VHeadline.com oil industry commentarist Oliver Campbell writes: It is no secret that Petroleos de Venezuela (PDVSA) is having trouble maintaining production capacity. With a natural production decline of around 25% a year, it is necessary to develop that magnitude of additional oil for the production level to remain where it was.
There is some doubt whether PDVSA has been able to replace this natural decline. It is not enough to discover new oil through further exploration: the oil has to be producible now, not some years down the road, and that is the problem.
However, there is some most heartening news from the Strategic Associations in the Orinoco Oil Belt. PDVSA and the Ministry of Energy have hid their light under a bushel and not told us of the tremendous success these ventures have had.
Originally, the multinationals were not keen to invest in the Oil Belt because they had little experience of producing extra-heavy crudes and of upgrading them into lighter, more sellable crudes. They were thus granted special concessions, including a royalty of only one percent, to induce them to invest in the area.
I have recently been in Caracas and asked some colleagues what has made these venture such a success. I was particularly interested in the case of Sincor which produces a crude of 8Âş API and then upgrades it to 32Âş API. The first is like thick tar and has a dark black color, but the latter looks like slightly dirty water.
This remarkable achievement has not been given the dissemination it deserves and I believe VHeadline.com readers will be interested to know more about Sincor’s operations. I thank the colleagues who provided me with the information on which my article is based.
Administration: The shareholders are TotalFinaElf (47%), Statoil (15%) and PDVSA (38%). The operations are run by Total and the top two executives are both French. The company has around 1,000 employees of which about half are engaged in production and half in refining (upgrading).
Drilling: This is carried out by contractors using a system called horizontal drilling. The well is drilled vertically till it reaches the oil sands and then horizontally so that it is in the form of an L. The horizontal part of the tubing, called a slotted liner, has longitudinal perforations that allow oil to enter. This is possible because the temperature in the reservoir is around 50ÂşC and the oil is quite fluid. As there is insufficient pressure in the reservoir, the oil is pumped to the surface by the very efficient pumps the company itself has developed. The other companies have also greatly improved pump efficiency and this is a main reason for the success in the Oil Belt.
Up to 24 wells, in what is known as a cluster, can be drilled from the same site so that the L’s at the bottom go out in different directions. These wells can reach subsurface targets a kilometer away from the cluster site. The great environmental advantage of these clusters is that since all the surface pumps are close together, much less land is used for oil production. For instance, on the east coast of Lake Maracaibo the wells have been drilled at 300 meter intervals whereas in the Oil Belt the clusters are some 5 kilometers apart. This means not only is less land taken away from agriculture but that fewer electric cables, production lines, etc have to be installed.
The advance in technology from vertical drilling at specific intervals on a grid, to directional drilling from one site, and now to vertical and horizontal drilling from one site means drilling costs have gone down considerably.
Pipeline transport: When the oil reaches the surface, it cools down and congeals. In order that the oil can be pumped without reheating it is then diluted with naphtha. There are two parallel pipelines which go from the production area to Jose, a huge industrial complex sited far north on the Caribbean coast, where the oil is upgraded. One is used to pump the diluted oil, and the other to send back the naphtha which is separated from the oil at Jose and reused time and time again.
Operating costs: Production costs are about $3 per barrel and refining costs (upgrading) around $6 per barrel. Both include depletion and depreciation.
Thanks to their commitment and technological success, Sincor have managed to achieve lower operating costs than originally envisaged. The upgrading costs may be somewhat higher than for the other Strategic Associations since the deep conversion method used by Sincor, under license from the patentee, upgrades the crude to 32ÂşAPI rather than the 26Âş or 27ÂşAPI achieved by the others.
Production levels: Sincor produces and processes around 200,000 barrels per day (bpd) and the intention is to raise this to 220,000 in the near future by expanding the plant at Jose. The bottleneck is not production but upgrading capacity. In the upgrading process, during which sulphur and coke are both extracted, there is volume loss and Sincor state they are producing about 180,000 bpd of upgraded crude.
Sales customers: Most of the upgraded crude is sold to customers on the US Gulf Coast under long term contracts.
Operational problems: Some of the wells which have been active for years are beginning to produce ever growing quantities of water with the oil because of the aquifers close to the oil sands. My colleagues believe Sincor should have foreseen this difficulty and taken remedial action much earlier. The longer term problem (though it will probably be overcome by events mentioned below) is if production will last out the 35 years of the joint venture. However, the volumes of oil originally in place (OOIP) are enormous and, taking into account probable technological progress, the present estimated recovery factor of only 6 percent looks very conservative.
New production technology: The good news is that much research is being carried out on different methods that will substantially increase the recovery factor. I will touch on just two categories: fireflood and steamflood. The most exciting of these, in the former category, is called THAI (Toe to Heel Air Injection). It involves pumping air down a well to the reservoir and causing in situ combustion with temperatures as high as 450ÂşC t0 600ÂşC. The beauty of this method is that the heavy oil is upgraded in situ by thermal cracking and converted to oil of around 20ÂşAPI.
Much of the original research has been carried out in cooperation between the University of Bath in England and the Alberta Research Council in Canada. They estimate final recovery can be between 60 and 80% of the OOIP.
These are the results of small scale tests and it has to be seen what the results are in the field but the method seems to have huge promise.
Shell de Venezuela carried out fireflood tests in the Tia Juana field on the east coast of Lake Maracaibo in the 1960s. The main problem encountered was that sulphuric acid was produced as a by-product and it corroded all the metal tubing in the wells … as a result the project was abandoned.
In the steamflood category, many companies favor a method called SAGD (Steam Assisted Gravity Drainage). Horizontal wells are drilled in pairs into the oil sands, one above the other. Steam is injected into the upper well and softens the oil so that it drains into the lower, producing well by gravity. Various steam-flood methods have been tried in the past and they are much in use all over the world. Their drawback is the large amount of energy (natural gas) required to generate the steam. However, SAGD also holds much promise under the right conditions.
It is evident that if the recovery factor in the Orinoco Oil Belt can be increased to 60% (is this more than a dream?) in the not-so-distant future, then huge amounts of extra-heavy oil will become available and, with prices not lower than US$30 a barrel, Venezuela will reap a great bonanza.
Sincor’s Profitabilty: Obviously Sincor do not divulge their financial results to all and sundry. However, assuming an average sales price of US$30 a barrel and total costs of $9 a barrel, one comes up with the following figures:
Average export price $30.00
Total costs (9.00)
Royalty at 16.67 percent (5.00)
Profit before income tax 16.00
Income tax at 34 percent (5.44)
Net profit per barrel 10.56
Assuming 180,000 bpd of upgraded crude is produced, then 180,000 x 365 equals 65,700,000 barrels per year. If we round down the profit to $10 per barrel, Sincor’s annual net income is some $657 millions.
This is a truly excellent result and the company must be congratulated on running such a slick and profitable operation.
The other three Strategic Associations should also be doing well financially. Together the four have compensated for PDVSA’S loss of production capacity by producing some 500,000 bpd.
At the same time they have provided the Nation with substantial revenue in the shape of royalty (recently increased), income tax and PDVSA’s share of net income.
I take my hat off to the companies involved.
Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Campbell returns frequently to Venezuela and maintains an active interest in political affairs: “I am most passionate about changing the education system so that those who are not academically inclined can have the chance to learn a useful skill … the main goal, of course, is to allow many of the poor to get well paid jobs as artisans and technicians.” You may contact Oliver L Campbell at email: [email protected]
