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Luisa Palacios and Bob McNally on Why the US-Venezuela Oil Deal Matters · Columbia Energy Exchange

• 0:00
  Luisa Palacios:
• 0:01
  I think that is one of the concerns that people have. Really the way to pretty much de-risk Venezuela and mobilize significant investments in the oil sector. There are more sustainable ways to do that in a way that anchors those investments, which are long-term investments into a path that is credible and much more transparent and durable.
• 0:02
  Bob McNally:
• 0:03
  It creates problems while trying to solve problems. And I think you look at a Chevron or an Exxon or a Conoco, it's been in there, been in there and out of there over decades. I think they know what success is. They know what risk is. And I think having Uncle Sam sit with you at the table and as your business partner is not necessarily the thing you want.
• 0:04
  Jason Bordoff:
• 0:05
  It's been a tumultuous year for Venezuela, marked by political upheaval and deadly earthquakes. Then in late August, the Trump administration announced a deal for over 65 billion barrels of Venezuelan oil reserves and a 35% stake in North American Blue Energy Partners or NABEP. The move could turn a little known private company into one of the world's largest corporate holders of oil reserves. But NABEP wasn't the only headline. In the same week, Chevron pledged $7 billion to double its Venezuelan production. Italian Major Eni moved forward on a massive oil field agreement. And GE Vernova signed on to rehabilitate the country's crippled electric grid. All told Venezuela signed deals covering more than 150 billion barrels of oil resources, an unprecedented scale up for a sector starved of investment for over two decades. Yet for all the fanfare, basic questions remain unresolved. What are the terms and the legal basis for the deal?
• 0:06
  (01:59):
• 0:07
  What does direct US government equity and Venezuelan oil actually mean for American energy security and for oil prices? Where does the deal fit in the long energy history between the US and Venezuela? Is this a genuine turning point or just the latest swing in a cycle of investments and setbacks that has not yet delivered lasting progress for ordinary Venezuelans?
• 0:08
  (02:25):
• 0:09
  This is Columbia Energy Exchange, a weekly podcast from the Center on Global Energy Policy at Columbia University. I'm Jason Bordoff. Today on the show, Luisa Palacios and Bob McNally. Luisa is an adjunct senior research scholar here at the center where she was also our head of research. Before joining CGEP, Luisa was chairwoman of Citgo Petroleum Corporation, the US refining arm of Venezuela's state oil company, PDVSA. And Bob McNally is the founder and president of Rapidan Energy Group, an independent energy consulting and market advisory firm. From 2001 to 2003, he served on the White House National Economic Council as special assistant to President George W. Bush. And in 2003, he was also the senior director for International Energy on the National Security Council, the same job I held for President Obama. His 2017 book, Crude Volatility: The History and the Future of Boom Bust Oil Prices examines the history of oil price swings.
• 0:10
  (03:30):
• 0:11
  Luisa and Bob joined me to discuss fundamentals of the deal and the many questions that remain unanswered. We considered what the deal means for the current Venezuelan government and Venezuelan people, how it fits into the long history of its oil industry, and what this equity stake really means for the United States. I hope you enjoy our conversation. Luisa Palacios, Bob McNally, great friends, CGEP colleagues. Welcome to Columbia Energy Exchange. Again, great to have you both on. Thanks for making time.
• 0:12
  Luisa Palacios (03:59):
• 0:13
  Hi, Jason.
• 0:14
  Bob McNally (04:00):
• 0:15
  Hi, Jason. Thanks for having us on.
• 0:16
  Jason Bordoff (04:02):
• 0:17
  So we're going to jump right into things after hopefully people got a little bit of a Labor Day break with some rest and relaxation. And of course, the energy world never stops from Hormuz oil markets. And in this case, one of the things we want to talk about is Venezuela. So people, especially in the waning days of summer, maybe with some holiday packed in here and there, will have seen some headlines, but just may not fully understand the details and details were a bit scarce for a time. So all of this may not be fully understood yet, but we'll have seen the announcement from the Trump administration claiming a big deal with Venezuela where an entity with significant US government control reportedly has control now over reportedly 65 billion barrels of oil reserves. Trump took to social media to call it the biggest oil deal in world history.
• 0:18
  (05:01):
• 0:19
  That sounds like a pretty big deal. Let's start with you, Luisa. Tell us what we know about what was actually done with this announcement with the US government, with the Venezuelan government, and with this private company owned by Alejandro Betancourt.
• 0:20
  Luisa Palacios (05:18):
• 0:21
  So Jason, I think why don't we start with the things that both the Venezuelan government and the US government have agreed on in terms of what was announced. It's a deal for 17 oil fields with reserves of about 65 billion barrels. The deal will lead to apparently a hundred billion dollars in investments and it will yield about 200 billion in fiscal oil revenues for the Venezuelan government. There are then divergences in what was announced. On the one hand, the US government mentions a hundred year concession or lease. The Venezuelan government announced a 25-year contract for the 17 fields. The US announced that as part of this deal, it is taking a 35% equity stake, which you mentioned, in NABEP, which is a relatively unknown Venezuelan oil producer exploration and production in the oil industry. And that as part of that deal, the US is going to take a 20% offtake at costs and will have the right of first refusal over the 80% additional 80% of production coming out of NABEP.
