Chavez Oil Decline Leaves Prospects for Biggest Reserves
By - Mar 6, 2013
Hugo Chavez leaves his successor the task of reviving Venezuela’s oil fields after the late president’s policies of limiting investment and expelling U.S. drillers reduced production by 13 percent over the past decade.
As Chavez languished for 21 months with cancer, Venezuela’s bureaucracy let the nation’s oil infrastructure languish. A critical $233 billion development of fields, pipelines and refineries fell behind schedule in the country’s Orinoco heavy oil belt, which may hold more crude reserves than Saudi Arabia, according to a U.S. Geological Survey study.
Output at new Orinoco fields was supposed to reach 195,000 barrels a day by the end of last year. Instead, production is close to a 6,000 barrel-a-day trickle that’s costing state-owned Petroleos de Venezuela an estimated $19 million a day in lost revenue, according to data provided by the Venezuelan Oil Chamber and officials at Russian, Asian, European and U.S. companies partnering with PDVSA.
“Their plans fell very short because of the lack of pipelines,” Thomas O’Donnell, an independent petroleum analyst, said in an e-mail from Berlin on March 4. “The real cost of Venezuela’s political crisis was that not much has happened. Everyone at PDVSA was busy with Chavez.”
Output in South America’s largest oil exporter declined 13 percent to 2.7 million barrels per day in 2011 from 1999 when Chavez came to power, even as proven reserves almost quadrupled in the period, according to the BP Statistical Review of World Energy. The publication ranks Venezuela’s potential at 296.5 billion barrels, the world’s largest.
Peak Production
For Venezuela to regain its peak oil production, the task for Chavez’s successor is to jump-start those stalled projects while shifting toward policies that encourage outside investment and an inflow of talent into a country drained of both by Chavez’s nationalizing of its oil wealth.
Little change is likely, according to Oswald Clint, an oil and gas analyst at Sanford C. Bernstein & Co. in London. “The death of President Chavez increases uncertainty over the political direction of Venezuela in the short term,” he wrote in a note today. “However, we believe the most likely scenario is one where the current environment for international oil companies continues.”
The industry was cautious in its response to how it will proceed in a post-Chavez Venezuela.
“We’ll have to wait for the new head of state to be named and look at the statements he makes about the country’s future directions,” T.K. Ananth Kumar, finance director at Oil India Ltd. (OINL), a partner with four other foreign companies at the Carabobo-1 block in Orinoco, said today in a phone interview. “Hopefully, things will not turn for the worse.”
Different Environment
BP Plc may look at investing in Venezuela again if the “right conditions” exist, Chief Executive Officer Bob Dudley said today on CNBC. Fu Chengyu, chairman of China Petrochemical Corp., said yesterday in Beijing the company won’t be affected by Chavez’s death. Sinopec, as the parent company is known, has exploration contracts for the Junin-1 and Junin-8 blocks.
“What you would hope for is a very different investment environment,” Enrique Sira, senior director for IHS CERA, an energy consulting company, told reporters yesterday at the IHS CERAWeek conference in Houston. Under the right conditions, Sira could foresee “a significant inflow of experienced, knowledgeable people, technical resources and capital flowing into Venezuela.”
Any change will still take years, he said.
Some fear change for the worst. Under Venezuela’s constitution, an election must be held within 30 days. Vice President Nicolas Maduro, who Chavez said should be elected to succeed him, will serve as interim president until then.
‘More Radical’
Chavez’s endorsement makes Maduro a favorite, and he has pledged to stay the socialist course of his mentor.
“We are committed to make sure that not one program, not one initiative is postponed,” Maduro said in a televised address yesterday. “We will inaugurate all the works we need to complete.”
Later in the day, Oil Minister Rafael Ramirez said on state TV that the nation had no intention of changing its policies.
In the transition period, “there’s actually a risk of Maduro being more radical than Chavez as he attempts to prove his revolutionary credentials to Venezuelans,” said Risa Grais- Targow, political analyst at Eurasia Group, from New York.
Chavez, 58, died yesterday at 4:25 p.m. at a military hospital in Caracas, Maduro said in a televised address. Chavez asked Maduro, a former bus driver, to preserve his legacy before traveling to his fourth surgery in Cuba in December.
Currency Devaluation
A former paratrooper, Chavez raised oil taxes to as high as 95 percent of production and diverted PDVSA’s revenue to houses and milk farms. U.S. companies Exxon Mobil Corp. (XOM) and ConocoPhillips who refused Chavez’s new fiscal terms had their fields nationalized.
Stagnating oil production combined with rising public spending pushed Venezuela’s current account into a deficit last quarter, leading the government to devalue the bolivar by 32 percent on Feb. 9. Oil accounts for 96 percent of Venezuela’s dollar earnings.
The nation’s Orinoco belt should be a money spinner. It extends over 55,314 square kilometers of central Venezuela and contains 257 billion barrels of proven heavy oil reserves, according to PDVSA. The U.S. study found the mean estimate of recoverable oil reserves at 513 billion, according to the Energy Information Administration website.
Russian Companies
Output is constrained by a lack of pipelines at the six new Orinoco blocks, forcing companies to truck thick crude hundreds of kilometers from remote central Venezuela to coastal refineries and export terminals.
An Orinoco block known as Junin-6, developed by a group of three Russian companies, is producing less than 2,000 barrels a day after starting in October, said a spokeswoman for group leader OAO Rosneft, who could not be identified because of company policy.
Production from PetroVietnam’s Junin-2 project is less than 3,000 barrels per day after starting in the same month, Oil Chamber President Alfredo Hernandez said March 4. PetroVietnam Chairman Phung Dinh Thuc declined to comment when contacted by phone by Bloomberg News in Hanoi. The Carabobo-1 block further east is producing about 1,000 barrels per day after starting in December, said Ananth Kumar.
Ramirez, the oil minister, said last year that initial combined production at Carabobo-1, Junin-4 and Junin-6 would be 75,000 barrels per day.
Idle Fields
“Chavez’s illness had reduced the government’s disposition to make long-term investment decisions,” Richard Obuchi, public policy professor at the Institute of Advanced Administrative Studies business school, said March 1 by e-mail from Caracas.
Three more Orinoco projects that Ramirez and foreign oil executives said together would produce 120,000 barrels per day by the end of last year remain inactive.
The Carabobo-3 partly owned by Chevron Corp. of San Ramon, California, and Junin-5 partly-owned by Rome-based Eni SpA have not begun production, according to e-mailed comments last week from spokeswomen at Chevron and Eni, who could not be identified by name because of company policies.
’New Dawn’
China National Petroleum Corp.’s Junin-4 block also remains idle, said two oil consultants with direct knowledge of the matter. Liu Weijiang, CNPC’s spokesman in Beijing, declined to comment. PDVSA operates Orinoco projects with a 60 percent stake. Company spokesman Alfredo Carquez and head of new Orinoco ventures, Ruben Figuera, didn’t return phone calls and e-mails seeking comment.
PDVSA said it will invest $10.5 billion in new pipelines and terminals between 2012 and 2018 under the Oil Sowing Plan released in April.
Along with those promised investments, outside industry executives are hoping for some free-market thinking.
“Hopefully a new day will dawn in Venezuela and those trade relationships will open up,” said Philip Rinaldi, chief executive officer of Philadelphia Energy Solutions, the U.S. refiner backed by Carlyle Group LP.
To contact the reporter on this story: Anatoly Kurmanaev in Bogota at akurmanaev1@bloomberg.net
To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net
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