However, for the last 15 years or so, mismanagement, underinvestment, rampant corruption and a plummeting oil price has seen the industry fall into decline, dragging the country down with it.

Today, Venezuela’s abundant oil reserves are largely controlled by the military, handed to it by incumbent leader Nicolás Maduro in 2017, and serve as an economic lifeline to both the country and the population at large.

But Venezuelan oil production is under increasing pressure. Its crude exports to the US average about 500,000 barrels per day (bpd), but these will end under new sanctions instated in January. These state that US persons cannot make cash purchases from state-owned oil company PDVSA or sell it diluent, which is needed to blend Venezuela’s extremely heavy crude.

The restrictions are expected to have a significant impact on the country’s export revenue. Furthermore, tensions are increasing in the government’s ongoing dispute with neighbouring Guyana over the discovery of five billion barrels of oil equivalent in disputed coastal waters.

According to Wood Mackenzie, Venezuelan exports have fallen in recent years, with those to the Gulf Coast declining from 700,000 bpd in 2016 to 500,000 bpd in 2018.

“The oil industry is really in tatters; production is at the lowest it has been for decades, the government can’t afford to pay the workers and there are no repairs, maintenances or investment,” says Eileen Gavin, senior Latin America analyst at Wood Mackenzie’s sister company Verisk Maplecroft.

PDVSA is functioning, in part, says Gavin, due to its 60/40 joint venture (JV) partnerships with foreign firms Chevron, Total, Eni, Russian-owned Rosneft and Chinese-owned CNPC, with the lion’s share of production coming from these operations.

However, since the sanctions, PDVSA has been forced to find new cash buyers for this heavy crude, especially as one of its main buyers, China, is not paying cash but receiving oil shipments in lieu of mounting debts.

“It is going to be very difficult, if not impossible for Venezuela to find a cash buyer for the volumes it was sending to the US,” says Jim Burkhard, vice president and head of IHS Markit crude oil research.

“It’s a big challenge because the US Gulf Coast refining industry is the biggest market for crude; others could buy it, but probably not in the same volumes.”

Venezuela has found some custom from India, which is becoming an increasingly lucrative buyer. The government says it wants to double exports to the country but, even so, it is likely shipments will be heavily discounted due to quality issues and in order to compete with Middle Eastern grades.

Meanwhile, the government finds itself again embroiled in a stand-off with neighbouring Guyana over a century-long dispute after ExxonMobil discovered more than five billion barrels of oil and gas off Guyana’s coast. In December, the Venezuelan navy stopped two ships exploring in the disputed coastal waters.

“This has been going on for years and is unrelated to the current economic crisis,” says Jose L. Valera, partner at Mayer Brown LLP.

“This will probably need to be taken to the International Court of Justice, where a final determination of where the border line is can be made, but it doesn’t seem to me to be intentionally provocative from Guyana, just the government doing what it believes is has a right to do,” he adds.

It’s unclear how long the industry can go on functioning as it is, and in turn propping up the military and the government – especially as the presence of US and European companies operating in the failing state becomes increasingly questionable.

“The JV partners are taking a long view,” says Gavin, “but there will be some legal questions over their contracts and some of the debts/credits accumulated with PDVSA, so there is a lot of uncertainty; they have to pay royalties and it is a very risky operating environment.”

Presently, European companies are under no legal obligation to pull out of Venezuela, but whether this will change remains to be seen. Chevron and other US companies have been given a licence until 27 July 2019 for their operations in the country, but it is unclear what will happen after this date.

“Companies are going to want to stay in Venezuela as long as they can, it’s unlikely they will write off their investments,” says Burkhard. “They will want to talk with new governments to try and secure their interests.”

Russian and Chinese companies are also staying put, and if others leave they could look to increase their presence.

“PDVSA could maintain its support from other countries, and because they are large and powerful ones, the oil industry could continue as is for a long time,” says Valera.

But the Trump administration, through its sanctions, is keen to squash the military regime – holding on to power through sham elections – as well as demonising socialism and offsetting the leverage Russia and China have on the Maduro regime.

However, Burkhard doesn’t think US sanctions are about helping US oil companies in the long run, as others have suggested. “This is a much bigger story than getting US oil companies invested in oil,” he says.

Opposition leader Juan Gerardo Guaidó, who is now recognised as the country’s interim leader by the US and some 50 other countries, has tried but failed to take control of Venezuela’s oil reserves by naming an interim board of directors to PDVSA and its most valuable foreign asset, the US-based refiner Citgo.

What will happen next is anybody’s guess. By the fourth quarter of this year, Wood Mackenzie predicts there will be a governmental transition underway, simply because the current situation is not sustainable – but this is by far the most optimistic scenario.

Others include the oil industry collapsing, cutting off a funding source for the military and government, but adding further economic devastation to an already dire humanitarian situation.

However, while accelerating deterioration is likely, says Burkhard, complete collapse would take something more to happen, such as civil war.

Alternatively, the military and Maduro manage to cling to power supported by meagre oil export funds, and other illicit money flows. This would likely mean Venezuela would sink further to become a quagmire and closed-off state and see many more Venezuelans joining the three million people who have already fled the country. In fact, the UN estimates there will be 5.3 million Venezuelan refugees and migrants by the end of 2019.

The future of Venezuela, its people and the world’s largest oil reserves hangs in the balance. Gavin says the best scenario now would be a ‘negotiated transition’ and a new US-facing government that would invite much needed investment into the country, but that the industry may need billions over several years to rebuild.

“The opposition has put together a framework for the national oil sector and they will have no choice but to privatise much of it, bringing in more service companies, which means there may be many opportunities for investors willing to go in later down the line,” she says.

Then there is a clear argument for Venezuela to overhaul its previously opaque and shadily run oil industry, adopting transparency and boosting legitimacy by joining the Extractive Industries Transparency Initiative, and to establish a sovereign wealth fund akin to Norway’s.

“There is a huge framework that needs to be done, but much of this is political willingness. If there is political will, it will get done,” says Gavin.

But also, Valera adds, the country must look to diversify its economy away from the oil industry and “allow the private sector to effectively rebuild the country”.

Yet, whatever happens next, all agree there is going to be a prolonged period of uncertainty, and rebuilding the country and its oil sector will take many years and billions of bailout and investment dollars.

“Even in a transition scenario, even with the support of the military, there are so many other criminal actors on the ground it will not be easy to restore operational stability. It could take possibly half a decade,” says Gavin.

In the meantime, the Venezuelan people hope for a solution that will provide food and humanitarian aid, and eventually see their once wealthy and stable country restored.