Petrobras on top
PdV has long been Latin America's pre-eminent oil company. But it is losing ground to Petrobras, writes Robert Cauclanis
PDV has the largest proved oil reserves outside the Middle East and achieved sales of $96bn last year. But the Venezuelan national oil company (NOC) is in trouble: production is falling and, with a substantial margin of its profits being used to fund social projects, oil investment is insufficient.
PdV's decline coincides with an impressive rise in the fortunes of Brazil's NOC, Petrobras. When Venezuelan President Hugo Chávez was elected in 1998, PdV dwarfed Petrobras, producing 3.5m barrels a day (b/d) of oil, compared with the Brazilian company's 1.1m b/d. But Petrobras, which has recently boosted oil exports to the US, says it expects to be bigger than PdV within a few years. In sales, profit and upstream spending, Petrobras has already overtaken PdV. In crude output and reserves growth, the Brazilian company is gaining on its rival.
Since 1998, Venezuela's production has fallen; PdV claims it is producing around 3.3m b/d, but other organisations, such as the International Energy Agency, estimate output at 2.3m-2.4m b/d. In the last 10 years, Petrobras has raised output in Brazil by around 70% to nearly 1.9m b/d and plans to reach 2.1m b/d by December (see Table 1). With around 340,000 b/d of (non-Petrobras) ethanol production, Brazil may already outdo Venezuela this year in production of petroleum and equivalent liquid fuels.
Petrobras, which is state-controlled but also publicly traded, does not hide its ambitions. Brazil will become a significant oil exporter soon and join Opec, President Luiz Inacio Lula da Silva said in May. Within Opec, Brazil would "work to lower global oil prices", Lula said, giving poor countries more access to oil supply. That would bring it into conflict with Venezuela, a founding Opec member. Given the government's need to fund its expensive social programmes, Venezuela is arguably the organisation's biggest price hawk.
Local fuel subsidies are one reason why PdV is much less profitable than Petrobras: while retail gasoline costs around $0.05 a litre in Venezuela, consumers pay 30 times that much, or $1.50/l, for gasoline in Brazil.
Petrobras is already ahead of PdV in sales, with $112bn last year, compared with $96bn for PdV. Petrobras achieved a profit of $13.1bn in 2007. Depending on whom you ask, PdV's profit amounted to $3.5bn or $6.3bn (the first figure was provided by Venezuela's Central Bank, which maintains some autonomy from Chávez; the higher figure is PdV's).
PdV has said it aspires to pump 6.2m b/d in Venezuela by 2020, but spending is insufficient to put it on track to reach this total. Last year, according to company data, PdV's corporate spending was $11bn, or markedly less than the $14bn the company made to social projects. In addition to oilfields, PdV now runs subsidised grocery stores and cafeterias.
Petrobras, whose $20bn in spending last year was mostly used on Brazilian oil and gas development, sees its domestic output rising to 3m b/d by 2016. That forecast does not include oil from Brazil's new sub-salt oilfields, such as the 5bn-8bn barrel Tupi discovery, which Petrobras says may produce an additional 0.5m-1m b/d by the end of next decade.
No longer the poor cousin
Until recently, PdV's vast reserves made Petrobras look like a poor cousin. But the Brazilian firm is quantifying significant new reserves under a layer of subsea salt, prompting chief executive Jose Gabrielli to predict that Brazil, which held 12bn barrels of oil equivalent in proved reserves last year, could soon be "somewhere between Nigeria and Venezuela" – holding 36bn and 80bn respectively – in terms of proved reserves. The sub-salt oil will be technically challenging to tap, but it appears largely to be prized light crude.
Not to be outdone, Chávez has predicted that Venezuela will be able to book more than 230bn barrels of new proved reserves in the Orinoco region. But they are bituminous, extra-heavy crude, which must pass through multi-billion dollar upgrading facilities before it can be processed by normal refineries.
Petrobras is also challenging Venezuela's pre-eminent position as oil supplier to the US, making investments in US refineries – as PdV did through Citgo, its US subsidiary – to handle its increasing exports of heavy crude, which exceeded 0.5m b/d last year. But it is in South America that the rivalry between PdV and Petrobras has been most evident.
When Bolivia nationalised its gas industry in 2006 (with guidance provided by some of Chávez' energy-policy advisers), Petrobras, the largest foreign investor in Bolivia, was the biggest loser (see p5). It agreed to pay sharply higher taxes and royalties, while ceding control of gas at the wellhead to the state. But when Petrobras froze investments in Bolivia because of the nationalisation, PdV said it would fill the gaps left by the Brazilians.
Ecuador's government (a close ally of Chávez) is considering ejecting Petrobras from the country, forcing it out of Blocks 18 and 31 in the Amazon region. It says Petrobras may have "illegally" transferred part of its Ecuadorian concessions to Japan's Teikoku Oil without seeking government approval. Petrobras denies the charges: it accepts that it invited Teikoku into the concessions as a partner, but says it complied with government regulations. PdV, meanwhile, has been angling to enter Ecuador to develop around 1bn barrels of oil in the Amazon-region's Ishpingo-Tambochocha-Tiputini block – an area Petrobras had hoped to exploit.
Meanwhile, Petrobras last year blocked PdV's plan for a large gas trunk-line from Venezuela to the Southern Cone countries of Brazil, Argentina, Uruguay and Chile, claiming the economics did not make sense for Brazil.
Thanks to the size of its reserves, Venezuela itself continues to draw interest from foreign investors, despite several legal changes in the country's oil regulations since the late 1990s and sharp increases in royalties and taxes (including a new tax on windfall oil profits, passed in April, designed to contribute an additional $9bn a year to state finances).
Eni took a 40% stake in February in a new Orinoco venture, Junin-5, in partnership with PdV, with 60%. Eni expects to invest $10bn-20bn at Junin-5 over the next decade; its production target is 300,000 b/d. And according to local reports, Chevron may be willing to take over the past role of ConocoPhillips, which exited Venezuela last year. In a plan worth $7.7bn, Chevron and PdV could operate an Orinoco field and a related, 180,000 b/d crude upgrader for 25 years.
Petrobras produces around 14,000 b/d in Venezuela, but has seen its share of output – and profit – fall because of changes in operating terms. It has shown little interest in participating in new ventures in the country.
Another attraction of Venezuela's upstream – according to the government – is low production costs. Oil minister Rafael Ramírez claims production and upgrading costs at future heavy-oil developments may be as low as $5.50 a barrel. Venezuela already has capacity to pump 0.625m b/d from the Orinoco region. By contrast, costs at Brazil's new sub-salt fields will be very high: Petrobras' first sub-salt well at the Tupi field cost $240m.
But Brazil's offshore patch also represents an attractive play for outside investors, although the government is considering boosting the state's take from oil sales (PE 6/08 p6), having kept them stable for a decade.
But the greater co-operation between PdV and Petrobras that Chávez called for in 1998, has failed to materialise. Projects that have been discussed include refineries, pipelines, ethanol projects and even a bi-national oil firm. But the only joint venture that has reached the planning stages is a refinery in northeastern Brazil. And even that may not be seen through: PdV may opt out because it plans to build refineries in several other countries.