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Gas is growth area, not oil

Venezuela’s vast, untapped gas resources and under-exploited markets offer significant investment opportunities for privately owned companies. Even so, progress with some projects, such as Venezuela LNG, remains slow. The oil sector is less accessible and, if the government pushes ahead with the new hydrocarbons law, will be all but closed to foreign capital, writes Tom Nicholls

GAS DEVELOPMENTS represent the most attractive upstream opportunities for privately held firms in Venezuela, say analysts, investors, lawyers and even the state-owned oil company, PdV. By contrast, the country's new hydrocarbons law, which was due to come into force at the start of this month, would deter private investment in oil.

'The gas sector is where the real opportunities lie,' Luis Pacheco, PdV's executive director of planning, tells Petroleum Economist. 'Onshore and offshore gas should be the playing fields of the futureboth for PdV and private investors.' 

Venezuela has enormous, but unexploited, gas reservesestimated proved reserves are 146 trillion cubic feet (cf)Latin America's largest and the world's seventh largest. But its domestic and export markets are small. The government hopes to attract at least $10bn in investment over the next 10 years to develop its gas reserves in order to expand petrochemicals, diversify its sources of power (dominated by hydro-electric) and build an export market.

Says Pacheco: 'That's the most significant change one can expect in the Venezuelan hydrocarbons industry in the next five or six years.'

The liquids approach

The approach to liquids is different. Venezuela's new oil law may yet be amendedby mid-December, it looked probable that Congress would soften its more controversial elements, improving the economics for private investment in upstream projects. But whether it is enforced in its original form or suspended pending revisions, the oil sector is probably in for a period of uncertainty.

Allowing private capital into Venezuela's oil and gas sector has always been a sensitive matter. In 1975, the country nationalised its oil industry, forcing out foreign operators. In 1996, it reopened exploration and production (E&P) to foreign participation, to a limited degreein the so-called apertura process.

Three years later, any prospect of a part or full sell-off of stakes in PdV was killed off by the 1999 constitution, which prohibits privatisation of the company. And the new hydrocarbons law looked like it was designed to kill off private investment in E&P.

The terms may fall short of the expectations of privately held companies, but the extent of liberalisation 'is certainly more than what we had before', argues Pacheco, emphasising the opportunities in the gas and downstream sectors. 'The nationalisation law of 1975 reserved to the state all oil activities, from exploration to marketing. The new law formally opens both sectors to private investors.' But he adds that the 'upside potential for gas is a lot higher. It's a new business, there are new fields and there are new opportunities.' 

Significantly, E&P of non-associated gas are not covered by the law, but by separate legislation, introduced in 1999. In addition, free from Opec-imposed output constraints, there is no limit to the amount of non-associated gas that can be produced. With underdeveloped local and export markets and large reserves (albeit dominated by associated gas, which accounts for about 91% of the total), there are major growth opportunities.

Gas consumption in 2000 was 1 trillion cf, up slightly from 0.9 trillion cf the year before (according to BP's Statistical Review of World Energy). In 2000, PdV handled 3.4bn cf/d of gas. Of this, 1.1bn cf/d was used in the oil businessmainly reinjected or flared; 2bn cf/d supplied the internal market and 345m cf/d was converted into 168,000 barrels a day (b/d) of natural gas liquids.

PdV: financial results, 1998-2000

$m

2000

1999

1998

Sales of crude and derivatives

Exports and international markets

49,780

30,369

23,289

Domestic

2,230

1,450

1,315

Petrochemicals and others

1,224

781

922

Equity in earnings of non-consolidated

investees

446

48

133

Total

53,680

32,648

25,659

Costs and expenses:

Purchase of crude and production

19,759

10,959

8,978

Operating

10,010

8,532

7,561

Exploration

169

118

123

Depreciation and depletion

3,001

2,821

2,849

Sales/administrative/general

1,256

1,192

1,255

Production and other taxes

4,986

3,008

2,078

Financing

672

662

365

Others, net

848

6

375

Total

40,701

27,298

23,584

Profit before income tax, minority interests and cumulative

effect of accounting change

12,979

5,350

2,075

Net profit

7,216

2,818

663

 

Source: PdV, KPMG

Says Pacheco: 'When you look at the hydrocarbons sector, you have to look at the two sidesnon-associated gas, which is totally open to private investment, and the new hydrocarbons law for crude oil, in which you will have formalised participation of private investors.' 

Forging ahead

In mid-2001, the government pushed ahead its programme to open the gas sector to private participation with its first licensing round for non-associated gas E&P rights (See box at the bottom of this page).

TotalFinaElf, the leader of the consortium that won the most prospective acreage (the only areas with proved reserves) says it is 'confident a need for additional gas exists (in particular for power generation) from complementary sources in the short term' and forecasts 'strong growth in gas demand in the long term'. PdV forecasts gas demand will grow at a rate of 7.5% a year during this decade and expects it to double by 2009.