• 0:22
  (06:48):
• 0:23
  Both governments, I do also think that have mentioned that they expect significant oil production coming out of this deal with the Venezuelan government specifying that it will be for about 1.5 million barrels per day of production in the 25-year period at an average of about $65 per barrel.
• 0:24
  Jason Bordoff (07:12):
• 0:25
  In theory, hypothetically, this is all additional production on top of what Venezuela is producing today, you're saying the potential for these 17 fields over a very long time period is 1.5 million barrels a day.
• 0:26
  Luisa Palacios (07:24):
• 0:27
  This is what the Venezuelan government has announced, yes.
• 0:28
  Jason Bordoff (07:27):
• 0:29
  Got it. I have many questions, as I'm sure lots of listeners do as well, but Bob, anything you want to add to what your take was on the headlines we saw and the documents that came out of the White House providing a little more color in the days after?
• 0:30
  Bob McNally (07:40):
• 0:31
  No, I think Luisa did a great job. I still would emphasize there are things we don't know. I'm not a lawyer and I'm certainly not a financial engineer, but I still don't understand how the US would take an equity stake, especially if it's through the Pentagon's Office of Strategic Capital, which explicitly says and under statute that it doesn't take equity stake. I get a penny more...
• 0:32
  Jason Bordoff (08:01):
• 0:33
  So say more about that. I mean, people will have read that the US government is taking equity stakes in lots of companies these days.
• 0:34
  Bob McNally (08:07):
• 0:35
  Yeah. Well, certainly under President Trump, the US government is taking equity stakes in different companies, but as I understand, the entity that's the US counterpart, the US government side of this deal is the Office of Strategic Capital at the Pentagon that was set up under President Biden to encourage financing, give loan guarantees, et cetera, for critical minerals and other resources. So we're taking that office and that's the counterparty to this deal. But the statute, and I believe an OSC representative has said publicly, "We don't hold equity stakes." So again, not a lawyer, not a financial engineer. I understand this concept of a penny warrant sort of sort of saying, "I'm not giving you equity upfront. I'm giving you an instrument that could convert to equity if things get rolling down the road." Okay. But again, I ask who holds the equity on the US government side and under what authority?
• 0:36
  (09:05):
• 0:37
  That to us isn't clear. And it gets to the final thing I'd say is Congress is obviously not going to ratify this. If it passes legal muster, and again, details still to come out, it has sort of a provisional expiration date of 12:01 PM on January 20th, 2029. You really need the next president to fully support this. And I think that's something perhaps we'll talk about a little later, but that's certainly a question too.
• 0:38
  Jason Bordoff (09:38):
• 0:39
  So Luisa, Bob brought up legal questions in the United States. I take it there are significant legal questions under Venezuelan law about the role PDVSA, the national oil company plays in developing resources about the, maybe you can remind listeners about the revised hydrocarbons law that was passed since Maduro was removed from power and Delsi Rodriguez assumed power. My understanding is there are potentially large inconsistencies with what Venezuelan law requires for who the ability to grant concessions. Is this actually a concession? Who has legal ownership of Venezuelan oil resources? How do you understand what was done and how that's consistent with Venezuelan law?
• 0:40
  Luisa Palacios (10:23):
• 0:41
  So Jason, they're definitely legal questions, but I would say that the concerns go beyond legal questions as well. So you have concerns about transparency, about legality, about the fiscal terms, about legitimacy, and about the choice of partners. You are asking specifically about the legal terms. Indeed, the fact sheet of the US of the White House says a hundred years oil lease. That figure does not exist in Venezuela's constitution or in the new hydrocarbon law that was passed. So there's no oil lease. There's not even, you can actually assume that the word means concessions. There are no concessions in Venezuela either. And so that already is inconsistent. There's no such thing. The duration issue I think is also relevant because under the new hydrocarbon law, indeed you can engage with the national oil company of Venezuela, PDVSA, or a Venezuelan entity that is a government entity can engage with private companies under a joint venture agreement or a sort of production sharing agreement or contract, but only up to 25 years, although the 25 years can be renewed.
• 0:42
  (11:46):
• 0:43
  There's no such thing as a hundred years of concessions or just a 100 year straight. And so the Venezuelan government and the head of PDVSA have been clarifying during the past days that indeed there is a 25-year agreement that has been reached with NABEP so that we can start to see that there's some clarification on the part of the Venezuelan government to putting into the Venezuelan legal context what this is and what this is not.
• 0:44
  Jason Bordoff (12:19):
• 0:45
  And tell us what we know or don't know about North American Blue Energy Partners.
• 0:46
  Luisa Palacios (12:25):
• 0:47
  So until I would say two weeks ago, this was a company that was only known to maybe some Venezuelans that were involved in the oil industry, in part because it is a company that is not really very well known or has been known in the country for a long time. It has a limited history. I think more pertinent to the discussion is that the reason why it has been known is because of its CEO who is somebody with a past history in Venezuela linked to both contracts, electricity contracts under the Chavez regime. And so there are many, many questions related not only to the CEO of the company, but to the company itself, given that it has been assigned with no competitive bidding and in secrecy, 17 fields for 65 billion barrels, which the scope of the deal is quite substantial. And there are some that believe because of the scope of the deal that this is a deal and an agreement that should have been approved by the National Assembly.
