The Venezuelan Oil Deal Portends A New Era of Power Politics | Energy Shots

Good morning and welcome back to Energy Shots. I'm Joseph Majkut of CSIS. Last week, the Trump administration announced what may be the largest oil deal in international history. Kevin, what do you make of the news as we've heard more details this week? >> Well, would you call that something of a power play? >> You might. We talk a lot about power here on Energy Shots, but I think you're not talking about electricity. >> And power maybe of a different kind. Joseph, um 6 or 7 years ago at ClearView, when we first started talking about moving from an era of rules to an age of power, I think we got some feedback that that sounded like a vast oversimplification. Uh but it may actually be fundamental. Now, let me say for the record, vast oversimplifications like spurious correlations can give analysts a lot to talk about, and without them we might have less. But you know, this is a fundamental change in how things work. The The established order is changing. So, I'd like to uh I'll take presidents whose names start t r u for a thousand, please. >> Well, Kevin, I think like let's look at like we you know, we we start with President Truman. >> Okay. >> Not necessarily the architect, but the builder of the international order following World War II. >> A lot of infrastructure for the order got built on his watch. >> And And the I think the big question we're asking is, you know, is something changing and is President Trump the harbinger of a new era? So, let's talk a little bit about the rule system and the power system when it comes to politics and energy. >> Okay, this is uh this is again taking some of those ideas from 6 years ago and just running through the And rules are constrained by history. Uh they are about process. Uh and they prioritize consistency. Uh they talk about sort of reasoned analysis. That's right. When we go through regulatory doctrine, right, we we look at the the fine text in the the cost-benefit analyses, we are living in the stuff of rules. >> Right. And those For those who aren't reading, rules give predictability through process is how you wrote it. Uh they're constrained by history, tradition. They prioritize consistency as the basis for a predictable future, and they rely on reasoned analysis of performance over time. This is a technocrat's dream, but it also has provided stability and a sense of certainty, which has allowed for massive growth in the private sector, uh the rise of a global economy that has treated us all well. Why is that going to have to change? Or why might that change? >> Well, I'm not sure I can speak to that, but I can speak to the fact that it has. So, maybe we should talk about what it has changed into. Uh the expediency through symbols is a summary, I think, of sort of appreciating that power flows where it can. It takes the path of least resistance. Uh and you often find that it elevates expediency over some of the more cumbersome process. Uh and among other things, symbols are sort of the language of power. And if you think about that, you think about the fact that we are now seeing memes being conveyed through social media by leaders across the world as a way of making statements. That is the symbology, the symbolic language of power at work. >> Now, this theory is all well and good, but what does it mean when we talk about energy? When the president talks about this new deal, he mentioned 65 billion barrels of oil that the US now controls. What is he talking about? >> Well, he's talking about making an investment in North American Blue Energy Partners on the on the US behalf, which which is a Venezuelan operator with a relatively recent vintage acquisition and operation history, currently doing about 200,000 barrels per day production from 17 fields, or at least has access to 17 fields with those 65 billion barrels of resource. Six of those fields are are green field, so no production at all. And that's roughly half of the resource in question we're talking about. And so, a lot of those fields are in Venezuela's Orinoco Belt, where you have a a heavy crude, and I I suspect that may be something we'll talk about a little bit, but uh >> Well, I mean like we since the since this began, what we're showing here is on the x-axis proven crude oil reserves. Since the Maduro regime has been toppled, everyone has heard about the 300 billion barrels of proven reserves in Venezuela and these leases that the US now has some sort of interest in. >> 35% apparently. >> Right. And and an option to buy I believe 20% of future production at cost. Um those are going to be drawing from this enormous resource. This is an attempt to use power to develop resources that have thus far been sort of slowly developing. >> Well, so if we go back a few episodes to say October or January when we last talked about Venezuela, we showed that production had peaked in the late '90s at 3 and 1/2 million barrels per day, but dropped considerably as the the industry has fallen into disrepair. >> Right. And that's exactly what we're showing here on the y-axis. This is the crude oil production from and we're looking here across different countries. So you've got the United States lower in proven reserves. We might talk about that in a second, but a very high producer. Burning through our proven reserves as we are the largest oil producer on the planet. Saudi Arabia enormous reserves and a very large producer. Venezuela