A snapshot of the Venezuelan petroleum industry, May 2011

Oil slicks in Lake Maracaibo


VENEZUELAN OIL: TO HAVE AND HAVE NOT

A snapshot of the Venezuelan petroleum industry in May, 2011

I. ANATOMY

1. The Resource base

Venezuela has proven reserves of about 85 billion barrels of conventional oil and some 185 trillion cubic feet of gas. These volumes make Venezuela the leader of the HAVES in the hemisphere.
Probable resources are even more important. Since the 1960’s we know of the existence, in the Orinoco river area, of some 1.3 trillion barrels of heavy to very heavy oil “in situ”. The development of these extensive reservoirs has been slow and, therefore, relatively little is known about reservoir mechanics and about a precise recovery factor of the oil in place. For many years, up to very recent, the best estimate for a recovery factor, given the heavy, highly viscous nature of the oil and the lack of an efficient water-drive, gas-drive mechanism or compaction mechanism, was between nine and ten percent of the oil in place. However, PDVSA has recently decreed that the recovery factor should be twice as large, 20 percent, effectively doubling what they call the “proven, certified reserves” of the Orinoco area, and claiming that Venezuela is now the country with the highest proven oil reserves in the world. This amounts to a fraud, as there are no new data or production data that can justify such an abrupt increase in the recovery factor. A U. S. geological survey report mentioning that the area could “technically” recover up to 25 percent of the oil in place does not claim that this figure represents “proven reserves”. Their estimate does not conform to the international definition of proven reserves, which calls for 90 percent certainty, technical and economic feasibility and even a fixed period of time for the recovery.

The way the concept of reserves has been handled by PDVSA illustrates the unprofessional and politicized nature of its current management. They have also applied the same arbitrary philosophy to the natural gas “proven reserves”, which have been increased by some 5 percent in one year, on the basis of only two wells drilled in the Gulf of Venezuela that are not properly tested and much less produced for the required amount of time.

2. Production.

Production is another activity without transparency. Official figures place it at 2.8 million barrels per day of oil and 7 billion of cubic feet of gas. Oil production comes from some 15,000 active wells, many approaching old age. Non- official figures, however, place production at some 2.3 million barrels per day of oil while gas production seems to be closer to 6 billion of CFD. There is a current deficit of between 1,5 and 2 billion of CFD that cannot be met in the short, or even, medium term. This has forced Venezuelan heavy industry (aluminum, iron, steel) to reduce output significantly. Colombia is now exporting gas to Venezuela through a pipeline that was originally built to transport Venezuelan gas to Colombia.

3. Drilling Activity.

Production levels are intimately connected to drilling activity. Venezuelan oil production comes from mostly mature oilfields that show a declination of some 20 percent per year. This means that, if no new production were generated, Venezuelan production would decline by some 400-500.000 barrels per day. If Venezuela wanted to expand its current level of production by, say, 500,000 barrels per day, it would have to generate one million barrels of new production per day. However, Venezuela only had 65, later increased to 81, rigs drilling new holes in 2010, as compared to 120 rigs in 1998 (Baker-Hughes). According to PDVSA’s annual report, these rigs only completed 106 new wells in 2010. At an average initial production of some 1,000 barrels per day per well (my back of the envelope estimate), the new production generated by new wells in 2010 was of the order of 100,000 barrels per day, significantly less of what is required to stop the decline.

4. Refining and Exports.

Refineries in Venezuela ran at 66 percent capacity during 2010, only 1.1 million barrels per day of crude oil input. PDVSA claims that they produced 389,000 barrels per day of gasoline and naftas, which indicates that these products would represent almost 40 percent of the total refinery products. This sounds high to me. Even if true, the domestic market absorbed almost 300,000 barrels per day. This means that the volume left for export is extremely low. In fact, U.S. imports of Venezuelan gasoline are currently at an all time low. Venezuela seems to be buying gasoline from third parties in order to meet its long-term supply commitments with U.S. clients and even to sell it in the Venezuelan domestic market, at considerable loss, due to the frequent problems of maintenance in the refineries.

