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??

The Keystone pipeline - A Canadian response

Well that didn’t take long! (With a hat tip to Art Berman). I mentioned at the end of the last post that the loss of the oil market through postponement of the Keystone pipeline would not sit well with Canada. The delay in the pipeline removes at least temporarily sales of some 600 kbd of Albertan crude from the Canadian inventory, with the concomitant losses to provincial and national government revenue.

Speaking in Hawaii, the Canadian Prime Minister (who met with the Chinese President while on the island) said:

“This does underscore the necessity of Canada making sure that we’re able to access Asian markets for our energy products, and that will be an important priority of this government going forward,”

And to emphasize the point, while the Canadian Finance Minister has noted that the pipeline plan itself might not survive the delay. TransCanada Corp, who were to operate the pipeline has to retain its customers, even as the Finance Minister flies to China to market energy exports, and perhaps sell the available supply to China. And in the broader scheme of things:

Canada will seek to join a new Asian trade block as it tries to increase energy exports to the region following the U.S. decision to delay approval of TransCanada Corp.’s $7 billion Keystone XL pipeline, Prime Minister Stephen Harper said.

To recap from the earlier posts in the OGPSS series on Canadian pipelines there are plans by Enbridge to build a “Northern Gateway” pipeline from the oil sands to the West Coast. And this has already found support from China. Given the irritation that the United States has just provided the Canadian Government it is worth repeating the comment by the President of Enbridge:

I challenge any of you to name one other country in the world that only has one market for its largest export. Right now our most valuable resource is landlocked in North America and isolated from the world market. That means it is often isolated from world price. The August spread between West Texas Intermediate and Brent Crude, the world price, was $22 per barrel. Canadian heavy crude has more often than not sold at a discount to U.S. light crude that goes well beyond the quality differential – simply because of lack of market.

It should not be forgotten in this debate that the greatest objection to the pipeline seemed to come from Nebraska. Lest you forget Nebraska is the largest producer of corn ethanol west of the Mississippi River. It has 34 ethanol plants, converting 769 million bushels of corn a year into 2 billion gallons of ethanol. (The equivalent of 130 kbd out of the national production of around 900 kbd).

Official map of the planned pipeline from the Department of State.

TransCanada Keystone Pipeline, LLC (Keystone) is proposing to construct and operate a crude oil pipeline from Hardistry (Alberta), Canada to Patoka, Illinois (view map of project). The pipeline will be able to deliver 435,000 barrels per day (bpd) of crude oil to existing terminals in Missouri (Salisbury) and Illinois (Wood River and Patoka). The system capacity could be expanded in the future up to 591,000 bpd.

The proposed project includes 1,073 miles of new pipeline in the U.S. (Keystone Mainline). The Keystone Mainline will be comprised of 1,018 miles of 30-inch diameter pipeline from the Canadian border to Wood River, Illinois and 55 miles of 24-inch diameter pipeline from Wood River to Patoka, Illinois. Keystone may also construct an additional pipeline segment from near the Nebraska-Kansas border to Cushing, Oklahoma consisting of 291 miles of 30-inch diameter pipeline.

OGPSS - Pipelines and Eastern Canada

I wrote, last time, about the projected pipelines that are being anticipated to take advantage of increased production from the oil sands in Alberta, Canada with the intent that I would use that to lead into a review of the oil sands operation itself. However Gail has raised the issue of the proposed reversal of the pipeline (Line 9) that runs from Sarnia in Ontario to Montreal so that oil would flow to the Suncor refinery in Montreal, rather than the current flow which runs the other way. (Sarnia is right by Detroit). The pipeline reversal is planned to continue beyond Montreal, to include reversing the flow of a supply pipeline from Portland, ME so that the oil from Alberta might also supply northern New England. The project has been called “The Trailbreaker” and had been postponed two years ago when demand declined.

The overall question of the relative role of exports and imports on the Canadian oil supply equation was also raised in comments on the previous post. As a result I am going to look a bit more into the overall Canadian picture, and particularly that in the East Coast, and will postpone the oil sand piece a week (sorry Neil). To begin it helps to look at the current projects that Enbridge have in mind for pipelines.

Overview of the Enbridge planned pipeline projects (Enbridge)

The Ozark pipeline, which is shown running from Cushing to Wood River was closed on Friday, Sept 30th, when the pipeline was found to be exposed as it ran across the bottom of the Mississippi River. It carries around 240 kbd and the shut down is precautionary, since there has been no leak detected.

The dark green arrow from Cushing to Houston will be known as the Wrangler pipeline and would carry up to 800 kbd from Cushing to the refineries along the Gulf, competing with the Keystone XL, which is planned to bring an additional 500 kbd down from Alberta (about 500 kbd flows through existing connections). The intent is to move the oil away from Cushing where it is proving to be a bit of a glut.