enormous reserves, but relatively meager producer. If you look at the R/P ratio, it would take something like 900 years to produce proven reserves in Venezuela at today's production rate. And I think what we're seeing is an attempt to increase that production rate, get this oil out of the ground and into international markets. >> Sure. And of course the recoverability of those reserves is a key question as well. Technology can improve that and sometimes you may find that those reserves increase. Technology can also expand the finding and discovery of resources, which is to say that neither of these are static numbers and the dynamism is important. But in the context of this, so that in an age of power where we live today, energy policy is essential as geopolitical platform. It enables the option set to presidents. I think we've talked about this also in past episodes. It's inconceivable to think that when the US was a net importer of 32% of the energy that it consumed 20 years ago, that we would be projecting economic and military force against major producers like Venezuela, major producers like Russia, major producers like Iran. It enables a broader option set to our leaders. And so having access to additional reserves maybe for a more tumultuous, more volatile age of power maybe sort of a long-term strategic goal. >> Exactly. Now, what does it look like to try and redevelop some of those things? >> Well, so what have you got here? We have we have a history going back to relatively recently when the Biden administration provided some sanctions relief in the context of what they hoped would be electoral and democratic reforms in Venezuela. And what you can see is that the crude production has climbed slowly. It has roughly doubled, almost doubled. It's now just south of about 1.2 million barrels per day by this assay which uses IAEA data. And importantly the imports into the United States where refineries are well suited to process the heavy sour crude that comes from Venezuela have steadily increased with a major increase recently since the toppling of former Venezuelan president Nicolas Maduro. And so we are looking at about 630,000 barrels per day in June according to the Energy Information Administration, which is slightly more than 60% of the production in that month as assessed by the International Energy Agency. >> And so when you hear the administration saying, you know, Venezuelan crude is always really making its way into the United States and might provide immediate relief. Is this the kind of flow that they're talking about? >> This is a very steep curve. Uh if you just look at what this looks like. Now, if we had rolled back the clock into the 2010s, we would see that the imports from Venezuela were at approximately this level. >> So, in 2019 >> prior to the sanctions going in place in January of 2019 under the first Trump administration, uh importers, again, primarily in the Gulf Coast, the US Gulf Coast, were bringing a lot of this heavy sour from Venezuela in then. >> I guess I see. And so, what does this new deal mean for what these curves might look like in the future? A lot of what we're trying what the the Trump administration wants to see is an increase in overall production. Do we also expect to see increases in US imports? >> I think that's a likely uh expectation. And maybe one of the ways to look at that is to look at uh not only the uh the increases in in imports, but also exports. So, there's there's two dimensions to this, which is that right now a lot of the the crude that's being produced in Venezuela relies on diluent, not just to move the heavy uh dense crude from the oil fields in the Orinoco Belt to where they can be upgraded, cuz a lot of the upgraders on which the old process of investing in Venezuela relied are in ill repair themselves, but to actually use the diluted crude as the product that is sold onto the global market. So, you have if essentially a 4:1 ratio, about 20% diluent, uh a very high uh API gravity naphtha, 55° API, as essentially a solvent to dissolve and move that 9 API gravity Orinoco Belt crude when it comes out of the ground. >> Right. Uh and it it moves through the the the pipes at a 16 API gravity for the Merey blend that goes onto the world market. Uh and so, to do that, you have two things happening at once here. Uh what you're seeing is sort of a a growth in the the products exports to Venezuela, which includes not just gasoline, diesel fuel, and other products that they use for consumption, but also naphtha for diluting uh that crude. And that that is part of the story. >> So, the more that Venezuela is buying US naphtha, perhaps the more they can blend, the more they're reactivating the supply chains that let them sell oil out into global markets. >> Keywords you used were US naphtha. They had been buying diluent from other sources. They have some domestic supplies of diluent. But it's largely been an import reliance for this Merey blend. And I think so what that means, what that means is that you can get more production. Synergistically, you have the same refineries that are buying the heavy crude that are in a position to supply a critical input at least at this stage of the production recovery until the the upgraders are are back up and running. >> Now, we hear a lot about the the heavy sour nature of Venezuelan oil and and the challenges that that's going to potentially bring to increasing its market share or getting more out