2nd FWIW - (Notice there's a lot of print about oil these days)
Sunday, June 14, 1998
Oil's Next World Player
With a surging supply of crude reserves and liberalized investment laws,
Venezuela is setting the stage to challenge Middle East producers for
dominance.
By CHRIS KRAUL, Times Staff Writer
PUERTO LA CRUZ, Venezuela--To grasp the magnitude of
Venezuela's growing power in the world oil market, this
scenic Caribbean beach town is a good place to start.
A $14-billion "oil city" is rising in the sand and desert scrub
country at a town called Jose just west of here, a refining complex
and depot that will rival the largest energy installations on earth. It
will handle crude oil piped from the Orinoco Belt oil fields 125 miles
to the south. From there, tankers will haul it to the United States
and elsewhere.
Orinoco is home to oil reserves that seem to grow by the day. It
is a cache() of uniquely tar-like crude that is
yielding itself up to today's oil-recovery technology and launching
Venezuela into the top rank of oil-producing nations.
The Jose complex and the Orinoco Belt are keys to Venezuela's
strategy to double its oil production over the next nine years and
challenge the hegemony of Middle East producers in world
markets. It is already the largest exporter of oil to the United States.
What might surprise those who know Venezuela's recent history
is that most of the big dollars being invested in Jose and in the
Orinoco are coming from foreign companies such as Arco,
Conoco, Mobil, Total of France, and others that were ordered out
of the country in the mid-1970s when Venezuela nationalized its oil
industry.
Their presence in this balmy, sun-splashed resort town is
evidence of a 180-degree turn in Venezuelan policy. Venezuela has
reopened its doors because the state-owned oil company Petroleos
de Venezuela, or PDVSA, needs foreign money and technology to
attain its lofty production goals.
It is part of a broad new apertura, or openness, including
privatization and liberalized investment laws, designed to repair an
economy that for the better part of two decades has been one of
South America's basket cases. State control of many industries
brought highinflation, economic stagnation and political turmoil.
Venezuela is among the last South American countries trying to
introduce free-market principles, especially so since the 1994
election of President Rafael Caldera(). State-owned
businesses ranging from banks, shipping fleets and aluminum mills
have or are being sold to the highest bidder.
Oil development is a national imperative in a country that
depends on oil for up to 60% of the federal budget and nearly half
of its economic output. This year's steep decline in oil prices has
underscored Venezuela's dependence: Oil revenues have tumbled
by at least $4 billion, leading to a loss in investor confidence.
Venezuelan stocks were trading at a 19-month low last week.
* * *
The good news is that Venezuela's proven oil reserves--the
amount considered recoverable at current prices and
technology--have surged from 15 billion barrels in 1976 to 75
billion today. The government has said Orinoco may someday add
up 270 billion barrels more.
"Frankly, they didn't have the cash to develop the oil sector to its
full potential on their own. It's better for their long-term survival to
gain market share, even if you have to give foreigners a piece of the
action," said Rafael de la Fuente, Latin American economist for
Paribas investment bankers in New York.
Venezuela has been laying the groundwork for an expanded
global role, buying the Citgo network of 15,000 gas stations in the
United States and 16 overseas refineries, becoming a vertically
integrated company from wellhead to gas pump. The state-owned
company has drawn a stream of industry plaudits as a leader in
technology and strategic policy.
Now basic economics dictate that there is no reason for
Venezuela to continue to accept the role it took two decades ago as
deferential junior partner to the Middle East members of OPEC,
said Rafael Quijano, a Latin American specialist with Petroleum
Finance Co. in Washington.
"The truism in economics is that more is better than less and
sooner is better than later. When you have the reserves that
Venezuela has, the question becomes: How fast can you exploit the
resource? You can increase the value of it by producing faster,"
Quijano said.
Venezuela's push has implications for prices and even the future
of OPEC, the oil exporters' cartel, of which Venezuela is an
ambivalent and blatantly quota-breaking member. Venezuela
currently pumps out 3.1 million barrels a day, 25% more than its
OPEC quota.
The output from Jose will be a major addition to the pool of oil
available to the United States and other importing nations and is one
key reason many analysts see stable or declining oil prices
continuing for years into the future.
Said De la Fuente of Paribas: "Can they do this in a vacuum
without it having a negative impact on oil prices? My sense is they
are not operating in a vacuum and that these production plans have
been one of the dampening effects on prices in recent months."
PDVSA President Luis Giusti insists prices won't suffer
long-term and that rising global demand and falling or stagnant
future production in such areas as the North Sea, Algeria and the
United States will counterbalance Venezuela's added capacity. His
country is simply trying to expand its market share, maintaining that
it's justified by his country's expanding reserves.
"Why not? We have the markets, we have the reserves, and we
have the industry. Why shouldn't we invest in our most competitive
economic sector when we have the largest competitive advantage?"
said PDVSA chief economist Ramon Espinasa in an interview.
Espinasa described Venezuela's oil resources as "practically
infinite."
* * *
If Venezuela is to reach its targets, it will need some $30 billion
in investment by foreign companies over the next several years. To
attract it, the government has had to convince outside firms that
nationalizations are a thing of the past.
Arco, whose small refinery here was nationalized in 1975, seems
willing to let bygones be bygones, as are dozens of other foreign
companies. There is too much money to be made here to nurse a
grudge. In fact, Arco is spending $3 billion to make Venezuela its
largest source of oil after Alaska over the next decade.
