How Venezuela Ruined Its Oil Industry
https://www.forbes.com/sites/rrapier/2017/05/07/how-venezuela-ruined-its-oil-industry/#56f318cc7399
...Venezuela's highest-ever oil production occurred in 1998 at 3.5 million barrels per day (BPD). That also happened to be the year that Hugo Chávez was elected president of Venezuela. During the Venezuelan general strike of 2002–2003, Chávez fired 19,000 employees of the state oil company Petróleos de Venezuela, S.A. (PDVSA) and replaced them with employees loyal to his government.
This eliminated a tremendous amount of experience from Venezuela's oil industry. Most of Venezuela's proved oil reserves consists of extra-heavy crude oil in the Orinoco Belt. The Orinoco contains an estimated 1.2 trillion barrels of oil resource. This oil is expensive to produce, but after oil prices climbed to $100/bbl, 235 billion barrels of this heavy oil were moved into the "proved reserves" category. This positioned Venezuela ahead of Saudi Arabia as the country with the world's largest proved oil reserves.
Because this oil is particularly challenging to produce, Venezuela invited international oil companies into the country to participate in the development of these reserves. Companies like ExxonMobil, BP, Chevron, Total and ConocoPhillips invested billions of dollars in technology and infrastructure to turn the extra-heavy oil into crude oil exports.
What most people do not understand about the oil industry is that it is extremely capital intensive. When oil prices rise, oil companies may indeed reap billions of dollars in profits. But reaping that reward required billions of dollars in capital investments, and if oil prices decline it can quickly turn into billions of dollars of losses. This is the key to understanding what has gone wrong in Venezuela.
In 2007 oil prices were on the rise, and the Chávez government sought more revenue as the investments made by the international oil companies began to pay off. Venezuela demanded changes to the agreements made by the international oil companies that would give PDVSA majority control of the projects. Total, Chevron, Statoil and BP agreed and retained minority interests in their Venezuelan projects. ExxonMobil and ConocoPhillips refused, and as a result, their assets were expropriated. (A World Bank arbitration panel has ruled against Venezuela in both expropriation cases, but the country continues to appeal the decisions).
o there are primarily two related causes that have resulted in the steep decline of Venezuela's oil production, despite the sharp increase in the country's proved reserves. The first is the removal of expertise required to develop the country's heavy oil. This started with the firing of PDVSA employees in 2003 and continued with pushing international expertise out of the country in 2007.
Second, the Chávez government failed to appreciate the level of capital expenditures required to continue developing the country's oil. This was in no small part due to inexperience among the Chávez loyalists that were now running PDVSA, but it may not have mattered in any case. When oil prices were high, Chávez saw billions of dollars that could be siphoned to fund the company's social programs, and that's exactly what he did. But he failed to reinvest adequately in this capital-intensive industry....