and using it in to make products that relieve consumer prices. What do we know about that? >> Let's talk about that market share. So here we're looking at the EIA's import data. And now we're going all the way back to 2015. And the the bright pink are the other sources of heavy sour besides Mexico, the Maya grade, primarily Canada, where we have a a lot of heavy our principal source of heavy oil comes from Canada. And of course Venezuela in the green. And what you can see is that once the sanctions go into place, US imports dropped to zero. And you can see where they were at this this very fat wedge in the middle prior to the onset of those sanctions. We are looking, by the way, not at the total national imports where there's much more much more Canadian oil coming in. This is into the Gulf Coast into pad three where those high complexity refineries are processing the crude. And what we can see is that that green wedge is expanding. It's expanding at the same time that you can see that the Mexico Maya, the orange wedge, is contracting. So there is a real significant gain of market share, but there's also a major delta on the total level going into pad three relative to the pre-sanction status quo. Right. Now, this tells us something I think also a little bit about the era of power politics because at the same time we're improving relations with Venezuela and increase in increasing purchases from there. We know we're having trade conflicts with Canada and Mexico and seeing our imports from from those countries decline. >> Yes, although I think that may be more rhetorical than practical. So, we are importing 4 million barrels per day of heavy oil from Canada right now. We're not going to be replacing that with Venezuelan crude anytime soon. >> Yes. Let's come back to the question of like the big scheme here cuz we learned a lot of details this week about what this deal might actually mean, what the administration's trying to accomplish. One of the things the president said, which you and I have talked about on Energy Shots before, is that this oil was going to be used to refill the SPR. What do we make of that? And how is that actually going to work? >> Well, uh I think one of the things that we we discussed is that the SPR is poorly suited right now to store that particular grade of crude. It's not configured for it right now. So, one option might be to sell that crude uh and to to use the proceeds to purchase crude not just from anywhere, but all the SPR solicitations since the refill post-Biden uh drawdown began uh have been for domestic production. >> Right. >> Which has a number of both political and economic implications. >> Well, thankfully this uh this news called me to task to learn a little bit more about uh API gravity, sulfur content, and the different kinds of crudes that are available. I worked I worked out this chart just so we can give the audience a little bit of um way to consider the issue. So, what we're looking at here on the Y axis is the self sulfur content. Very low, that's sweet oil, and very high, that's sour oil. And we're looking at the API gravity. API gravity runs in reverse, so when it's very low, you've got thick sludgy oil, and when it's high, you've got light oil. And what we're seeing here is major crude grades as documented by the energy company ENI. Here you've got Arab Heavy, here you've got the that Maya crude that comes from Mexico. Just behind it is crude from Canada. And then you've got the Merey here, which is this heavy sulfuric oil that comes out as a blending process from Venezuela. We've also got here different crude varieties that come from Venezuela. And what we're showing them against is the range of API gravity and sulfur content that the US SPR has made purchases of I think in the last 5 years. And you'll note here, this is the US refinery average as estimated by the EIA. And so for the last for for the last few years, SPR purchases to the extent we've been making them are being made of domestic production matching what our refineries are putting out as a blend of different crudes produced in the United States. So when you hear that the Venezuelan oil is not suitable for the SPR, this is the relationship that we're talking about. Venezuelan crude by volume comes out from up here and we want to fill the SPR right now with crudes that are down in this quadrant of the chart. >> So there's a couple things to take away from this and the important one is where you look at where the bottom of your box is is roughly at half a percent >> Yeah. >> sulfur content. And that is the conventional dividing line between sweet and sour. So below that is sweet, above that is sour. And if you look at where we are here, this is right on sort of the the the cusp of between medium and and light crude. So it depends on where you divide and there's there's different dividing lines, but this is essentially a lightish side of the medium light line. But where you where your box extends is really on that that dividing line between medium and light. So we have a medium sour a medium sour SPR grade sort of range which also goes to light sweet. >> Right. >> And we have a refinery kit which is set up for sort of the right in the light medium sour line, but not as sour, not as sour as what we're talking about here, and not as thick. >> So, you know, when you hear from analysts or you read on social media, no way Venezuelan crude is going to make it into the SPR, physically that's