In 2013, Venezuela was the 11th largest oil producing nation in the world, and the 4th leading supplier of oil imports for the US. Venezuela has enormous oil resources, mostly in the form of heavy oil sands (similar to Canada’s). At current oil prices, Venezuela’s proved oil reserves are the largest in the world at 289 billion barrels. Saudi Arabia is second with 266 billion barrels. For comparison, US proved oil reserves are 44 billion barrels.

Yet a decade earlier Venezuela’s proved reserves were only 77 billion barrels. At that time Saudi Arabia’s reserves were tops in the world at 263 billion barrels. How then, did Venezuela manage to nearly quadruple its oil reserves?

What happened in Venezuela is similar to what happened in the US with the fracking revolution. Venezuela always had enormous heavy oil resources in the Orinoco region of the country. But in order to be classified as proved reserves, these resources have to be extractable, both technically and economically at prevailing oil prices.

In 2003, with oil prices below $30/bbl, Venezuela’s heavy oil couldn’t be extracted with the technology of the day. But major integrated oil companies like ExxonMobil (NYSE: XOM), ConocoPhillips (NYSE: COP) and Chevron (NYSE: CVX) were investing billions of dollars in Venezuela in order to turn those heavy oil resources into reserves.

Between 2005 and 2010, with oil prices surging past $50/bbl and then $100/bbl, the heavy oil investments in the country began to pay off. A combination of improved technology and higher oil prices resulted in a huge increase in Venezuela’s proved oil reserves.

This development didn’t go unnoticed by the late Hugo Chávez, then President of Venezuela. Once the risky investments of the oil companies began to pay off, Chávez decided to reap the rewards. He tore up existing contracts, dramatically increased taxes on these companies and attempted to force them to give up majority ownership of the projects to Venezuela’s state-owned oil company, Petroleos de Venezuela (PDVSA).

Chevron eventually accepted the new terms, but neither ExxonMobil nor ConocoPhillips did. So Chávez seized their multibillion dollar investments and asked them to leave the country.

As the expropriation drama played out, I wrote a number of articles about the situation. One thing I stressed is that the oil industry is capital intensive, but Chavez’ intent was to siphon off revenue to finance his agenda. So I argued that over time, underinvestment would run Venezuela’s oil industry into the ground. This has indeed happened, and it is a strong argument in favor of Western oil expertise in developing challenging oil plays around the world:


Despite the world’s largest proved oil reserves, Venezuela’s oil production has declined by 25% since 1998, when Chavez first won an election for president, and is down nearly 20% since 2007, when the expropriations took place.

ExxonMobil and ConocoPhillips both went after Venezuela at the International Centre for Settlement of Investment Disputes (ICSID), an arm of the World Bank. ExxonMobil sought $10 billion at ICSID for the expropriation in 2007 of a large heavy crude project in the Orinoco region. In February of 2012, Venezuela was ordered to pay ExxonMobil about $908 million for lost contractual earnings, but the ICSID decision on a second expropriation of ExxonMobil’s Cerro Negro heavy oil project is still pending.

However, ConocoPhillips had made the largest investments in the country. In the 1990s COP began making an investment that would ultimately total more than $4.6 billion in heavy oil ventures. By the time Chavez expropriated the assets, the price of oil had made those investments much more valuable. ConocoPhillips ultimately took a $4.5 billion impairment charge against earnings in 2007 as a result of the expropriation.

ConocoPhillips originally brought the biggest case against Venezuela, seeking $30 billion in compensation for its stakes in two Orinoco projects — Petrozuata and Hamaca — and two joint venture exploration agreements in the Gulf of Paria that Venezuela expropriated in 2007. Venezuela spent years stalling, and even attempted to disqualify one of the three arbitration judges.

But on Sept. 3, 2013, ICSID ruled that Venezuela had breached its obligations “to negotiate in good faith” and therefore acted unlawfully. It was ordered to compensate ConocoPhillips for the expropriation. In March the ruling was upheld on appeal, and the parties are now arguing over the damages. ConocoPhillips is now seeking $6.5 billion for the seized assets, while rejecting Venezuela’s offer of $2.3 billion, which is less than half what COP invested in the country.

At that time of the expropriation, I wrote a somewhat tongue-in-cheek response to Venezuela’s actions: Let’s Confiscate Venezuela’s US Refineries. The assets in question were Citgo Petroleum’s, which is the refining unit of PDVSA. Citgo owned four US oil refineries and two asphalt plants, with a combined daily crude processing capacity of 756,000 barrels. Citgo also operated a 265,000 barrel-a- day refinery in Houston in a joint venture with Lyondell Chemical and had more than 13,500 US retail fuel outlets.

Now the potential seizure of Citgo assets to satisfy the judgements in favor of ExxonMobil and ConocoPhillips looms as a real possibility. This may explain PDVSA’s sudden urge to find a buyer for Citgo. It may be trying to stall the decision on damages long enough to sell Citgo, making it more difficult to enforce the oil companies’ claims.

But even if PDVSA manages to unload Citgo, ExxonMobil and ConocoPhillips have other options. They can seek expropriation of other Venezuelan assets in the US and in other countries that are members of ICSID, and Venezuela has bond offerings in New York that could be targeted. Enforcement of these judgments could be a catalyst for XOM and COP to push a bit higher, although the potential impact to COP will likely be relatively larger (COP’s settlement will probably be larger, and it’s a smaller company than XOM).       

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