VENEZUELA - Oil Background.

Oil exploration in Venezuela began more than 100 years ago. The country started to produce oil in 1917, when its output averaged 300 b/d. This increased from 1,300 b/d in 1920 to 4,000 b/d in 1921 and 6,100 b/d in 1992. Production averaged 165,500 b/d in 1927. It rose to 370,000 b/d in 1930 and

The country returned to democracy in 1958, two years after its output reached 2.457m b/d. In 1960 Venezuela helped found OPEC at a Baghdad conference, and its output averaged 2.846m b/d. Output peaked at 3.708m b/d in 1970, with the main producers then being Exxon, Shell and other majors.

Output fell to 3.22m b/d in 1972. It exceeded 3.36m b/d in 1973, the year which ended with a quadrupling of world oil prices. In 1976, when the state nationalised the oil industry and PDVSA was created, Venezuela's output averaged 2.294m b/d. It fell gradually in the 1980s due to an oil glut, from 1.895m b/d in 1982 to 1.564m b/d in 1985. Venezuela lost some of its sustainable capacity, partly due to under-production and partly because of poor maintenance. By 1990, the sustainable capacity had fallen to about 2m b/d.

In December 1998 a 180-degree turn occurred as populist Hugo Chavez, then a 44-year old former paratrooper who had staged a failed military coup attempt in 1992, was elected president of the republic. He took office on Feb. 2, 1999.

One day before Chavez took office, on Feb. 1, 1999, Luis Giusti resigned as president of PDVSA. Since then Chavez has forced PDVSA to reverse its opening to foreign oil capital, has worked on a radical new constitution put in place in February 2000 and renamed the country after Simon Bolivar (his 19th century hero). Called "Hurricane Hugo" and barnstorming the business community as being the champion of the poor, Chavez is an ally of Fidel Castro and is rated as the most pupular man in Venezuela's history (see background & The Oil Curse in Downstream Trends of this week)

The Oil & Gas Reserves: Venezuela's Ministry Energy and Petroleum (Menpet) in October 2007 said it had confirmed its proven oil reserves at 100 bn barrels, out of the more than 300 bn barrels estimated to exist under its land and maritime territory. It said the new total was achieved after the latest partial certification of 12.4 bn more barrels in the Orinoco Belt. It said: "The Belt reaches a total of 25.9 bn barrels of oil and 6.4 BCF of gas in proven reserves". It said still remaining to be verified was the "more than 200 bn barrels of petroleum" thought to reside in the country's oil reserves, with which "Venezuela's petroleum reserves would exceed the 300 bn barrel figure that would confirm the country as the one with the largest liquid hydrocarbon reserves in the world".

PDVSA earlier this year assumed control of all oil E&P ventures, including the four Orinoco JV upgraders. Menpet said that, in the so-called Carabobo Blocks 2, 4 and 4, in the Orinoco region, surveyors had certified 20.1 bn barrels of proven crude oil reserves and more than 5 TCF of natural gas reserves. Total gas reserves are put at 152 TCF.

The reserves certification programme, dubbed "Magna Reserva", includes seismic studies conducted by PDVSA and several foreign partners in 27 blocks, and it is the first step towards more aggressive development of the Orinoco Belt oil. Companies which participate in Magna Reserva are likely to be the first considered for new developments. PDVSA has teamed mostly with foreign NOCs for this, including Petrobras (Brazil), PetroPars (Iran), CNPC (China), and ONGC (India).

In 2006, Petrobras (40%) and PDVSA (60%) set up a JV to develop the Carabobo-I block, which Petrobras is exploring as part of Magna Reserva. The project would initially produce 20,000 b/d of extra-heavy crude, peaking at 200,000 b/d. An offsite upgrader would further process the crude into lighter syncrude. This has about 28.6 bn barrels in place, with an expected recovery rate of 20%. Production could begin by 2009.

President Chavez wants OPEC and the IEA to include Orinoco's oils as part of Venezuela's proven oil reserves. Previously it was said the Orinoco oils and bitumen would be recognised as conventional by 2021. Chavez says inclusion of the Orinoco deposits would make Venezuela home to the world's largest oil reserves. But Saudi Oil Minister Ali al-Na'imi in 2005 said his country's reserves could be increased to 464 bn barrels.