probably an accurate statement, but we also heard this week from Secretary Wright how this might actually work in practice, and we can go to video now to hear a little bit more from the secretary. >> Let's do that. >> Are you convinced that this deal will cuz you've made the point that the oil a lot of the oil here is already being produced by China and Russia or being sold to them. And this oil might displace some of their profits. What will the primary use of this oil be cuz it can't necessarily be used to refill the SPR because it's a different type of oil. >> The oil is the largest commodity traded in the world, the largest business in the world. As we're doing in the strategic petroleum reserve right now, we swapped barrels right now during a time of conflict for return of barrels later. You can also swap types of crude. We'll swap you a a barrel of heavy crude for a barrel of light or medium United States crude. So, look, these are fluid liquid marketplace. Doesn't mean that exactly these barrels go in there. >> Okay, good cuz there you're also that that has been out there we can't put this oil this exact oil in those salt caves. >> Okay. >> Well, you can't say it better than that, can you? We'll swap you a barrel of heavy crude for a barrel of light or medium United States crude. >> So, this is a critical distinction that you and I have talked about before because when you think about the era of power politics, you suddenly have larger coalitions you need to deal with. The United If this scheme is going to work, which we have to be honest, we're not sure that it will. Um you have to manage a you know, the a coalition in Venezuela. You have to manage your private sector here in the United States because the optics of the US government getting involved sort of implicitly subsidizing oil production in another country when we are the largest oil producer in the world could get sticky, but the swapping, meaning using markets to say we the United States can purchase this oil at uh concessional rates, and then we're going to swap it for United States medium crude and go into the SPR. At least at the top line, sort of makes sense. >> Well, so the Biden administration conceived of the SPR replenishment process as a way to convey to domestic producers the incentive to keep drilling. What they would call in markets a put. The opportunity to put the oil to the US to buy for the SPR at a certain price. When it falls below that threshold, the US is the buyer, the US is in a market. Uh that incentive is still present in this construct. But in addition to that, uh I think there's a there's a subtle political message. That use of the word United States, the words United States crude, uh get to the idea that this isn't necessarily to be seen as competitive. And to be fair, for some players in Venezuela, the build-out if this succeeds of related supporting infrastructure could enable a stepping stone to further investment, which would help their endeavors. Uh but it's a competitive market, and in a down market, in a in a time of price weakness, uh I think there are some in the oil patch who would say, "What are you doing this for?" >> Right. And and I think like, you know, like let's think a little bit about sort of a world in which this works. Where the US now has access to oil reserves and increasing production out of Venezuela. Um the SPR, we know that it's already slated to be refilled uh as the payback to some of the releases we've made this year. We're now below what, 300 million barrels? >> And below 290, we're 286. >> It's going to take us several years to go back up and do the refill that's already been promised after this last release. But that's not going to get us all the way back toward a full or nearly full SPR. One of the things we've learned over the last 6 months, take the evidence of China, what Japan has been able to do, maintaining a large reserve is a incredible hedge against your uh against market disruption and a tool for your own economic certainty or your own economic security. And so, if you if you think about, you know, 4 or 5 years from now, this uh these new leases are are rein- are producing more and you're swapping it into the SPR, you might have a tool for improving US economic security and critically, Congress does may not have to spend money to do it. >> So, the age of power politics is likely to be a more volatile one. Mhm. Uh in a more turbulent world, having more oil insurance isn't just an economics question. Uh it's also, as if we said at the outset, uh the construct provides more options in terms of the geostrategic domain that a leader can explore uh and include including targeting economically or militarily other key producers. So, I I think we'll have to see how this turns out. That as you say, uh we're at very early days uh and more importantly, I think we should tell all our viewers this before we close. We are recording this on September 3rd uh in advance of its airing on September 4th, which is to say that the great volatility of an age of power could still intercept whatever we've said and uh provide some volatility. >> In which case we will make uh vertical phone video updates and corrections to what we've recorded here on Thursday. Kevin, it's always a pleasure to be with you. For those who joined us online, thank you for being with us on Energy Shots. Do subscribe, comment, uh give us your feedback, we take it to heart. Hope you have an energetic day. >> [music]