I. THE SHORT AND MEDIUM TERM OUTLOOK
There are two sides to the coin when trying to analyze the short and medium term outlook of Venezuelan oil: one is the official version, the other is the one I believe in.
A. The Official Version
According to this version the outlook for Venezuelan oil is bright. The country –it reads - possesses the largest proven oil reserves in the planet, higher than those of Saudi Arabia. These enormous reserves are located in the Orinoco river region of southeastern Venezuela. The proven reserves in this region are listed at 298 billion of recoverable oil. Moreover, says the official version, the U.S. Geological Survey has said that recoverable oil from this region could be twice that amount, at nearly 600 billion barrels. The gigantic magnitude of these deposits have led the Venezuelan government to re-baptize the area with the name of Hugo Rafael Chavez Frias, the leader of the Venezuelan revolution that was in power from 1999 until his death in early 2013. According to this official version the production from this area will reach 3 or more million barrels per day within the next four years. As this has been the prediction since 2010, the country should already be producing that much from the area but the real production today is closer to 700,000 barrels per day.
The official version also speaks of a vigorous natural gas development program that will eliminate the deficit of gas in Venezuela within the next three to four years. But, again, this prediction has been made since 2008 or so, and still the country suffers from a severe deficit of natural gas that is only partly remedied with imports from Colombia, through a gas pipeline that was originally built to send Venezuelan gas to Colombia.
The official version speaks of an active participation of international companies in the Venezuelan oil and gas sector. Companies from Russia, China, Italy and Spain, as well as one large U.S. petroleum company (ChevronTexaco), are present in Venezuela.
In general, says the official version, although oil production in the country has decreased during the last 15 years, the outlook for the oil sector is seen as very bright. In particular, it claims, full control and sovereignty over the oil industry has been attained. According to the government PDVSA, the state oil company is one of the largest oil companies in the world and maintains a very strong financial and operational position
B. The other version
According to this version the amount of proven oil reserves of Venezuela is about half of what the government claims. This is due to the fact that Venezuela has not followed the international rules that apply to the definition of proven oil reserves. By arbitrarily assigning a recovery factor of 20% to the oil estimated to be in place in the Orinoco region, the Venezuelan government abruptly doubled, as if by magic, the size of the country’s proven reserves. In turn the U.S. Geological Survey never spoke of proven reserves in the Orinoco region but of resources, which is a totally different concept.
Still, the amounts of proven reserves in the Orinoco area are very significant. However, there are four main obstacles to their development, not of size but technical, financial , logistical and administrative.
The oil in the Orinoco region is extremely heavy and has sulfur and metals such as vanadium and nickel in relatively large amounts. It needs special treatment and upgrading in installations that the government has neglected to build in the last 15 years. Now, when they need to increase production in the region they will have to blend it with light oil, in order to make it commercial. But Venezuela does not have enough light oil to do this, so it has to import it. The economics of doing this and the political impact of Venezuela importing oil are very negative.
The other three problems are equally serious. The financial requirements for the development of these deposits do not exist in Venezuela. The country has been on the brink of default for months now and the foreign companies partnering with the Venezuelan state owned oil company, PDVSA, are reluctant to supply the capital required because they do not trust the government any longer. Venezuela has lost most of its credibility in international financial markets and has had to rely increasingly on China’s loans to make ends meet. Total Public debt already amounts to some $150 billion and mounting.
The logistics involved in a large scale development of these resources: skilled labor, water, electricity, roads, housing, pipe and other materials, simply are not available in the country to support operations to produce much more than one million barrels per day.
Still another problem, more difficult to quantify, but critical has to do with the quality of PDVSA’s management. The company insists in running the show but lacks good quality management and, worse, has been greatly weakened by a dispersion of tasks that have nothing to do with the core business. They import and distribute food, build houses and engage in agricultural projects. In addition, the company shows high levels of corruption, some of it very well documented, although no corrective action has ever been taken.
