Venezuela has the largest proved oil reserves in the world. But 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 (not to be confused with proved reserves).
This oil is particularly challenging to produce, which is why 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.
The challenges in producing this oil require significant capital investment. These investments are risks on the part of the oil companies making them, but they will pay off if oil prices rise.
The Causes of the Decline
In 2007 oil prices were rising, 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.
ExxonMobil and ConocoPhillips refused, and as a result, their assets were expropriated. (These expropriations were later ruled to be illegal, and compensation was granted to both companies).
So there are two related causes that have resulted in the steep decline of Venezuela’s oil production, despite the the country’s top rank in 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.