Venezuela is important to world energy markets because it holds proven oil reserves of 73 billion barrels, plus as much as 1.2 trillion barrels of extra-heavy oil, including bitumen. Venezuela consistently ranks as one the top suppliers of U.S. oil imports and is among the top ten crude oil producers in the world.
Note: information contained in this report is the best available as of January 2000 and can change.
Many U.S. oil companies have large investments and decades of experience in Venezuela. Despite the country's current economic troubles, most companies have long-term plans for further involvement in Venezuela.
Venezuela consistently ranks among the top three sources of U.S. oil imports. U.S. government agencies, such as the Export-Import Bank and the Overseas Private Investment Corporation (OPIC), have supported projects in Venezuela. In June 1999, Venezuela received a $1-billion loan from the Ex-Im Bank for the purchase of U.S. goods.
Politics and the Oil Industry:
There has been much speculation about what the recent governmental changes will mean for Venezuela's energy sector, its state oil company, Petróleos de Venezuela (PdVSA), and foreign investment.
Venezuela is home to the Western Hemisphere's largest oil reserves, and its economy is extremely oil-dependent, despite efforts at diversification. Oil accounts for roughly three-quarters of total exports, about half of government revenues, and about one-third of GDP. Energy policy has been affected by the change in government.
President Chávez advocates a shift in focus away from crude oil production and toward petrochemical, refining, and natural gas production. Venezuela, a country not historically known for its adherence to OPEC quotas, has complied with OPEC production cuts in 1999, helping to raise worldwide oil prices.
While Chávez is tightening government control over the oil industry, foreign investment does not appear to be immediately threatened. In August 1999, Venezuela's Supreme Court upheld the constitutionality of eight oil exploration contracts with foreign oil companies.
The decision stood, despite the resignation of the President of the Supreme Court later that month. Some of Chávez's changes might make operations more expensive for foreign investors, however, as social benefits are increasing. For instance, the work week has been reduced from 48 to 44 hours.
Furthermore, increased government control is not seen as a positive sign for long term investment in the Venezuelan oil industry.
Venezuela nationalized its oil industry in 1975-76. PdVSA, one of the world's largest oil companies, is by far the largest business and employer in the nation. Privatization of the company has been banned by the Constituent Assembly.
Since 1996, auctions and investments on oil and gas rights have earned PdVSA billions of dollars in joint venture agreements with major international oil companies.
PdVSA has established "strategic alliances" and "production sharing agreements" (PSAs) with foreign oil companies. Production from private operators is estimated to account for about 14 percent of total production.
Official energy policy has changed radically under the Chávez government. To gain greater control over PdVSA, Chávez appointed Hector Ciavaldini as president of the company in August 1999. This prompted several top PdVSA executives to resign.
PdVSA is under the jurisdiction of the Ministry of Energy and Mines, headed by Minister Alí Rodríguez. The Ministry believes that the company was overly independent under Luis Giusti, the former PdVSA president, and asserts that the opening of the company that occurred during Guisti's tenure benefited foreign companies at the expense of Venezuela.
Revenues from PdVSA are expected to fuel Chávez's plans to boost government spending on social programs. Over two-thirds of PdVSA's revenue presently is paid to the government in royalties (although this percentage is slated to fall in the coming months, concurrent with a rise in income tax).
Venezuela's adherence to its production quotas is another policy change under the Chávez government. Previously, Venezuela had often produced more than its official OPEC quota limits.
Now, it is producing very near its quota of 2.72 million bbl/d, agreed between OPEC countries in March 1999, and reaffirmed in September 1999. Foreign companies remain mostly unaffected by the quotas, which are upheld by PdVSA.
Venezuela favors adoption of an OPEC price control regime with a band, in which production levels are automatically triggered by price levels.
If oil prices rose above $20 per barrel, OPEC countries would increase production; if the price fell below $16, production would be reduced.
