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ERROR: type should be string, got "https://www.barrons.com/articles/venezuelas-oil-industry-whats-next-51549371620\nWhat’s Next for Venezuela’s Oil Industry\nRisa Grais-Targow and Robert Johnston\nFeb. 5, 2019 8:00 am ET\nPhotograph by Scott Olson/Getty Images\nThe Venezuelan oil sector is facing near-collapse, reflecting the chronic under-performance, political interference, and funding challenges confronting state oil company PDVSA. The latest blow comes in the form of new U.S. sanctions, announced January 28, designed to help usher Nicolas Maduro out of the president’s office, and opposition leader (and U.S.-recognized interim president) Juan Guaido into it.\nThere is little if any prospect for stabilization if Maduro remains in office. But the possibility of a genuine political transition away from the Maduro/Chavez regime and toward a new, more stable era has sparked speculation about the potential recovery and growth of the world’s largest oil reserves holder.\nIn the immediate term, there are still downside risks for Venezuelan oil. The U.S. sanctions will include both a ban on U.S. exports of diluents (needed to process Venezuela’s tar-like extra-heavy crudes) as well as a more punitive, de-facto ban on U.S. imports of Venezuelan crudes. To some extent, these sanctions will hurt U.S. refiners as well: the de-facto import ban means U.S. refiners will need to replace about 500,000 barrels per day of extra-heavy oil supply. Production cuts from OPEC, government-mandated production curtailments in Alberta, and ongoing stagnation in Mexico mean that alternative suppliers of similar barrels are far from abundant. Venezuela, though, will suffer more. While they may be able to find other buyers for their crude in China and India, discounts and higher transportation costs will further erode revenue.\nMoreover, reports suggest that some trading companies have already cancelled their contracts owing to concerns about exposing themselves to potential U.S. actions. While OFAC granted licenses to a handful of companies, the broad universe of both U.S. and European firms that engage with PDVSA but also have U.S. assets or exposure to the U.S. payments system could prompt others to also take precaution and further hit PDVSA’s operations. These factors collectively seem likely to push Venezuela’s oil exports below recent 900,000 barrels-per-day levels.\nBut if new elections can be held in an orderly fashion, the Venezuelan oil sector will be able to shift its focus to recovery and potential longer-term growth. A reasonable benchmark for recovery would be a return to the 2 million barrels-per-day production level that Venezuela managed only eighteen months ago. But even getting this far would require expensive investment in repairing both heavy oil upgraders and conventional wells, particularly in the Lake Maracaibo region. In the latter, production is down by 50% since 2014 and there are concerns about the effects of missing maintenance and corrosion on the safety and productivity of existing wells.\nAll of this will require external funding, as the new government would be dealing not just with social and economic stabilization but also debts to foreign lenders, partners, and service contractors. Still, with possible support from the IMF and other multilateral agencies, some funding could materialize and with time, the quality of infrastructure would improve. It won’t be easy: one significant barrier would be finding skilled local labor, given the decades-long outflow of oil expertise from Venezuela to Colombia, Canada, and elsewhere.\nBeyond the initial intensive work-overs mentioned above, and after the country has stabilized, industry and government sources suggest that an annual investment of around $20 billion would be necessary to further increase production. Venezuela still has existing operators in-country (including Chevron , CNPC , Shell, Equinor , Lukoil ) that have significant technical capacity and have undeveloped acreage, particularly in the Orinoco extra-heavy oil belt. The core development opportunity is in the Junin portion of the Orinoco, which was bid out to foreign partners several years ago, but has seen little development since. PDVSA once believed the Junin fields could lead to an increase of over 3 million barrels per day over a decade, although there has been little activity there since.\nAn opposition-led government could move quickly to offer new incentives to encourage development of these resources. This would be a major shift: the resource nationalist model under Chavez/Maduro did not offer attractive terms or predictability. For the companies that have been committed to Venezuela and invested in managing political risk, these could be very attractive projects with both low break-even costs and enormous below-ground reserves. While Venezuelan voters could oppose terms that are perceived to be overly-generous, the new government may not have much choice if they want to attract investment.\nWhen Hugo Chavez became president in 1999, and resource nationalism was at its peak, the oil sector looked very different. Today, global demand growth is healthy, but below the breakneck levels of the early 2000s, when booming Chinese demand and concerns about a peak in global conventional production drove high prices. In another contrast, U.S. shale now provides an alternative development opportunity, along with other Latin American markets such as the deepwater sectors of Brazil and Guyana.\nAlthough the energy sector has changed dramatically since the Chavez-Maduro governments have been in power, Venezuela still has the reserves, scale, and operators to meet or exceed its old production levels. But little is likely to change until the fate of Maduro’s presidency becomes clear, a story that could take months to unfold.\nRisa Grais-Targow is Director, Latin America, and Robert Johnston is Managing Director, Global Energy and Natural Resources, for Eurasia Group\nThe Venezuelan oil sector is facing near-collapse, reflecting the chronic under-performance, political interference, and funding challenges confronting state oil company PDVSA."