Introduction
Over the past few months, we have observed two
significant developments. If media
reports are to be believed, the U.S. government has secured some form of
management of Venezuelan oil resources. Venezuela is said to have circa 300 billion barrels of oil
resources, the largest known proven accumulation of such resources on the
planet. However, some 70 -90% of this is regarded as "extra-heavy
oil".
Extra-heavy oil is a form of crude oil that is exceptionally dense (i.e. API below 10 for those technically aware of
this measurement standard), has a high viscosity (i.e. does not flow easily)
and has usually a high sulphur content (which creates corrosion problems and is
environmentally unfriendly).
The cost of producing this type
of oil is considered relatively high. Various industry and academic sources quote this
range of costs:
- Lifting - costs of USD 15 - 25 / barrel: This is the operational cost to get the oil out of the ground. It
is high as there is no natural flow in the reservoir.
- Capital Expenditure of USD 10 – 25 / barrel: Upfront capital expenditure can be relatively high related to
building steam-generation facilities, heaters etc. and drilling a large
number of wells).
- Transportation cost of USD 5 - 10 / barrel: Costs are relatively high as the oil must be heated and blended
with diluents to flow. Also, due to high sulphur content, corrosion issues
are expensive to manage.
When the above cost structure is
coupled with the fact that such heavy oil is mostly sold at a discount to the
Brent Benchmark, i.e. USD 2 – 10 / barrel discount, then the margins for a
viable business begin to be difficult to achieve.
Recall, that a host government
would also expect a share of the commercial pie by way of royalties and taxes.
Currently, it is reported that Venezuela state oil royalty is 30 percent of
revenue. So, if oil prices are at around the USD 60 / barrel mark for Venezuela
heavy crude, and we assume that in future months, the 30 percent royalty is
halved to assist a foreign investor’s investment case, then the total cost of
producing Venezuelan crude could be conservatively estimated to be:
- Lifting
Cost of USD 15 / barrel,
- Capital
Expenditure of USD 12 / barrel,
- Transport
Cost of USD 5 / barrel,
- Royalties
(15 % at USD 60 / barrel oil price) of USD 9 / barrel
Estimate of Total Upstream Costs: USD
41 / barrel
Royalties only become tangible when
the oil is monetized so it is likely that an upstream investment case can be
achieved through negotiations with the host government or resource owner. The reality is that current levels of expected
royalties would need to be reduced to make commercialization of this resource a
viable investment for upstream players in the oil and gas industry and the
Venezuelan government may be left with little choice in the matter.
What Happens Next?
Well, the oil has to be refined
at a reasonable cost, and a market must be found for this oil. Venezuelan oil
is heavy and “sour” (i.e. contains sulphur) and requires complex refining to
make it easily marketable.
Against this backdrop, the European
Union has been setting increasingly higher emissions standards (a series of
regulatory limits that determine how much pollutants and greenhouse gases
(GHGs) new vehicles can emit). They apply to vehicles sold and registered in EU
member states, the European Economic Area (EEA), and often influence standards
in other markets.
With motor vehicles being designed to accept
cleaner fuels and emit less GHGs, coupled with marine vessels moving to more
environmentally friendly fuel sources, aeroplanes pushing the use of
Sustainable Aviation Fuels (SAFs) and China pursuing an aggressive Electric
Vehicle strategy, the market for the large oil resource of Venezuela would be
limited.
Thus, the relaxation of emission standards in
a leading mega economy like the U.S. is a logical progression after achieving
management of the large oil resource of Venezuela.
Under President Donald Trump, the U.S.
Environmental Protection Agency (EPA) has taken major steps to repeal federal
greenhouse-gas emissions standards for new motor vehicles — including undoing
the 2009 Endangerment Finding and related vehicle GHG and fuel
efficiency rules.
This matters because:
- Those standards historically pushed for lower tailpipe emissions
and greater fuel efficiency (e.g., via Corporate Average Fuel Economy
regulations and greenhouse gas limits) - effectively reducing how much
fossil fuel (petrol/diesel) could be burned per mile driven.
- Rolling them back means less regulatory pressure to improve
efficiency and curb CO₂ emissions from cars and trucks — the largest
source of U.S. transportation emissions.
So, with weaker emissions standards:
- vehicles
can be less fuel-efficient;
- gasoline
and diesel demand can stay higher than under stricter standards; and
- total
greenhouse gas emissions from the transport sector can be higher.
Summary
The Trump administration’s vehicle emissions rollbacks may increase U.S. gasoline / diesel consumption compared to continued stringent regulation.
- Using heavier, more carbon-intensive Venezuelan crude as the source
feedstock means that for every gallon burned, the total climate impact
could be greater than if lighter oil or less oil overall were used.
- Venezuelan crude likely be cheaper to refine for use in the U.S.
land transportation.
- The cost of equipment fitted in motor vehicles in the U.S. to
reduce greenhouse gas emissions will likely reduce, making such cars
cheaper to manufacturer.
It is likely that the rollback of emission
standards in the U.S. will be challenged in U.S. courts at both state and
Federal level. So, the situation remains in flux.
It is important to note that this interplay of
Venezuelan oil and U.S. emission standards deregulation is not causal; i.e.
U.S. emissions rules do not depend on Venezuelan oil, and Venezuelan oil
availability does not regulate U.S. vehicle standards, but their combined
effects will likely influence the total emissions green print of the energy and
transportation sectors and the price of oil in the years to come.
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