Venezuela's difficult economic climate has resulted in frequent strikes in the oil industry as well as other industries. In December 1999, workers in the oil industry staged a 24-hour strike demanding wage increases, in the latest demonstration of discontent with economic conditions.
Union organizers and Chávez supporters often clash, as unions tend to be dominated by the political parties that Chávez ousted with his 1998 victory.
Venezuela is one of the world’s largest oil producers and exporters. In 1999, Venezuela produced an estimated 3.0 million barrels per day (bbl/d) (2.8 bbl/d of crude), down about 340,000 bbl/d from 1998 levels.
Venezuela exported about 2.5 million bbl/d, of which about 1.5 million bbl/d went to the United States (1.2 million bbl/d was crude oil). The United States has become increasingly reliant on oil imports from Venezuela in recent years.
In Venezuela itself, EIA estimates that oil consumption in 1999 amounted to 462,000 bbl/d, up 6,000 from 1998. Consumption is subsidized by the Venezuelan government.
Production is predicted to increase substantially in the coming decade, as PdVSA plans to almost double its current output level.
Venezuela has four major sedimentary basins, containing an estimated total of 72.6 billion barrels in proven oil reserves: Eastern, Western, Barinas-Apure (where most oil production occurs), and the largely unexplored Northern basin.
Due to the maturity of many of these basins, PdVSA spends a good deal of its budget on the application of secondary and enhanced oil recovery techniques to maintain output levels.
Proven reserves in these fields are estimated at close to 2 billion barrels of light and medium crude oil. Heavy crude oil with gravities of less than 20° API accounts for about three-quarters of Venezuelan oil production.
The largest heavy oil reserves are in the 270-mile long by 40-mile wide Orinoco Heavy Oil Belt in eastern Venezuela. Estimates of Orinoco's total oil potential range as high as 1.2 trillion barrels, although only a small fraction of this is considered as part of Venezuela's proven oil reserves.
There are four congressionally approved joint ventures in extra-heavy cruds in which PdVSA is a minority owner. They are now in different stages of development. All aim to convert the extra heavy crude from the Orinoco Belt from the approximately 9° API crude to about 20-23° API, and even as high as 30° API of synthetic crude. Most of the crude would be shipped by pipeline to Jose on Venezuela's Caribbean coast.
wo of the projects -- Sincor and Hama
ca -- have been stalled amidst financing difficulties. The $3-$4 billion Sincor project is a joint venture with France's TotalFina, Norway's Statoil, and PdVSA. This project hopes to produce 180,000 bbl/d.
Heavy crude production originally was set to begin in 2000, with the upgrading plant slated to come online in 2002, but has been delayed due to PdVSA's budget constraints. PdVSA had decided to sell its stake, but has since reversed its decision.
The Hamaca project is the least advanced of the joint ventures and is facing tough financing conditions. The $4-billion joint venture, which includes Phillips Petroleum (operator), Texaco, and PdVSA (Arco sold its interests in mid-1999), will export to U.S.
Gulf Coast refineries. The 35-year agreement has plans to pump 190,000 bbl/d and to upgrade it in a large refining complex, but has been delayed by market conditions and by a redesign process.
Construction is now slated to start in mid-2000, with first production in mid-2001 and completion of the plant in 2003-4. The Petrozuata project is a $2.4-billion partnership of PdVSA and Conoco and aims to extract 1.5-2 billion barrels over its 35-year contract. The project is estimated to be 70 percent -80 percent complete.
The project involves drilling 500 horizontal wells and building a 125-mile, 36-inch pipeline. Production began in September 1998 at around 30,000 bbl/d, and increases up to 120,000 bbl/d are expected. The majority will be sent to Conoco's Lake Charles, Louisiana, refinery, and the remainder will be processed by PdVSA at its Cardón refinery.
Another project is the $1.9-$2.3 billion Cerro Negro oil venture between ExxonMobil (operator), Veba Oel, and PdVSA, which aims to produce, upgrade, and market 120,000 bbl/d. Production of 60,000 bbl/d began in December 1999. That amount is expected to double in 2001, when a new coking plant is completed. Crude presently is blended with condensate and piped to the Jose complex.