• 0:48
  (13:57):
• 0:49
  And by the way, during the past days, the National Assembly of Venezuela did seem to vote in favor of the agreement signed by the interim president, Delcy Rodriguez. But what was signed is not even very clear because there were no more details about what was signed. So I completely agree with Bob, is that what is actually incredible is that a deal of this size with this potential impact and importance, and we don't know, we still do not know all the details of how it came about and how it's going to work.
• 0:50
  Jason Bordoff (14:41):
• 0:51
  I mean, there's been a lot of speculation or I don't know, questions raised externally about the circumstances in which this all happened, obviously, which was the Trump administration through military force removing the leader of Venezuela. There have not yet been democratic elections to choose a successor. His vice president is now in power. And I think it's fair to say, tell me if this is incorrect, Luisa, her hold on power depends significantly on the relationship with the United States and with the support of the Trump administration. And so it seems to me, I'm curious what the reaction has been from all sides of the political spectrum in Venezuela. Is it reasonable for people to think there was a sense of pressure exerted by the United States for a deal like this, which is rather unconventional, or is there some other reason to think the Venezuelan government would have undertaken something like this?
• 0:52
  Luisa Palacios (15:37):
• 0:53
  I would agree with that statement, Jason, because this is not a government that in the past, its DNA has not been of agreements with private sector participation of this matter. That said, this is a government that has engaged in the past with a lot of secrecy. And I think that is one of the concerns that people have, that really the way to pretty much de-risk Venezuela and mobilize significant investments in the oil sector, which presumably was the goal that is being pursued with this deal, there are more sustainable ways to do that in a way that anchors those investments, which are long-term investments into a path that is a credible and much more transparent and durable because deals of this nature in a country that has a history of renegotiation and repudiation, I think carries significant risk when process is not followed, when there is not a lot of legitimacy and transparency done throughout the process.
• 0:54
  Jason Bordoff (17:01):
• 0:55
  So I'm coing to come to you in a second, Bob, but just to make sure myself and everyone listening understands what we know about what was done, the Venezuelan government gave to North American Blue Energy Partners the right to develop these fields. As you said, the law in Venezuela allows joint ventures or product sharing contracts working with PDVSA, not oil leases, not a concession. Alejandro Betancourt's company develops these. They have a 25-year right to do that. 20% off take to the US government ostensibly for the purpose of the SPR. We can talk about that, Bob, if that makes sense, at cost and then the option for the rest. And just remind us, so tell me if I missed anything, Luisa, and then also what we know about the financial terms by which the government of Venezuela benefits from this deal and what payments come to them through the development of these resources.
• 0:56
  Luisa Palacios (18:00):
• 0:57
  So the fiscal oil revenues in the country are composed of royalties and income taxes. In the case of just conventional crude, those oil royalties can go up to 30% and in the case of income taxes, they can be as high as 50%. When you are developing greenfield, the recently passed hydrocarbon law can lower both the income tax so as to be the same that any company in Venezuela, not oil companies in Venezuela have to pay, which is 34%. And the royalty can be as low as 16%, which is what seems to be some of the details that are coming out of this because I think the 17 fields, one I think is important to understand is that half of those fields are really green fields in the Orinoco oil belt for which there is really no infrastructure whatsoever. And so presumably, and that's what was embedded in the hydrocarbon law, is that for greenfield investments that require that amount of upfront capital investment, particularly initial infrastructure, the conditions were going to be just much more favorable.
• 0:58
  (19:17):
• 0:59
  And so the only thing that we know is that for those greenfields, the terms are the ones that I just mentioned. I assume that for the other fields that are conventional fields or producing fields, that the terms are the ones that are followed for conventional fields. But that is the thing, all of those details should be well known. I should not have to be guessing.
• 1:00
  Jason Bordoff (19:42):
• 1:01
  Bob, you raised some questions about the way in which the US government can take an equity stake in companies, but just step back and tell everyone how you're thinking about what we know, maybe we don't know everything about this deal. You've written, I've written about why the United States is in a stronger position economically, geopolitically, because we are a very large producer now of oil rather than a very large importer. So the idea that you would have another country in the Western hemisphere, I'm just sort of being provocative to get your response, and it is going to significantly increase production and that supply will come to the United States, does that make the country better off and stronger or is there a downside to this that people should understand?
• 1:02
  Bob McNally (20:26):
• 1:03
  Well, Jason, I think what we're seeing emanates from something new in American foreign policy, and that is the Trump administration's determination to reverse unacceptable situations in our own hemisphere especially. And when it comes to migration, drugs, the Russians, the Chinese, the Iranians, and the oil, the Trump administration prioritize, I think it's fair to say in terms of the Trump doctrine, the “Donroe” doctrine, what you have, Venezuela is number one, and that's new. But I really think we need to step back and understand that President Trump and Secretary Rubio and others, and I don't see a lot of folks opposed to some of these other changes, and I don't think anyone laments the loss of the Nicholas Maduro regime from many angles. But if we step back, if there was ever to be a Netflix series, and I really think there should be one about the modern oil industry in the United States, Venezuela would be our top partner, if you think about it.
