OGPSS - Venezuela after Hugo Chavez

With the death of the Venezuelan President Hugo Chavez the future production, and exports of Venezuelan crude are gaining a little new attention. I had noted in the last post that there is a difference of around 400 kbd between the 2.379 mbd that outside observers report to OPEC that the country is producing, and the 2.768 mbd that Venezuela itself reported. The question now becomes one as to whether the new President will be able to resurrect an industry that has overseen a slow decline in overall production, with a more rapid decline in exports.


Figure 1. Venezuelan oil statistics (Energy Export Databrowser)

My short answer to that question is No! It is based on a number of reasons, and may be swamped by the voices that note that the country has a vast remaining pool of oil in the Orinoco Basin, that the USGS has estimated to be more than a trillion barrels in size, of which some 513 billion barrels are technically recoverable. But there have been a number of posts about those numbers and the more critical number which is that of the rate of oil production.

Colin Campbell reminded us in his 2006 Review of the country that the Venezuelan Government was one of those urging the creation of OPEC, back in 1960. Back when that piece was written Colin expected that production, which had been falling as the reserves in the Lake Maracaibo region declined, would start to wind back up, as the heavy and extra heavy oils of the Orinoco were brought into a higher level of production. And he anticipated that, by now, the country would be producing around 3 mbd, which it is not.

One of the requirements before one can market the heavy oil is to have refineries that can process the oil. The United States, which imports around 1 mbd of Venezuelan crude, has the Citgo refineries, which are wholly owned by PDVSA (the Venezuelan oil company). Whether that will influence their switch to Canadian crude if the Keystone pipeline is put in place is an open question. But easing the American demand might help with Venezuelan relations with China.


Figure 2. US Monthly imports of crude and Petroleum Products from Venezuela (EIA )

China, which has refineries that Sinopec built that can also handle the crude, has stepped in here and spent over $40 billion with much of this in loans to be repaid through increased oil exports. Back in 2007 China had made the decision to pull out of Canada, and to concentrate its investments in Venezuela instead. Since that time they loaned Venezuela over $20 billion, in return for a commitment for oil exports that were to reach 1 mbd in 2012. The date to reach that target has now slipped to 2015 as overallproduction has continued to decline.

Last August President Chavez announced a $130 billion plan for investment in the Orinoco.

He said that there are 150 different clusters of oil wells in the Belt, but the goal in the next six years is to increase that number to 500. Before the nationalization of the Belt, there were just 37 clusters.

The clusters are comprised of 24 separate oil wells, each of which extract around 1,200 barrels per day. At these facilities, hydrocarbons are extracted using 45-meter drills purchased in Venezuela and assembled in Venezuela.

“All this has been nationalized, which before was the property of multinationals, and production has also been increased,” the president said. He recalled that before the government took control of the Belt, there were just 2,800 wells, while now there are more than 4,000.

Because the Orinoco crude is very heavy, to an API gravity of 9 degrees, it is difficult to produce and requires a considerable energy investment to extract and process the crude.

Last September two joint ventures came on stream. That at Petromiranda, where PDVSA has Russian partners began producing 1,500 bd, after an investment of $800 million, with a goal of eventually reaching 45,000 bd. At the same time Petromacareo, where PDVSA is partnering with the Vietnamese, came on line at 800 bd, with an initial target production of 4,000 bd. (The project has slipped from a target start date of early 2011, and the ultimate goal of 200 kbd from Petrimacareo is in more doubt.)

The crude has to be upgraded, and TNK-BP is partnering to double the capacity of the Petromangas upgrader from 120 to 250 kbd. Until that capacity is increased Orinoco production may be limited.

There is thus a history of project slippage and missed targets that is unlikely to improve in the short term. New plans for further investment either by the Chinese, Indians or Russia are now on hold, while the Presidential election to replace President Chavez is decided, but the experience in the last couple of years is likely indicative that progress in increasing production will be difficult to achieve and when set against a rising domestic consumption (as the Export Land Model predicted) is already leading to a fall in exports.

One of the drivers for that increase in domestic consumption is that the price of gasoline in Venezuela is $0.04 per gallon (four cents). In contrast, in Saudi Arabia it is around $0.61. The low price of gas means that there has been a significant increase in demand, exceeding that domestically available. As a result the country has been importing gas at up to $100 a barrel to sell it for $5 – you can’t balance those books by increasing the volume of sales!!

Yet cutting back on domestic consumption, or increasing prices could prove difficult for the incoming President. So maybe it would be a good idea to invest in the Keystone pipeline, as a simple precaution??

OGPSS - Tensions over oil in the South China Sea

In the introductory remarks to these posts on Chinese energy supplies and usage, I mentioned that one of the concerns beginning to be evident lies in disputes over the ownership of some of the oilfields offshore. Disputes over ownership have been continuing for some time, and this week was no exception, with Chinese moves to create a new city, Sansha, on Woody Island and thereby strengthen their claim to the region. Woody Island, or Yongsing lies in the Paracel chain of islands in the South China Sea.
(The post has been slightly modified to recognize the speculative nature of the overall resource available.)

