A tough market and a struggling economy, but the oil sector and other natural resources point to its long-term potential of this South American country. Martin Clark reports.

Located on the northern shores of South America, directly above Brazil and facing out to the Caribbean Sea and Atlantic Ocean, Venezuela sits atop some of the world’s largest oil deposits.

Proven crude oil reserves are estimated to be in excess of 297 billion barrels, on a par with — and even outstripping, by some measures — Saudi Arabia.

Although its average daily production is considerably less — and currently in decline still further — there is clear and obvious potential for long-term exploitation and development.

Yet oil production is now close to a 50-year low, with Venezuela finding itself in the press for all the wrong reasons in recent times.

That includes a profound economic recession and ensuing political crisis dating back to around 2014, triggered in large part by the collapse in oil prices of that year.

The economy has long been overly dependent on income derived from its hydrocarbon sector.

According to the Organisation of Petroleum Exporting Countries (OPEC) — of which Venezuela is a member — oil revenues account for a staggering 98% of export earnings.

While other global oil producers have also felt the pain of lower crude prices, it has exacerbated the already challenging social and economic conditions inside Venezuela.

Despite its oil wealth, many of the country’s 31 million people still live in deep poverty, often in shanty towns, visible even around the hillsides above Caracas, the bustling capital.

The crisis has brought with it soaring inflation — potentially reaching one million per cent according to doomsday forecasts by the International Monetary Fund (IMF) — and even shortages of basic goods and foodstuffs in shops and markets.

The IMF says the country could even be facing the hyperinflation perils faced by Germany’s Weimar Republic in the 1920s and Zimbabwe a decade or so ago.

It has sparked something of an exodus, among the disenchanted and impoverished people.

Nearly two million citizens are believed to have fled Venezuela since 2015, about half of them travelling across the border into neighbouring Colombia.

The country has likewise come under the spotlight for its human rights record in recent times, another key test for a government already struggling to keep on top of its problems.

Political transition

At the same time, Venezuela has been adjusting in recent years to a political transition, something that has no doubt deepened its economic woes.

It follows the death in 2013 of former president Hugo Chavez, a self-styled champion of the poor during his 14 years in office, who invested billions of dollars of the nation’s oil wealth into social programmes, such as education and healthcare.

However, an often fractious relationship with the USA, in part, due to Chavez’s leftist political beliefs, often soured relations with the West, undermining foreign investment and goodwill.

The Chavez political ideology incorporated strands of Marxism and Bolivarianism, which prioritises education and social justice, sometimes at the expense of capitalism.

It meant the presidential successor to Chavez, Nicolas Maduro — re-elected for a second, six-year term in May 2018 — essentially stepped in at a time of plummeting oil prices, an economy in freefall, and a lack of certainty with the passing of its charismatic former leader.

Indeed, Maduro now claims the country remains a victim of an economic war waged by opposition leaders with support from the USA.

A crackdown on local opposition prompted the USA to impose sanctions on the country, further undermining business links.

The move also resulted in the South American trading bloc Mercosur excluding it in 2017, urging the president to release prisoners, end repression and fast track a new, more open political system.

The Mercosur suspension does not affect trade or migration policies, though, in order to avoid worsening any humanitarian crisis.

Naturally, it has created a difficult climate for trade and investment with big name foreign investors like General Motors and Kellogg’s all quitting Venezuela in recent times.

Trade relations

Yet Venezuela remains significant for many reasons, not least its giant oil reserves.

It is the sixth largest country in Latin America, by size and economy, with the potential to expand greatly over time.

As a former Spanish colony, it has historical links to Spain — Spanish is the official language — but there is also a flow of trade with other European States, including the UK.

Major British names with business interests include Shell, Diageo, BT, GSK, AstraZeneca, Aggreko and British American Tobacco.

There is also a ready market for British goods and services.

The UK exported £337 million in goods and services to Venezuela in 2015, according to the Department for International Trade.