• 1:04
  (21:36):
• 1:05
  And after oil went from some illumination for the first 50 years and around World War I became about transportation, really important. I mean, Venezuela, that's when things started, right? That's when Standard Oil found oil. And then right after World War I, we had a peak oil scale. We're running out. We're never going to have more oil. We need oil abroad. So the first place we went is Venezuela. In the 20s, Chevron goes in and Exxon goes in and we produce and produce, and Venezuela is our great partner during World War II, produce, produce. But then it's not greed, but it's you know what? The Venezuelan government wants its stake, wants its rent, wants its share. So they pioneer Juan Perez Alfonso, the oil official serving in the government. They had a brief democratic government in the 1940s came in and said, look, we need not only a higher rent, we want a fifty-fifty, fifty-fifty of profit sharing.
• 1:06
  (22:28):
• 1:07
  That's what OPEC later took over. And then Perez Alfonso comes to the United States, learns quotas from the Texas Railroad Commission, the 1950s while in exile, goes back after a revolution, becomes the oil minister, says, this is great. When we started putting the United States, then the problem was too much oil. We start putting quotas into effect. Under President Eisenhower, Venezuela said, Not us, don't let us in. Come on, give us the same terms as Mexico, as Canada. We said no. And so sort of jolted, right? Venezuela went to OPEC and said, Hey guys, I want to show you this Texas Railroad Commission, this quota thing they do. Let's band together. And so Venezuela becomes a founding member, one of the founding members, but really a leader in OPEC. And then in 1975, signs the nationalization law, as Luisa said, we don't do concessions anymore.
• 1:08
  (23:19):
• 1:09
  Now it's all nationalized. But then nationalization wasn't so quick and easy, right? Then you get to the 80s and where's Venezuela going to put all this heavy oil? Well, the logical place is in the US, but they need refining to do that. So they invested in PDVSA and US refining. Anyway, then Maduro comes along, rips everything up. All I'm trying to say is Netflix should pay attention, Jason. We've had the longest of. I'm trying to think of another country with which we have had such a close and long and dramatic relationship in oil than Venezuela. So it's not just, "Hey, let's go grab Venezuela's oil production and kick out the Russians and the Chinese." Okay. But it's also, it stems from a long narrative of oscillation, if you will, between engagement and estrangement and Venezuela's desire to produce, produce in welcoming capital. The Apertura in the 1990s come in. And then it was Nicolas Chavez, get out. I mean, so this volatility, if you will, on both sides I think is just fascinating. It is something that is driving the events we see today.
• 1:10
  Jason Bordoff (24:25):
• 1:11
  So I mean, coming back to my question then, if we had an authoritarian regime, again, as you said, in the 1990s, PDVSA was a very well-respected company. Its CEO was feted in London as oil executive of the year, and then an authoritarian regime comes in, the country falls into humanitarian catastrophe, economic collapse, and its oil industry falls apart. So the idea that you have a new leader, that it would rebuild that, that the US government is investing in a company to help make that happen as good for Venezuela, and if those resources can come to the United States, good for the United States. Is that argument wrong? And if so, why is it wrong, Bob?
• 1:12
  Bob McNally (25:08):
• 1:13
  I don't think it's wrong. I think we have to hope and expect, and I would defer to Luisa and others with true expertise in Venezuela. But look, I think I mentioned January 20th, 2029. For this plan to succeed, to de-risk outside capital, especially US long-term massive capital investment, I think, and I think Secretary Rubio has talked about this, I think a necessary, if not sufficient condition is a solidly democratic, legitimate, durable government in Venezuela. You need that to have a hope that a Democratic president doesn't rip this thing up on day one.
• 1:14
  Jason Bordoff (25:53):
• 1:15
  You mean in the United States or in Venezuela?
• 1:16
  Bob McNally (25:55):
• 1:17
  In the United States, but also in Venezuela, in my view. If I'm Exxon or Chevron and I'm looking, I'm thinking, does this really give me more confidence? I want to make sure that after 2028, there is a durable, legitimate democratic government that is getting along well with both parties in Washington DC. That's the real guarantee that they will live up to these commitments, that we will handle the inevitable bumps in the road, which come with all of these types of long-term engagements. Even the ones that are very successful, they're always going to be changes over time as the resource gets developed and the government wants to claw back some more rent. So it's always a drama, but it's manageable if I think only if Venezuela has a legitimate democratic government.
• 1:18
  Jason Bordoff (26:44):
• 1:19
  So I suspect, Luisa, you may agree with some of that, the idea that growing Venezuelan oil production for the revenue that can benefit and rebuild the country of Venezuela if oil supplies and actually US refiners are quite well suited to it. So if those supplies come to the United States, if you have rule of law and a democratically elected government that builds the confidence for companies like Chevron and many others to go invest, Darren Woods sort of notably said in the White House, it's uninvestable right now. This was when Maduro was first removed from power. That could be potentially be quite a bit of progress, but it doesn't seem like that is what is happening here. I suspect, tell me if you agree, there's a reason this is North American Blue Energy Partners and not Chevron or ExxonMobil or some other companies that are getting involved in a deal like this. Is the answer to my question that the objective may be a sensible one, but the way that we are going about this based on what we know, which is incomplete information, has some serious unintended consequences, lacks the durability that would be necessary to celebrate it.
