in practice. The cash it received from sales after paying off shipping, diluent & blending, and marketing, barely cover the lifting or production cost.
2. The full-cycle break-even cost is meaningless here since Venezuela is basically cannibalising its assets. It is not replacing depleted wells, no full maintenance, not funding abandonment, not paying risk-adjusted returns on capital.
3. The fiscal break-even data is not a definitive science. It varies depending on definition of government spending. For example, IMF estimated a fiscal breakeven of US$100-120. The US$60-70 is on a less broad view of government spending. At today's deep discounted price of US$35-40/bbl, there is absolutely no way Venezuela can depend on oil revenue to balance their budget. This reinforces the view Venezuela's dire financial straits pushed Chavez and then Maduro deeper and deeper into the narcotics business for revenue.
Those talking of "Trump oil grab" does not understand Venezuela is optimising one metric only - short-run cash survival cost. That means the lifting cost (which may be higher due to low maintenance) plus blending & dileuting, minus anything that can be deferred. Thus cost on paper appears low and output seemingly maintained below economic cost while infra decay is accelerating.
The question one might raise is if they are making losses, why does Venezuela continue to sell oil during the sanctions? Venezuela continues operating below full-cycle cost due to irreversible shutdown risks and high restart costs. Venezuela's oil sector operates under irreversible shutdown economics - wells are kept running at a loss because shutting them would permanently destroy production capacity. Keeping production alive preserves the option to benefit from future price recovery. Restart is costly, requiring disproportionate capital, time and effort.
The ex next question to ask is if sanctions were lifted, how would the Venezuelan oil be priced? The only guideline is pre-sanction prices. If sanctions were lifted tomorrow, Venezuelan oil will re-enter the market as a discounted heavy barrel. It is not politics, but the quality of the oil.
Pre-sanction, Venezuelan oil from 2015-2019 were priced at 20-30% discount off Brent crude. Based on today's Brent crude = US$60 per bbl
Venezuelan oil = US$42-48 per bbl
Lifting cost = US$15-30
Full-cycle break-even cost = Irrelevant.
Fiscal breakeven = US$60-70
Shipping & insurance (US$3-5) + diluent & blending (US$2-4) + middlemen/risk premiums (US$2-3) = about US$7-11
Netback= US$31-41
At US$60 Brent, Saudi barrels print cash, US shale competes, Canada expands, but Venezuela merely becomes viable again. It is not a prize catch. Sanctions don't make Venezuela oil cheap because it is valuable; they make it cheap because it is hard to sell. Remove sanctions and the oil trades like any other heavy crude - discounted, but no longer distressed.
ECONOMICS OF NORMALISING VENEZUELA'S OIL PRODUCTION
A normalised production easily debunks the "Trump oil grab" narrative under current market pricesNormalising means rebuilding what has been destroyed by Chavez/Maduro's socialism - recapitalising, rebuilding the infrastructures, new equipment, new drillings, retraining manpower in PDVSA (the national oil company). Assuming current levels of production, various analysts have estimated ballpark figures for Full-cycle Break-even cost such as US$65-80 (Wood Mackenzie). Venezuela's heavy-sour oil is not cheap, that is the reality. There is no way Valenzuela can recapitalise and be profitable under current market conditions.
Now the break-even cost US$65-80 is only in respect of the state producer. For an external investor the break-even cost will be higher after adding taxes and royalties.
PDVSA has been hollowed out under Chavez/Maduro with cronies replacing the tens of thousands of engineers, geologists, professional managers. Its institutional memory has been destroyed. PDVSA has been destroyed by Chavez/Maduro using it as their piggy bank. PDVSA wasm't destroyed by low oil prices or bad oil. It was destroyed when a technically competent national oil company was converted into a political instrument. Here's what all "Trump oil grab" voices never understand. PDVSA has massive debt buildup and oil pledged to China and Russia. Its cash flow has been mortgaged years in advanced.
MARKET PRICE vs NORMALISED VENEZUELA OIL
"Trump oil grab" narrative must bet oil market price will skyrocket.Assuming a normalised production and same level of output, and a discount rate of 20%-30%, Venezuela oil is only viable if Brent crude is US$110. Then Valenzuela oil data will be:
Invoice Price = US$77-88 per bbl
Lifting cost = US$15-20
Full-cycle break-even cost = US$65-80
Fiscal breakeven = US$60-70
Shipping/insurance + diluent & blending + middlemen = about US$7-11
Netback= US$66-81
Oil price needs to hit US$110/bbl for a normalised Venezuelan oil to be viable. Netback barely able to cover Full-cycle break-even. Valenzuela oil will be just viable while all other producers enjoy a bonanza.
