(Oilprice.com, Nick Cunningham, 27.Dec.2018) — Last Friday, the Guyanese government fell after a no-confidence vote, a move that likely was viewed as an opportune moment of weakness in Caracas.
A day later, Venezuela’s navy approached two Norwegian vessels conducing seismic work in Guyanese waters on December 22, forcing the ships to flee to safer waters. The ships, under contract by ExxonMobil, are surveying the area and working to develop massive oil discoveries that could transform Guyana.
Venezuela says the activity is illegal because it is in disputed territory, but Guyana, and much of the world, views the harassment by Venezuelan ships as illegitimate. “Guyana rejects this illegal, aggressive and hostile act,” Guyana’s foreign ministry said in a statement. Venezuela’s incursion “demonstrates the real threat to Guyana’s economic development by its western neighbor” and “violates the sovereignty and territorial integrity of our country,” the ministry said.
The U.S. State Department said the Venezuelan navy had behaved “aggressively,” a statement that Venezuela’s foreign ministry criticized on Tuesday as being “interventionist and disrespectful.” Venezuela said Exxon’s contractors were in areas under “undoubtedly Venezuelan sovereignty.”
“It is evident that the U.S. government is interfering in a matter that is not at all incumbent upon it, with the goal of promoting corporate interests closely linked to the Washington ruling elite,” the Venezuelan foreign ministry said in a statement.
The move comes as ExxonMobil and its partner Hess Corp. are spending heavily to develop a string of oil discoveries off the coast of Guyana. The discoveries encompass some 5 billion barrels of oil reserves, and offshore Guyana has quickly jumped to the top of the priority list for ExxonMobil. As such, Guyana – a very small and poor country on the northern coast of South America – is home to one of the most active and attractive offshore plays in the world.
In early 2018, Exxon unveiled a spending plan that would allow the company to significantly increase oil production by 2025, after years of stagnating output. Exxon’s sterling reputation among shareholders has taken a hit in recent years as it has struggled to grow, and some of its peers have caught up to the supermajor. In fact, many analysts now see some of Exxon’s rivals as a much more compelling investment.
Exxon’s strategy to boost profits and expand production hinges on two key upstream targets. The first, the Permian basin, comes as no surprise because every other oil company seems to be betting their fortunes on Texas shale. The second, however, is offshore Guyana.
The fact that Guyana stands at the center of one of the largest oil companies in the world illustrates the size of the prize. Over the past half-decade, Exxon has made discovery after discovery in Guyanese waters, repeatedly revising up its estimate for how much oil might lie beneath the seabed. As recently as early December, Exxon and Hess hiked their estimate for Guyana’s offshore reserves by 25 percent after announcing their tenth discovery.
That has the Maduro regime seething. Venezuela’s oil production has been in freefall for more than a year and the economic crisis has only grown worse with time. Venezuela claims ownership over some of the maritime territory in which ExxonMobil is working, but Guyana says that the territorial dispute was settled over a century ago. To be sure, Venezuela has held outstanding claims over some territory in Guyana for quite a long time, but the disagreement was dormant for decades. That is, until Exxon started poking around for oil.
ExxonMobil was forced to suspend exploration activities after the move by Venezuela and Guyana has referred the case to the United Nations. As of Tuesday, the foreign minister of Guyana said that it was “in discussion” with ExxonMobil on when it might resume operations, according to Reuters.
Despite the attempt by Venezuela’s navy to disrupt drilling operations in Guyana, the move is unlikely to have a lasting impact on Exxon’s developments in the country. Indeed, on Wednesday, Exxon said that its operations were unaffected, despite the retreat by the seismic ships a few days earlier. “Exploration and development drilling is continuing in the southeast area of the Stabroek Block,” the company said in a statement.
The episode is mostly a distraction from the larger story unfolding in Venezuela. On December 26, Reuters published a special year-long investigation into the demise of PDVSA at the hands of the company’s military leader, Major General Manuel Quevedo. In 2017, Maduro handed over PDVSA to Quevedo in what was widely interpreted as a move to bind the military closer to the regime. As Reuters details, the results have been disastrous.
Quevedo has presided over a vertiginous decline in oil production, and the company has seen a worker exodus that has not abated. Oil export revenues fell by a fifth in 2018 from a year earlier and are likely set to continue to decline. Harassing oil vessels in neighboring waters won’t change that dynamic.