All of these serious weaknesses will make the medium term development of the Venezuelan oil resources a highly doubtful enterprise. In addition, the longer term development of the Venezuelan oil resources appear equally compromised by global factors which lie beyond Venezuela’s reach.
II. THE LONGER TERM, GLOBAL FACTORS
In a more global sense the oil industry could be pictured as a ship, the S.S. OIL, slowly disappearing over the horizon.
More than 40 years ago, Sheik Yamani, Oil Minister of Saudi Arabia said: “The stone age did not end because we ran out of stones”.
Today the petroleum age is showing strong signs of transition, not because we are running out of oil but because a powerful combination of environmental limitations, technical breakthroughs and geopolitical events are chipping away at the dictatorship exercised during the last one hundred years by fossil fuels, particularly oil and coal, in the energy sector.
A. Environmental limitations
There is as much oil as ever to be produced in the planet but environmental scientists say that, in order to comply with a limit of 2 degrees centigrade increase in global warming, substantial volumes of fossil fuel resources will have to be left in the ground, as stranded assets. Imagine: most of the Canadian oil sands, most of the Orinoco region heavy oils, large percentages of Russian and Iranian oil, would have to remain indefinitely in the ground. Such an environmental limitation, if applied, would have dramatic geopolitical and financial repercussions. Even if this game changing move did not fully take place, there is no doubt that the environmental card is being played ever more strongly, as humanity realizes the critical importance of minimizing carbon emissions.
B. Technical breakthroughs
· Horizontal drilling and fracking have given the U.S. a surprising degree of energy self-sufficiency, to the point that the country might become a net exporter of oil and gas within the next few years. Within the last five or six years this country has practically doubled its oil and gas production. Other countries such as Germany, China, Mexico and Argentina are now starting to develop similar resources.
· Renewable energy is on the ascent. Due to its unhealthy dependency on Russian gas Europe has made a strong move towards renewable energy, to the point that about 25% of all its energy consumption comes from these sources. In the last ten years renewable energy has grown by over 80%, mostly biomass, but also hydropower, wind and solar. In the U.S. renewable energy represents only 10% of total consumption, but almost 15% of all electricity supply.
· Toyota is now producing cars driven by hydrogen batteries and electric car manufacturing is on the rise. This year over 260,000 electric cars will be produced in the United States.
· At the leading edge there are transparent solar cells that would generate electricity just by capturing solar energy in thin transparent films, much more efficiently than solar panels. They are already being commercialized.
C. Geopolitical developments
· There is a clear shift of the axis of energy power, away from traditional fossil fuel producers in the Middle East to the Western Hemisphere, where the resources of shale oil and gas extend from the U.S. to Mexico and down south to Argentina. The combined fossil fuel resources of this region are now the largest in the world. The boom of natural gas represents, in itself, a major transition from oil to cleaner forms of energy. This power shift has all kinds of geopolitical implications on U.S. foreign policy in the Middle East and in Latin America. Such a development should have been of benefit to Venezuela, except that the short and medium term factors listed above did not allow the country to take advantage of this situation.
· Due to lower oil prices that could extend beyond the usual cycle pattern Russia and China will have to revise their relations, as Russia will need a commercial partner badly and will probably have to make important concessions to China in energy matters. Russia has the oil and needs the money. China has the money and needs the oil.
· OPEC will see its influence greatly diminished, as Saudi Arabia and the Gulf States decide to go their own way
Venezuela will experience a drastic decline in its regional political power, as Cuba and the Caribbean Anglo-states gravitate towards the U.S. looking for long term, alternative energy supplies
· Europe will diminish their dependence in Russian gas with the help of U.S. future exports and the progress of their “green” policies.
The outlook for Venezuelan oil is not bright. It is full of formidable obstacles in the short term and uncertainties in the longer term. There is a high risk that much of the Orinoco region oil resources will be left in the ground as stranded assets, due to the combination of the short and long term factors listed above.