Arco's plans include the lead role in a $3.5-billion consortium in
the Orinoco region to extract super heavy crude, an almost
intractable asphalt-like substance that has been likened to "liquid
street." Early next year, Arco and partners will start drilling 1,000
wells and building a refinery to render the crude into something
marketable.
Last month, Arco raised its Venezuela stakes by agreeing to buy
Union Texas Petroleum in another $3.5-billion deal. UTP's 150
million barrels of lighter crude reserves in western Venezuela was
one of the deal-makers for Arco, said Stephen Mut, Arco's Latin
America manager.
Arco expects Venezuela to eventually provide it with 1 billion
additional barrels on top of its current 4 billion total reserves, he
said. As early as 2002, one-fourth of Arco's global daily crude
production could be coming from here.
"This is a critically important region for Arco. When you are in
the oil production business, you better be where the resource is,"
Mut said in an interview in Caracas, where Arco established a
South American headquarters office in January.
Dozens of other firms see it Arco's way. The Chinese, Japanese
and Norwegian national oil companies, along with Amoco, Exxon
and Texaco(), have joined the Venezuelan
invasion, paying huge prices for rights to develop oil on this
suddenly open market(). Chevron and British
Petroleum joined Arco recently in establishing regional offices in
Caracas.
Venezuela is letting the foreigners "reactivate" oil deposits that
PDVSA once thought were depleted but are now exploitable with
today's technology. Outside companies can also explore for oil in
new blocks on a shared-risk basis with PDVSA.
But the Orinoco Belt and Jose have attracted most of the recent
attention because of the size and cost of the undertaking and
because of the technology advances that now make extracting the
heavy crude feasible. One key is improved horizontal drilling
techniques that involve tapping the reservoir not from directly
overhead but from a right angle.
Another key has been the technique of diluting the thick crude
with a kerosene-like fluid at the wellhead to make it transportable to
Jose by pipeline 125 miles away. The pipeline is actually a loop:
The kerosene is re-sent to the oil field after extraction in Jose.
Three other groups led by Conoco, Mobil and Total plan similar
Orinoco projects in partnership with PDVSA. Exxon and Coastal
may follow. The first, the $2.4-billion Conoco-PDVSA project
called Petrozuata, is nearing completion and will begin shipping the
first Orinoco heavy crude to Conoco's Louisiana refineries by the
end of this year, Conoco's Warren Hairford said.
"With 60,000 barrels a day, Venezuela will be the third-largest
source of crude for us, after the North Sea and the United States,"
Hairford said in an interview at his Puerto La Cruz office. The
Petrozuata project set distance records for horizontal drilling of its
500 wells, he added.
PDVSA, the world's second-largest oil company after Saudi
Arabia's Aramco, is forming a host of joint ventures with foreign
companies to ramp up oil development and raise half the $65 billion
it plans to spend over the next decade to double oil production.
PDVSA is also outsourcing some $10 billion in services that it once
tried to perform in-house.
* * *
Among the beneficiaries of the new openness is San
Diego-based SAIC Corp., which is leading a $1-billion project to
upgrade PDVSA's computerized information management system.
Cheering Venezuela on from the sidelines is the U.S.
Department of Energy, which has been seeking to reduce the U.S.
reliance on Middle East crude since the 1973 oil embargo. To that
end, the DOE has "worked with a number of countries to
encourage policy changes" including Venezuela, said Dave
Pumphrey, the department's director for the office of policy for the
Americas, Asia and Africa.
Since 1977, the U.S. reliance on Middle East oil has fallen from
28% of total imports to 18%, thanks largely to big increases from
Mexico, Venezuela and Canada. The U.S. today imports 9.7
million barrels a day, about 55% of consumption.
"Diversification of oil supplies has been in place for a number of
years within our overall energy policy, so you're less vulnerable to
political disruptions in the world marketplace," Pumphrey said. "It's
like portfolio diversity. You're not as exposed to any type of
interruption in one place."
* * *
Venezuela's Black Gold
One of the world's biggest oil production complex, a $14-billion
project near Puerto La Cruz on the Caribbean shore of Venezuela,
will refine and ship oil piped from the nation's Orinoco belt. The
region, where Arco is a big player, has helped shift the balance of
power in world oil markets away from the Middle East.
Pumping Plans
Venezuela hopes to double its oil production to more than 6
million barrels a day over the next nine years by building a
$14-billion "oil city" on its scenic Caribbean shore. The country,
which holds the world's sixth-largest oil reserves, produced an
average of about 3 million barrels of oil a day last year.
The World's Largest Proven Oil Reserves
Proven oil reserves as of Jan. 1, 1997, in billions of barrels:
Saudi Arabia: 259.0
Iraq: 112.0
Kuwait: 94.0
Iran: 93.0
Abu Dhabi: 92.2
Venezuela: 64.9*
Mexico: 48.8
Russia: 48.6
Libya: 29.50
China: 24.0
*1998 estimate: 75 billion
Venezuela's Oil Production
Average daily crude oil production, in millions of barrels:
1997: 3.18 million
Source: Oil & Gas Journal
Researched by JENNIFER OLDHAM / Los Angeles Times
latimes.com
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