Venezuelan Crude and the Constraints of American Refining Capabilities

U.S. Oil Executives Skeptical of Investing in Venezuela

During a recent meeting, U.S. President Donald Trump urged major oil companies to commit significant funds to rejuvenate Venezuela’s struggling oil industry. However, his appeal was met with hesitation. Darren Woods, CEO of Exxon Mobil (NYSE:XOM), was particularly blunt, describing Venezuela as “uninvestable” under its current legal and regulatory environment. Similarly, ConocoPhillips (NYSE:COP) CEO Ryan Lance reminded Trump that his company incurred substantial losses when it withdrew from Venezuela during Hugo Chávez’s presidency.

Nationalization and Its Aftermath

The decline of Venezuela’s oil sector can be traced back to 2007, when the Chávez administration seized control of oil assets belonging to ExxonMobil and ConocoPhillips. This move followed the companies’ refusal to accept new terms that would have handed majority ownership to the state oil company, PDVSA. The nationalization was enacted through a presidential decree and changes to the Hydrocarbons Law.

Mixed Responses from the Oil Industry

Despite the overall reluctance, Trump did receive some positive feedback. Jeff Hildebrand of Hilcorp expressed readiness to help rebuild Venezuela’s energy infrastructure. Chevron (NYSE:CVX) also indicated it could quickly boost its Venezuelan output of 240,000 barrels per day.

Challenges in Restoring Venezuela’s Oil Production

Experts have previously noted that restoring Venezuela’s oil production to its 1970s peak of 3.5 million barrels per day would require billions in new investment. Currently, the country produces about 1 million barrels daily, with Chevron responsible for a quarter of that output. U.S. refiners value Venezuelan crude for its suitability in complex refineries equipped to process heavy oil into high-value products. Merey crude from Venezuela’s Orinoco region is among the world’s heaviest and most sulfurous, necessitating specialized refining processes.

Refinery Limitations and Coking Capacity

Only a minority of U.S. refineries—primarily those on the Gulf and East Coasts—are equipped with cokers, which are essential for processing heavy Venezuelan crude. Companies with significant coking capacity include Valero (NYSE:VLO), Exxon, Chevron, Marathon Petroleum (NYSE:MPC), Phillips 66 (NYSE:PSX), and PBF Energy (NYSE:PBF).

Refining Technologies: Coking vs. Hydrocracking

Coking and hydrocracking are advanced refining techniques that convert heavy oil fractions into lighter fuels such as gasoline, diesel, and jet fuel. Coking uses heat to break down heavy oil, leaving behind solid petroleum coke and lighter liquids. Hydrocracking, on the other hand, employs hydrogen and catalysts to split large molecules, resulting in cleaner fuels with fewer byproducts. Highly sophisticated refineries can achieve higher yields of valuable distillates. Due to shortages of heavy crude, many U.S. refineries have invested in equipment to process lighter oils like those from U.S. shale fields.

Impact on Competing Crude Supplies

Source: Bloomberg

An increase in Venezuelan crude exports could reduce demand for heavy oil from Canada, Mexico, and the Middle East. The U.S. remains the primary buyer of Canadian crude, even after the TMX pipeline expansion improved access to Asian markets. This keeps Western Canadian Select (WCS) prices closely linked to U.S. refinery demand. Meanwhile, greater Venezuelan supply could benefit refiners in the Midwest and on the West Coast, such as British Petroleum (NYSE:BP) and HF Sinclair (NYSE:DINO), by increasing WCS discounts if Gulf Coast demand shifts.

Venezuela’s Limited Short-Term Potential

According to Rystad Energy, only 300,000 to 350,000 barrels per day of Venezuelan production could be quickly restored with minimal investment. Raising output beyond 1.4 million barrels per day would require substantial and sustained capital.

Massive Investment Needed for Recovery

Rystad estimates that maintaining production at 1.1 million barrels per day over the next 15 years would require $53 billion. To boost output above 3 million barrels per day, the investment could soar to $183 billion—comparable to the annual capital expenditure for all North American land-based oil projects.

Severe Infrastructure Deterioration

Satellite intelligence firm Kayrros describes Venezuela’s oil infrastructure as being in a dire state after years of neglect and equipment cannibalization. Many storage tanks at the Bajo Grande and Puerto Miranda terminals are unusable due to corrosion and lack of maintenance. Kayrros estimates that about one-third of the country’s storage capacity is offline, reflecting both damaged tanks and reduced refinery operations. The Amuay and Cardón refineries are operating at less than 20% of their capacity, effectively serving as storage facilities rather than production centers.

Pipeline Network in Disrepair

Venezuela’s pipeline system is also in poor condition. A leaked PDVSA document from 2021 revealed that the pipelines had not been upgraded in half a century, with the state oil company estimating $58 billion would be needed for full restoration. More recent assessments put the cost at over $100 billion. Venezuela’s operational pipeline network spans 2,139 miles (about 3,442 kilometers), a fraction of the 9,000 kilometers in the United Arab Emirates, which produces a similar volume of oil.

By Alex Kimani for Oilprice.com