Venezuelan oil is key to Trump’s Russia plan. There’s a problem with that

President Donald Trump made a bargain with India this week that introduced a simple calculus.

The reality isn’t that simple. Venezuela’s crude operation isn’t yet up to snuff, and India can’t easily turn its back on Russia.

But it’s a start. Trump can still use Venezuela’s newly open-for-business oil industry to fight Russia on economic terms and limit its ability to continue its devastating war with Ukraine.

What Venezuela offers

India and China make up the vast majority of Russia’s oil sales. Western countries have sanctioned Russian oil since the start of the Ukraine war, so those Indian and Chinese oil purchases are crucial to help keep Russia’s economy afloat.

Venezuela’s oil offers an attractive alternative.

Its heavy, sour crude is remarkably similar to Russia’s — it’s the thick, sludgy stuff that is perfect for making the fuel oil, diesel, asphalt and other derivatives that India’s booming economy needs. America’s light, sweet crude, by contrast, is great for making gasoline — but not much else. And India’s refineries are well-positioned to handle Venezuelan-type oil.

After the United States captured Venezuelan President Nicolás Maduro on January 3, Trump laid out the welcome mat for US oil companies to start drilling. The South American country passed legal reforms last week that could help bring back foreign oil companies to revitalize Venezuela’s dilapidated oil infrastructure.

“It is definitely a step in the right direction, and it will help pave the way for higher investment in the country,” Homayoun Falakshahi, lead crude research analyst at Kpler, said about Venezuela’s just-passed oil industry reforms.

But the good news pretty much ends there — at least for now.

Venezuela isn’t ready for prime time

Venezuela has been producing only a hair over 1 million barrels of oil per day, the vast majority of which gets shipped to its largest customer: China.

Even if Venezuela sent 100% of its oil to India, it wouldn’t make up for the 1.5 million barrels of oil India imports from Russia each day.

Venezuela has that potential: It’s sitting on the world’s largest proven oil reserves. Before former President Hugo Chavez’s socialist government came to power in 1999, the country was producing more than 3 million barrels of oil per day.

But its infrastructure has long since crumbled, and it would take tens of billions of dollars each year over the course of a decade to get back to that production level, industry experts widely agree. That would take foreign investment and cooperation from major Western oil companies that have so far been hesitant to devote the resources needed to power Venezuela’s revival.

Just after the United States ousted Maduro, America’s energy industry said that to persuade oil majors to return, Venezuela will need to establish the rule of law, ensure long-term political stability, a repeal of its nationalist oil laws and repay billions of dollars in debts. The United States would also need to repeal its sanctions and offer some form of financial guarantees.

Only two of those things have happened so far: The Trump administration got rid of sanctions, and Venezuela revised its oil laws.

Trump said debt repayments, security and financial guarantees would not be part of the bargain with oil companies that choose to go back to Venezuela. And despite the fact that Venezuela’s acting President Delcy Rodríguez is playing ball with Trump for now, there’s no chance Venezuela can guarantee its current government will continue to honor any deal struck with Western oil companies over the long haul.

And US oil companies will still need to pay the country a hefty royalty on their oil production. That calls into question whether oil majors can get the same return on their investment there as in other countries — particularly when oil prices are so low — noted Rob Thummel, a senior portfolio manager at Tortoise Capital.

India can’t dump Russia instantly

Although Trump said Indian Prime Minister Narendra Modi promised to stop buying Russian oil, that can’t happen overnight. India would need to make big infrastructure upgrades, noted Rob Haworth, senior investment strategy director at US Bank Asset Management.

“The adjustment of the global supply distribution chain will take time, especially noting the transit time differences between Russian imports and Venezuelan imports for India,” Haworth said.

India would also need to pay a hefty premium over the Russian Urals oil it’s buying now. Russian oil trades at a significant discount — roughly $16 a barrel — to OPEC or US crude, making it hard for India to quit. (Falling global oil prices have made that calculation a bit easier for India to accept.)

India has been reducing Russian oil imports lately, perhaps as a bargaining chip for a trade deal with the United States, noted Falakshahi.

“It seems it worked,” he said.

But India has been flouting Western sanctions by buying Russian crude off of shadow fleet vessels for years — and there are no signs it’s about to stop, even after reaching a deal with Trump.

“If anything, we actually expect India to ramp up its purchases of Russian crude,” Falakshahi said. “Russia has been circumventing the latest US sanctions on Rosneft and Lukoil and is now supplying most of its crude via new intermediaries.”

Hurting Russia where it counts

Venezuelan oil adds a welcome X factor into the Russia equation that could one day change the status quo, at least somewhat.

Russia has already been hurt by falling oil prices, and its economy is struggling because of global sanctions. High inflation and growing debt have made life even more difficult for Russians.

However, Russian President Vladimir Putin’s economy isn’t all that close to collapsing. Russia has managed to expand through a combination of increased manufacturing, shadow oil fleets and higher taxes. Losing India as an oil customer is unlikely to deal a fatal blow.

Still, weakening Russian oil sales could make a difference, even if India only gradually weans itself off Russian crude.

“Over time, this may create additional challenges for the Russian economy,” said Haworth. That would make the war in Ukraine harder for Russia to fund.

And in a war that has killed nearly 2 million people, something is better than nothing.