4. Value of Venezuelan oil exports.

Venezuelan exports are currently distributed as follows: to the Caribbean, 12 percent; Asia, 17 percent; Europe, 8 percent; South America, 2 percent; USA, 61 percent. USA and European clients seem to be the only ones paying Venezuela on a regular basis. The Caribbean clients do not pay commercial prices and even the subsidized prices are not paid in cash but in foodstuffs or personal services; Asia, mostly China, has already lent Venezuela about $32 billion and is slowly getting paid in oil shipments. This means that, although current oil prices are much higher, Venezuela is not really receiving the full benefits of the windfall.

5. Maintenance and investments.

These two essential components of a well-managed oil company are notoriously sub-standard in PDVSA. Maintenance is poor, which accounts for frequent refinery accidents and paralysis and an increasing number of oil leaks in Lake Maracaibo. Investments in 2010 were $10 billion but most of it went to production activities. For the last ten years there have been no additions to the refinery or petrochemical infrastructure. In contrast other large oil companies such as Shell and Exxon Mobil regularly invest between $25-30 billion per year, three times as much.


II. THE PHYSIOLOGY.

1. The quality of the management.

The need for political control of the oil industry led Chavez, in 2002, to name a Board without petroleum or management expertise. This led to a rebellion of managers and technical staff that ended with the dismissal of 20,000 employees, the best and the brightest. Today, they have been replaced with 100,000 employees but, as they candidly admit on their 2010 report, they have an acute lack of experienced personnel, which explains many of its operational setbacks. Today the company is full of people but short on qualified staff. Projects and programs are badly lagging behind because of the politicized nature of the payroll.

2. The dramatic change in PDVSA’s Mission.

Currently the stated mission of PDVSA is no longer to produce, export and sell oil in the most efficient manner, in order to supply the central government wit the necessary resources to advance national progress. It is to promote a “socialist society”. To this effect, PDVSA has become a food importer and distributor, a builder of houses for the poor, a training ground for a militia that will “defend Venezuela from a U.S. imminent invasion”. To do this PDVSA is now dedicating more than $1500 million per year.

3. The way oil money is being handled.

The oil income is no longer going to the Venezuelan Central Bank, as it should, by law, but to several parallel financial entities such as FONDEN, all exclusively controlled by Chavez. This is a clear violation of the laws of the country. Only in 2010 some $30 billion of oil income remained unaccounted for, and this amount is bound to increase dramatically during 2011 given the rise in oil prices. This money will be invested in Chavez’s 2011-2012 presidential campaigns.

4. The situation in the Orinoco Region.

In the Orinoco region, where the development and upgrading of the heavy oil calls for very advanced technological skills, the regime of Hugo Chavez has decided to invite a myriad of oil companies from countries that, by and large, have no oil expertise in doing this. Some 35 companies are roaming the area, from countries such as Vietnam, Cuba, Iran, China, Russia, Belarus, even Uruguay, that know little or nothing about producing, much less upgrading these very heavy oils. The Orinoco area has become a Babel Tower where companies compete for the scarce available resources. Operations in the area have become a logistical nightmare. Production projections by PDVSA talk of increasing one million barrels per day or more from this area within the next three years but this appears to be an impossible task. To make matters more difficult, PDVSA has requested foreign oil companies that they supply all the money required for investments and operations since they do not have sufficient funds. Foreign operators are becoming increasingly reluctant to do, especially companies like Repsol or Chevron, precisely the ones that seem to have the better technological qualifications.

5. Corruption.

Due to the manner contracts are given, frequently without bidding, corruption within the oil industry is at high levels. A striking recent case concerns the rental of the Aban Pearl, an offshore drilling barge that sank in Venezuelan waters last year. This barge was owned by an Indian company but rented to a ghost company incorporated in Singapore, a few weeks before the contract was signed. The owners received $375,000 per day for the 3-year rental but the contract was for much more than this, possibly even twice as much. The surplus remained in the hands of the owners of the ghost company. I have identified some of these persons publicly but the Venezuelan government has taken no action.

III. TO HAVE AND HAVE NOT.

The lyrics to the acid rock song “To have and have not” say: “Qualifications once the golden rule now are just pieces of paper…” The same is true in the Venezuelan oil industry. You can have much but if you do not use it properly and keep it in good working order you have nothing. The Venezuelan oil industry has been in a liquidation mode for some years now. Still the resource base is so great that it will survive the current administration and still be a major factor in the global energy equation for a long time to come.