Can Chevron Profit From Venezuelan Oil?

Can Chevron Profit From Venezuelan Oil?

Key Takeaways

  • Chevron paused operations in 2019 due to sanctions placed by the US aimed at restoring free elections in the country.
  • Venezuela has the world’s largest oil reserves.
  • It will take time to get production back up to full capacity, so investors will have to be patient.

Oil giant Chevron has been denied oil production in Venezuela since sanctions were imposed in 2019, continuing roughly five years of political pressure on Venezuela to be more democratic. But it now looks like those sanctions will be lifted, freeing Chevron to resume its operations. What impact, if any, will this have on Chevron stock and oil prices in general? Here is what investors need to know.

Where Chevron gets its oil

Chevron gets its oil from regions around the world, they operate in the mid-continental U.S., Gulf of Mexico, and California. They also have operations in West Africa, Western Australia, Canada, Argentina, and Venezuela. The Venezuelan operations are of particular concern due to the fact that the company got caught up in sanctions against the country by President Trump. Chevron had to nearly cease its operations in the country and was limited in the amount of oil it could sell.

U.S. sanctions on Venezuelan oil

Chevron’s investments in producing oil in Venezuela are substantial but were hampered by the Trump administration’s sanctions in 2019. They were implemented with the hope of getting President Maduro to stop behaving autocratically and return to more democratic governance. The sanctions consisted of blacklisting the state oil company, Petróleos de Venezuela (PDVSA), and all but stopped the production and transportation of oil from the country. Venezuela has the world’s largest known oil reserves, estimated to last 1,374 years with normal production output.

In early October 2022, the Biden administration stated that it was starting the process of lowering sanctions on Venezuela and allowing Chevron to resume pumping efforts and exporting oil from the country. The relief from the sanctions is contingent on Maduro’s government resuming talks with its political opposition to discuss what is needed to hold elections that are free from manipulation.

The Biden administration faces pressure to ease sanctions against Venezuela due to the war between Russia and Ukraine and OPEC lowering oil production. Another issue is that three years of sanctions have resulted in hundreds of thousands of Venezuelans leaving the country in search of a better life. The countries surrounding Venezuela have long been the destination for migrants, but these countries are now overwhelmed, barely able to absorb the influx.

Also at issue is the fact that there were over 150,000 Venezuelans intercepted at the US-Mexico border between October 2021 and August 2022. These numbers indicate a humanitarian crisis is unfolding in Venezuela. Improving economic conditions in Venezuela, partly by allowing oil production to resume, may reduce the number of people trying to leave the country.

The importance of Venezuelan oil to Chevron

Chevron began working in Venezuela in the 1920s after the Boscan Field discovery. It’s been operating there for 100 years and has invested heavily over that time. To date, the company has five onshore and offshore oil production projects, four joint ventures with PDVSA, and three heavy or extra-heavy crude oil projects.

Even though Chevron has been producing oil in Venezuela for 100 years, its output and profitability have suffered since the early 2000s due to political instability. In 1999, Chevron was producing 3.5 million barrels a day when Hugo Chávez was elected president. In April 2022, it was producing a scant 700,000 barrels a day. Even though Venezuela sits on top of a significant oil reserve, its political issues prevent the country from taking full advantage of its most abundant resource.

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While oil production in Venezuela is important to the country and Chevron as a whole, it’s apparent that Chevron is not suffering from the loss of production. The company has been using its profits to pay down its debts. At the end of the 2020 fiscal year, it had a total debt of $44.31 billion and a total of $31.36 billion in debt at the end of the 2022 fiscal year. It also had cash on hand of $29.18 billion at the end of its 2022 fiscal year.

Chevron has been delivering steady profits, and its stock has increased in value. As of this morning, the stock was up to $161.26, up 47.18% from a year earlier. It’s clear that Chevron has not suffered from the loss of production in Venezuela and stands to become more profitable once the situation stabilizes and production resumes.

Will this lower oil prices?

The U.S. government is taking a slow and cautious approach to restoring Chevron’s ability to pump and sell oil. Earlier in 2022, the Biden administration allowed Chevron to maintain its facilities in Venezuela and fully prepare the refineries to operate. However, the restoration of Chevron’s oil production depends on the willingness of the Maduro government to restore democratic procedures in the country.

Chevron’s Venezuelan refineries were hardly producing before gasoline prices spiked. Restoring the refineries to full production may not cause a significant decrease in oil prices unless they can produce at full capacity. Even still, with OPEC+ reducing production, odds are this will have little impact in the immediate future as it will take time to get everything up and running.

Bottom Line

The ability to begin producing oil from Venezuela will certainly help Chevron’s bottom line, but it remains to be seen how much of an impact it will have on the global energy market. Investors should not expect significant changes to the company’s bottom line in the near term. Any effect will likely happen in the next fiscal year. Still, this oil company is one of the best in the world at what it does and has a strong balance sheet, so no matter what happens, this stock is one investors should consider.

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