Hey, all Peter Zeihan here coming from Colorado. Today we’re going to talk about Venezuela. But from perhaps a positive scenario point of view. The core issue is oil. That’s where all the money comes from. And if you’re going to reconstruct the country in any form, that’s where it’s going to be able to pay for itself. I really don’t see the Trump administration dumping $100 billion and regenerating the infrastructure.
So let’s talk about what’s necessary and why and how it might might happen. Venezuelan crude falls today into two general categories. The first chunk, the chunk that is responsible for about 80% of the production is a place called the Orinoco Belt, which is down in the Amazon. It is not crude in the technical term. It’s something called Bitterman, which requires incredible amounts of energy and steam injection to liquefy it enough that you can bring it to the surface, and then you run it through something called an upgrader, which is kind of like a refinery, just to make it liquid enough to be stable for shipment.
And then you have to inject something called diluted into it. So again, it can flow, and then you pump it north to the coast, where it’s loaded for export. This makes it the most expensive crude in the world per barrel produced and requires incredible technical acumen to function. Historically speaking, most of the work on the Upgraders, has come from US multinationals a little bit from, say, total in France.
Schlumberger, Baker Hughes, all of those, oil services firms were heavily involved in the development of the program. And eventually they trained at PDVSA, which are PDVSA, which is the state oil company, to do a lot of the work. But that kind of came to a crashing halt back in 2002, when we first had a political coup against Chavez, followed by kind of an economic resistance against the professionals within PDVSA.
When that process was over and Chavez re consolidated control over the country, he purged PDVSA. And what we found out was basically everyone who had an engineering degree didn’t like the guy and joined in the coup, and so he got rid of all of them. And since then we’ve had a steady degradation of what PDVSA can do. It’s no longer one of the most capable oil companies in the world.
It’s barely holding together. And if it wasn’t for the presence of U.S. super major Chevron in some of these projects, most of them probably would have shut down, in order to get the Orinoco back up to what it could be. So it’s producing one 2 million barrels a day. You’re talking about investment, at least in the tens of billions, probably closer to 200, because there’s several stages to this process.
Think of it kind of like what the Canadians do with oil sands, but remove easy capital access, remove the skilled labor, remove the rule of law, remove the physical pipeline linking it to the world’s largest consumer market. They have to do this all in the Amazon, more or less by themselves, without cash, but still bringing in foreigners.
Very, very expensive projects. And I think the most likely outcome is that this is going to eventually fall down to zero, because they’re simply not going to be able to maintain it. The second part of the Venezuelan oil complex is a little bit more interesting from a functional point of view, if not a chemistry point of view, and that is the Lake Maracaibo region.
Now, Lake Maracaibo is a large bay in the western part of the country and Zulia State that is connected to the Caribbean that has a mix of onshore and offshore production. If you go back to the mid 1990s, it was producing somewhere between 1.5 and 2 million barrels a day, which was the majority of Venezuelan oil production. And it is kind of a medium light mix instead of the Biderman that exists over in, southern Venezuela.
As a result, produce production is a lot more basic. The geography is a lot more friendly, and most of the physical infrastructure to process the crude actually exists locally. There’s a large complex that technically could process about a million barrels a day, whereas Venezuela barely processes anything of that of the stuff that comes out of the Orinoco. But most importantly, you know, the Orinoco is basically asphalt, and so getting asphalt out of the ground is a bit of a bitch.
Whereas the stuff in Orinoco again, light, medium, sweet, much easier to process. And the export options because it is on the water are much easier as well if there’s a solution here. For Venezuela, it lies in the Maracaibo region. A couple reasons. Number one, there is a line of the Andes that cuts the Maracaibo region and Zulia from eastern and central Venezuela.
And so there’s always been kind of a semi secessionist view of the world compared to Caracas. So Caracas is a Republican project that was formed after the collapse of the Spanish empire, very anti-colonial, very pro-independence. But Zulia and Maracaibo are more like a post-imperial remnant who never really fully bought into the Caracas project. And while they’re not secessionist in the traditional sense, they definitely feel that they’ve been robbed blind by Caracas government, not just under Maduro and Chavez, but all the governments have come before, all the way back to the Spanish breakup.
So I can easily see a devolution of the state of Venezuela or Western. Venezuela under Maracaibo kind of goes one way and Caracas goes the other way. Caracas falls apart, Maracaibo is more stable. And that’s before you consider things like the United States getting involved, because if you are an American energy company, the Mark region is a far more friendly environment to operate in than the Orinoco.
You don’t have to deal with the jungle. You don’t have to do the interior. You don’t have to deal with the capital. You don’t have to deal with, you know, to fight the geography. Everything’s just easier. But easier is not the same thing as easy. Because this is a region that has been denigrated by Caracas for decades.