• 1:20
  Luisa Palacios (27:52):
• 1:21
  I agree with everything you said, Jason. I would add that I just don't think there are any shortcuts. I understand the desire for Venezuela to go faster, for all production to increase at a faster rate, for all investments to really take off. I just think that we're going this about in the wrong way. You actually have to build the basics and the basics are what you just mentioned is a rule of law, government capacity, an electricity system that works, a democratically elected government, but it is also legitimacy, a trustworthy government. And so I understand that you might think at some point in this idea that has been presented to us that you're de-risking, that the US entering into Venezuela in this way might be de-risking Venezuela's investments in the oil sector and beyond. But the only thing it is doing, it is de-risking NABEP, the North American company.
• 1:22
  (29:15):
• 1:23
  It is not risking Venezuela. If anything, it could create a little bit of noise. It might stagnate a process that needs to occur of changing the hydrocarbon law, enacting the regulation, eventually having a old regulator, and then starting to see investments. It just seems to me that there are no shortcuts and that attempts to do shortcut might actually end up creating problems in the future.
• 1:24
  Jason Bordoff (29:49):
• 1:25
  Bob, what's your take on the. You asked the question about how the government takes an equity stake, and of course we've seen that in other things, critical minerals and semiconductors and more. So there is a broad trend towards state capitalism in the name of national security on both sides of the aisle. But what does it mean for the US that this is a political deal? The US government sort of specifies this is an agreement with a private company rather than a government to government negotiated political agreement?
• 1:26
  Bob McNally (30:22):
• 1:27
  I think building on what Luisa said, we don't have all the details on this thing and it is novel to say the least. It's again, not novel that under President Trump are taking equity stakes in companies, but it's not clear just how we are taking an equity stake. And that's important because that gets to durability. It gets to whether it can survive legal review before he leaves office and certainly its viability afterwards. So I hesitate, Jason, to go too much into that because we just don't know the details. But if we can just step back for a second. Let's assume that it's legally robust. The design of this thing is such that it can pass legal muster. Again, we have to see that, but let's assume that. Well, yes, it is novel, but the goal here, and if President Trump is succeeded by President Vance or President Rubio or someone like that, there's a chance that they will certainly want to keep up the engagement with Venezuela and they probably will want to make sure this effort continues.
• 1:28
  (31:32):
• 1:29
  And so it really depends on who's in office on January 21st, 2029 in my view. Even if it passes legal review, a Democratic president could just stop it. And so I really think if we step back for a second, look, at the time that this was announced, coincidentally, Chevron announced a big expansion in the Orinoco. As far as I can tell, that had nothing to do. I'm not aware they had any knowledge of this thing. This is completely separate from this de-risking effort that the Trump administration has put forward. And it's admirable. It's understandable, like Luisa said, that they want to do this, take a shortcut. Is there a shortcut? Not so clear. But whether this turns out to be a good thing for Venezuela and the United States really doesn't depend on the shortcut one way or the other. What really depends on is whether what Chevron did with companies who are willing to put more capital to work in Venezuela, irrespective of this US policy, making a bet on all the things that Luisa just talked about, rule of law, democratic, legitimate government, electricity system, that's really going to play out over the coming years and decades.
• 1:30
  (32:43):
• 1:31
  I don't want to say it's unimportant, but I'm struggling a little bit to see this deal, even if it passes legal review as being a game changer, a durable game changer. I really think the game changer is the things that Luisa laid out. I don't want to ruin your podcast here by saying it's unimportant, but you get on a point. It's just not the central act in my view.
• 1:32
  Jason Bordoff (33:10):
• 1:33
  So if that's right, Luisa, what do you think the US government was trying to achieve? As we've talked about, if you didn't have sanctions on Venezuelan oil, US refineries are pretty well suited to that type of crude and much of that supply would probably flow to the Gulf Coast. When you create the right conditions for investment, companies like Chevron go in. So why do this?
• 1:34
  Luisa Palacios (33:30):
• 1:35
  So Jason, that is really a very good question. And so I am going to try to provide some theories. And so first, maybe the Trump administration was a little bit hesitant or getting impatient with the pace at which investments were taking place in the country. They were not going fast enough. Again, it has been clear that the Trump administration sees as a metric of success for some reason, whether there are investment announcements in the oil industry in the country. And so I think that an administration that might provide or might give a measure of success, these kinds of investments, a hundred billion dollar investment by the North American Energy Blue Energy Partners might seem to meet that kind of metric. But I think to Bob's point, in the same week that the agreement with North American Blue Energy Partners was announced, I really want to stress that Chevron announced another deal in Venezuela in which they are saying that they're going to invest $7 billion in the next five years to increase double production in Venezuela.