With this surplus, and the ability to move oil around the Mid-West, the need for additional feed down from Montreal dissipates, and thus the argument for the reversal of flow so that crude from Alberta can be sent back up that pipe to the refineries in Eastern Canada. At present oil comes by tanker to Portland, ME and then enters the Portland-Montreal Pipe Line (PMPL) system. The oil flows through either an 18-inch or 24-inch line up to Montreal, a distance of 236 miles, with flow then continuing to Sarnia. A certain increase in energy security would thus be achieved for the East Coast of North America, if the oil refined on the East Coast was produced in North America, instead of coming from Russia and the Middle East. At present flow would be reversed in only one of the pipes, the 18-inch, coming from Portland. At present some 200 tankers a year offload in Portland, and send around 95 kbd up to Montreal. (The pipeline came into being in 1941 to avoid exposing oil tankers moving into Quebec to U-boats).

Portland Montreal Pipe Line (Wikipedia)

If one looks at the overall flows of oil in Canada, the increasing reliance on Albertan oil can be appreciated.

Flows of Canadian crude oil in thousand cubic meters/day – (multiply by 6.3 to get kbd) in 2009 (Canadian NEB)

Canadians consume around 1.5 mbd, of which half is gasoline, and 30% diesel. I discussed their exports in the last post.

Interestingly the largest exporter of gasoline from Canada to the US lies further East, where it comes from the Irving Oil refinery in St John New Brunswick with the 300 kbd refinery shipping 75% of the gasoline it produces into the Eastern United States.

There are two other refineries in the region, the Dartmouth refinery at Halifax in Nova Scotia refines 82,000 bd of crude, largely for the Eastern provinces of Canada. The crude is off-loaded from tankers, refined and then loaded onto smaller coastal tankers for delivery.

Yet further East is the Come by Chance refinery, now the North Atlantic Refinery in Newfoundland. In its time it was one of the largest bankruptcies in Canadian history, but it now refines some 115 kbd that arrives in 320,000 ton tankers at the nearby ice-free port. It suffers from that bankruptcy in that a subsequent sale was commensurate on the product not being sold in Canada (outside of Labrador and Newfoundland), which means that the products largely ship to the United States.

Yet one must go even further East to find the oil fields of the Eastern Canada Sedimentary Basin. And unfortunately while the nearest refinery might be near an ice-free port, the fields themselves are not.

Eastern Canadian Sedimentary basins and hydrocarbon fields (Center for Energy )

The fields include White Rose which is expected to yield around 230 milllion barrels, at around 120 kbd, with a life of 12 – 15 years. First oil was in 2005.

Terra Nova is estimated at 406 million barrels. With a production of around 125 kbd it is anticipated to last 18 years. Production began in 2002.

Seasonal floating ice in these parts varies from 1.6 to 5 ft thick and an average wind speed of around 20 mph. also leads to ice buildup on the tankers and superstructure making it a consideration in operations, as are icebergs. (Remember the picture of the tug pulling an iceberg). That was taken around here.

Hibernia is also producing at around 126 kbd, and by August 2010 had produced 704 million of the 1.4 billion potentially recoverable oil from the field, Approval has now been given to extend development to the south.

Current plans to develop Hebron, some 6 miles N of Terra Nova include also the fields of West Ben Nevis, and Ben Nevis. Production is expected to begin in 2017, at a rate of around 150 – 180 kbd of oil and 200 – 350 kbd of water. Reserves are considered to be in the 400 – 700 mb range.

Although these numbers are significant, and will provide for a considerable fraction of the need in this part of the world, and further south, they do not constitute the promise of sustained increased levels of production that are required for significant help against the declining production seen in many of the worlds major oilfields. For some help in that direction it is necessary to head West. And so it is time for the review of the oil sands.

There is however, considerable controversy over the operation of the oil sands in Alberta, particularly from those objecting citing the mess that is made of the landscape. In general the illustrations of oil sand operations that are used, show the site during mining, where the black color of the sand tends to make for a dismal picture. It might be more informative to show what the sites are like afterwards. And so, as a prelude to more discussion, here is a photo of some reclaimed land. It is here that the wood bison (as opposed to buffalo) roam.

Reclaimed land after the oil is removed from the sand (CAPP )

OGPSS - Pipelines through Canada

If one looks at the countries that are major importers of oil into the United States, Canada currently easily tops the list exporting 2.085 mbd of crude (2.524 mbd of total petroleum products) for example in June. Interestingly Saudi Arabia was in second place at 1.164 mbd and Mexico had fallen to third place at 1.108 mbd. In light of the countries that used to occupy places on earlier lists and no longer do, it is worth noting that places such as Chad and the Congo are now on the list.

