Economist Intelligence Unit: Venezuela oil: Fuel of tomorrow

Click for original at EIU

Hopes of developing the Orinoco Belt’s mighty oil reserves once again recede into the future.

Nuclear fusion researchers like to joke that joining atoms together is the energy source of tomorrow, and always will be. It is a quip that might easily be adapted by frustrated oil companies in Venezuela, which boasts the planet’s largest untapped pool of oil. Venezuela first brought in private companies to dip into the vast extra-heavy oil deposits of the Orinoco Belt back in the 1990s. But dozens of additional joint ventures proposed since are making slow progress

This was supposed to be the year in which Orinoco tar would finally be converted into meaningful quantities of cash. Petróleos de Venezuela (PDVSA), the state oil company, had said that investments nationwide would surge to an unprecedented US$53bn in 2013. Several of the new tie-ups are indeed finally drilling, building pipelines and even producing small amounts of oil. However, 2013 is unlikely to bring the massive investments needed to ramp up production in line with the region’s promise.

Expectations are already being scaled down. In February, company president and oil minister Rafael Ramírez said PDVSA will invest just US$25bn this year. Since that statement was made, the death of President Hugo Chavez in March and the ensuing election have dominated the attention of PDVSA executives, who were responsible for much of the (successful) effort to have Nicolas Maduro elected as president. This is one reason why production plans at the Orinoco are bound to be delayed once more.

Early production

PDVSA has, at least, taken some steps to move investment forward. With its partners, the firm invested US$1.2bn last year on maintenance and expansion of the four existing Orinoco “upgraders” (where the heavy oil is converted into light, sweet crude). A similar sum will be spent on the task this year.

Further investments have boosted output from the extra-heavy crude fields and nearby conventional sites to 1.3m barrels/day (b/d), PDVSA says. It bought 80 drill and workover rigs (used at wells that have already been drilled) for the Orinoco division in 2012, it has told Venezuela’s legislature. Construction of at least half a dozen extra-heavy crude projects is progressing: each of these is eventually expected to produce about 400,000 b/d, half of which will be converted at upgraders. One, a joint venture with Italy’s Eni, entails building a refinery to continue processing the crude into naphtha, diesel and liquefied petroleum gas (LPG).

Most encouragingly, at several of the new extra-heavy crude projects 2012 saw the beginning of “early production” (the initial output of tar-like crude at a new field, even before it is connected to an upgrader by pipeline). These included the Petromiranda joint venture with a Russian consortium—in which Gazprom, Rosneft and Lukoil are all present—and Petromacareo, a joint venture with Petrovietnam. In addition, PDVSA drilled its Junin 10 field in 2012 in preparation for early production. That landmark will also be reached as soon as this month at the Petroindependencia joint venture with Chevron and a group of Japanese companies, Mr Ramírez said in March.

But still lagging

Output at these sites is supposed to grow this year, but currently amounts to just a few thousand barrels a day. This reflects the deeper problems that are hampering—and will continue to set back—development throughout the Orinoco Belt. The most serious of these is a severe shortage of light crude and naphtha with which to mix Orinoco tar in order to transport the oil from wellhead to upgrader.

Then there are the difficulties of Venezuela’s own making. Behind the repeated delays at all big Venezuelan oil projects, including those in the Orinoco, lies chronic short-termism. Private partners are reluctant to commit to development while PDVSA and the government defer building the necessary infrastructure—roads, port facilities and even cities to house workers. Although Chevron has agreed to finance a US$2bn upgrade of an existing field, for instance, it failed to even mention Venezuela in its US$33bn investment plan for 2013. For its part, PDVSA has not been able to commit the needed funds because of constant government calls for it to take on yet more social work. The state-directed Great Venezuelan Housing Mission has built around 350,000 homes since 2011, according to official figures, many constructed by PDVSA staff.

Domestic politics locks in failing policies. Mr Chávez made resource nationalism his trademark, so a successor who openly offers incentives to private companies risks being labelled a traitor to the cause. Mr Maduro has signalled his intent to be true to Mr Chávez’s legacy, keeping Mr Ramírez in his dual role.

The investment environment for foreign firms thus remains extremely poor, and the Economist Intelligence Unit forecasts that Venezuelan oil production, already declining, will continue to dwindle. This is despite some hopeful signs. Investment terms have in fact already improved in certain respects: notably, earlier this year while Mr Chávez was hospitalised the government cut the oil windfall-profits tax. Technical, small-print changes can, it seems, be implemented without running a political risk. Yet attracting the scale of investment necessary to make significant inroads in the Orinoco Belt will require far greater improvements to the stability of contracts and business relationships. (When Lukoil criticised the investment environment in March, it was soon forced to apologise, lest it be expelled from the country.)

Given the narrowness of Mr Maduro’s recent election victory, his administration may not survive its allotted six years. In the longer run, that sounds like good news for foreign oil players, who stand to benefit if a government friendlier to their interests comes to power. By and large, though, they do not want an early change of regime. That would probably be chaotic—and push development of the Orinoco Belt into the even more distant future.

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About Steven Bodzin

Steven Bodzin is a reporter. He blogged when he was a freelancer.

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