Monday, January 24, 2011

OGPSS - Some closing (for now) thoughts on Venezuela

I had not intended to start my new series of Tech Talks by looking at Venezuela, but that is how is has worked out, with three posts now on their crude oil and natural gas prospects. But Venezuelan production is not just tied in the oils of the Orinoco, most of it still comes from the more conventional oilfields of the country. As Jonathan Callahan noted, Colin Campbell has previously written on the geology, and equally important history and politics of Venezuelan production in his newsletter of July 2006. He takes us back to the first well that was drilled south of Lake Maracaibo in 1878, and outlines developments since that time. I looked through Daniel Yergin’s “The Prize” to see if it could cast a bit more light on the development of production through the country – but it is really a book more about the politics than the geology.

The book did, however, suggest that perhaps some of the developments of the industry were due to steps imposed on Venezuela and others. Thus, for example, up to 1932 Venezuela was supplying between 9 and 12% of US demand, but Congress then imposed a tariff on imports, leading to their being cut in half, and initially playing havoc in Venezuela, since about 55% of its production had been sent to the US. Within a few years they had, however, found an alternate market in Europe, and pre-war (WW2) were supplying 40% of the UK oil demand. In 1943 they decided that they weren’t getting a fair share of the profits and passed a law initially to nominally split the profit from the oil 50:50 with the oil companies. When President Betancourt came to power he first adjusted the rule to ensure that it really was 50:50 (and not realistically 40:60) and then was the first to ask for his percentage in oil, which the country could sell itself. Since the profit was set by the sales price of the oil, when Standard Oil of New Jersey on August 9, 1960 unilaterally cut the price of oil by fourteen cents, this led others to also cut their prices, and the economies of the oil exporting countries immediately suffered. The year before representatives of Venezuela, Saudi Arabia, Kuwait, Iran, and Iraq had met and signed a “Gentlemen’s Agreement” at the Arab Oil Congress in Cairo, which included language agreeing to “defend the price structure” and with the hope of switching the profit ratio to 60:40 in their favor. The drop in the posted price led to a meeting of the five initial signatories in Baghdad on September 10th, and by September 14th OPEC was formed. The oil companies then apologized and tried to re-establish control, but from such small beginnings . . . . (And The Prize was written in 1991). Venezuela nationalized their oil industry in 1975-76, creating Petroleos de Venezuela S.A. (PdVSA) as the operating company.

Well, with that bit of history behind us, and moving forward to 2006, when Colin wrote his piece, at that time the conventional fields in Venezuela were producing around 1.8 mbd, largely from the Lake Maracaibo conventional wells, and he anticipated that they could hold this level until about 2015, when it would drop to around 1.6 mbd. The unconventional production from the Orinoco was producing at around 650 kbd, for a total of around 2.45 mbd. He expected that the Orinoco flow would be stable until 2015, and would then rise at 3% pa through a peak in 2030, and then decline at 2% a year.

Venezuela claims to now have the world’s largest oil reserves, at 297 billion barrels, mainly in the Orinoco. In seeking to develop that oil, Venezuela is now actively working with Chinese companies (as I mentioned earlier) to the tune of a $40 billion investment, and the intent to raise production from the Orinoco by perhaps 800 kbd (with Venezuela still retaining that 60:40 split) . This gives Venezuela a target of producing 4 mbd by 2015. However that assumes that they are producing the “official volume” which is 3 mbd at the moment. The EIA put it closer to Colin’s total, or around 2.5 mbd in 2008, averaged 2.2 mbd in 2009, and it was falling. OPEC, in their January 2011 Monthly Oil Market Report notes that Venezuela has a production of 2.26 mbd in December. However this may not include the NGLs that are produced with the natural gas, and this has been estimated at around 300 kbd by the EIA. At the end of the year rains hit the Paraguana Refining Center refineries that process half of Venezuela’s crude, collectively around 1 mbd. The Amuay refinery (which processes around 650 kbd) was closed for a couple of days, while the Cardon refinery was closed for about two weeks.

If the Chinese loan of $20 billion last April is requiring Venezuela to ramp up deliveries to them from 400 kbd last summer, to 1 mbd by 2012 then this may explain why they are now having some difficulty making promised deliveries elsewhere, and are needing the helping hand that I mentioned in earlier posts. It might also explain why deliveries to the US have been falling off.

One way in which energy might be saved is to use renewable power to replace oil in the refineries. With most of the electric power in the country coming from hydro, it would have been thought that this could be a source of replacement. Unfortunately there are significant problems in the power systems of Venezuela – which I am going to forego discussing, other than giving the reference to a more comprehensive story. Cuba has, however, been instrumental in helping out with some of those problems, which were exacerbated by the severe drought. As a result thermal power stations were used to generate electricity, and it is this that Venezuela is considering to replace with wind energy.

The idea of using wind to provide some power for the refinery and thus release oil, was first bruited in 2005, it has apparently not yet worked out.
Venezuela's state oil company PDVSA aims to boost fuel oil exports by about 100,000 barrels a month through the increased use of wind for electric power generation, Nervis Villalobos, the president of state-owned electricity firm Cadafe and deputy energy and oil minister, told BNamericas

It was not until March 2010 that an agreement with the Spanish firm Gamesa was reached to build the first wind farm, And while plans for a significant development of some 100 MW in Falcon have been announced , this is partly now to reduce the reliance on hydropower. The overall intent is to generate 1500 MW in the next five years, but construction of that first farm, initially slated for last year, is now not projected to start until this July.

It is quite difficult to get accurate numbers on oil and gas production from Venezuela, so perhaps it is time to move on to a different place.