Waiting on the Orinoco’s flows in Venezuela
Progress looks as far away as ever at Venezuela's great oil hope
Last year, Opec announced that Venezuela had edged past Saudi Arabia to become holder of the world’s largest crude reserves. The Latin American country leapfrogged Saudi Arabia – which has proven reserves of 264.5 billion barrels – thanks to the certification of reserves in the Orinoco Belt. Venezuela now sits on total proven reserves of 296.5bn barrels, up from 211.17bn barrels. It is an astonishing figure, with the increase based purely on the Orinoco’s heavy oil.
And that reserves cache could yet increase further. The US Geological Survey has estimated that the Orinoco Belt, which cuts through more than 50,000 square kilometres of Venezuela’s remote interior, holds estimated total recoverable resources of around 513bn barrels of oil.
But developing the Orinoco’s heavy oil requires billions of dollars of investment, advanced drilling, heavy oil upgrading technology and an army of experienced workers. Crude in the region is typically around 8° API, making it tar-like, similar to Canada’s oil sands. Venezuela plans to upgrade the oil to between 16° and 32° API by mixing it with lighter crudes, which is an expensive and large-scale process. So far, that has proved to be too daunting a task for Venezuela. Optimistic development plans and production targets have still to be met.
In 2006, President Hugo Chavez unveiled a comprehensive strategic development plan that would see Venezuela producing 5.4 million barrels per day (b/d) of oil by 2012. Much of that output was to come from new developments in the Orinoco Belt. Chavez’s plan now seems hopelessly optimistic. According to the International Energy Agency (IEA), in January this year, Venezuela’s total oil production was 2.48m b/d, down about 1m b/d from 2000, the year after Chavez came to power. Although Venezuela may have more booked reserves than Saudi Arabia, it has a long way to go before it challenges the kingdom’s estimated production capacity of 12.5m b/d.
The problems start at the heart of the sector; with state-run oil company PdV. Once held up as a model national oil company, its critics claim PdV has been reduced to a shadow of its former self by years of mismanagement and lack of funds. Oil minister and the head of PdV, Rafael Ramirez, recently dismissed this criticism as “absurd”.
But the numbers tell a story of a company struggling under the weight of a mounting debt pile. PdV reported a manageable debt of just under $3 billion as recently as 2006. The company’s debt has ballooned in recent years, though, hitting $20bn in 2009 before rising to nearly $35bn last year. That figure is expected to increase further in coming years as the government speeds up its spending in a competitive election year and PdV’s share of project financing continues to rise.
Since coming to power in 1999, Chavez has used the company as a piggy bank to fund government initiatives. Some of those initiatives, known as misiones, have provided direct benefits, usually in the form of housing and welfare, and are a source of Chavez’s enduring popularity among Venezuela’s poor. But with an increasing amount of its funds diverted to social programmes, PdV has struggled to invest sufficiently to maintain output from its mature projects and meet its funding commitments to new developments. Under reforms implemented in the wake of the 2007 energy sector nationalisations, PdV now owns a 60% stake in all Orinoco Belt heavy-oil projects. While this increases the government’s take once oil starts flowing, it also means the firm must invest heavily in the early stages of development.
Moreover, the company potentially has billions of dollars of liabilities hanging over its head from lawsuits filed in international arbitration courts after the nationalisation. The biggest of these cases are with US supermajors ExxonMobil and ConocoPhillips, which both left the country after their assets were nationalised. Venezuela received some good news on this front in January this year, when a World Bank arbitration panel awarded ExxonMobil $908 million in compensation, far less than the $7bn the supermajor was seeking. A second claim filed by ExxonMobil has yet to be ruled on. ExxonMobil has said it expects to be awarded a larger settlement from that ruling.
The amount ConocoPhillips is claiming is thought to be much larger; Ramirez has put the figure at $20bn.
Chavez has threatened to ignore the international arbitration court’s decisions if he does not agree with them. Experts, however, say that refusing to accept international arbitration would likely scare away foreign investors, arguing that, firms will be wary of remaining in the country if they have no recourse to international courts in the event of a contractual dispute.