• 1:36
  (35:10):
• 1:37
  ENI, the CEO of ENI, was also in Caracas signing the migration of its contract. They have one of the heavy oil fields in the country that is a 35 billion barrel field. And so this is huge and they're committing to increase production already in the country. This is ENI, the Italian oil company. They think they're going to see production already by the end of the year. GeoPark, a Colombian company also signed an agreement in the country. The agreement constitutes about 16 billion barrels of oil and they too are committing to investments. The three of them together, I actually in aggregate those billion barrels that were signed not with the North American Blue Energy Partners, but with these three companies already bigger than the reserves that were signed by North American Blue Energy Partners. And these are actual operators with capital, the three of them publicly listed companies in the country.
• 1:38
  (36:27):
• 1:39
  That to me is more relevant for the oil outlook of Venezuela and oil investment outlook of Venezuela than the North American Blue Energy Partner announcement. In part because as I mentioned, the 17 fields are a lot of different fields. A big chunk of them are, half of them are green fields that require a level of operational expertise, balance sheet, process history, operational excellence that I really have no understanding right now that North American Blue Energy Partner can show because it's not a known entity. It's a small operator. It used to be a small operator in Venezuela that not a lot of people knew about. And so just developing oil fields in a country like Venezuela is difficult, particularly the heavy oil. These are not easy and it requires a lot of not only expertise, but the balance sheet and financial capacity to be able to develop these fields and to bring them online.
• 1:40
  Jason Bordoff (37:51):
• 1:41
  You're a scholar, not only of Venezuela, but of national oil companies and state-owned enterprises more broadly. And I'm just wondering if you think the US government has now created a national oil company on the spectrum of Saudi Aramco to Equinor to, as you just said, a company like any or places where there's a minority government stake, but also government control over the board or the CEO. What is the spectrum of nationally owned and operated versus government influenced and how should we think about what we think may have been created here?
• 1:42
  Luisa Palacios (38:22):
• 1:43
  I think that is a question that is really relevant to answer because taking a 35% stake, a government agency taking a 35% stake in an extractive industry of another country, that comes with a lot of challenges, Jason. And that means that the US government now owns the governance, operational and environmental track record of a company that we don't know really very much about. This is a company that operates in one of the most difficult places as well from the point of view of environmental liabilities, which is the Lake of Maracaibo, which has been destroyed. And the level of oil spills that take place in that area means that the US government is also taking on those kinds of risks. And so you are not just a silent. When you have 35% stake of a oil production company in an emerging market, you are taking on much more than just equity stake.
• 1:44
  (39:37):
• 1:45
  You are taking on a lot of different challenges. It's a lot of scrutiny about the wellbeing and operational excellence. And so I do think that this is something that you have to think about. That is why I spent some time writing and thinking about what national companies are, how they operate, the governance, the internal controls that exist because these are very difficult institutional arrangements that can go very wrong. And so you have to get it right. And so I was very interested as part of the subsequent notifications by the White House. They discussed some of the governance issues, like for example, the US has veto power over the board. The board will be composed of the majority of Americans. It will be ruled by US law. What I would say is that yeah, that's fine. You have to go when you are in this area, in this realm of operations, you actually have to go beyond that.
• 1:46
  (40:47):
• 1:47
  You have to assume a level of transparency. It's just not a private equity play. You might think it's a private equity play, but it's not. When you are the most important operator of a country, there is a level of transparency that you need to have. I do think that North American Blue Energy Partners that has not published that I can see any kind of financial balances. I think that from now on, this is a company that has to publish its investment plans, its production plans. If this is not a company but a vehicle, the 17 fields cannot be operated by a very small company. And so if it is a vehicle, then I think, and it is a vehicle that it is going to be outsourced and you're going to outsource operation to other partners in Venezuela, this is something that needs to be understood.
• 1:48
  (41:41):
• 1:49
  Who are you outsourcing that operation to with what kind of partners, what kind of process, how are you assigning that? What I mean to say, Jason, is that when you take on this kind of challenges, there's a lot that comes with it that I don't think even if you are a minority partner, there is a government stake comes with it comes a lot of public scrutiny and therefore you have to deliver on a lot of more things than just an announcement and a fact sheet.
• 1:50
  Jason Bordoff (42:14):
• 1:51
  Bob, can you put this in a little historical context and help people understand, is this unprecedented? Has the US government created a national oil company? I have some recollection, you're the historian, not me, that back when Southern California, Standard Oil of Southern California and Texaco, the origin of Aramco was a US company getting oil concessions in Saudi Arabia that the FDR administration, Harold Dickies considered creating a petroleum reserves corporation and having the US government take control of those concessions. I don't think it ultimately happened, but maybe not an unprecedented idea. How do you as a historian sort of think about what has just happened?
• 1:52
  Bob McNally (42:59):
• 1:53
  Oh, Jason, the United States has flirted with nationalization since the very first days, our very first panic. And as I say, our first panic was after World War I. The US Navy was so horrified having just gotten out of coal and switched to oil when oil prices rose sharply after World War I, that they were seizing supplies at bayonet point. They had sailors forcibly taking oil at the price they wanted from private depots in California. And the Secretary of the Navy said, "We should just nationalize the oil industry because we need it for the US military." Oh my golly. So we're tempted. And going back to your said earlier, I'm tempted to looking what's happened recently with the Trump administration taking state ownership to paraphrase President Nixon, that we're all dirigiste now. But I'll make a prediction, Jason. I don't think it lasts, at least in the Republican Party.
