Most people just assume that Saudi Arabia is the world's oil king. While it's true that the Middle Eastern nation is the leading oil producer in OPEC, it's not the undisputed leader for global oil output, as that title has rotated between Saudi Arabia, Russia, and the U.S. in recent years.

Meanwhile, when it comes to proven oil reserves in the ground, Saudi Arabia comes in second among its OPEC peers. Instead, the real oil kingpin in OPEC is Venezuela, which has 300.88 billion barrels of proved oil reserves, according to OPEC's data. That's 24.8% of OPEC's total and ahead of Saudi Arabia's 266.46 billion barrels of proven oil reserves, which is 22% of the organization's reserves. However, despite being OPEC's largest reserve holder, Venezuela hasn't been able to leverage its massive reserves to threaten Saudi Arabia's control of the group.

Venezuelan flag painted on oil barrels.

Image source: Getty Images.

Drilling down into Venezuela's oil

The bulk of Venezuela's oil is in the Orinoco Belt, which is in the northern part of the country. In fact, according to some estimates, there are as much as 1.2 trillion barrels of oil in the region. That said, this is heavy oil, which like the oil sands of Canada is more expensive to extract. That's why the estimate of proven oil reserves, which are those that the country can produce with reasonable certainty under current technology and prices, is a fraction of that amount.

For example, according to data by industry consultant Rystad Energy, it costs the country $27.62 to produce a barrel of oil versus just $8.98 per barrel for Saudi Arabia. In fact, at $23.35 per barrel, shale drilling in the U.S. has cheaper costs than Venezuelan oil. That's why despite holding the largest oil reserves, Venezuela is just the sixth-largest producer within OPEC and 10th-largest globally.

A pump jack under an orange sunset.

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Why so much of that oil is still in the ground

One of the main reasons Venezuela's oil output lags others with smaller reserves is due to the significant upfront capital investment required to pull a barrel out of the ground. According to Rystad, the country must invest $6.66 per barrel in capital to access the oil compared to just $3.50 for Saudi Arabia. That's because the country's heavy oil resources are deeper in the ground and harder to extract, whereas Saudi oil is close to the surface, making it much cheaper to obtain. The Washington Times further describes the differences: 

Unlike light and sweet crude from Saudi Arabia, oil from Orinoco is tarlike. It is laced with metals and sits beneath deep jungles. Getting to the oil field means building roads, electrical-power grids and other major infrastructure. Once the oil is extracted from the ground, it is technically difficult to process.

To overcome those technical and financial challenges, Venezuela has sought to draw in foreign investment capital to boost output. In the early 1990s, for example, the country created a new fiscal framework to spur investments into the Orinoco Belt. That led U.S. oil giant ConocoPhillips (COP 0.20%) and others to invest in the development of several oil projects in the country. However, after winning reelection as President in 2006, Hugo Chavez nationalized the country's oil, steel, cement, and banking assets, which has hurt foreign investment in the country's oil industry. After having its assets ceased, ConocoPhillips initiated arbitration proceedings against the country with an arm of the World Bank. It's been fighting that case in international courts since.

As a result of that nationalization, Venezuela now must rely on state-owned oil company PDVSA to do most of the heavy lifting. However, the company isn't reinvesting enough of its income back into new production even to offset the natural decline from legacy wells, let alone grow production. That lack of investment has only intensified in recent years due to the country's deepening fiscal problems as a result of the oil market downturn, since oil revenue accounts for 95% of the country's export earnings and 25% of GDP. As such, the oil price collapse has had a devastating impact on its economy, forcing the company to conserve cash. For example, PDVSA has had trouble paying its bills, which is why leading global oil-field service giant Schlumberger (SLB -1.61%) fired nearly its entire workforce in the country last year after unpaid bills from the country's oil company mounted. Meanwhile, without the help of Schlumberger, PDVSA couldn't get the services it needed to keep oil flowing. 

Oil workers on a rig.

Image source: Getty Images.

What's the future hold for Venezuela's oil?

That said, with oil prices stabilizing, Venezuela is working to get its oil industry back on track. In fact, it recently awarded Schlumberger a $3.2 billion drilling project to drill 80 new wells, which should boost output by 250,000 barrels per day over the next few years. However, that output will not even begin to replace what the country has lost due to the natural decline of its legacy fields; production has dropped 12% over past year to around 2.3 million barrels per day and may tumble another 20% this year.  

Because of that, the country needs ramp up spending significantly if it wants oil output to grow enough to match its vaunted reserves. For that to happen, the country would need to enact a new fiscal framework to spur foreign investment, which would still be a tough sell given its history and higher-cost production. That's why it really doesn't matter that Venezuela leads OPEC in reserves, because it isn't likely to ever challenge Saudi Arabia as the organization's largest producer.