Many of the company’s foreign partners have complained that PdV’s funding shortfalls have slowed down major projects. Contractors, too, have claimed the company is slow to pay its bills. US oilfield services firm Halliburton, for instance, has said in its Securities Exchange Commission filings that it continues to see payment delays in Venezuela. In its 2011 annual report, Halliburton said it had taken out $292m in surety bonds to insure against non-payment for services in Venezuela. In 2010, it took out $210m in similar bonds. Other major oilfield services providers, such as Schlumberger, have also complained of mounting unpaid bills.
PdV has relied on international debt markets to raise cash, but it has also taken a more unorthodox route – by turning to its foreign partners for financing. In many countries, seeing one of the world’s largest oil companies getting into the banking business would sound alarm bells. But in Venezuela’s troubled oil patch, it has become common, and is, arguably, indicative of PdV’s financial difficulties.
In March, Chevron agreed to establish a $2bn line of credit for PdV to help fund an expansion at the Petroboscan project, in the west of the country. And in July 2011, Italy’s Eni agreed a similar deal with PdV. Eni agreed to lend PdV $2bn, of which $1.5bn would be used to fund construction of a heavy oil upgrader at the Junin-5 heavy-oil development in the Orinoco Belt. The remaining $500m would be invested building a power plant on the Guiria peninsula in the east of the country. Eni is poised to become one of Venezuela’s biggest foreign investors in the coming years, with $7bn already earmarked for Junin-5, as well as the Perla gasfield development.
As well as asking its partners for funding, Venezuela is also turning to its political allies – Russia and China, in particular – for cash. In October last year, Venezuela agreed a deal that would see Russia lend it $4bn through 2013 in exchange for access to energy projects. Shortly after the agreement was signed, Russian state-run Rosneft signed a co-operation deal covering the development of the Carabobo-2 heavy oil block in the Orinoco Belt. Rosneft is also a member of a consortium of Russian firms – including Lukoil, TNK-BP and Gazprom Neft – working with PdV on the Junin-6 development.
It is Venezuela’s relationship with China, though, that is most important. Underpinning the alliance are 14 co-operation agreements signed over the past several years that have extended more than $38bn dollars in loan financing to Venezuela – most of which will be paid for in future oil shipments. It is an arrangement that has allowed Venezuela to meet its short-term cash needs. But, by forfeiting future oil revenues, the move is likely to have long-term consequences for PdV’s financial health.
The deals are part of a broader shift away from Venezuela’s traditional market in the US towards the east. In February, Ramirez said that Venezuelan oil exports to China were currently around 460,000 b/d and would reach 1m b/d by 2015. Ramirez also sought to counter rumours that China had received a sweetheart deal in exchange for its financial largesse, saying that China would actually pay slightly more than other buyers because “it is a distinct market”. The opacity of the deals makes that claim hard to verify, but the Wall Street Journal reported last year that it had reviewed government documents that appeared to confirm that China was paying market prices.
The shift east can also be seen in US trade data. According to the US Energy Information Administration, US imports of Venezuelan crude have fallen to its lowest levels since the early 1990s. Imports in December 2011 were 810,000 b/d, about half the peak level of 1.55 million b/d in May 1998.
In October last year, Venezuela’s foreign minister Nicolas Maduro met with his Colombian counterpart, Maria Angela Holguin, to discuss a new pipeline that would run from the Orinoco region to the port city of Tumaco on Colombia’s Pacific coast. The $6.73 billion pipeline is reportedly being designed to carry 880,000 b/d of 16° API crude. Crucially for Venezuela, the pipeline would improve its access to the Chinese and other East Asian markets.
As well as guarantees of years of oil shipments, China’s state-run oil companies have been given access to Orinoco Belt projects. Sinopec is expected work alongside PdV at Junin-8, and with Belarus’ Belorusneft and PdV at Junin-1. Meanwhile, China National Petroleum Corporation is working with PdV at Junin-4. China National Offshore Oil Corporation, meanwhile, has signed a cooperation agreement covering the Boyaca-2 heavy oil project. The companies have pledged to invest up to $40bn over the coming years. But even these projects, which are a priority for Caracas, have been slow to get off the ground.
In addition to the pressure to shoulder the bulk of investment, foreign investors also operate under harsh fiscal terms. The harshness of the terms were epitomised by the government’s decision last year to impose a 95% windfall tax on revenues earned on prices over $100 a barrel. The tax will not apply to heavy-oil projects until they have recovered their costs. But one investment bank said that the tax “borders on confiscation”.