PdVSA operates the Western Hemisphere’s largest refining system and is one of the world's largest oil refiners, with a combined domestic and international capacity of about 3 million bbl/d.
Domestic refinery capacity stands at about 1.187 million bbl/d, while its foreign holdings in Curaçao, the United States (in Lake Charles, Lemont, Corpus Christi, Paulsboro, Savannah, and Lyondell), and Europe (with Nynas and Ruhr Oel), add about 1.8 million bbl/d of capacity.
PdVSA's refinery ownership is expected to increase in the coming years, to insulate the company from future decreases in the price of crude oil.
Presently, Venezuela sells mostly crude oil but would like to raise the refined product proportion of sales to 60 percent from the current 40 percent rate.
PdVSA recently integrated the Amuay and Cardón refineries in the Paraguaná Gulf, creating the Paraguaná refining center, with a capacity of about 940,000 bbl/d, one of the largest in the world.
The center represents over 70 percent of Venezuela’s local refining capacity, and can produce a range of products and lubricants. The port and docking stations can serve over 120 tankers per month.
PdVSA now has a reformulated gasoline production capacity of about 200,000 bbl/d. About one-third of Venezuela's refined product exports are exported to the United States, where they are distributed mainly by Tulsa-based Citgo, PdVSA's U.S. refining and marketing subsidiary, and one of the largest U.S. gasoline retailers.
In 1998, Venezuela produced 7.2 million tons of petrochemicals. PdVSA aims to double its output of petrochemicals by 2006, as increased petrochemical production is included in Chávez's plan to shift focus away from crude production. However, some foreign companies are showing reluctance to become involved in Venezuela.
For example, Chevron pulled out of a $1.5-billion petrochemical joint venture with PdVSA, citing "economic reasons".
Orimulsion is a branded product that is used as a boiler fuel, similar to #6 fuel oil. It is an emulsion of approximately 70 percent natural bitumen, 30 percent water, and less than 1 percent surfactants (emulsifiers).
Bitumen is considered a non-oil hydrocarbon and is not counted towards Venezuela's OPEC crude oil production quota. Burning Orimulsion in conventional power plants produces emissions of carbon dioxide, sulfur dioxide, and nitrogen oxide roughly similar to emissions from fuel oil.
Bitor, a PdVSA subsidiary, manages the processing, shipping and marketing of Orimulsion. Bitor now operates one Orimulsion plant in Cerro Negro, with a capacity of 5.2 million metric tons per year, and hopes to produce 20 million metric tons per year by 2006.
According to Bitor, more than 1.2 trillion barrels of bitumen exist in the Orinoco Belt. Economically recoverable reserves are now estimated at about 267 billion barrels. Canada, China, Denmark, Guatemala, Italy, Japan, and Lithuania either consume or are considering consuming Orimulsion.
Venezuela has proven natural gas reserves of about 142.5 trillion cubic feet (Tcf), the highest in Latin America and among the largest in the world. Current plans call for exploration to increase Venezuela's proven reserves.
The country produced only about 1 Tcf in 1998. Domestic demand is relatively low, largely because Venezuela's highly developed hydro industry thus far has precluded the use of gas for power generation.
About 60 percent of the country's gas production is consumed by the oil industry, which either re-injects the gas into oil fields or flares it; 11 percent is consumed for power generation; 6 percent is used in petrochemical production; and the rest is used mainly by industrial or commercial customers in large cities.
The Chávez administration plans to dramatically increase production and consumption of natural gas in the coming years, as part of an overall shift away from the country's economic reliance on oil.
PdVSA traditionally has had a monopoly on Venezuelan natural gas production. Foreign companies, such as Shell, have operated in joint ventures with PdVSA. However, August 1999 legislation opened up the sector to foreign investment in exploration and production, distribution, transmission, and gasification (although no company would be allowed to explore, produce, and transport in the same region).
