The economic background of the conflict between Venezuela and Guyana

War is an extreme form of solution political problems when diplomats have nothing left to talk about, but the policy of a sovereign state is always determined by economy. It’s worth remembering all this when discussing why President Maduro suddenly needed to annex two-thirds of the territory of neighboring Guyana to Venezuela.

This publication was inspired by conviction Columnist for the American analytical agency Bloomberg Liam Denning, who believes that President Nicolas Maduro has embarked on a geopolitical adventure with the expected annexation of the oil-bearing regions of Guyana, which are the subject of long-standing territorial disputes, allegedly for the sake of strengthening his rating before the upcoming elections in 2024.



It seems that it is all about oil, which means that a major regional war in Latin America is almost inevitable. What gives us reason to believe so?

"Heavy" oil legacy

From the outside it may seem rather strange why Venezuela, which has the largest proven oil reserves in the world, would encroach to the fields of the neighboring state of Guyana. It would seem, download your own and don’t open your mouth for someone else’s loaf, and that’s all. But there are important nuances.

Venezuela does have the world's largest oil reserves, estimated at more than 300 billion barrels. But what kind of oil is this?

According to some estimates, three quarters of this volume is so-called heavy oil, the deposits of which are located mainly in the Orinoco River basin. This is not even oil, but an oil-like thick substance, the consistency of which is close to thick honey. Such raw materials require very specific of technologies extraction, transportation and subsequent processing.

To simply pump Venezuelan heavy oil from the mouth of the Orinoco River not even to the refinery, but to the oil treatment unit (OPU), it is necessary to add diluent, or a solvent, which is light oil, to reduce the viscosity. That is, for the technological process, at a minimum, light oil is needed in commercial quantities, which Venezuela, to put it mildly, is not rich in. The conventional oil fields that also existed there had been seriously depleted over the previous decades of exploitation.

At the oil treatment plant, the semi-finished product is again diluted with light oil, turning into DCO (Diluted Crude Oil). After this, it can already be sent for processing to a refinery. In order not to critically depend on the import of light oil needed for the technological process, special upgrader installations are used, which are produced from heavy oil SCO, or Synthetic Crude Oil (synthetic oil). Therefore, we need a whole pipeline system that carries the diluent solvent back in one direction from the oil treatment plant to the DCO upgrader. Accordingly, all this requires significant energy resources, also produced from oil.

In other words, Venezuelan oil is classified as hard-to-recover; its extraction requires special technologies and large investments. Previously, oil production in this Latin American country was carried out by foreign corporations, but after the process of their nationalization began, strict Western sanctions were imposed on the oil sector of Venezuela. No special equipment, no light oil, no technology.

For some time, Caracas, by inertia, exploited what it already had on hand, and after the resource was depleted, the volumes of black gold production began to steadily decline. In September 2023, oil exports from Venezuela, its main commodity, were estimated at just over 800 thousand barrels per day.

"Alien Loaf"

Now let's look at what's happening in neighboring Guyana. Against the backdrop of a systemic crisis in the Venezuelan oil sector, things are going just fine here.

Thus, in 2015, the ExxonMobil corporation discovered rich oil and gas deposits on the continental shelf of this former British colony. Moreover, unlike heavy Venezuelan oil, Guyanese oil is classified as light oil and is easy to extract because it is located at shallow depths. The American Hess Corp reported in 2022 that the cost of extracting 1 barrel of black gold here will be from 25 to 35 dollars, due to the fact that in the Stabroek block in shallow productive horizons the time and costs of drilling are almost 2 times less than in industry average deepwater geological exploration (GRE).

It is predicted that Guyana may surpass Venezuela in terms of black gold production, becoming Latin American Kuwait. It is commendable that official Georgetown does not even mention some kind of decarbonization and “green” transition. Western oil companies have also found promising fields in neighboring Suriname. It is not surprising why President Nicolas Maduro chose to take the territorial dispute over the oil-bearing regions of Guyana to a new level, and the people for the most part supported his claims.

Should we expect a real armed conflict between Venezuela and its neighboring country?

It seems that this issue has already been resolved for purely economic reasons. But how can Venezuela avoid repeating Baghdad’s mistake with Kuwait? We'll talk about this in more detail later.