In spite of the risks, many oil companies have chosen to stay on in Venezuela. There are two reasons for this. One is the sheer scale of the Orinoco Belt’s resources. The other is that those that have stayed are convinced that, for all its bluster, Chavez’s government now knows that it needs foreign investors if it ever hopes to raise production from the Orinoco Belt. And because foreign investment is crucial, it will not make any further moves that would force more companies out, one industry source told Petroleum Economist.
Nevertheless, 2012 looks set to be another year in which optimistic production targets are missed. In February, Ramirez outlined PdV’s plans to lift Orinoco Belt production by about 470,000 b/d this year. There is a sharp difference between production figures released by Venezuela, and those reported by international agencies. According to Venezuelan data, this year’s planned output increase would lift production from around 3m b/d to 3.5m b/d. Using International Energy Agency’s production figures as a base, the increase would take production up to nearly 3m b/d. Ramirez has said that PdV aims to increase its production capacity to 4m b/d in 2014 and 6m b/d by 2019.
Much of the short-term increase is expected to come from Junin-2, where PdV is working with PetroVietnam and Junin-10, the only Orinoco Belt project that PdV is developing on its own. The focus on these two blocks “leads one to wonder whether the production targets will be met”, said Alberto Cisneros-Lavaller, of Global Business Consultants, a Caracas-based energy consultancy.
Cisneros-Lavaller, previously spent 20 years working at PdV, said both Junin-2 and Junin-10 lie in remote and under-developed parts of the Orinoco Belt. It is understood that both fields lack basic infrastructure, such as roads, let alone sufficient pipeline access to carry oil to market. He also questioned why PdV chose to emphasise these particular projects, rather than those where it is working with better-funded partners.
There is reason to doubt that other projects will come on stream this year as well. At Petrocarabobo, for instance, where PdV is working with Spain’s Repsol YPF, Malaysia’s Petronas and Indian companies ONGC, India Oil Corporation and Oil India, Ramirez said that production could reach 35,000 b/d by later this year. However, the heavy-oil upgrading infrastructure is not expected to be completed until 2017.
Venezuela’s gas sector, too, is in disarray. For years, Venezuela had sought investors to help it develop a liquefied natural gas (LNG) export industry. PdV had hoped to install LNG export capacity of at least 10m tonnes per annum with the three-train Delta Caribe Oriente project on the country’s east coast. Initial plans envisaged the plant running at capacity by 2020. However, investor after investor baulked at the terms on offer. In September 2011, PdV was forced to freeze its LNG plans to grapple with a domestic gas-supply crunch.
Despite sitting on nearly 180 trillion cf of gas reserves – the largest in the Americas outside the US – Venezuela has struggled to meet domestic demand. In 2010, natural gas consumption of 748bn cf outstripped production of 697bn cf, according to EIA data. Gas shortages have been particularly acute in the west of the country, where insufficient investment in transmission infrastructure has left the region almost completely reliant on pipeline imports.
In January this year, Venezuela was forced to extend a 250m cubic feet a day (cf/d) gas import agreement with neighbouring Colombia until 2014. The deal, first struck in 2007, originally envisaged flows through the Antonio Ricaurte pipeline being reversed once a number of gas fields offshore Venezuela came on line. But, as with a number of Orinoco Belt projects, the developments have seen repeated delays, and none are, as yet, on stream.
There is a bright spot on the horizon for the gas sector, though: The Perla field. Discovered by Repsol and Eni in 2009, Perla is the largest gas discovery ever made in Latin America. The field, in the Cardón IV block in the shallow waters of the Gulf of Venezuela, holds more than 16.3 trillion cubic feet of gas-in-place. Last year, Repsol and Eni signed a supply-and-purchase agreement with field partner PdV that will see the field come on stream in 2013. PdV will pay $3.69 per million cf, well above US natural gas prices of $2.33/m cf. The $1.5bn first phase of development will see Perla produce 300m cf/d. Two subsequent development phases will see output ramp up to 1.2bn cf/d.
The supply-and-purchase agreement covers total production of 8 trillion cf through to 2036, which is less than Perla’s likely total recoverable resource. Applying an industry standard 70% recovery rate at conventional gas fields to Perla’s gas-in-place estimate of more than 16.3 trillion cf implies that at least 11 trillion cf of gas will be available over the lifetime of the field.