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Venezuela -- Aló Presidente!

The chief obstacle to the progress of the human race is the human race.
     —Don Marquis

In a world where the National Petroleum Council talks about "continuing risks" to the oil supply, Venezuelan president Hugo Chávez is said to pose a significant threat to the interests of the Organization for Economic Co-operation and Development (OECD) member countries. Venezuela's production has declined since 2000, and the country is home to the world's largest unconventional resource under development, the Orinoco extra-heavy crude. A lot is at stake in Venezuela, so it is prudent to assess the risk there now and down the road. Do Venezuela's policies affect the peak of global oil production?

Venezuela tightens oil grip (Christian Science Monitor, April 14, 2006) reported on the country's ongoing nationalization of its oil assets.

James Williams, energy analyst at US-based WTRG Economics, warns that Venezuela's track record of changing contracts before they expire could put future production at risk by making companies reluctant to invest in multi-billion-dollar heavy oil projects.

Mr. Molchanov says recent takeovers of private and corporate property encouraged by the Chávez government have heightened oil company fears. "If companies have to choose, they might pick another country," he says.

Colonel_chavez "‘Everything that was privatized will be nationalized’, Mr Chavez promised after he won an election late last year." El Presidente (pictured left) has been true to his word. ExxonMobil, ConocoPhillips and PetroCanada have left Venezuela, while other companies have agreed to stay on as minority partners with the national oil company Petróleos de Venezuela, SA (PDVSA).

The EIA's reserves page cites three different estimates for Venezuela's conventional oil. According to BP and the Oil & Gas Journal (Pennwell), Venezuela's conventional oil reserves amount to approximately 80 billion barrels. World Oil (Gulf Publishing) put the country's reserves at 52.650 billion barrels in September, 2006. This latter figure is remarkably close to the suspicious OPEC doubling to 56.3 billion barrels that occurred in 1988. Since that year, Venezuela has produced about 17.7 billion barrels, most of which was conventional oil (the rest came from the Orinoco formation, see below). The World Oil estimate allows for ample reserves growth in this period, but the other estimates have only grown over the years. Market analyst Joe Duarte raises the possibility of "irregularities" within PDVSA, saying that "over the last few years numerous questions have been raised, not just about PDVSA's actual oil reserves and production capacity, but also about PDVSA's finances" (Rigzone, May 2, 2006). The conventional reserves question warrants further investigation, but given Venezuela's nationalization of its assets, we can expect less data transparency, not more.

Iea_venezuela_production Venezuela's oil production rate is in dispute. PDVSA's numbers are higher than the estimates of the International Energy Agency (IEA), which are shown in the graph (left). The large dip in late 2002/early 2003 was caused by the failed coup attempt and accompanying PDVSA labor strike. The IEA's estimates show that Venezuelan production (crude + condensate) never reached pre-strike levels. The IEA's latest oil market report has Venezuelan production at 2.56 million b/d in 2006, a figure that includes Orinoco extra-heavy oil (prior to upgrading to syncrude) since March, 2006.  Their 2007 1st and 2nd quarter figures are 2.44 and 2.37 respectively. The August Oil Market Report attributes part of the recent drop to the turmoil caused by the nationalization of the Orinoco crude.

Venezuelan supply is estimated marginally lower in July at 2.34 mb/d. Official pronouncements in July variously put output from the four Orinoco projects at between 420 kb/d and 520 kb/d, compared with heavy crude upgrading capacity of 630 kb/d. On top of uncertainties surrounding Orinoco output following the departure last month of ExxonMobil and ConocoPhillips, there are reports that PDVSA is struggling to obtain sufficient rigs to sustain both Orinoco and conventional crude operations. Oil Minister Ramirez was quoted as having reduced the active rig target for 2007 from 191 to 120. Reluctance by rig contractors to contribute 10% of contract value to social programmes within Venezuela may be one cause of this.

The IEA's 2007 numbers are consistent with Venezuela's promised OPEC quota cut of 138,000 barrels made in late 2006. The South American producer also agreed to another reduction of 57,000 barrels in February, 2007.