Operations in the petroleum sector declined considerably after nationwide strikes in December 2002 and January 2003 which caused oil exports to be suspended and led to the sacking of 18,000 of PDVSA's personnel (see DT). A resultant shortage of geologists, reservoir engineers and other upstream experts affected E&P operations. Since then, oil production capacity has been declining steadily because of under-investment, with President Chavez diverting much of PDVSA's income towards his social projects and aid to power states in Latin America.

Before the strikes, exploration was directed towards increasing the reserves of light oil and natural gas which are mainly offshore in eastern Venezuela. Work also concentrated on Lake Maracaibo, the southern end of Lake Maracaibo, northern and central Monagas, western and eastern Zulia, central Anzoategui, the Andean flank, and Barinas. The Zuata field and the Orinoco belt stood out for an increase in the oil recovery factor.

In August 2002, PDVSA launched a major five-year exploration programme intended to raise its oil production potential to new levels. The novel aspect of this, dubbed Vision, was its integrated view of the country for exploration - including a vast offshore sector encompassing much of the Caribbean coastline and a strip of the Atlantic. The project also incorporated downstream analysis. Felipe Audemard, then the PDVSA executive who was overseeing the Vision, said: "We are selecting areas on the basis of business and technical criteria. In some areas the focus is gas, in others, such as the western continental play, oil is the driver". The plan included 16,000 km of new 2D seismic, 22,000 sq km of 3D data and 168 exploration wells.

The most visible aspect of this project was a 10-well exploration programme in the offshore gas play known as Plataforma Deltana, north-east of Venezuela, where PDVSA has offered five blocks to foreign companies. PDVSA in 2003 was in a campaign to acquire a big volume of seismic data to lay the groundwork for the new exploration concept (see background in Vol. 61, Gas Market Trends No. 18).

New concepts resulted in a major new oil discovery, Ceuta-Tomoporo. Based on the premise of Venezuela's ancient geological link with Africa, PDVSA has focused on an under-explored south-western region known as the Western Llanos. Outcrop studies over the last eight years identified some pre-Cretaceous source rocks and oil seepage in the Andean region. Some of the Palaeozoic Fms tend to run too deep for commercial purposes but an encouraging trend at about 12,000 feet or less has been identified.

PDVSA in 2003 gave a contract for a first 2D seismic shoot of 1,100 km. Plans to acquire 3D seismic was to depend on the results of this first phase. Taken together with existing projects such as Plataforma Deltana, PDVSA said it could prove up 91 bn barrels of oil and 38 TCF of gas then rated as probable. Under the "yet to find" category, the company listed another 84m barrels of oil and 246 TCF of gas.

Chevron in June 2005 announced a major gas find at the offshore Macuira 1X exploration well on Deltana's platform, advancing its plans to evaluate Venezuela's first LNG project. Chevron operates Block 3. PDVSA has an option of getting up to 35% in the block on declaration of commerciality (see gmt18VenzGeolOct31-05).

StatoilHydro in late October 2007 completed the third and last well of the minimum exploration programme of Deltana's Block 4. The campaign, begun in December 2004, found gas-bearing sands in the Cocuina and Ballena areas. The Orca well was not successful. StatoilHydro and its partner Total, based on thorough evaluations of the results of this exploration campaign have proposed to Menpet to retain acreage around Cocuina in order to assess commerciality. Block 4 is a licence awarded to Statoil in 2003. StatoilHydro, with a 51% interest, is the operator in which Total has the remaining 49%. Statoil has been present in Venezuela since 1995, and participates in Sincor, the most successful project in the Orinoco Belt which produces, upgrades, and commercialises extra heavy crude oil.

In 2002 PDVSA found Ceuta-Tomoporo oilfield, which will be developed on a big scale. The Tomoporo extension, which officials say has more than 500m barrels in reserves, is located at the south-east margin of Lake Maracaibo.

Earlier this year, PDVSA took control of the four Orinoco JVs, with ExxonMobil and ConocoPhillips having abandoned their assets in Venezuela and suing Caracas for compensation (see OMT). Few in the oil industry believe PDVSA will manage to efficiently run these projects by itself in the long run, an argument the Chavez administration calls unfair. Minister and PDVSA's CEO Ramirez says the Orinoco region is operating smoothly and now produces about 600,000 b/d, for a total national output of 3.2m b/d. But these are widely disputed. Secondary sources, including analysts and the Paris-based IEA, say the country's real production of crude oil sits closer to 2.4m b/d. PDVSA, critics say, has failed to recover from the crippling 2002/03 oil strike which brought the industry to its knees. PDVSA also suffered from Chavez's decision to fire thousands of experienced industry executives in the weeks following that strike.