• 1:54
  (43:58):
• 1:55
  I think in the Democratic Party, state ownership of means of production is gaining favor. It's going to gain more favor. And I think they will happily follow the president's lead. They will do it with very different companies though in different sectors and for different reasons. So I think they welcome the president's, let's say, normalization of state capitalism. But I'll make a bold prediction and I'll admit maybe this is a bit of wishful thinking coming in, but I don't think it survives President Trump. I think a lot of things will not survive President Trump on the right, on the political right, on the Republican Party. And state capitalism is one of those things that won't survive. And I can easily see a scenario where a future Republican president wants to keep the wins from this administration with Venezuela. We don't want to see the Russians back, the Chinese back, the Iranians back.
• 1:56
  (44:45):
• 1:57
  We don't want to see the drugs back. We don't want to see all the problems back, and there will be a strong and abiding interest in making sure we have a close relationship. But I can see both sides ditching this deal, assuming again, it even passes legal muster. I just don't see it as viable necessarily. And to Luisa's point, I think I'm making it too, it's not necessary. The real success or not depends on these other factors. So yes, it's a novel foray into state capitalism. In this case though, even the Democrats who come in and they will be avid practicers perhaps of state capitalism, but not with this deal. I
• 1:58
  Jason Bordoff (45:26):
• 1:59
  Hear you about political trends on the left, it does seem like a 35% stake in a company to develop another country's resources is a step beyond government. A few government can own grocery stores, but we can come back to where this trend is going on both sides of the aisle. I was asked by a reporter last week why this was North American Blue Energy Partners and not Chevron or Exxon. And my answer was, I don't think there's any way companies like that would've undertaken a deal like this. Do you agree with that, Bob?
• 2:00
  Bob McNally (45:54):
• 2:01
  I think that's right. Again, as Luisa was saying, the point here is to have the government de-risk, but in some ways it uprisks the novelty of it, the uncertainty of it, the introduction for the first time really of the US government. It creates tailwinds, but also headwinds and risk and scrutiny and invites controversy in some ways. So it creates problems while trying to solve problems. And I think you look at a Chevron or an Exxon or a Conoco, it's been in there, been in there and out of there over decades or a hundred years in the case of Chevron. I think they know what success is. They know what risk is. And I think having Uncle Sam sit with you at the table and as your business partner is not necessarily the thing you want. So I think you're right, Jason. I think this is not something they would particularly welcome or feel it is necessary for their long-term success.
• 2:02
  Jason Bordoff (46:56):
• 2:03
  Luisa, what's your sense of the durability of this arrangement either because of events in Venezuela or in the United States?
• 2:04
  Luisa Palacios (47:06):
• 2:05
  I think it's difficult to say, Jason. I have to say, I think it will depend on how it evolves, how it operates. If you continue to see the lack of information about it, I think it's going to bring more scrutiny and it's going to become a liability. But if it can somehow try to start to fix the governance issues, the transparency issues, the legal issues, then there is a scenario where it becomes something else. Right now, it's just too soon to say. What I am most concerned about is if the US leaves, but the North American Blue Energy Partner agreement with PDVSA continues. And so that to me feels like the worst of all scenarios. And so I would say what happens to it depends on how the US and the Venezuelan government deal with the criticism in front of them and whether it is a successful deal or not.
• 2:06
  Jason Bordoff (48:26):
• 2:07
  And Bob, you said earlier you're skeptical this last political change in the United States. What does that look like? The US government sells its stake, whatever that stake is, just exits the arrangement?
• 2:08
  Bob McNally (48:37):
• 2:09
  Yes, I think if a Democratic candidate wins, I think especially if there's been any controversy around this as it unfolds and so forth, I think they wouldn't feel they need to keep it and they just get rid of it. Stroke of the pen makes it happen. Stroke of the pen makes it go away. So even if it's sort of above board legally, why would a Democratic president want to have a US government owning a foreign oil company reserves? I just don't. Jason, I want to ask you, I should turn it around. You tell me. But now then if it's a Republican wins again, and if it's Vice President Vance or Secretary Rubio or someone from the Trump administration camp, I think there you'll have more momentum and a desire to keep it going. However, I doubt there'll be as much strength and determination to protect this deal per se, especially if it encounters scrutiny and opposition of Venezuela.
• 2:10
  (49:41):
• 2:11
  It becomes a problem in the relationship. I think the broader equities, again, immigration, drugs, the Russians, the Chinese, all these wins, all these clear wins that I think even a Democratic president would want to preserve in the next administration, I think those take priority. And saving this deal, this novel deal at all costs, I just don't see it being a top priority in almost any administration. And so I think the odds are probably stacked against it. And again, I don't think that really matters one way or the other for whether we see Venezuela reaches potential in the coming decades as an oil producer and a democratic government.