The Venezuelan Oil Stats War by Sohbet Karbuz,1 former head of the non-OECD energy statistics section of the IEA, describes in detail the dispute between PDVSA and the OEDC watchdog for data from 2003 through 2005. Karbuz's adjusted numbers (comparing apples with apples) show that Venezuela claimed all liquids production of 3.56 million b/d in 2005 according to their SEC F-20 filing, while the IEA's total was only 3.01 million b/d for that year. The argument still raged in 2006 (See Venezuela's oil model: Is production rising or falling? from the Christian Science Monitor, March 31, 2006). The consensus of Western analysts is that PDVSA is having production problems. These two quotes describe that position—

While the government denies it and high oil prices mask it, analysts say Venezuelan oil production is declining. Since Chávez took over in 1999, production in the state-run oil fields has fallen almost 50 percent, say analysts at PFC Energy, a global energy consulting firm based in Washington, D.C., who spoke on condition of anonymity rather than risk the wrath of the Venezuelan government. [Christian Science Monitor]

The difference between [Venezuela's numbers for 2003-2005] and [those of the] IEA is almost the same as Un-upgraded Orinoco oil production. Is the IEA making a mistake there? I don't think so. Then the difference should be in crude+condensate production. But if that is the case is PDVSA lying to the SEC? [Karbuz, Energy Bulletin]

The argument between Venezuela and the IEA is now politicized. If you believe the IEA estimates are accurate, then Venezuela's claims are fraudulent, and vice versa. It seems more likely that PDVSA, which is now a branch of the Chávez government, has something to hide.

What are the prospects for Venezuelan production in the medium-term? As long as Colonel Chávez funds his Bolivarian Revolution and cuts into upstream investment capital for PDVSA, production will suffer. It seems likely that PDVSA no longer has the exploration & production expertise it once had before the 2002 strike. To make matters worse, increasing anti-Western sentiment has led PDVSA to create "its own version of the Houston-based oil-field services company Halliburton to provide services within the oil-producing country." Good luck. Venezuela's national oil company is now a fully fledged political entity, as these quotes from their website (link op. cit.) indicate—

PDVSA’s progress is non-negotiable — “Neither PDVSA nor the Bolivarian Revolution are negotiable”, affirmed the People’s Minister for Energy and Petroleum and president of PDVSA, Rafael Ramirez, in front of a large group of workers gathered in the Menpet-PDVSA La Campiña facilities to tackle the most recent opposition media campaign in the country.

Oil for the people — To put the oil resources to the service and well-being of the country; to build a new economic and social model, ending inequalities that have been present in Venezuelan Society over the last decades. PDVSA stimulates the endogenous development of communities, realizing a fair distribution of the Nation´s oil wealth.

And so forth. Similar statements do not appear on Chevron's website, or that of Russia's Rosneft. They are even hard to find at the Iranian National Oil Company's website. It is a unique situation in the world today.

Chávez's politics are anti-Western, but Venezuela is not isolationist. Thus it comes as no surprise in a competitive world that others are willing to walk where ExxonMobil, ConocoPhillips and PetroCanada fear to tread (World Energy Monthly Review, August 2007).

A collection of new-to-Orinoco players, including Russia's Lukoil, China's CNPC and India's ONGC, have been invited to explore investment in the region. In June, Brazil's Petrobras announced a joint venture with PDVSA to invest $2 billion in the development of the Carabobo block in Orinoco's heavy-oil belt.

Orinoco Faja BlocksThe extra-heavy oil in the Faja region along the Orinoco river (pictured left) is viewed as crucial to the world's longer term future. (Rigzone — this is an excellent technical overview). Russia's Lukoil is working with PDVSA to "produce a quantitative estimate of hydrocarbon reserves" in the Junin-3 block of the Orinoco river valley. China's National Petroleum Corp is already working in the Junin-4 block (Reuters, March 24, 2007). Chávez gleefully announced that "the United States as a power is on the way down, China is on the way up. China is the market of the future" after his meeting with CNPC President Jiang Jiemin. The bummer for the OECD nations is that El Presidente just might be right. The gold rush is on, but now excludes greater participation by Western international oil companies.

Despite the fanfare accompanying developments in the Faja, the medium-term outlook for Venezuela's conventional oil production is dismal. Venezuelan Economic Growth Falls to Two-Year Low was the Bloomberg headline on August 14th. Export revenues and volumes—at least to the United States—are down. Venezuelan economists are depressed. Venezuela still dreams of 5.8 million barrel of oil according to PDVSA, but that is looking more and more doubtful (Petroleum World and the PDVSA website). The mutual dependency between Venezuela and the U.S. remains strong, so most of the puffed-up rhetoric heard on Chávez's  Sunday broadcast Aló Presidente! ("Hello, President!") is a bluff. Orinoco syncrude production is unlikely to scale up to the levels that Venezuela achieved in conventional oil production in the past.

Is the Bolivarian Revolution an important factor affecting a medium-term peak of the world's oil production? Do one-legged ducks swim in circles? Colonel Chávez is a one-man wrecking crew, and like comrade Castro, he will probably be around for a very long time.

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1. It is not possible to describe the entire conflict between PDVSA and the IEA in this column. See the Karbuz article for a detailed account. The argument revolves around how production is assessed from all the possible liquids sources i.e. Orinoco extra-heavy oil, NGLs, other unconventional production and  crude + condensate.

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