PDVSA in October 2007 signed a deal to drill 21 gas wells off the coast as part of its Mariscal Sucre gas project. It signed a four-year contract with Neptune Marine Oil & Gas Ltd, a drilling contractor based in Singapore, for $785m. The Neptune Discoverer will begin work in February. The Mariscal Sucre project is the cornerstone of Chavez' plan to boost gas output for local consumption and export. PDVSA and Petrobras are to jointly develop four Mariscal Sucre gas fields, but so far the companies have yet to settle the terms of investment or a production plan. The project is estimated to cost $3 bn. Petrobras and PDVSA differ on the destination of gas sales. Petrobras wants to sell most of it as LNG, while PDVSA favours selling the bulk of the output locally, for much lower prices. PDVSA wants to begin production in late 2010.

Russian state-controlled giant Gazprom's affiliate Zarubezhneftegaz on Sept. 20 said in the fourth quarter of 2007 it will begin drilling in two offshore blocks: Urumaco-1 and Urumaco-2. Zarubezhneftegaz has calculated there to be 100 BCM (3.4 TCF) of gas in those blocks. It recently concluded its geological work on the blocks.

Venezuelan Vice President Jorge Rodriguez was in Moscow in September and met with Gazprom CEO Alexei Miller, with whom he discussed matters related to "development of bilateral co-operation in the area of energy over the long term". The Russian giant then said: "At the meeting, [they] discussed the...participation of Gazprom in the construction of energy infrastructure in Venezuelan territory and also possible co-operation in other projects in the maritime region and on the continent". Moscow told Rodriguez Gazprom was interested in Caracas' plan for a gas pipeline spanning much of South America.

At a meeting of the Russian-Venezuelan High Level Commission, of which Rodriguez and Russian Deputy PM Alexandr Zhukov are co-chairmen, Zhukov said: "That 'southern ring' will unite in an energy network Venezuela, Brazil, Argentina, Uruguay, Paraguay and Bolivia". He said: "the constructive dialogue between Russia and Venezuela comes accompanied by a positive dynamic in bilateral economic co-operation, above all in the energy and fuel sector". He noted that "leading Russian companies in the sector, like Gazprom and LUKoil, are already working with success in Venezuela". Zhukov and Rodriguez emphasised the importance of the first meeting held in Moscow by the Russian-Venezuelan Business Council. The High Level Commission, meeting on Oct. 24 in Caracas, discussed a planned encounter between Russian President Vladimir Putin and Chavez. Chavez has already visited Russia five times and in September invited Putin to visit Venezuela. (Bilateral trade increased almost sevenfold over the past two years, from $77.5m in 2005 to $517m in 2006, although of that amount no less than $456.5m were Russian exports to Venezuela. That increase was due mostly to military co-operation, since Venezuela in the last two years signed nearly $4 bn worth of contracts with Russia to buy 24 fighter-bombers, 50 combat and transport helicopters, air-defence systems and 100,000 Kalashnikov assault rifles).

Zhukov in September said: "It's time to move to a new model of co-operation, a more perfect [one], which includes an increase in industrial production, in merchandise and services in transformation industries and in high-tech in Russian and Venezuelan supplies". Among the most attractive JVs, Zhukov emphasised plans by Rusal Corp to create a mixed firm to extract bauxite and produce aluminum oxide, aluminium and alloys in Venezuela, as well as construction of a fertiliser plant. He mentioned construction of the Uribante-Caparo hydro-power complex and the prospecting and extraction of gas off the western coast of Venezuela.

PDVSA on Oct. 25 announced that the fourth meeting of the High-Level Commission (CIAN) with Russia in Caracas was a success with seven agreements signed. Highlights of the contracts included study, quantification and certification of the reserves in the Ayacucho-2 Block and the Gaza Petrolifero Orinoco between PDVSA and TNK-BP. President Chavez was then quoted as praising Russia for its support, saying Moscow had been there for Venezuela during its hard times. Chavez added: "Agreements like these show the great efficiency and achievement that we have obtained to bring our communities and governments closer, relationships necessary and strategic to construct a multi-polar and balanced world. The Russians and Venezuelans long for a different world and America". Minister and PDVSA President Ramirez added: "Russia has an important role to play in the vision of the [Venezuelan] State to diversity our markets and relationships, and enter and have a presence in our country like never before to develop oil and energy activities". CIAN approved the purchase of 20,000 tons of pipes for strengthening the oil infrastructure, as well as the contract award to a Venezuelan company for water pumps.