• 2:12
  Jason Bordoff (50:23):
• 2:13
  I saw a tweet which just showed one of those gifts of someone in a full-throated laugh and the tweet was something like AOC and Greta Thunberg discovering US governments can control what the boards of oil companies do. And it's a joke, but the political pendulum swings. And so if you have an administration that is first and foremost concerned about climate above all else, and there's a precedent for control of private energy companies and oil companies activities, yeah, things could swing in different directions.
• 2:14
  Bob McNally (50:53):
• 2:15
  Absolutely. I've advised my clients for that as a long time. We were just in Alaska with the Aspen Institute and I said it there. I said, "Your biggest risk, the oil companies, is you get a far left populist democratic government that tends to plug holes in our social security and Medicare. I think that'll be the reason it won't be climate change." And they will take control of those companies and then go after that cash as the government in Venezuela did, as Maduro did and so forth. So it's a big risk. They are going to be flush with cash and these governments are going to starve. The governments are going to be hungry as these interest rates go up. So yeah, real risk, I think. Real risk.
• 2:16
  Jason Bordoff (51:32):
• 2:17
  Just last question to both of you, if this deal does persist, what the implications would be for oil supply and for prices and markets? I mean, are those numbers you talked about, Luisa, of 1.5 million barrels or whatever, are these in the realm of what might be plausible? And then Bob, the administration has talked about doing this to bring energy prices down. Oil prices are rising. Much of the strait of Hormuz remains closed, not all of it. What impact in the near to medium term would this have in terms of oil market balances? Luisa and then Bob.
• 2:18
  Luisa Palacios (52:06):
• 2:19
  I don't think that as a result of this deal, you're going to get really any relief in oil production in Venezuela in the next year or two. I will not completely rule out that you get some increases in oil production, but nothing that will really change the dynamics in the oil market.
• 2:20
  Jason Bordoff (52:29):
• 2:21
  And just to remind people listening where we are, production is up a few hundred thousand barrels a day since.
• 2:22
  Luisa Palacios (52:34):
• 2:23
  Production is up about 1.2, 1.1, 1.2. Okay, yes. Up
• 2:24
  Jason Bordoff (52:39):
• 2:25
  To 1.2, not up 1.2. Yeah. From about 800,000 before. Yeah, go ahead,
• 2:26
  Bob McNally (52:44):
• 2:27
  Bob. Yeah. No, I would just say Venezuela matters an awful lot. It could be just what the doctor ordered if Venezuela could get back to that three plus million barrels a day. But as Luisa said, it's a nothing burger this year and in the coming years. Let's just remember, before we went into this drama in Venezuela and then Iran, just before at the end of last year, the IEA was beginning to walk back this peak demand narrative that had been propagating through its reports. For five years, they and others, many people believed and invested that oil demand was going to peak by 2030. Well, that's falling out of favor. And as it falls out of favor, what it reveals is a gap, a huge underinvestment in oil and gas, that's a separate issue, but not now in the early 2030s. My point is this, if you connect those two dots, you say, "Wait a minute, just before we all got bamboozled with all this Venezuela and the coup and taken over and Maduro's in jail and now Iran, just before we were starting to realize demand's going to grow and we're under invested, we're going to need that two to three million barrels a day in 2033.
• 2:28
  (53:51):
• 2:29
  We really are. And this I think is the promise, and this is why I think you see major oil companies irrespective of this deal. And Luisa just went through the big. This is why capital is willing to take a risk on these enormous but risky and fraught. If you look at the history going back a hundred years as we discussed, why do you do that? I think there's an increased willingness to do it, especially after the Hormuz crisis, because not just that, well, the Middle East is dangerous, but the world's going to need those hydrocarbons in 2033. I think we shouldn't lose sight of that. And so that's why I think and I hope that Venezuela, one way or the other, with or without this deal, it's going to pay off, but it's not going to be for another five to 10 years or so.
• 2:30
  Jason Bordoff (54:38):
• 2:31
  Really interesting. There's so much more to discuss. We'll have you guys back on. This is fast moving and still a lot of uncertainty, and I want to talk about what's happening in oil markets, energy markets, Hormuz, the broader context in which this all plays out. So we will continue this discussion on a future episode. Bob McNally, Luisa Palacios, great to be with you. Thanks for joining us.
• 2:32
  Luisa Palacios (54:58):
• 2:33
  Thank you, Jason.
• 2:34
  Bob McNally (54:59):
• 2:35
  Thank you, Jason.
• 2:36
  Jason Bordoff (55:05):
• 2:37
  Thank you again, Luisa Palacios and Bob McNally, and thank you for listening to this episode of Columbia Energy Exchange. The show is brought to you by the Center on Global Energy Policy at Columbia University. The show is hosted by me, Jason Bordoff, and by Bill Loveless. Mary Catherine O'Connor, Dara Diamond, and Kyu Lee produced the show. Gregory Vilfranc engineered the show. For more information about the podcast or about the Center on Global Energy Policy, please visit us online at energypolicy.columbia.edu or follow us on social media at ColumbiaUenergy. And please, if you feel inclined, give us a rating on Apple or Spotify or wherever you get your podcasts. It really helps us out. Thanks again for listening. We'll see you next week.