Tight oil’s threat to Venezuela’s Orinoco belt
High-cost heavy-oil belt production may lose out to cheaper US unconventional output
The rise of tight oil in the US is reshaping the global oil market, with implications for governments and investors around the world. In Venezuela, the surge of new supplies from North America, and potentially beyond, could pose a threat to the development of tens of billions of barrels of extra-heavy oil in the Orinoco belt.
The Orinoco belt holds vast heavy-oil reserves, estimated by the US Geological Survey at more than 500 billion barrels, and lies at the heart of the government’s strategy to revitalise its oil sector. But developing those resources will come at a steep cost. Huge investment is needed to drill thousands of development wells, deploy heavy-oil recovery technologies and build upgrading and transport infrastructure.
Costs are expected to be even higher because of the government’s preferred Orinoco development plan, which favours greenfield developments in remote parts of the country, rather than taking advantage of upgrading and transport infrastructure already built by the first generation of Orinoco heavy oil projects.
Indeed, the Orinoco heavy-oil barrels are some of the most expensive in the world to develop. Goldman Sachs estimates a commercial break-even price of around $90 a barrel for new Orinoco projects. At those prices, Orinoco oil was always going to be a marginal supplier to global markets, vying with other relatively expensive marginal sources of supply such as Canada’s oil sands and other for market share.
As conventional oil production declined, it has long been assumed that Venezuela’s heavy oil would step in as an important supply source, seeing steady demand growth. Instead, the rise of lower-cost tight oil supplies threatens to push Orinoco heavy oil further to the margins of the market, potentially reducing long-term demand.
Goldman Sachs has estimated the commercial break-even costs for the Bakken and Eagle Ford tight oil plays at between $70/b and $75/b, giving it a clear cost advantage over Venezuela’s heavy oil.
It is early in the exploration process for reliable cost projections for tight oil projects outside the US, but early estimates from two of the most promising regions – Argentina and Russia – bode ill for Venezuela.
Goldman Sachs estimates early Argentina tight oil projects would be profitable at around $80/b. Bank of America Merrill Lynch estimates tight oil from Russia’s Bazhenov formation could be profitably produced at around $80/b, though that could come down if proposed tax breaks for unconventional oil production are passed. And those costs could go down significantly with more experience, something that has not happened with heavy-oil projects.
US tight oil production is forecast to surge over the coming decade, pushing overall production from 8.1m barrels a day (b/d) in 2011 to 11.1m b/d by 2020, according to the International Energy Agency (IEA).
The effect of rising US production has already been felt in Caracas. Crude exports to the US, historically the most important buyer of Venezuelan oil, have fallen to around 925,000 b/d through the first nine months of this year. That is about half the peak reached in the late 1990s and the lowest level since the late 1980s.
If the US success can be replicated elsewhere it could move the world into a new era of oil abundance, a trend that could be compounded if demand growth falls short of predictions. That is a world in which Venezuela’s extra-heavy oil projects would struggle to compete.
That would force the Venezuelan government as well as the international and foreign national oil companies that have entered the Orinoco belt in recent years to re-think their plans.
Oil majors such as Chevron, Repsol and Eni have suffered Venezuela’s challenging political environment and punishing fiscal regime because the Orinoco belt offered a rare opportunity to access significant oil reserves. Those companies, though, have been slow to commit investment because of the steep costs involved and uncertainty over development plans. Those investment decisions could be put on the backburner if more promising opportunities arise elsewhere.
It poses a much more vexing problem for the government. Development of the Orinoco belt has been put at the centre of plans to increase oil production after years of stagnant output and is expected to be a major source of wealth for the country, potentially delivering trillions of dollars of revenues for the government.
President Hugo Chávez has pledged to double oil production to 6m b/d by 2020, with Orinoco belt extra-heavy oil driving production higher. The IEA, by contrast, forecasts production to remain stagnant for the rest of this decade, with output from the Orinoco belt slow to come and increasing total production to just 3.5m b/d by 2035.
The government does have options. It could increase the competitiveness of Orinoco belt projects by improving fiscal terms and giving foreign operators more say over infrastructure investment decisions.
It could also choose to refocus state oil company PdV’s mission away from the extra-heavy oil projects to boosting investment in the country’s mature oil fields. Those ageing fields are declining rapidly, partly due to underinvestment. Many argue that shifting investment towards maximising output from those mature fields would be a far more cost-effective way of boosting Venezuela’s oil production.
Russia, a key ally of Venezuelan president Hugo Chavez, is paying the price for its slow to react to the rise of shale gas and its effects on the global gas market. Venezuela would be well advised not to make the same mistake when it comes to the rise of tight oil.