LUKoil, close to the Kremlin and 20% owned by ConocoPhillips, has been developing its business in Venezuela. Among other projects in the country, LUKoil and PDVSA are jointly to develop a part of the Orinoco Belt's bitumen reserves. This Russian connection may help ConocoPhillips and PDVSA find a compromise formula as the US major is set to file for arbitration over assets it formerly owned in Venezuela; in June it abandoned two heavy oil JVs in the Orinoco Belt after PDVSA assumed majority ownership of all JVs involving IOCs and local private firms. ExxonMobil, which rejected new PDVSA contract terms, has filed for arbitration. (Chavez' government assumed majority control in May of the Cerro Negro heavy oil project. The oil fields and heavy crude upgrading plants in the Orinoco River basin were run for more than a decade under contracts by six major IOCs. Chevron, BP, Total and Statoil agreed to stay on as minority partners. But Exxon and Conoco balked at the tougher terms).

Galp Energia of Purtugal in September 2007 confirmed it was in talks with PDVSA about JVs in Venezuela in oil and gas E&P, in a filing requested by stock market regulator CMVM to clarify earlier press reports. It was later said that Galp and PDVSA were in talks to create a JV to supply crude oil to Portugal, citing Galp's CEO Manuel Ferreira de Oliveira. De Oliveira was quoted as saying an agreement was to be signed in October and that Galp would be involved in E&P activities in Venezuela. Galp is aiming for the American continent to serve a third of its energy needs, with Africa and the Middle East serving the other two thirds.

PDVSA board member and VP for E&P Luis Vierma on Sept. 4 spoke of a serious shortage of drilling rigs in Venezuela. He said PDVSA had no plans to relax its demands on oil service firms seeking business in Venezuela, despite the rig shortage, adding: "We won't relax absolutely anything in the [oil rig] tenders. We will look for oil rigs everywhere". He said PDVSA will continue to insist on a number of terms from these firms, "particularly the clause that demands they devote money to social investments".

PDVSA then was conducting a 53-rig tender requiring that service firms operating in Venezuela donate money for social investments, among others terms. PDVSA's stiff terms led rig suppliers to desert previous tender. Vierma and Minister Ramirez claim foreign firms had orchestrated a "boycott", to make life harder for the Chavez revolution. PDVSA then insisted on having results from the 53-rig tender in a month. These new rigs, Vierma said, should allow PDVSA to "maintain and even increase [oil] production". He said some foreign service companies already had made some offers, but he gave no details.

PDVSA continues to suffer from an oil rig shortage which recently forced authorities to declare an "operational emergency". PDVSA expects to have 135 rigs by end-2007. But that would fall short of its original 191-rig plan set early in the year.

Winds of resource nationalism now are in direct conflict with IOCs, which are facing structural, cyclical and political challenges. With Chavez in the lead, governments from Latin America to the Far East are bent on challenging the prevalent world order. Nigeria, Africa's largest oil producer, is to renegotiate all JVs and PSAs with IOCs.

In Kazakhstan, authorities have fined Chevron $609m for alleged environmental lapses, the latest in a number of moves against foreign investors in the Tengiz oilfield. Agip KCO, an international consortium developing a huge oilfield in the Kazakh sector of the Caspian Sea, is under pressure to revise its PSA giving the government better terms. The consortium has once again delayed the start of commercial production and increased the cost budget. Agip KCO regards these as the result of significant complexities in developing a unique series of oil deposits. Astana now wants to revise PSA terms to give the government control over the JV and a higher share of profits. Kazakh MPs recently approved a law allowing the government to break PSAs with IOCs. The move threatens to undermine existing commercial deals in the oil-rich country.

Russia has arm-twisted Shell and other global majors. Once Russian officials stepped up complaints about environmental breaches, Shell and its partners got the message and had to sell a majority stake in the Sakhalin-II JV to Gazprom in 2006. Something similar happened to TNK-BP which had a majority share in Kovykta, a huge gas field in eastern Siberia. A draft law in Iraq allowing IOCs a major stake in the petroleum industry is under severe strain and the possibility of it being enacted is remote, despite tremendous pressure and lobbying from Washington. Resource nationalism has reached Algeria and several other countries. With NOCs undertaking ever more challenging E&P operations, competition between oil services providers and IOCs to provide technical support will intensify. Such competition is likely to radically reshape the petroleum industry.