Figure 1. Location of the current region of dispute in the South China Sea (Agency France Press)

Ownership of the territory, and underlying potential hydrocarbon reserves, is a matter of dispute between several countries, although China has administered the region since a 1974 conflict with Vietnam.

The Chinese government declared the establishment of Sansha last month, saying its role is to administer the disputed Paracel and Spratly archipelagos and surrounding South China Sea waters, which are believed to hold oil and natural gas deposits. The islands are claimed in whole or in part by Brunei, China, Malaysia, the Philippines, Taiwan and Vietnam.

The China National Offshore Oil Corp (CNOOC) has recently sought foreign interest in exploring nine blocks in the region, coming as close as a mile to the Paracel Islands – a region that Vietnam claims lies within its territorial waters, and which it used to occupy.

Further south, near the Spratly Islands, the dispute switches to include the Philippines with the latter already getting bids for some of the blocks, which the Philippines also claims lie within their 200-mile territorial waters. The benefit that China achieves by claiming the Spratly Islands can be seen by looking at the change that this brings to their territorial waters, in contrast with those of the other adjacent countries.

Figure 2. Disputed territories around the Spratly Islands, and the territorial waters in dispute. (EIA ) The extent by which the Spratly’s extend Chinese territorial waters can be understood from the location of the red line showing their claims.

In more detail, the areas of dispute can be broken into more specific locations, names that will likely become more familiar as these disputes continue to fester. The actual amount of oil and gas that might be available is still relatively speculative, since there has been little actual drilling in the region, as yet. However, by some estimates, much of which is Chinese, the region is thought to hold up to 213 billion barrels of oil, more than that left in the Saudi reserve. On the other hand, as Joules and Art have reminded me, the USGS estimates put the total at only on the order of 20 -30 billion barrels. Only drilling into the putative fields will realize an answer to that question, but then this turns to the debate into who gets to sell the permits for such drilling.

Figure 3. Regional identifying names in the South China Sea. (Next Big Future )

The disputes are now moving to possibly bring in additional players, with China already accusing the United States of meddling, and this just after Secretary Clinton had appeared to make some progress in defusing the tensions.

These tensions in the region are not new, and in his book “Resource Wars” Michael Klare listed some of the conflicts that had taken place between some of the involved parties in the years to 2001, when the book was written. In several cases shots had been fired and people died, as the different nations tried to establish claims, most particularly to various, otherwise uninhabited islands in the Spratly Islands.

In 1974 China seized the Paracel Islands from Vietnam, and in the resulting conflict a Vietnamese naval vessel was sunk, and several soldiers were killed.

In 1988 the Chinese and Vietnamese navies exchanged shots at Johnson reef (video here ) with Vietnam losing three ships.

In 1992 Vietnam accused China of landing troops at Da Luc Reef, and China seized 20 cargo ships in the ongoing dispute. Both parties have landed on different islands as a way of seeking to claim the territory and the Vietnamese Parliament has just (2012) passed a law establishing sovereignty over the Paracel and Spratly Islands. This has raised more tension with China.

The conflicts are not just between China and Vietnam, in 1995 the Phillipine government discovered that China had built a military base at Mischief Reef, which lies some 150 miles from Palawan Island, and as Michael Klare notes, well within the 200 mile territorial waters of the Philippines (which extend 200 miles – to simplify the explanation of the nuances of maritime law). Given that there are mutual defense treaties between the USA and the Philippines (dating from 1951) and that China militarily rebuffed the Philippine ships sent to investigate, created new tensions in the region. An Army War College review paper has noted the military buildup that is now occurring:

Aside from China's long-term modernization plan for both her Army and Navy, Brunei, Malaysia, and lndonesia have purchased aircraft from the United Kingdom. Malaysia bought guided missile frigates from the United Kingdom and lndonesia purchased sixteen corvettes from the former East Germany. Even the financially strapped Philippines is acquiring Italian aircraft and is also considering an additional $14 billion for defense modernization. The possibility of a regional arms race is clearly very real, if not already underway.

The situation at Mischief Reef has continued to evolve. As Strategy World notes:

For over three decades China has been using a gradual strategy that involves first leaving buoys (for navigation purposes, to assist Chinese fishermen), followed by temporary shelters (again, for the Chinese fishermen) on islets or reefs that are above water but otherwise uninhabited. If none of the other claimants to this piece of ocean remove the buoys or shelters, China builds a more permanent structure to aid passing Chinese fishermen. This shelter will be staffed by military personnel who will, of course, have radio, radar, and a few weapons. If no one attacks this mini-base China will expand it and warn anyone in the area that the base is Chinese territory and any attempts to remove it will be seen as an act of war. The Vietnamese tried to get physical against these Chinese bases in 1974 and 1988 and were defeated both times.

Since the initial incident the small base at Mischief reef has been expanded into a more substantial military base, whose presence is now being used to justify a Chinese objection to the Philippine authorized drilling for oil off Palawan Island. The Chinese have also prepared to start drilling around Palawan Island, bringing the Philippine Navy back into the dispute.

