Q&A: How oil giant Venezuela fell into crisis

Venezuelan President Nicholas Maduro's hemisphere shaking election victory last month is the culmination of a tumultuous two years for the Venezuelan economy. Almost entirely dependent on revenue from oil exports, the collapse of global oil prices has been harder felt there than anywhere. Food lines wrap around city blocks in Caracas, hospitals are bereft of supplies and crime on Venezuela's always dangerous streets is turning into a humanitarian crisis. Antoine Halff, a scholar at Columbia University's Center on Global Energy Policy and former analyst at the International Energy Agency, explains the state of play in South America's largest oil producer.

Q: Venezuela's been one of the world's largest oil producers for decades. But production there has been declining in recent years. What's happening down there?

A: Venezuela's been doubly hit by the drop in oil prices but also by years of mismanagement and broader underlying problems. It started with Hugo Chavez, and it got worse progressively over the last few years. Corruption is endemic. There are broader economic ills, like the multiple foreign exchange rates which makes it difficult for companies to manage supplies and to budget and raise costs exponentially. There is the insecurity; violence is a problem. Logistics, like transportation, is difficult.

Q: Those sorts of problems seem to be a fact of life when it comes to drilling for oil and gas in developing countries at-large. What makes Venezuela so different?

A: (State-owned Petróleos de Venezuela, S.A) has made it very difficult for foreign companies to invest, so it's mostly left to its own devices. And it does not have the expertise to manage fields that are in some cases complex to manage. Corruption is endemic. Companies around the world have had to deal with the collapse in oil prices. But for companies operating in Venezuela the additional problem is in every step of the supply chain there's an intermediary who take their cut and bring the costs up. For most companies, what cost $10 billion in 2014, today may be costing $5 billion because of efficiency and drop in fees from service fee companies. In Venezuela it's the opposite. By one industry estimate, what cost $5 to $6 billion a few years ago now costs $12 billion.

Q: Most of the major oil companies have ceased drilling operations in Venezuela. Who's left at this point, and how is the current political situation likely to effect investment there?

A: Everybody is on the fence, waiting to see how things evolve. Chevron has probably maintained a closer relationship than other companies. They had surprisingly cordial relationships with Chavez, but under Maduro it's deteriorated and become much more challenging. Maduro has been trying to raise money with the Chinese companies and Chinese government, as well as Rosneft and Russian government to generate cash. He raised some financing from Rosneft and puts up its U.S. refining arm Citgo as collateral. The reports are that Rosneft is seeking to exchange its claim to Citgo for concessions on oil fields within Venezuela, but this is not officially confirmed.

Q: How likely are Russian or Chinese firms to be able to turn things around there?

A: I think the high level answer is difficulties of operating in Venezuela apply to everyone, from the hyperinflation to the corruption to the violence. And generically Chinese companies don't necessarily have the highest level of expertise. A lot of the fields in Venezuela are mature fields, and they need to be managed carefully.

Q: So what's next for Venezuela? What is Maduro doing to try and right the ship, so to speak?

A: At the moment, Venezuela is caught in a catch-22. It needs to really get its oil industry back on track to generate revenues, but at the same time it can't really get the industry back on track without fixing the economy. Maduro's not in a position to change things. In order to fix the economy and the oil industry, you need a new team. What Maduro's trying to do is extract as much revenue as he can to service the debt and to avoid default.

Q: How likely are the latest American sanctions against Maduro personally to get him to change course?

A: This step alone is unlikely to push him over the edge or make him crack. It should not be seen in isolation, however, but rather as part of a dynamic. In Venezuela as in North Korea, U.S. options are limited and there really isn't any magic weapon. The challenge for Washington is to avoid two or three equally undesirable sets of unintended consequences: a whiplash effect for American consumers and the U.S. economy through higher gasoline prices at home; unwittingly giving Maduro the gift of a scapegoat, an easy excuse for wrecking his country; and to avoid pushing him further into Russia's arms.