PdV does not want to miss out on a share of this potentially lucrative market. It has started drilling on the offshore Deltana platform, in the Gulf of Paria, near Trinidad, reactivating an exploration programme (started in the 1980s) that resulted in several discoveries, including the Los Testigos, Mejillones, Patao and Dragón gasfields, and gas and condensates deposits at Río Caribe. PdV expects to complete drilling this year. It will also carry out extensive 2-D and 3-D seismic studies over an area of about 5,000 square km, at water depths of 100-1,000 metres.

Pacheco says the firm will spend around $300m in around 18 months appraising reserves and ascertaining whether Trinidad's huge offshore gasfields straddle the maritime border between the two nations. Once it has conducted sufficient drilling, the government will meet officials from Trinidad to try to reach a unitisation agreement, says Pacheco, noting that Trinidad's government has 'already shown willingness to do that'.

Several other gas development programmes are under way. Repsol YPF has started gas and condensates output at the Quiriquire field, in Monagas state, western Venezuela (which was already producing about 13,000 b/d under a marginal field contract). This will supply gas to western Venezuela, which is suffering a severe shortage.

Gas output has begun at an initial rate of 74m cf/d) and is scheduled to reach a sustained output level of 269m cf/d this year, when development is completed.

Venezuela's role on the international gas market would be transformed by a liquefied natural gas (LNG) export terminal. Long overshadowed by its tiny neighbour, Trinidad and Tobago, Venezuela has been trying to establish an LNG plant for about 13 years. The project, Venezuela LNG, is close to the development phase, but wrangling over the ownership structure between the state and the project's private backers continues to stall progress.

Rising prices

Separately, PdV, Colombia's state-owned Ecopetrol and ChevronTexaco have agreed to conduct a feasibility study for a 200-km gas pipeline from Colombia's offshore Guajira region to markets in Venezuela's Lake Maracaibo, which are short of gas.

In the long term, the line could be used to develop Venezuela's gas reserves. When the study was announced, in August, Nelson Nava, president of PdV Gas, said the pipeline would import gas for the 'early years' of the project, but that the flow could later be reversed and used as the first leg of a pipeline export system to Central and South America.

Nevertheless, despite the various initiatives, the opening-up of the gas sector has been slowed by the lack of a clear, long-term development plan. Bureaucratic obstacles, a shortage of gas, low end-user gas prices and uncertainty over pipeline tariffs are blamed for the delays to the expansion of transmission infrastructure.

Gas prices recently began to rise under a government scheme, but some privately owned firms claim they remain too low to stimulate investment. In the meantime, PdV has guaranteed a minimum price for producers, whose capital will be needed if gas production is to rise by 50% from 6bn cf/d to 9bn cf/d in a decade, in line with the government's target. In addition, there remains some confusion over the rules governing the development of associated gas, which is not properly covered in the new hydrocarbons law or the 1999 gas law.



First gas licensing round: a partial success

VENEZUELA HELD its first licensing round for non-associated gas acreage last year. Of the 11 onshore blocks on offer, six were awarded (at the end of June). Competition was not intenseonly one block received more than one bid, although the energy ministry described the round as a success.

Luis Pacheco, PdV's executive director of planning, says the winning groups are studying their acreage and adds that they will hopefully start development activity early this year.

This followed the removal of PdV's monopoly over gas production in legislation introduced in 1999, which opened the non-associated gas sector to foreign investment in exploration and production; distribution; transmission; and gasification.

The most attractive acreagethe only areas offered with proved gas reserveswent to a TotalFinaElf-led consortium (69.5%) that includes Repsol YPF (15.0%) and local firms Inelectra (10.2%) and Otepi (5.3%) under a 35-year contract. Yucal Placer North and Yucal Placer South, covering a combined 1,800 square km in the east of the country, about 100 km southeast of Caracas, were partially exploited at a low production rate up to 1989.

They have combined proved reserves of 2 trillion cf (of dry gas, which as the operator points out, is not linked to oil production and therefore free from the onus of Opec quotas). The Trio Yucal Placer consortium plans to invest $380m on exploration and development, eventually producing 300m cf/d. It also plans to install a gas treatment plant and to build a 30 km pipeline to transport the gas into PdV's network.

The other winning bids were made by: Repsol YPF for Barrancas, in Barinas state; Pluspetrol for Barbacoas (Guárico-Aragua) and Tiznado (Guárico-Cojedes); Pérez Companc for Tinaco (Cojedes).

The five areas that did not receive bids are: Memo, El Totumo, Norte de Ambrosio, El Pao and La Galera. The government says it could open a new licensing procedure for these areas, or they could be awarded directly by the energy ministry.

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