And further north the Chinese Drilling Ship the CNOOC 981 has begun (in early May) to drill around the Paracel Islands. This is the first deep water well that the company has drilled itself, the fifteen earlier such wells being drilled by CNOOC partners. The exploration vessel Ocean Oil 708 is now also working in the disputed region.

Although the tensions have not accelerated as swiftly as Michael Klare anticipated when he wrote “Resource Wars” over a decade ago, they are nevertheless indicative of the aggressive position that China is taking to secure as much oil and gas as it can for future needs. With the modernization of their navy there some quite serious concerns developing over their future plans, since territorial issues can lead on to much greater conflict that we have seen so far in the region.

The disputes has now spread to Scarborough Shoal where an initial arrival of Chinese fishing vessels has been followed by support vessels from Chinese government agencies. Scarborough shoal lies 124 miles from the main Philippine island of Luzon. However

China insists it has sovereign rights to all of the South China Sea, even waters close to the coast of other countries and hundreds of kilometres from its own landmass.

This makes claims for even the smallest piece of land projecting from the sea more critical.

Figure 4. Raising the Philippine flag over part of Scarborough Shoal. (News Com)

Figure 5. Chinese flag flying over Scarborough Shoal (or Reef) (Huang Yang Dao Google Earth)

Coal, water and an Afghan problem of reality

It has been the first full day of the conference on innovations in coal production, and by the evening we delegates were ready for our evening meal. The papers today included the one from Vietnam that concluded that by 2020 the country would produce around 75 million tons of coal a year, but would still need to import another 120 million tons to meet the needs that are already predictable to meet future power needs.

It was another delegate that pointed out that by far the majority of folk were over 40, and so it was no surprise that in the evening, in a field above the village, we sat in an open wooden pavilion, and after bigos, beer, sausage, and other Polish food, sat around the fire and sang.

Around the fire

The photo does not do the group justice, since with a 3-man folk band playing trumpet, accordion and bass, the density of folk was soon about 3-times that shown, and even those of us with no Polish were singing along, as someone else said, “in French” (la, la la!)

But for a little while I, and the sole Afghan delegate, sat in a relatively quiet corner and chatted over (at least for me) a beer. And I came to an appreciation of one of the problems that I had not thought about for that country, and that I will, as a result share.

We went through the usual talk of Afghanistan being an unconquerable country (vide Alexander the Great, the British and the Russians to name but three). But then we talked about what could, realistically, be done to help the country.

I have just ( in Tuesday’s post) quoted figures on electricity availability in the country – at around 10 – 12% percent. “No”, he said sadly,”it’s about eight.”

One of the reasons that I write the Tech Talks on Sundays is that unless you understand some of the “behind the scenes” ways in which things work, you can’t understand why certain “logical” answers actually won’t.

So it is in Afghanistan. With so little available electric power (and this is not the place to explain why that is a critical rung in the ladder of progress) the thing that would cement the local affection for any “invader” would be the provision of power to the populace.

But there is a rather large snag – the operation of a significant sized power station requires a lot of water. (And the TT on that will explain why). But the one thing that Afghanistan does not have is copious amounts of water. It is not part of the world that sees the seasonal rains of the monsoon. Rather it relies on the melting of the snows that fell in the winter and the storage of water in underground tanks and cisterns. (See, among others, Kipling).

Such provision works well for individual homes, it can – under the right circumstances – store enough water for a 40-acre farm that will keep the family alive (different world - different agriculture) – but it can’t meet the needs of a 100 MW coal-fired power generating plant without a whole lot of changes.

(Oh, and a brief aside to Jerome – wind turbines are, in their place, a great alternative source of needed electricity, but in Afghanistan the winds bring the sands from the surrounding desert and in the abrasion of surfaces under wind, sand and rain attack is where I can raise a knowledgeable question of reality).

The coal in the country is found in the North and swings around the edge of the country on the East.

Coal deposits in Afghanistan (USGS)

Because of the growth of the Himalayan mountains the seams are now left in a steep (about 45 degree) incline that makes it more difficult to extract the coal. The immediately logical method of mining in such conditions is to use hydraulic monitors, as they do in New Zealand, but one gets back to the water availability problem.

Water is much more a right that is owned in Afghanistan than it is, in many other parts of the rest of the world. It is a topic that already is capable of stirring riots and anger – even in the United States, where water provision in California is now becoming a major problem.

But in the drier places of the world, such as Afghanistan (but also neighboring Pakistan) the lack of water comes at the same time as the maturing of a great increase in population ( from 24 milion in 2003 to 35.5 million in Afghanistan in 2015) and some attempt to bring industry to the country – both greatly increase water demand, while supply remains relatively flat.

It is a very difficult problem, there is coal for power, not really enough firewood for the future population demand for fuel, and there is not a lot of alternative choice. But other than burning the coal for domestic heating and cooking, how can they use it? How do they find the way to generate the electrical needs that the country has, and without which the future of the country is going to be as restricted as it might have been in the times of Alexander. The need for water is almost ubiquitous to the provision of so many forms of power, and so how do we circumvent it? Or can we?