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Slow-mo in the Orinoco

New development of Venezuela’s vast heavy oil belt is moving like treacle

FOR A brief time in the early 2000s, it looked like the Orinoco Belt, a vast heavy-oil rich region roughly the size of Costa Rica in the heart of Venezuela, might become the centre of the oil world. New supplies of crude were becoming harder to find, while demand and prices were on the rise. Venezuela’s new leader, Hugo Chavez, had clamped down on the industry and his brand of resource nationalism made oil executives and Western policymakers nervous. Still, the industry had the technology, the cash and the will, and the Orinoco Belt offered an almost unparalleled opportunity, with more than 200 billion barrels of oil that had hardly been touched. It looked like a winning prospect.

That moment has long since passed. Year after year of missed investment and production targets has choked the play and killed the optimism. Investment terms have tightened. The near-constant threat of nationalisation has spooked foreign investors. Which of them wants to park capital within reach of the Venezuelan government? State oil company PdV, around which the industry revolves, has become deeply politicised. Its political and social mandate has overwhelmed its ability to manage the country’s sprawling oil industry. Investment has fallen far short of what is needed and the firm’s debt is spiralling ever higher.

The past year has brought a mini-exodus from the Orinoco Belt: Petronas, Surgutneftegaz and Lukoil all say they are quitting Venezuela. Companies complain of interminable delays, an opaque decision-making process, unpredictable tax and fiscal regimes, infrastructure shortages and PdV’s unwillingness or inability to meet its share of investment. PdV holds a 60% stake in all Orinoco Belt projects. The foreign partners get the remaining 40%.

So much oil…

For a patient investor, however, the Orinoco retains great potential. The US Geological Survey, part of the Department of the Interior, said in a 2010 report that more than 500 billion barrels of oil could eventually be produced from the Orinoco Belt with existing heavy-oil technology. The Venezuelan government estimate is half that, around 250 billion barrels. Either way, the region could pump crude at a rate of 5 million barrels a day (b/d) for more than a century – probably long after the end of the age of oil.

Although it is often compared with Canada’s oil sands, there are some key differences between the two that make the Orinoco Belt in some important ways more attractive. Although very heavy, at 8-16 API, Orinoco oil flows much more easily than Alberta’s bituminous crude. That means it can be produced using cheaper in situ horizontal and vertical drilling and thermal recovery techniques, rather than the more expensive and ecologically destructive surface mining deployed in much of Alberta’s oil sands.

Precise production costs are difficult to come by, and PdV has not published data, but independent analysts have estimated the full cost of producing and upgrading Orinoco oil at around $30 a barrel. That makes it cheaper to produce than Canadian oil sands, or even much deep-water and shale production.

In recent years, the government and PdV have set – and missed – ambitious targets for the country’s output. The latest is to produce 6 million b/d by 2019, up from its own figure of around 3 million b/d now. (Independent estimates put Venezuela’s oil production around 2.4 million b/d.) About 4 million b/d of that production would come from the Orinoco Belt, up from about 1 million b/d being pumped from the original four Orinoco projects set up in the late 1990s.

But the latest plan also recognised what has long been clear to outside observers: there will be little progress over the short term. The plan, released in November, sharply reduced by 700,000 b/d the production expectations for 2014 from the previous year’s target, with a new goal of 3.3 million b/d. Even that goal will surely be missed. Most analysts expect output to be stagnant or continue to decline over the short term.

The long-term outlook for the region hangs on a handful of leading Orinoco Belt joint-venture projects between PdV and its international partners – both western majors and state-owned oil companies from political allies (see table). PdV and those partners have set out plans that would see investment of $170 billion in the Orinoco Belt between now and 2013 to 2021.

… But so little progress

Venezuela’s most important international energy relationship is with Beijing and China’s national oil companies. China has extended around $40 billion in oil-for-loans deals to Venezuela, and China’s state oil companies now play a leading role in the Orinoco. Their projects, though, have shown little progress, much to the dismay of policymakers in Beijing who have grown increasingly frustrated by the delays.

China National Petroleum Corporation (CNPC) is developing two projects alongside PdV in the Orinoco Belt. In 2010, the companies said they would invest $16.3 billion in the project, with initial production of 50,000 b/d starting in 2012, rising to 400,000 by 2016. The companies also plan to build a 200,000 b/d upgrader in the Orinoco Belt and a 400,000 b/d refinery in China’s Guangdong province geared towards processing Venezuelan heavy oil.

The companies missed the 2012 start-up date. Then in early 2013, the head of PdV, oil minister Rafael Ramírez, said the project would start initial production at 15,000 b/d by the end of the year. Even that modest target seems not yet to have been met.

