Tightening the Belt: Venezuela's Oil Complex

Despite harbouring enviable oil reserves, Venezuela's resistance to foreign investment has so far stunted exploitation. Sarah Blackman reports on an evolving industry.


A fixation on nationalisation and a reputation for curbing foreign investment has, for a long time, stood in the way of Venezuela becoming the largest oil producer in the world.

Industry reports that the country has at least 100 billion barrels of proven oil reserves — mainly ultra-heavy crude buried onshore — should be reason enough to attract the interest of global financiers. However, an unpredictable government, led by Hugo Chávez, has made it difficult to penetrate.

But the situation is showing signs of change; Venezuela is beginning let down its guard, and not a moment too soon, as oil production in the country is rapidly declining and foreign investment is needed more than ever. But will international players tolerate Venezuela's notoriously strict terms and conditions?

Nationalisation

In recent years, Venezuela has focused on the nationalisation of oil and gas resources, claiming the majority share in million-dollar projects. In 2006, the country implemented the 2001 Hydrocarbon Law, which introduced a system of ownership on oil fields and empresas mixtas (joint venture companies).

One of the reasons why Hugo Chávez introduced such policies was to gain control over PetrĂ³leos de Venezuela (PDVSA), which now has a minimum 60% stake in all oil projects around the country. But these decisions have since back-fired on Venezuela, according to Scott Pearson, an analyst for Latin America upstream research at Wood Mackenzie.

"In recent years, Venezuela has focused on the nationalisation of oil and gas resources."

"A couple of massive players, ExxonMobil and ConocoPhillips, decided that they couldn't accept these new terms so they left the country," says Pearson. "The nationalisation laws have absolutely hindered international investment."

A number of foreign oil companies have also halted their services due to non-payment, according to a report published by research company GlobalData in 2009. Ensco International, for example, terminated a drilling contract with PDVSA as the latter took control of a rig and failed to pay off its debts.

It's fair to say that PDVSA's close involvement with all aspects of the industry makes other players nervous about diverting capital to the region. Omar Rahim, energy trader for global consultancy firm Inenco, explains why, "Where a project is self-financed, shareholders often do not support the investment given the Government's tendency to retrospectively amend or, indeed, tear-up contracts."

PDVSA fallout

Before the 2001 Hydrocarbons Law was introduced, the President announced that 10% of PDVSA's annual investment budget would be spent on social programmes. The company didn't take kindly this decision, however, and in December 2002 — in the midst of anti-government protests which attempted to overthrow the president — PDVSA's workers went on strike. And, as a result, 20,000 workers considered to be non-supporters of Chavez were struck off.

Once again, this decision cost Venezuela dearly, as a cut in staff also meant a cut in sector know-how, explains Rahim, "PDVSA has an unenviable reputation of not investing in the necessary technology, which results in shutdowns and lost production time, as well as potential damage to equipment. This was exemplified by the recent fire at the 600,000 barrels-per-day Amuay facility."

Despite a lack of faith in the Venezuelan oil industry, its reserves alone mean that some hungry foreign investors are still willing to take a chance on the country. And, finally, they are being given a slice of the action.

Exploiting new projects

During political its disputes with both local and international oil companies, Venezuela not only lost out on vital industry expertise but also the necessary funds to undertake new projects and boost production. And, at the moment, the country is treading the same old ground.

"Despite a lack of faith in the Venezuelan oil industry, its reserves alone mean that some hungry foreign investors are still willing to take a chance."

Pearson explains, "We are not under any doubt that production in Venezuela is declining because it is working on mature fields, so year by year it is producing less and less."

Indeed, many parts of the country's Orinoco heavy oil belt, a field believed to have 513,000 barrels of oil in place, are still undeveloped, but future projects are set to change this.

Last year Venezuela held the Carabobo licensing round and awarded two contracts for projects that will be located in the belt. It is hoped that the projects will each produce 400,000-480,000 barrels per day, with the help of contract winners Chevron, based in the US, and Repsol, based in Spain.

As part of its Oil Sowing Plan, Venezuela also hopes to involve international players in 30% of its heavy crude projects, a move which proves the country's growing willingness to bring foreign players into the picture.

One to watch

Although some key players in the oil industry have been put off by Venezuela's ownerships rules, others have not been fazed, simply because the country is rich in unconventional oil reserves. GlobalData senior analyst Kashyap Ramprasad explains, "Easy to extract oil is something that is dwindling at a very fast rate worldwide. Companies have to look to exploit unconventional oil reserves and these are mostly available in very large deposits across Venezuela and Canada."

Rahim seconds that argument and adds, "Oil companies will be keeping a close eye on developments in the country, in much the same way that Libya was persuaded to let foreign investors come on board."

"Many parts of the country's Orinoco heavy oil belt, a field believed to have 513,000 barrels of oil in place, are still undeveloped."

Venezuela certainly has the reserves to support future production growth, but for now the consensus among analysts is that the country still has a long way to go before it catches up with its fellow OPEC members.

Pearson says that Venezuela is already a leader in the oil sector but it is yet to make the most of its own assets: "The Government came out with an energy strategy plan in 2008, where the target was to produce 5.8 million barrels a day by 2013. They are nowhere near this target.

"In the short term, Venezuela doesn't have the production capacity like other countries do, where they can quickly increase production in certain fields. But, that is not to say that one day they couldn't."