Orinoco Flow

Five are left.

Since 1965 I have been conversant with the heavy oils of the Orinoco area. I started to get familiar with the area through the work of Galavis and Velarde that was published in 1967 in the VII World Petroleum Congress, in Mexico City, under my co- supervision as Exploration Manager of the Corporacion Venezolana del Petroleo. This work defined well what the so-called “Faja” was all about, an extensive area north of the Orinoco river where very heavy oil could be found at shallow depths. This “belt” was simply the southern border of the Eastern Venezuela Geological Basin. Geologists familiar with the area know that the oil gets lighter and lighter to the north, towards the center of the basin, where API oil gravities are 40 degrees or more.
As a senior production geologist for Phillips Petroleum in Bartlesville, Oklahoma, I made a very detailed study of Morichal, one of the oilfields in the “Faja” and became very familiar with the fluvial and deltaic nature of the producing sands, their horizontal and vertical development, the physical characteristics of the oils and so on. In the 1960’s we already knew that these heavy oils were rich in nickel, vanadium and sulfur and that producing and selling the stuff was going to be a major headache. At a time, in fact, we in Shell thought of marketing similar oil, Boscan. as an aphrodisiac. This idea did not prosper.
One of the problems in developing the area was the low recovery factor. In heavy oils the recovery factor tends to be much lower than for light oils. The reason is simple. Heavy oils do not flow easily. In addition, the Orinoco heavy oils lacked an efficient mechanism of production in the reservoirs such as a strong water drive, they had low associated gas and did not seem to show compaction, although this last mechanism is only apparent after a considerable production history has been established. We always thought of 8-10 percent of the oil in place as the most we could recover from these multiple and somewhat erratic sands, unless some real technological breakthroughs became available.
In those years the “Faja” became a political sacred cow. The “technocrats” wanted to develop it, the moderate politicians of COPEI and AD wanted to keep it as “a research project” (whatever that meant), Perez Alfonzo said that it should be kept intact for future generations and the extreme left accused the CIA of trying to put their dirty hands on the “belt”. After the “nationalization” took place in 1976 the technical staff of the Ministry of Energy wanted to manage the development while PDVSA argued that they should be the ones doing it. As a result it was only in the 1990’s when portions of the “Faja” were contracted to multinational oil companies for development, as part of the so-called “apertura” (opening) of the oil industry to foreign, private participation. This move was extremely positive for the nation. After a significant investment was made an important production was established and, more important, significant upgrading of the oil was achieved. The oil companies started to get returns on their investment and this return increased as prices of oil increased.
When Chavez arrived in power and the greedy Ramirez gang took over management of PDVSA they decided to alter unilaterally the nature of the contracts. First they increased the royalties to be paid, later the nature of the contracts themselves. What could have been done in a civilized, negotiated manner was done through ukase-like ultimatums. Ramirez kept telling the companies, arrogantly, that it would be: “my way or the highway”, confusing vulgarity with patriotism. Paradoxically, the main change they imposed on the contractors was to force them to become part owners. And they called this Nationalization! Up to that moment the foreign companies had operated on behalf of PDVSA and delivered the oil to them. The changes obliged the foreign companies to become shareholders and to become owners of part of the oil produced and upgraded.
However, PDVSA did not compensate the companies for their investments in an opportune manner. As a result, Exxon Mobil and ConocoPhillips denounced the contracts and asked for arbitration. Other companies tried to negotiate with PDVSA without much success. I don’t know the current status of these negotiations.
As this was going on, PDVSA decided to offer new “Faja” areas for development. For two or more years they conducted a very confusing bidding process in an area called Carabobo, while negotiating directly with other companies for contracts in another portion of the “Faja” called Junin. The foreign companies were expected to own no more than 40 percent of the joint venture but were expected to supply 100 percent of the capital. Since every new module of production and upgrading of 400,000 barrels would require about $ 12-20 billion in investments, PDVSA asked the international companies to supply their portion of the investments, to be repaid later in oil or some other agreed manner.