During a September 2013 trip to Beijing, Ramírez tweeted that CNPC would join PdV at the Junín-10 project, where the companies would invest $14 billion and eventually produce 220,000 b/d. Neither company has provided any further details since then. PdV had started work on its own at the block after a deal with France’s Total and Norway’s Statoil fell through in 2010, and said it started drilling wells in 2012. It hasn’t confirmed whether the project is actually producing anything yet, however.

Sinopec, China’s second largest national oil company, is also working at two Orinoco projects with PdV – Junín-1 and Junín-8. Both projects are targeting peak production of 200,000 b/d. Investment in Junín-1 will be around $14 billion, Ramírez tweeted in September 2013. Neither project has started production, either.

Assuming all those projects came good, China’s two leading national oil companies could see their share of investment in the Orinoco exceed $20 billion and their share of production reach almost 500,000 b/d.

Caracas has also developed deep energy relations with Moscow, and Russia’s state-owned Rosneft. It is the lead investor in a consortium developing the Junín-6 project alongside PdV. Aside from Rosneft, the project also initially included Lukoil, Surgutneftegaz, Gazprom Neft and TNK-BP. Rosneft, though, has consolidated its control over the consortium: it bought out TNK-BP and, after Surgutneftegaz and Lukoil decided to pull out, is the likely buyer of their stakes, too.

Junín-6 aims to produce 450,000 b/d and build a 250,000 b/d heavy-oil upgrader by 2018. Output of 10,000 b/d started trickling to an existing upgrader in September 2012. Production could be ramped up as new pipeline infrastructure is built out, but that appears to be far behind schedule.

The slow progress hasn’t deterred Rosneft. In May, it signed a joint-venture agreement to develop the Carabobo-2. The initial plan calls for peak production of more than 400,000 b/d, as well as the construction of an upgrader and associated infrastructure. Rosneft agreed to pay a $1.1 billion signing bonus and extended a $1.5 billion loan to PdV as part of the deal. Work at the site is in the early stages.

There are also several key projects where Western majors are playing a key role.

PdV and a consortium that includes Chevron as well as Japan’s Inpex and Mitsui are developing the Carabobo-3 project. Chevron is the only major US company to have stuck with Venezuela through the 2007 nationalisations. Carabobo-3 is expected to produce 400,000 b/d at its peak and the partners will have to build an upgrader to process the crude. Early production was expected to start in 2012, but has yet to begin. Chevron does not appear to have high hopes for progress at the project over the next year. In spite of its size, and the significant investment that would be needed to get the project up and running, Chevron has not included Carabobo-3 on its list of major projects for 2014.

Italy’s Eni appears to have made the most progress of any foreign company in the Orinoco Belt at the Junín-5 project. Early production started in 2012 at around 10,000 b/d, and in November 2013 Eni and PdV inaugurated new pipelines at the field that will transport diluent to the field and heavy oil to a nearby upgrading plant.

Repsol and a consortium of Indian companies that include ONGC, Oil India, and Indian Oil are developing the Carabobo-1 project alongside PdV. The project, though, suffered a setback in 2013 when Malaysia’s Petronas decided to exit the venture. At its peak, Carabobo-1 is expected to yield as much as 400,000 b/d and the partners plan to build an upgrader to handle the crude. Early production started in late 2012, with production being trucked to upgrading facilities.

There have been numerous other deals signed in the Orinoco Belt with state and private oil companies from Belarus, Brazil, Cuba, Argentina, South Africa and elsewhere, but those projects have yet to get off the drawing board.

While there have been a number of problems holding up the projects, the single largest problem facing development in the short- to medium-term will be the lack of upgrading facilities. The Orinoco Belt’s heavy crude has to be mixed with lighter hydrocarbons such as naphtha before it can be refined into finished products. Ramírez acknowledged the problem in November. “The upgraders are at their limit. We are producing a lot of diluted crude oil, or extra heavy oil that is mixed with naphtha, which is why we need to resolve the bottlenecks with the upgraders and expand their capacity with our present partners or with new ones,” he said.

A crucial question that the government has skirted is how its Orinoco Belt plans would fit within Opec’s production quota. Venezuela has been one of the cartels most hawkish members, urging tighter production quotas to keep prices above $100/b. An aggressive production expansion as planned in Orinoco Belt would obviously run counter to that position. Especially if it came at the same time Iraq, still recovering from the Saddam Hussein era, and Iran, assuming sanctions are eased, ramp up their own output as is expected over the next decade. 

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