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PDVSA’s Credibility Problem

PDVSA’s chief Rafael Ramirez faces a huge credibility problem over his investment plans.


Energy Minister and President of Petroleos de Venezuela, Rafael Ramirez, is developing a huge credibility gap in international petroleum circles. He claims, for example, that the Venezuelan state-owned oil company, together with foreign partners, will invest some $120 billion during the next seven or eight years in the Orinoco region, in order to establish a production of about 3 million barrels per day in that region.

Since the Venezuelan oil company has to provide 60 percent of this investment this means that they would have to contribute about $72 billion during that period. No one believes that it is logistically possible to invest efficiently $12 billion per year into the Orinoco area, in parallel with all other oil activities that should take place in the rest of the country. No one believes PDVSA can invest close to $7 billion per year of its own money in the Orinoco region. The country simply does not have that kind of money. In fact, both the country and PDVSA are increasingly growing their debt due to commitments that clearly exceed their financial capabilities, some of them not even related to oil.

Ramirez also claims that the U.S. companies that worked in the Orinoco area in the past “did not want” to recover all of the oil that could be recovered. He mentions often that previous operators only recovered some 6 percent of the oil in place, while current management is “ordering” the foreign partners to recover no less than 20 percent of the oil in place. This reasoning shows ignorance of the way oil reservoirs behave. The recovery factor of any given reservoir can only be established with precision after a considerable production history has been recorded in the area. The Orinoco heavy oil reservoirs (there are hundreds of small, different reservoirs) are still in a very early stage of development. To “order” a company to recover no less than 20 percent of the oil in place is meaningless. Nature does not obey government decrees. The recovery factor of 20 percent, or even more, could be possible given enough time and better knowledge of the multiple reservoirs existing in the region but is far from being a given. Traditionally a lower recovery factor of some 10-12 percent has been assumed given the nature of the oil, the lack of a significant water or gas drive and the apparent absence of compaction (again, this will not be known until a much longer development record is established in the region). Today, the Venezuelan government has used an arbitrary recovery factor of some 20-25 percent in order to claim much larger “proven reserves”, in violation of international standards.

David Fyfe, Head of the Oil Industry and Markets Division at the International Energy Agency IEA), makes what seems like a more realistic assessment of the Orinoco medium-term outlook. In a recent paper titled The role of heavy oil in meeting future demand, Mr. Fyfe states: "Venezuelan heavy oil production [has] enormous potential but plenty of problems." Among the problems Mr. Fyfe lists: "unattractive terms, the nationalization of foreign assets and national oil companies becoming favored at the expense of international oil companies."  Because of these and other reasons PDVSA’s goal of 3 million barrels per day in the Orinoco region "looks remote with the present investment regime." The IEA estimates a new Orinoco oil production of some 250,000-300,000 barrels per day by 2015, a volume “that would only partly upset declining production elsewhere in Venezuela”. The new Orinoco projects, Mr. Fyfe adds, "are showing substantial delays given the current operating environment in the country.”

Knowing the current operating environment rather well, I have to agree with Mr. Fyfe’s assessment. The operational layout in the Orinoco area resembles a Babel tower, with Chinese, Russian, Iranian, Spanish, Vietnamese, Italian and English companies working or thinking of working in adjacent blocks, under the supervision of a majority partner possessing a mediocre, politically driven, managerial staff.

This is why Mr. Ramirez is finding increasingly skeptical audiences for his rosy presentations on the Orinoco region. 

Gustavo Coronel, a 28-year oil industry veteran, was a member of the first board of directors of Petroleos de Venezuela (PDVSA) and is the author of several books.



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