What the Venezuela-Guyana border dispute means for oil prices

Voters in Venezuela on Sunday approved a referendum to claim sovereignty over a piece of land from neighboring Guyana, located in the oil-rich Essequibo region.

Venezuela has said the territory was stolen when the border was drawn more than a century ago, while Guyana considers the referendum a step toward annexation, the Associated Press reported. On Tuesday, Venezuelan President Nicolás Maduro directed the country’s state-owned companies to “immediately” begin exploring and exploiting the oil, gas and mines in Guyana’s Essequibo region, the AP said.

The U.S. Embassy in Guyana on Thursday said U.S. Southern Command would conduct flight operations with Guyana’s military, in an exercise designed to “build upon routine engagement and operations to enhance security partnership between the United States and Guyana.” Brazil has deployed troops along its border with Venezuela, according to news reports.

Even as oil prices have failed to react, whether or not Venezuela chooses to invade neighboring Guyana is a major geopolitical concern for the oil markets, James Mick, managing director and senior portfolio manager with Tortoise, said during a monthly energy podcast this week.

The territory Venezuela is claiming apparently represents about two-thirds of Guyana’s land, said Mick, and is an area that has long been disputed by Venezuela.

The land is of particular interest to Venezuela, as Mick pointed out that the country has seen a major decline in crude oil production due to a “multitude” of factors.

Guyana, meanwhile, is home to one of the “most exciting offshore discoveries of crude oil in some time, receiving a nice royalty fee, and currently produces almost as much crude oil as Venezuela,” he said.

So, “not surprisingly, Venezuela’s territorial dispute includes the offshore waters rich in petroleum,” Mick said.

Despite the risk that Venezuela may invade Guyana, prices for oil have remained at their lowest levels in nearly six months.

On Thursday, U.S. benchmark West Texas Intermediate crude for January delivery
CLF24,

CL.1,

fell 4 cents, or nearly 0.1%, to settle at $69.34 a barrel on the New York Mercantile Exchange, while global benchmark Brent crude for February delivery
BRN00,

BRNG24,

ended at $74.05 a barrel on ICE Futures Europe, down 25 cents, or 0.3%. Both benchmarks posted a sixth consecutive loss on Thursday and settled at their lowest since late June.

The reason the oil market hasn’t seen a price response is due to the “low probability” of a Venezuelan invasion of Guyana, Matt Smith, lead analyst, Americas, at Kpler, told CNBC in an interview Thursday.

He said the Venezuelan referendum was more “symbolic” more than anything else, and is not legally binding.

Guyana’s ‘significant’ oil growth potential

Exxon Mobil Corp.
XOM,

and its two partners, Hess Corp.
HES,

and Chinese oil company Cnooc Ltd.
883,
,
have found more than 11 billion barrels of oil off the Guyanese coast, according to The Wall Street Journal.

The nation’s production is expected to reach about 620,000 barrels a day once the Payara field reaches maximum capacity, said a report from S&P Global Commodity Insights.

At present, Guyana’s production represents a “very small percentage of overall worldwide crude-oil production, which slightly exceeds 100 million barrels a day,” said Tortoise’s Mick.

Still, “Guyana is an area of significant growth potential and one of few recent discoveries of crude oil in the world with this kind of potential,” he said, with oil production expected to double by 2028.

“Complicating matters, U.S. companies own a significant portion of those offshore oil fields,” including Exxon Mobil and Hess, along with Chinese company Cnooc Ltd.
883,
,
said Mick.

Guyana’s crude exports recently saw a spike higher, according to a chart provided by Kpler.

The big question is “what would the international community, including the U.S. government, do if Venezuela does invade?” said Mick, adding that this “harkens back to the early 1990s when Iraq invaded Kuwait.”

The U.S., meanwhile, would most likely take Guyana’s side in a dispute, but “would want this to play out in the international courts and not get involved to the extent that it was not required,” he said.

“The lever the U.S. government would likely pull if they did get involved would be sanctions re-imposed on Venezuela,” Mick said.

Venezuela’s next move

The U.S. had said in October that it would temporarily ease some sanctions on Venezuela after Venezuela agreed to hold presidential elections next year.

Asked Thursday about the status of sanctions relief, White House spokesman John Kirby offered no guidance.

“We don’t get ahead of sanctions decisions. So I’m not going to do that today. Obviously, we always have that option available to us,” he said.

The U.S. stands by “peaceful resolution” of the Venezuela-Guyana dispute, he said. “We absolutely stand by our unwavering support for Guyana.”

Venezuela’s production is going to be increasing because of easing sanctions, but it’s looking offshore and seeing this “plethora of oil and trying to do a grab for it,” Kpler’s Smith told CNBC.

At the same time, Venezuela doesn’t want to risk the reimposition of sanctions,” Smith told MarketWatch. He provided a chart showing U.S. imports of Venezuelan crude have climbed since the start of this year.

In a note Thursday, analysts at Height Securities said they see a “less than 50% probability” that Venezuela will invade Guyana.

“ We interpret the saber-rattling as most likely aiming to use the border confrontation to divide domestic opposition and acquire more leverage for relief from U.S. sanctions, without exposing Maduro to the risk of truly competitive elections,” they said.

However, a military campaign to seize the territory the size of the Essequibo would “pose major challenges to a more professionalized, experienced military than Venezuela’s, to say nothing of the harsh terrain and lack of logistics,” the Height Securities analysts said.

Given that, the “odds of accident or miscalculation between immature militaries supported by global powers leading to escalation should be taken seriously,” they said.

Meanwhile, if the U.S. wanted to “influence” Maduro, Mick said it could increase sanctions to drive the outcome it wants, such as keeping Venezuela from invading Guyana.

For now, “it’s not at all known what Maduro has in mind,” said Mick.  The Venezuelan president “could do nothing, threaten, wait for the courts, or invade.”

“Geopolitical experts are pontificating this is more about riling up national pride in front of an upcoming election,” said Mick. “Time will tell!”

—Robert Schroeder contributed.