So far two Carabobo blocks have been awarded to consortia led by Chevron and Repsol. In the other area, Junin, the government has said that ENI, China Petroleum Co. and a Russian group have signed letters of intention to develop three blocks. However, not one single new area has been developed yet, or even started to be developed after the eleven years Chavez has been in power. Everything has been mostly “blah, blah, blah”. One wonders the logistical nightmare of these five Orinoco blocks being developed at the same time. How many drilling rigs? How many kilometers of new pipe? And the metals produced? How will they be disposed of?
It seems unusual that two of the consortia have gone through a bidding process while three other companies or groups have negotiated directly with PDVSA. This is risky for the companies and bad for the nation. Transparency is usually the first casualty of this type of dealings.
Not only these dealings have been going on, but a process of “certification” of reserves has also been conducted, more or less in parallel. Companies from Vietnam, Iran, Cuba, Russia, China and other state-owned companies from ideologically friendly countries have been conducting “reservoir and engineering” studies in the Orinoco area that are supposed to validate reserves in the “Faja”. This process has been a rather clownish affair. These companies have been given all information on the areas and are paid by the Venezuelan regime to “study” the information. In so doing they become acquainted with the geology of the area and are given later the option to obtain a block for development without a bidding process, just as it happened with the Chinese and the Russians.
I have all kinds of reservations about this process. I think is a fraud for the nation. I think it has compromised our national sovereignty. I think it has served to promote high levels of corruption in PDVSA. I think is worthless as a process of certification of reserves since there is no really new significant knowledge available about the “Faja”. Whatever new “reserves” have been certified has been the product of a totally arbitrary change in the assumed recovery factor. Obviously, if the recovery factor is doubled, the “reserves” also magically doubled. This matter of recoverable oil in the “Faja” has become a real ugly mess in which the media, the regime, even the US Geological Survey share the blame. The estimate of the oil in place has not changed much in the last 50 years. What has been changing is the estimate of the amount of oil that can be recovered, from 8 percent to 15, to 20, now to 40 percent according to a campaign of misinformation led by Hugo Chavez. In the event where Chevron and Repsol were notified officially they were the winners, Chavez was quoted as saying (as reported by The Oil and Gas Journal): “A recent US Geological Survey report [states] that the Orinoco belt holds 513 billion bbl of recoverable heavy crude. In its report, USGS established a range of recoverable oil of 380-652 billion bbl and determined a mean estimate of 513 billion bbl”. What the USGS said was not this, of course, but now Chavez uses the report by the Geological Survey to tell the world that Venezuela has more “proven reserves” than Saudi Arabia, therefore, more geopolitical punch.
WHO will be in the “Faja”?
There are five consortia in the area now: Chevron et al, Repsol et al, China Petroleum Company, The Russian/BP consortium and ENI. They have agreed with PDVSA to pay a bonus and to develop a block in the Orinoco area. The general information given out is that each block will develop some 400,000 barrels per day of upgraded oils, with a required investment of some $ 12-20 billion, say an average of $16 billion each. This would mean that PDVSA should invest some $50 billion of their own money in the area during the next five to six years. I think this is bullshit. If PDVSA pretends to pay its partners with oil, this would require about one billion barrels of oil. This represents about 150,000 barrels per day for the next 20 years. The problems are several, including one of legality. No government can legally mortgage national assets beyond their term. The foreign partners would have to re- negotiate terms with the government that comes after Chavez. After Chavez departs, anything can happen.
Many oil Companies have long maintained business dealings with dictators, have kept cozy relationships with corrupt local officers, all for the sake of keeping a good commercial relationship with the country, trying to look the other way since so much money is on the balance. It is difficult to know if the oil companies come out on top due to this accommodating behavior with despots, or if they end up losing in the long term. The problem is that companies, as countries, have their cycles. If the company “A” made a deal with a dictator in the 1980’s and this deal provoked a political backlash against the company in 2005, chances are that the managers of the company in the 1980’s are now playing golf in Bermuda. Shareholders would probably not look beyond composite results and will not know what went on in any particular country, unless there is major scandal.
In Venezuela the political generations of the 20th century were strongly biased against international oil companies because of what they felt were their unholy alliances with Juan Vicente Gomez and, later, with Marcos Perez Jimenez. Similarly, whoever deals with Hugo Chavez today could become deeply resented by the political leadership that replaces Chavez. And Chavez might not be around much longer.