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Speaker 1: This is Kamala s Shelling and you're listening to Switched

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Speaker 1: on the Bloomberg and EF podcast. Today we're bringing you

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Speaker 1: another Analyst Reaction episode. It's a mini conversation that zooms

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Speaker 1: in on one specific event to tell a broader story

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Speaker 1: about the energy transition. And today that event is a

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Speaker 1: big one, the recent US military action in Venezuela and

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Speaker 1: what it could mean for the global oil market. With

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Speaker 1: me is David Daherdy, beanef's head of Research for Natural Resources,

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Speaker 1: to discuss Venezuela's huge oil reserves and what turning on

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Speaker 1: the venezulin taps would really mean for prices, trade routes,

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Speaker 1: and the oil market balance. David's team has recently published

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Speaker 1: a series of analyst reactions or short BNF research notes

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Speaker 1: that respond to an event as it unfolds about Venezuela.

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Speaker 1: Our conversation today is largely based on two of them,

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Speaker 1: Venezuela's oil market impact hinges on cost per barrel and

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Speaker 1: Venezuela's oil renaissance faces several high hurdles. BENIFE clients can

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Speaker 1: find the rest of these pieces, as well as other

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Speaker 1: analyst reactions, by heading to BNF go on the Bloomberg

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Speaker 1: Turnriminal or at BNF dot com. If you'd like to

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Speaker 1: learn more about how BNF approaches strategy research on the

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Speaker 1: energy transition, including developments and commodity markets, trends across different sectors,

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Speaker 1: and the cross cutting technologies shaping the future. You could

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Speaker 1: find more information on BNF dot com, and if you'd

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Speaker 1: like to speak with a member of our team about

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Speaker 1: becoming a client, email us at Sales dot BNF at

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Speaker 1: Bloomberg dot net. So let's dive in and discuss Venezuela's

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Speaker 1: oilfields and what they could mean for the global.

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Speaker 2: Oil market in the near and longer term.

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Speaker 1: David, thank you so much for joining today.

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Speaker 3: Thanks for having Regarda.

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Speaker 1: We've heard a lot over the last week about how

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Speaker 1: Venezuela has the largest proven oil reserves in the world.

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Speaker 1: So let's start with a hypothetical. If we could simply

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Speaker 1: ramp up production of Venezuelan and oil tomorrow, what would

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Speaker 1: it do to global oil balances.

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Speaker 3: That won't happen, firstly, but if it were, you could

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Speaker 3: at the very best increase oil supply by about two

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Speaker 3: million barrels per day of predominantly heavy heavy oil. The

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Speaker 3: market at the moment is already in deep excess supply,

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Speaker 3: so that would really hurt oil prices. But again that

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Speaker 3: is virtually impossible and it won't happen. I think the

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Speaker 3: numbers that you're hearing about maybe coming online over the

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Speaker 3: next two years are in the region of three hundred

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Speaker 3: to five hundred thousand barrels incremental, and that's on top

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Speaker 3: of the already one million barrels per day or so

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Speaker 3: of Venezuelan oil that is being exported, so it's a

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Speaker 3: much smaller number.

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Speaker 1: Does the world's oil market need that oil? Do we

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Speaker 1: have a deficit that that could help satisfy?

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Speaker 3: There is no deficit whatsoever for this to satisfy. It

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Speaker 3: is interesting in that the grade of Venezuelan oil is

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Speaker 3: probably in need in the oil market. So Venezuelan oil

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Speaker 3: is quite heavy, you could think of it as sludgy

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Speaker 3: and thick, and a lot of the growth and oil

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Speaker 3: supply over the past two decades or so has come

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Speaker 3: from places like the United States or even Brazil, whether

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Speaker 3: the oil is lighter or even medium, and it's a

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Speaker 3: different quality. Now, the new modern high tech refineries in

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Speaker 3: the world that have been built aim to buy heavy

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Speaker 3: oil and upgraded into a high priced product like gasoline

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Speaker 3: or jet fuel for example. Perhaps the world could do

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Speaker 3: it more heavy oil, but it doesn't necessarily just need oil.

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Speaker 3: It's got plenty as it is.

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Speaker 1: That's fascinating because we keep hearing about how venezuela and

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Speaker 1: oil is heavy and sour, and both of those words

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Speaker 1: sound so negative to me. But you're saying that, actually

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Speaker 1: people want heavy oil these days. Why why is that

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Speaker 1: what they're building new refineries for.

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Speaker 3: Well, generally it's cheaper than higher grade oil. So you're right, negative,

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Speaker 3: sour and heavy, these two words are not necessarily positive words.