Centuries, almost. It’s not a great place, especially right now. Civil control and law enforcement has largely collapsed. You have organized crime, gangs running rampant through the area. The Trump administration said that the Caracas government was facilitating drug shipment to the United States.
Maybe that was true, but there’s a lot more going through, more Acabo. Maracaibo also has literal pirates like Arg and Eyepatch, that basically raid the entire area. All the time. So if, if, if you’re going to have an economic renaissance in Venezuela or even just one in Maracaibo, in Zulia, first thing you have to do is secure the area and reestablish law.
And because Venezuela is not a naval power, you’ve got Maracaibo city on the far north side of Lake Maracaibo and the rest of the population of Zulia on the south side. You’re now basically talking about occupying, stabilizing two disconnected sections. So you’re talking about tens of thousands of troops. If you want to make this happen. But that is still the low hanging fruit in this question.
So much easier than Orinoco, even with all those complications. So let’s talk winners and losers. Most likely this isn’t going to work. Most likely we’re seeing the beginning of the end of Venezuela as an energy producer at all. First loser is, of course, Russia. The Russians bring no technology whatsoever to this fight. Basically their presence was geopolitical.
To stick it to the Americans, that goes down to zero. They’ll lose absolutely everything that they put in. Second biggest loser is China. China has spent the last 25 years expanding its refining complex to run crude, different kinds of crude from different parts of the world, including Venezuela. The idea being that eventually they’re going to have a fight with the United States.
And the more diversity they have for options, the better. And so they have sunk tens of billions of dollars into Venezuela to basically prepay for crude. And right now they are owed about 15 to $20 billion in Venezuelan crude. That is now all complete right off. In addition, the refineries that they have built in Shandong and near Shanghai to specifically process Venezuelan crude, they have now lost their only source of crude.
They will not get it back. So this has been a huge risk for the Chinese that now is being manifested as a complete loss. Other big losers. It really depends upon what happens with the oil sector. If I’m right and this all goes away, then the biggest loser is probably the refineries in the US Gulf Coast region.
A lot of them were designed to run on this sort of crude, and it’s just going to stop. They can still use, Canadian crude, but the price differential is not going to be as favorable if Venezuelan crude falls off the market altogether. So even if they can replace all the barrels they need, the cost per barrel is going to rise, and that’s going to force them to take a more diverse type of crude.
And that means less heavy and more sweet. Keep in mind that the U.S shale industry produces exclusively super sweet, super light. So we’ve been in this weird position in U.S. refining for the last several years, where the refiners on the Gulf prefer to take Venezuelan Canadian crude and the United States exports its light sweet to the rest of the world.
All we need to do is switch that so that we process our own. But that’s easier said than done. If you’ve spent a few billion dollars upgrading your refinery to run the heavy stuff. Heavy crude is typically used for things like asphalt, industrial products and diesel, whereas light sweet crude is usually used for gasoline consumer products. anyone who’s in refining will tell you that is the short story and hides a lot of nuance. I agree, but this is not a video about that. Winners in that scenario, of course, are Canada, because one of the problems that Canada has been having is it sells most of its crude into the American market.
The American market is the most super saturated energy market in the world. And anything coming out of the Caribbean, Venezuela goes to the US Gulf. So they’ve basically been selling at a massive discount, but sometimes it’s $25 a barrel that now closes and should allow the Canadians to get a better leg up. And that’s before you consider that they have a pipeline that’s kind of sort of working, shipping crude to their West coast now.
All right. What am I leaving out here? This isn’t an energy security play for the United States. I know a lot of people said that the United States was doing it for oil. And Trump is all about oil. United States is the world’s largest producer of crude. We export 5 million barrels a day of refined product, which is significantly more in refined product than Venezuela ever, ever exported in terms of raw crude.
So while there might be an economic play here for Exxon and Chevron in the rest, if if the country stabilizes the investment required to make it stabilized and you have to do that first is massive, then you have to go in and physically reconstruct infrastructure that has been dilapidated for decades. And in most cases, just needs to be ripped up and replaced wholesale.
The one possible exception is Maracaibo, where in theory, in five years you could get output up from its current 200,000 barrels a day to maybe a million. And in theory, the refining complex there, while massively outdated, is still broadly functional and could be rehabilitated without a complete reconstruction. But you are still talking about investment on the front end in tens of thousands of troops, and on the back end in tens of billions of dollars.
That is not something that I think the American population will support. That is not something I think the Trump administration is interested in. And that’s not something that I think the American super majors are going to get involved in it anyway, considering that there’s so much more crude and other places that are so much easier.