Top 15 countries sending crude oil to the United States in June (EIA )

Since that summary review Canada has gone on to post some of the highest volumes of the recent past:

Weekly imports of crude from Canada into the United States (EIA)

This increase has occurred as the amount imported from Mexico has seen some of its lowest numbers.

Weekly imports from Mexico into the United States (EIA )

The numbers suggest a growing importance for that oil coming from the North. It was, for example, interesting to note that in the recent report reviewing available United States oil and natural gas, authored by the National Petroleum Council, (which I discussed earlier) and which had Daniel Yergin as Vice Chair, that Canadian oil has begun to get counted with that of the United States in the more generic classification of North America thereby acting as an anticipated aid in solving some of the “domestic” supply problems in the near future. Following that report, Dr Yergin wrote an article in the WSJ denouncing the idea of peak oil. Euan Mearns has provided his usual detailed and well-argued rebuttal to this (as does this entire series) so I will not go into that further at this point.

I briefly looked at Canada when I was writing the earlier summary posts on the top 30 producers in the world, Looking at the reported and projected production for this year, production is anticipated to steadily climb once the summer months have passed.

Production of Crude Oil and Equivalent in Canada in 2011 (Canadian National Energy Board)

The increase reflects a steady increase in the component from Western Canada, which started the year at 91% of the total, but is anticipated to reach 93% by the end, largely on the basis of an increase in production from the bitumen of the oil sands.

In passing it should be noted that not all the oil that will come from Canada necessarily started there, since, for example, there is currently a move to lay a pipe that would carry oil from the Bakken formation in North Dakota and Montana through Saskatchewan to the Enbridge terminal in Manitoba, and thence to refineries in the United States. Further not all future Canadian oil exports can be assumed to come to the United States. Two pipelines also being proposed are to run the 727 miles from Bruderheim, Alberta to Kitimat in British Columbia. The first of these would carry an average of 525 kbd west, while the second would transport back some 193 kbd of condensate, which would help to thin the crude going through the larger pipeline. Not surprisingly this $6.6 billion project is getting considerable support from China.

Not that this would be a totally new investment by China in Canadian oil,

Earlier this year, for example, five companies signed up for so-called firm service, or guaranteed access, to a portion of the Trans Mountain pipeline, which carries oil from Edmonton to a port at Burnaby, B.C. Among them is PetroChina International (America) Inc., a subsidiary of Chinese energy giant China National Petroleum Corp.

The investment is not just in the pipelines to get the crude to China, there has also been a growth of Chinese acquisitions of shares in the companies extracting the oil. Recognizing that, in contrast with many exploratory operations, the presence of the oil in Alberta is much more certain, the risks of investment are reduced and a return, or in this case the oil itself is a much more certain outcome. As a result there are now more Asian companies entering the oil sand business.

It is not unwelcome news in Canada. Bear in mind that at present 99% of Canadian oil exports go the United States, and as the President of the Enbridge Northern Gateway noted recently:

I challenge any of you to name one other country in the world that only has one market for its largest export. Right now our most valuable resource is landlocked in North America and isolated from the world market. That means it is often isolated from world price. The August spread between West Texas Intermediate and Brent Crude, the world price, was $22 per barrel. Canadian heavy crude has more often than not sold at a discount to U.S. light crude that goes well beyond the quality differential – simply because of lack of market.

In perhaps the same way as they acted to provide a second market for the natural gas of Turkmenistan (other than Russia) thereby allowing the Turkmen to be able to sustain higher prices, so now they can, to some eyes, be seen to be riding to the rescue of Canadian prices.

And then there is the controversial Keystone XL pipeline set to run from Alberta down to Houston and refineries south, and which is generating some high-level opposition.

Planned route for the Keystone pipeline

There are some current indications that the State Department will approve the pipeline, permission needed since it crosses an international border. It may not hurt those chances that the chief lobbyist for TransCanada was, apparently, the deputy manager of Secretary Clinton’s 2008 campaign. The latest step by the opposing forces has been to challenge the permit that TransCanada has to carry out construction on the Canadian side. Apparently the delays that are holding up the start of construction of the 700 kbd pipeline have carried the project beyond the year during which TransCanada had permission to start construction, without such construction beginning. On the other hand TransCanada are pointing to preparations for river crossings and the laying of foundations for oil storage tanks as evidence of such construction.

It is expected that with this increased demand production from the oil sands will double by 2020. This expansion is not without demands of its own, since the use of natural gas in the mining process (see earlier posts) will lead to an increase in demand from 1.1 bcf to 3.0 bcf to help in that production gain. And so I will take another glance at the plans for the oil sands in the next post in this series.
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