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Speaker 3: But likewise, sweet and light oiled might be too sweet

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Speaker 3: and too light for the refining system. So if you're

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Speaker 3: a US golf codes refinery or a advanced refinery in China,

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Speaker 3: they're built in theory to buy cheap crude oils, heavy

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Speaker 3: sour crude oils and translate them into high and good

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Speaker 3: quality products that they can sell for a higher price

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Speaker 3: so that their margin increases. And having an expensive oil

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Speaker 3: that you can turn into a products that's going to

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Speaker 3: be the same price, whether you make it from heavier

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Speaker 3: or medium oil for example, doesn't make a huge difference

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Speaker 3: apart from your margin so basically this would turn into

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Speaker 3: a higher margin for a complex refinery.

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Speaker 1: So would we then expect Venezuelan oil to be heading

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Speaker 1: to the US or to China for refining.

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Speaker 3: Yes. So Traditionally the US Golf Coast, which has some

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Speaker 3: of the biggest and most advanced refineries in the world,

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Speaker 3: was a big, big buyer of Venezuelan oil, and even

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Speaker 3: in the past, over maybe the last three or four years,

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Speaker 3: China's big complex refineries have been the buyers of venezuela

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Speaker 3: and oil. Again, take in a cheap oil at a

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Speaker 3: big discount and turn it into a high price product

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Speaker 3: like gasoline. The interesting point here is will China still

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Speaker 3: be allowed to buy Venezuelan oil at this discount or

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Speaker 3: will all of the volumes now be directed towards Gulf

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Speaker 3: Coast buyers who could benefit from this cheaper source of oil.

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Speaker 1: That is a fascinating point about who will be allowed

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Speaker 1: to buy it, even if it does all go to

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Speaker 1: the US. I would imagine those Golf Coast refineries are

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Speaker 1: not just sitting empty waiting for venezuela and oil. So

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Speaker 1: the oil that they're currently refining, where would that end

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Speaker 1: up going? How is this all going to reshape global

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Speaker 1: trade flows.

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Speaker 3: Yeah, there's some rewiring that would happen now. Worth noting

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Speaker 3: the oil market is incredibly flexible, and we've seen that

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Speaker 3: over the past few years with sanctions on Russia and around.

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Speaker 3: For example, what the Gulf Coast refiners are currently processing

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Speaker 3: is a mix of heavy Mexican oil, heavy Canadian oil,

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Speaker 3: and to a lesser extent, Columbian oil, So that would

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Speaker 3: have to find a home elsewhere. There's some limitations set

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Speaker 3: up predominantly Canada, so Canada is basically pipeline wired to

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Speaker 3: the United States for the United States to consume heavy

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Speaker 3: oil from Canada. There has been development over the past

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Speaker 3: few years of the Translucent Pipeline being able to send

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Speaker 3: oil from Alberta out via the West Coast towards Asia,

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Speaker 3: but that has a limit. So there could be so

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Speaker 3: rewiring where you could see oil from Canada going through

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Speaker 3: pipelines in the United States and then being exported out

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Speaker 3: of the Gulf Coast to wherever is willing to buy it,

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Speaker 3: as the Golf Coast then starts to take cheaper Venezuelan

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Speaker 3: oil instead, and you've seen this response in Canadian oil stocks.

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Speaker 3: So the market has not been very excited for Canadian

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Speaker 3: oil producers given that there might be a competing grade

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Speaker 3: for their biggest client.

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Speaker 1: You keep saying that Venezuela and oil will be cheap,

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Speaker 1: and at the same time, however, we're hearing on news

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Speaker 1: reports that's going to take a lot of money to

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Speaker 1: rebuild Venezuela's wants very robust oil infrastructure. How much would

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Speaker 1: refiners have to be able to make from Venezuela and

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Speaker 1: oil to make it even worth their while to restart

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Speaker 1: those pumps.

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Speaker 3: Yeah, So there's a difference between existing supply and then

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Speaker 3: bringing back newer supply. So existing supply is about a

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Speaker 3: million barrels per day. Maybe twenty years ago, Venezuela was

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Speaker 3: producing two and a half million barrels per day and

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Speaker 3: at its peak just over three million barrels per day.