It says the market offers advantages such as low import tariffs, high potential returns due to high margins and a strong reputation for the quality of British goods and services.

Potentially — current political complexities aside — that also includes access for companies within the Mercosur trade bloc, opening up a huge and ever more dynamic South American market.

One major player, Anglo-Dutch giant Unilever, is still making it work and has vowed to stay put in Venezuela, albeit reducing its production to a single product — Tio Rico ice cream — during the economic squeeze.

The company’s factory sits in the outskirts of the northern city of Valencia, a hub for much of Venezuela’s industries and manufacturing.

But there are plenty of challenges for UK firms too, not least the lack of direct flights and the time and great distance required to get there and safety and security warnings from the Foreign & Commonwealth Office (FCO).

Other barriers include price controls, protective labour regulations and a government-controlled foreign currency exchange, which makes it hard to access foreign currency for imports and for remittance of capital and dividends.

Venezuela also holds a poor ranking in Transparency International’s Corruption Perceptions Index.

Oil and gas

While the long-term potential is there given the sale of its reserves, the nation’s strategic oil and gas sector has faced similar problems, not least a massively reduced output level.

Crude oil production is now less than half its 1998 level when Hugo Chavez was first elected and is still falling.

Output has plummeted 30% from 2.15 million barrels per day (bpd) in 2016, to a little over 1 million bpd by the tail-end of last year, reflecting an alarming downward trend.

The industry has also had to face up to a number of high-profile departures.

US engineering services giant Halliburton wrote off a US$312 million investment early in 2018, amid plans to reduce its activity and exposure to the country.

It has likewise suffered from late payments from Venezuela’s national oil company, PDVSA.

The country has faced dozens of cases filed at the International Centre for Settlement of Investment Disputes (ICSID) by oil and other industrial companies, that once operated there, seeking compensation for lost investments.

In a bid to reverse the trend, Venezuela has enjoyed more success signing partnerships with Chinese investors, notably in the energy sector.

That includes exposure to the country’s lucrative upstream oil deposits.

One recent deal will see Chinese firms drill 300 wells in Ayacucho, located in Venezuela’s vast oil-rich Orinoco Belt.

It builds on a relationship that has gone on for over a decade, which sees China provides oil-for-loans deals to secure energy supplies for its fast-growing economy while bolstering an anti-US ally in South America.

It brings with it essential cashflow for Venezuela at a time when investment from Western oil companies is effectively choked off.

Natural resources

Venezuela is more than just oil. It is a country of astounding natural beauty, and one with a rich and diverse landscape.

It is also among the most highly urbanised countries in South America, with Caracas a key gateway into the region.

Venezuela is rich in other natural resources as well. Apart from petroleum, other abundant natural resources include natural gas, iron ore, gold, bauxite, diamonds and other minerals.

Like the oil sector though, these are all areas that have not enjoyed the level of investment from Western firms required to match what is ultimately a world-class potential.

Similarly, tourism remains underdeveloped and largely the domain of adventure travellers for now.

Nonetheless, for visitors, the country boasts countless and diverse attractions, including the capital city itself, a busy, commercial hub with plenty of colonial and indigenous history to explore.

Beyond Caracas, Venezuela’s charm stretches from the snow-capped Andean peaks in the west, through to the Amazonian jungles in the south and the beaches of the north.

Highlights include the tropical resort islands, including Isla de Margarita and the Los Roques archipelago, along the Caribbean coast.

In the northwest sit the Andes Mountains, as well as the colonial town of Mérida, a base for visiting the Sierra Nevada National Park.

For the more adventurous traveller willing to brave the FCO travel warnings, there’s no doubt Venezuela now offers tremendous value given its hyperinflation spiral.

At the same time, it is an extremely challenging environment for international trade and investment.

Not a market for new exporters, for sure, but most certainly a country with incredible long-term appeal.

Last reviewed 23 January 2019