OIL PRICE MARKET OUTLOOK
The market seems headed for a classic setup for long-run price compressionThere is hardly any energy analyst that forecasts a sharp oil price increase ahead. Major oil producers are becoming revenue maximisers, not price-maximisers, at the same time that the largest marginal consumer is structurally weakening.
Saudia Arabia prefers price stability, not price collapse. They defend market share first, but not at any price. But the Saudis have a structural need for oil revenue due largely to their cost overruns in the NOEM City project. NOEM's cost overruns is believed to be in the hundreds of billions above initial plans which substantially increased fiscal breakeven pressure and dependence on oil cash flow. That reduces their willingness to withhold supply to support high prices. They will be inclined to go for volumes and increase market share.
Russia post-Ukraine will change the landscape. If settlement occurs, Russia priority will be FX earnings, budget stabilisation and industrial rebuilding. Oil is the fastest, most scalable revenue source. That means Russia will be a volume maximiser, pushing volumes aggressively, discounting prices to regain customers lost in the sanctions.
Post-Ayatollah Iran will use oil as an economic tool. If a regime change occurs, Iran will go through massive structural changes from a war economy to rebuilding industries and water management. Iran is capital-starved and infrastructure-depleted with oil exports the only near-term funding lever. That strongly incentivises them to rapidly ramp-up production, offer competitive prices and willingness to undercut rivals. Iran's ability to pressure global oil prices comes from its geology - giant, conventional onshore reservoirs that allow rapid production ramp-up once constraints are lifted. Iran has advantages that no other countries have -- large volumes, low marginal cost and fast activation capability.
China is headed towards structurally weaker oil demand. China's oil demand headwinds are real and structural due to industrial overcapacity, demographic decline, EV penetration, rail electrification and renewables displacing marginal fossil demand. China's oil demand doesn't need to fall sharply, it only needs to stop growing. That alone breaks the bullish oil narrative which depends on China and India alone to absorb everything. India cannot replicate China's past demand growth rate. China has ceased to be the global demand shock absorber. Going forward, this is a huge change and absolutely bearish on oil prices.
GEOPOLITICS OF OIL
Not even Trump can weaponise oil that barely breaks even and has no leverage over the marketFor oil to be a geopolitical weapon, it must satisfy at least one of the following:
- Have low marginal cost (can undercut rivals)
- Be quick to ramp (can swing markets)
- Be widely fungible (many buyers/refiners)
- Be price-maker, not a price-taker.
Venezuela fails on all four pre-requisites. It has instead :
- High marginal cost: It is extra-heavy crude which requires diluent, blending or upgrading to reduce viscosity so that it flows, thus extra cost. It is operationally fragile. Extra-heavy oil systems have more failure points everywhere in the chain. Extra-heavy crude requires continuous intervention at every stage. Operational fragility means high downtime, high fixed costs, low surge capability, poor reliability. That's why output collapses quickly and recovery is slow.
- Deep structural discounts: Even without sanctions, heavy discounts persists. It has limited refinery compatibility, thus few buyers. Most refineries cannot process Venezuela oil. With sanctions, discounts cut deeper, netbacks collapse. That's why sanctions against Venezuela is very effective.
- Slow, capital-intensive ramp-up: Its oil fields are degraded, infrastructure hollowed out. Any production increase requires time, money and stability. (Compared to Iran which has geology and spare capital; Saudi Arabia which is a swing producer)
- Venezuela is a price-taker: It cannot set a floor price, cap a rally, or discipline competitors. At best, it adds weak, discounted barrels at the margin, which lowers prices. It's huge reserves fools many, but in reality, has absolutely no leverage.
CONCLUSION
The claim of "Trump oil grab" assumes Venezuelan oil is cheap, easily exploitable and geopolitically decisive. In reality it is expensive at the margin, commercially impaired, strategically weak.
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Venezuelan oil is not a strategic windfall many imagine - it has no leverage and is a beggar at the pricing table, certainly not a rational target for seizure.Valenzuelan oil trades at heavy discounts, barely covers its own costs, requires billions just to stabilise output, and oil cashflows mortgaged to Russia and China. It faces a long capital-intensive rebuild with limited upside. While it has the highest reserves in the world, its oil is low quality and expensive and is marketable only at deep discounts. Venezuela's high marginal costs and deep discounts are killer factors that blunt the value of its enormous oil reserves.
The claim of "Trump oil grab" assumes Venezuelan oil is cheap, easily exploitable and geopolitically decisive. In reality it is expensive at the margin, commercially impaired, strategically weak.
This platform has withdrawn it's subscriber widget. If you like blogs like this and wish to know whenever there is a new post, click the button to my FB and follow me there. I usually intro my new blogs there. Thanks.