What will Venezuela do with its oil? Top five energy challenges after Chàvez.

With the passing of Hugo Chávez, the issue of what Venezuela chooses to do with its oil moves to center stage for the energy industry – and for environmentalists. Venezuela’s future leaders face key questions, including who to sell to and barter with and how aggressively to develop the country’s huge tar sands (oil sands) deposits. Here are five energy challenges that Venezuela will have to grapple with, many of which will have repercussions beyond its borders.

1.The Orinoco Belt

Venezuela's late President Hugo Chavez takes a sample of crude during his weekly broadcast at a nationalized oil field at Orinoco's belt in the southern strip of the eastern Orinoco River in 2008. One of the biggest dilemmas facing Venezuela's post-Chavez leaders is what to do with the country's immense deposits of tar sands, which offer a huge possible source of oil that would be costly and difficult to extract. (Miraflores Palace/Handout/Reuters/File)

The biggest issue for Venezuela is what to do with its immense deposits of tar sands (also known as oil sands). If one counts the technically recoverable oil estimated to lie in a 375-mile stretch of land along the Orinoco River, then Venezuela has bigger oil reserves than anybody, including Saudi Arabia – some 296.5 billion barrels of oil, by one estimate. The big question: Is it economically feasible to produce that oil? The process is energy intensive, costly, and environmentally questionable. Environmentalists have attacked Canada for producing oil from its tar sands – and have mounted a highly visible campaign to stop a planned pipeline that would carry its oil product to US refiners in the Gulf of Mexico. Venezuela's effort could turn out to be even bigger.

Venezuela needs to do something. Under Mr. Chávez, its economy became even more reliant on the oil industry even as production fell. In the mid-1990s, Venezuelan production peaked at around 3.5 million barrels of oil a day. Today, it's closer to 2.5 million barrels a day.

In the 1990s, Venezuela created four projects to begin to convert its tar sands into a lighter crude, known as syncrude. The facilities have the capacity to produce 600,000 barrels per day, according to the US Energy Information Administration, but they are estimated to be producing less than 500,000 a day. Venezuela could use more investment to develop its tar sands, but that would require outside help.

Foreign investment

Chinese President Hu Jintao, behind right, and Venezuela's President Hugo Chavez, behind left, applaud during an agreement signing ceremony at the Great Hall of the People in Beijing in 2008. (Elizabeth Dalziel/AP/File)

When Chávez re-nationalized his country’s huge oil company,  Petróleos de Venezuela SA (PDVSA), it sent a message to the international oil industry: no more business as usual in Venezuela. Instead of foreign companies owning a majority share of development products, the PDVSA would get a minimum 60 percent share. Royalty rates had already been raised. Companies who didn't agree to the new rules, such as Italy's Eni and France's Total, saw their facilities taken over. Others, like the US-owned Exxon Mobil and ConocoPhillips, simply left.

By 2009, it was clear that Chávez's strategy had failed to stop the slide in Venezuela's oil production, and he began allowing more foreign investment in the Orinoco Belt. China, India, Russia, Spain, Japan, Vietnam, and even Chevron in the US gained access to six blocks in the belt as minority partners with PDVSA. If all these projects come on stream, Venezuela projects that they would produce 2.1 million barrels of syncrude a day. Western analysts are pessimistic that Venezuela will achieve that boost without liberalizing its rules and opening up to more foreign investment. With a chaotic and arbitrary business environment within the country, foreign producers may be reticent to commit large investment sums to bring Venezuela's oil production back to pre- Chávez levels.

Relationship with the US

A burning flare is seen at the efinery complex of Amuay-Cardon in Venezuela's western state of Falcon, 350 miles from Caracas. Many of Venezuela's refineries have fallen into disrepair in recent years, forcing the country to import gasoline from the US to satisfy demand. (Jorge Silva/Reuters/File)

Chávez made no secret of his disdain for the United States, especially after a 2002 coup that briefly knocked him out of power – the US did not condemn it until it was clear that the takeover had failed. But for all the public tension, Venezuela has remained an important supplier of crude oil to the US. True, it supplied 44 percent less oil to the States last year than in 1998, the year before Chavez came to power. But it remains a top tier supplier. And the decline has much to do with increasing domestic oil production, which has reduced the need for Venezuelan oil.

 Still, the balance of power in the energy sector has changed. When Chávez came to power, Venezuela was a pivotal player in OPEC and the US was dependent on its oil as its own production continued to decline. Now, US production is resurgent, thanks to hydraulic fracturing technology. Venezuela's falling production has weakened its clout and its leverage. Its refineries are tottering from years of neglect, forcing Venezuela to import gasoline from the US to satisfy demand. Last year, a fire at the nation's largest refinery resulted in 42 fatalities.

Oil bartering

A street vendor pushes his cart past a mural depicting, from right, Venezuela's late President Hugo Chavez (C), Cuba's former leader Fidel Castro and Nicaragua's President Daniel Ortega (L), in Managua March 6, 2013. Chávez didn't use oil simply as an economic tool; he used it to prop up governments and score political points. (Inti Ocon/Retuers/File)

Chávez didn't use oil simply as an economic tool; he used it to prop up governments and score political points. In 2011, for example, Venezuela received 344,000 metric tons of food in exchange for oil – rice from Guyana; coffee from El Salvador; sugar, coffee, meat, and more from Nicaragua; beans and pasta from the Dominican Republic. Venezuela has refined oil for Ecuador at discount prices, sent diesel to Syria, and struck a deal to sell Cuba discounted oil in exchange for medical treatment for Venezuelans. These efforts helped prop up governments that Chávez favored.

In 2005, he offered to send emergency supplies to American victims of Hurricane Katrina. Through Citgo, a PDVSA subsidiary, he gave away heating oil to several hundred thousand poor Americans for several years running.

In last year's presidential campaign, opposition candidate Henrique Capriles promised to put an end to such gifts. He was handily defeated. But such foreign aid is expensive and increasingly difficult to justify at a time when Venezuela's own economy is struggling with rampant inflation and increasingly severe electricity blackouts.

PDVSA's future

Oil workers work at a petroleum area operated by Venezuelan state oil company PDVSA. With ballooning debt and falling porduction, PDVSA's future is uncertain. (Carlos Garcia Rawlins/Reuters/File)

Under Chávez, the national oil company became more than just a company. It funded his social programs, provided foreign aid, and boosted employment. PDVSA has twice the employees it had when Chávez came to power in 1999, even though its production has fallen.

The business approach would be to cut back the bloated payroll and reduce the company's operating costs (and ballooning debt). But with the economy suffering from years of mismanagement, cuts are politically sensitive. Even Mr. Capriles, the opposition candidate in last year's election, said he would not cut jobs at PDVSA.

 Another way to justify the company's bigger payroll is to boost production, something that Venezuela has tried to do, but with little success so far. Pressures may grow to open up its oil industry to more foreign investment if the economy – and oil production – continue to stagnate.

 Privatizing the PDVSA does not appear to be on the table. First nationalized in the 1970s, Venezuela experimented with liberalizing the oil sector. That initiative was quickly squelched when Chávez was elected president. Even the opposition doesn't talk about privatization.