Venezuela To Amp Up Oil Output

Venezuela To Amp Up Oil Output



Energy
Venezuela To Amp Up Oil Output
Oxford Analytica, 04.05.10, 6:00 AM ET

Venezuela's heavy oil is one of the world's largest hydrocarbon resources, and is relatively undeveloped. 

On Feb. 10, the government announced the results of the first oil auction held since President Hugo Chavez took office in 1998; it comprised three blocks in the Carabobo field of the Orinoco belt:

--Carabobo 1 was awarded to a consortium involving state oil company PDVSA (60%), Spanish Repsol (11%), Malaysian Petronas (11%), and India's ONGC (11%), Indian Oil and Oil India Ltd (7% together).

--Carabobo 3 was awarded to a consortium including PDVSA (60%), U.S.-based Chevron (34%) and Japanese Mitsubishi, Inpex, Japan Oil and Gas, and Japan Metals National (5%).

--Carabobo 2 was not awarded.

Details have yet to emerge, but it appears each of these consortia will be investing some $15 billion, large commitments even by oil industry standards. If these investments are added to what might be invested in the separately negotiated Junin blocks, total new investment in heavy oil projects could exceed $75 billion. Each of these consortia is likely to have to spend $6 billion to $8 billion on specialized refineries to upgrade the heavy oil to marketable specification and quality. The Venezuelan government showed it was prepared to sweeten the deals in some respects--lowering royalty levels and lifting some taxes--but maintained PDVSA as the dominant majority shareholder in each case.

--Doubling production. The government has stated that this suite of projects will increase the country's oil production from 3 million to 6 million barrels per day (b/d) by 2016, with first oil being delivered by 2013, an aggressive pace.

--Oil advances. Venezuela seems positioned to take a major step forward in the development of its oil industry. For some years, following enforced nationalization of the industry, most commentators felt it has been drifting or even slipping backward.

Production from these Carabobo and Junin projects is slated to start as early as 2013, reaching plateau production in 2016. However, this looks ambitious:

--Cementing consortia. The consortia need to be formalized and then actually established. In addition to the newly awarded Carabobo blocks, there are the separately negotiated Junin blocks, where there appears to be some way to go in formally establishing the operating companies. Progress has been slow, whether due to PDVSA's capability constraints or caution on the part of investors.

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--Ideological issues. Operable management structures that allow the lead companies to work effectively with PDVSA need to be devised, staffed and put into operation. PDVSA is seen by some as an ideologically driven company, so it could face challenges in working on these huge projects with a mix of state and private oil companies.

--Management skills. PDVSA will have to find suitably qualified and experienced staff to contribute effectively in these consortia in areas such as project management. Major players such as Shell and BP have their own internal academies to develop these skills.

--PDVSA finances. Although PDVSA will get financial support from other consortium members, it must find tens of billions of dollars to contribute toward financing very large projects. Caution among international lenders may make this difficult.

--Political risk. Chavez has made the pragmatic decision that Venezuela needs help to improve the rate of exploitation of the country's heavy oil. The judgment investors must make, given his track record, is what line he will take once the investment has been made.

Heavy-Oil OutlookWhile the estimate of oil in place has not changed materially for decades, the recoverability factor has risen from less than 10% to 40% at present. However, there are pluses and minuses to these heavy oil projects. They are widely perceived to be high-carbon at a time when low-carbon energy sources are seen as increasingly desirable. On the other hand, one of their obvious attractions is that they have a duration of between 25 and 40 years, with consistent, long-lived production.

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Oxford Analytica is an independent strategic-consulting firm drawing on a network of more than 1,000 scholar experts at Oxford and other leading universities and research institutions around the world. For more information, please visit here.

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