Before any significant capital flows into Venezuela's oil sector, the near future will be dedicated to political negotiation and establishing a stable legal framework. Major players like Exxon still consider the country "uninvestable," meaning the primary focus will be on creating the conditions for future investment, not the investment itself.
The significant rise in Venezuelan bond prices was not solely due to investors anticipating a positive political outcome. It was part of a larger market trend where investors sought high returns across the entire emerging market distressed asset class, including countries like Lebanon and Sri Lanka.
Despite the large volume of outstanding debt, holdings of Venezuelan bonds are highly concentrated among specialized, event-driven hedge funds. Mainstream investment vehicles like ETFs and active mutual funds have almost no exposure, making it a niche play for experienced distressed asset investors.
To spur investment in Venezuela's risky environment, the U.S. administration may need to employ a "carrot and stick" approach with oil majors. This could involve offering capital guarantees to de-risk investments (the carrot) or threatening to revoke leases on U.S. federal lands for non-compliance (the stick).
Venezuela produces heavy sour crude, which only specialized refineries can process. U.S. Gulf Coast refiners like Valero are poised to benefit from a cheaper, more abundant feedstock. This new supply could displace more expensive Canadian and Mexican crude, improving refinery margins.
China Development Bank holds $19B in Venezuelan debt. Marking it down would signal to other "Belt and Road" nations that its commodity-backed loans are not secure against regime change, creating a dangerous precedent. This forces the bank to hold non-performing assets, impacting its own financial standing.
Despite significant upfront costs of $15-20 billion to bring 500,000 barrels per day online, developing Venezuela's oil sector is comparatively inexpensive. The cost is estimated to be 25% cheaper than current deepwater projects in neighboring countries, presenting a compelling relative value proposition for energy investors if political risks can be mitigated.