The border dispute between Guyana and Venezuela has been ongoing for around two centuries, and Venezuela still claims large, resource rich swathes of Guyanese territory. In the conflict’s most recent iteration, which began several months ago when Exxon Mobil (XOM) announced the discovery of oil off the coast of Guyana, Venezuela has renewed the same claims, with the same tactics, massing troops and war materials in the eastern portion of the country, close to the Guyanese border.

Despite an apparent easing of tensions, are oil and gas operations in this area – which include not only Exxon, but Anadarko (APC), Shell (RDS.A), and Repsol (REPYY) – under significant risk of being impacted by conflict or expropriation? Does Venezuela even want open warfare with Guyana?

What would compel Venezuela into conflict with another state at this point?

The literature on foreign policy generates many potential causes and contributing factors for Venezuela to engage in military operations against a neighboring state, but there are a few key reasons that stand out. Related: The Numbers Behind The Current Oil Rally

First, many states will engage in “rally ‘round the flag actions,” whereby conflict with a foreign entity distracts the domestic population from internal problems. Variations of this can range from a war of words, as we have seen in the latest version of this dispute so far, all the way up to open warfare.

There are also two oil-specific contributing factors why Venezuela would be open to conflict as a petro-state. Research conducted by Jeff Colgan of Brown University in 2013 categorized several types of “petro-aggression,” and two types apply to this situation: the existence of these reserves raise the payoffs of any military conflict or occupation, as with Iraq’s invasion of Kuwait. The other form of petro-aggression is one of accountability. Venezuelan government relies on oil revenues for well over 90 percent of its annual budget, contributing to extremely low domestic accountability compared to other cases.

Finally, territorial disputes also serve to heighten tensions and serve as important contributing factors to recurring conflicts (think Kashmir).

All of these factors raise the potential of conflict, but what is the reality of the restraining factors acting on Venezuela? Related: Lithium Market Set To Explode – All Eyes Are On Nevada

Well, obviously, the economy is a major restraint. The Venezuelan economy is in a desperate situation. Any resources expended on supporting a foreign military operation would have a direct, real, and immediate impact on the resources available to the government for domestic patronage. This would put the ruling party’s power in further jeopardy.

Even if Venezuela saw an opportunity to seize territory without much trouble, it is not clear that such a move would be all that beneficial.

ExxonMobil’s discovery is 120 miles off the coast of Guyana. The rig itself is a deep-water rig drilled to 17,825 feet (5,433 meters) through 5,719 feet (1,743 meters) of water making this a fairly complex, technical operation requiring specialized knowledge, most likely not within the engineering capabilities of Venezuela’s PDVSA.

Barring any military action, Venezuela also has relatively few options in the legal realm. Exxon’s Liza well is actually located within Guyana’s exclusive economic zone on the southeastern portion of their waters, much closer to Suriname than Venezuela. Related: Has Oil Finally Bottomed?

On top of these formidable obstacles, any violation of Guyana’s territory would subject Venezuela would to international condemnation, limited regional censure, and potential additional sanctions, all of which would only contribute further destabilization factors to an already tenuous domestic situation.

So, what’s going on? What is driving Venezuelan saber rattling? The belligerent statements from the government of Venezuelan President Nicolas Maduro is symbolic, aimed at drumming up domestic support while distracting from the country’s economic failures.

As a bonus, Mr. Maduro also gets to lash out at an American energy company – two birds with one stone. The bottom line is, most international integrated energy companies have learned to conduct more realistic political risk scenarios for their multi-billion dollar operations, and in this case, Exxon’s deep-water operation, along with the other companies operating in the area, does not appear to be at risk of any Venezuelan action, militarily or otherwise.

By Ryan Opsal for Oilprice.com

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