The law allows for up to 20 percent to be charged in royalties.Existing natural gas infrastructure consists of 3,000 miles of pipeline, and Venezuela now seeks foreign investors to help expand this network. Three new pipelines are planned as part of a ten-year, $8-10 billion natural gas project to decrease the country's reliance on oil.
The new pipelines would run from the Anaco region in east Venezuela to three destinations: Margarita Island, an oil refinery in Puerto La Cruz on the north coast, and various points in western Venezuela. Construction could begin in 2000, and operations could begin in 2003.
Venezuela is interested in connecting its gas distribution network to that of neighboring Colombia. Through Colombia, Venezuela could connect to much of the South American continent. It also is interested in connecting with northern Brazil.
Venezuela has recoverable coal reserves of approximately 528 million short tons (Mmst), most of which is bituminous. Venezuela is the third largest producer of coal in Latin America, after Colombia and Brazil.
Production in 1997 amounted to over 6 Mmst, with most of it exported, mainly to other countries in the region, the eastern United States, and Europe. The Guasaré Basin, near the Colombian border, is the major coal producing region in Venezuela. Coal production has been limited during the last several years by strains on infrastructure and transportation.
As part of Venezuela's new energy policy, the government announced in April 1999 that it wants to increase production of high-quality coal to 21 million tons per year by 2008, which will require the construction of a railroad.
Total investment in the sector could reach $1.13 billion between 1998 and 2007, including $850 million from private investors. Although domestic consumption in 1997 was only about 1 Mmst, demand is forecast to increase by 29 percent per year in the next two decades, driven by an expansion in the country's energy-intensive industries as a result of improvement in the county's iron, steel and aluminum industries.
Venezulea's coal sector is dominated by Carbozulia, which is owned by PdVSA. Carbozulia operates in joint ventures with a number of foreign companies, such as Shell, Ruhrkohle, and Inter-American Coal.
Current government plans call for opening the sector up further to private operators, extending concessions to 40 years, and improving tax laws. Several foreign companies have been awarded contracts to manage Venezuelan coal mines.
Morrison Knudsen (MK) has a five-year contract with Carbones del Guararé (CdG) to provide mine-management services at its Paso Diablo Mine.
The government also recently granted a permit to Italy’s Coeclerici to manage logistics at Lake Maracaíbo, and to increase export capacity to 7 Mmst per year, from 4 Mmst. Meanwhile, the large Socuy mine is projected to expand its production to 5 Mmst.
The partners in this venture are Shell and Veba. Two other projects involve expansion of the smaller, nearby Mina Norte and Cachiri mines, whose output would be raised up to around 2 Mmst per year.
OIL AND GAS INDUSTRIES:
Organization, Oil and Natural Gas: Petroleos de Venezuela, S.A. (PdVSA, state-held), with some foreign companies involved in joint ventures; Coal: Carbozulia, owned by PdVSA, with some foreign companies involved in joint ventures; Electricity: Several state-held and private utilities, with Edelca as the largest public utility and Elecar as the largest private utility
Major Foreign Oil Company Involvement: Arco, BP Amoco, Chevron, CNPC (China), Conoco, ExxonMobil, Occidental, Pennzoil, Phillips, Repsol-YPF, Shell, Statoil, Texaco, TotalFina, Union Texas, and Veba Oel
Major Domestic Refineries (crude capacity-bbl/d) (1/1/00), PdVSA: El Palito, Puerto Cabello (126,900), Puerto de la Cruz (195,000), San Roque, Anzoategui (5,200); Paraguana Refining Center: Cardon, Falcon (288,230), Judibana, Falcon (612,750), Maracaibo, Zulia (10,800)
Major Oil Fields: Lagunillas, Bachaquero, El Furrial, Centro, Mulata, Lama
Oil Terminals: El Palito, Judibana (Amuay), La Salina, Maracaíbo, Puerto La Cruz, Puerto Miranda, Punta Cardon
© 2000 Mena Report (www.menareport.com)