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Speaker 3: So what I'm talking about is that one million boos

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Speaker 3: per day of existing supply. And there's two things to

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Speaker 3: take into account here. One is where can you buy

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Speaker 3: it or can you even buy it? If you have

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Speaker 3: a captive market and you're not allowing others to purchase,

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Speaker 3: then the buyer is going to ultimately set the price

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Speaker 3: for this, and that means the United States buyers will

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Speaker 3: set the price for Venezuelan oil. The other part of

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Speaker 3: it is building out new production and that is where

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Speaker 3: the really expensive part comes into play. And there's a

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Speaker 3: ton of guestimates out there. The break gave it estimates

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Speaker 3: for a Venezuelan barrel, which is highly unknown because the

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Speaker 3: data is so per is in the region of forty

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Speaker 3: five to eighty dollars per barrel, depending on which agency

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Speaker 3: you ask. So that's pretty big of a range when

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Speaker 3: you think about the risk that is also involved in

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Speaker 3: investing and developing those fields. Who can you sell it to?

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Speaker 3: You don't even know the off take price because of

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Speaker 3: my previous point that you might just have one buyer.

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Speaker 3: So if you're a big oil company, you might prefer

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Speaker 3: to invest in like neighboring Guyata or in the US permium,

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Speaker 3: where prices are more in the range of let's say,

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Speaker 3: thirty five to sixty five dollars per barrel, But it's

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Speaker 3: a much safer investable. You know what you're getting. You know,

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Speaker 3: you can sell it out into the market, there's no

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Speaker 3: restrictions on it. So those incremental barrels are where it's

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Speaker 3: going to be. Really you know, there's a huge question

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Speaker 3: mark of whether it's worth it or not.

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Speaker 1: President Donald Trump is talking a lot about bringing Venezuela

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Speaker 1: and oil back to the United States, and there's actually

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Speaker 1: a flotilla of ships headed for Venezuela to bring back

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Speaker 1: to the US Venezuela and oil. So what does all

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Speaker 1: this mean for the US oil industry specifically.

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Speaker 3: Yeah, that's a really interesting point because over the past

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Speaker 3: few years, the US oil play has become, you know,

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Speaker 3: the king of the field, right. They have expanded production hugely,

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Speaker 3: but all of that expansion, or most of that expansion,

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Speaker 3: has been light oil. So if we think about the

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Speaker 3: Strategic Petroleum Reserve in the US, it used to be

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Speaker 3: predominantly heavy oil because US refiners love that. Now it's

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Speaker 3: predominantly light oil, and they do not love that. So

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Speaker 3: oil coming from Venezuela to the United States could, in theory,

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Speaker 3: go into the strategic Petroleum reserve and correct that balance

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Speaker 3: to a certain extent, or it could go to the

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Speaker 3: refiners if they're willing to buy it. Now. So what

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Speaker 3: you're seeing is is maybe ten eleven I think it's

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Speaker 3: eleven ships currently on their way to bring oil from

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Speaker 3: Venezuela chartered by Chevron and that would get you about

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Speaker 3: I mean, there's estimates depending on how much each ship

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Speaker 3: is filled, but about five or five and a half

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Speaker 3: million barrels of oil that could be brought back, let's say,

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Speaker 3: to the US to put that into context, and the

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Speaker 3: Strategic Petroleum Reserve, about fifteen million barrels was added to

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Speaker 3: the SPR last year, so it's not an insignificant amount.

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Speaker 3: But the SPR is about four hundred and twenty million barrels,

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Speaker 3: so in the grand scheme of things, it's small, but

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Speaker 3: it's the kind of oil that the SPR has been

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Speaker 3: missing over the past few years, so this could be

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Speaker 3: a good solution. And I think that is where you're

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Speaker 3: going to see more of the oil going to. And

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Speaker 3: it's currently sitting in storage in Venezuela, reaching tank tops

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Speaker 3: but nowhere to go. So if it's actually not moved,

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Speaker 3: you might see repercussions further upstream where you have to

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Speaker 3: switch off or try. They've run down some of the

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Speaker 3: production in Venezuela.

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Speaker 1: David, thank you so much for coming in and talking

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Speaker 1: with me today. I've been reading your team's work all

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Speaker 1: week and it's so great to be able to speak

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Speaker 1: with you about what's going on in Venezuela.

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Speaker 3: Yeah, thanks for having me, and I'm sure we'll have

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Speaker 3: more to talk about it in the coming week Sundays.

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Speaker 3: Thanks Callla.

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Speaker 1: Today's episode of Switched On was produced by Cam Gray

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Speaker 1: with production assistance from Kamala Shelling. Bloomberg NIF is a

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Speaker 1: Recording, and any liability as a result of this recording

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00:10:59,120 --> 00:10:59,880
Speaker 1: is expressly disc