Oil and Gas in the Capitals

	Vol. 231 No. 3
DAYSE ABRANTES, CONTRIBUTING EDITOR, LATIN AMERICA

Venezuela’s heavy oil woos amid electricity woes

Although several private and state-owned oil companies decided to sit out the auction, Venezuela is one step closer to realization of projects in the promising Carabobo area of the Orinoco heavy oil belt after the biggest oil auction of President Hugo Chavez’s 11-year rule.

According to a recent assessment by the US Geological Survey, the Orinoco belt holds 1.3 trillion bbl of heavy oil in place. The report said that, with the use of widespread horizontal drilling and thermal recovery methods such as steam-assisted gravity drainage, the median recovery factor for the Orinoco resources is 45%. This places the area’s technically recoverable resources between 380 billion bbl and 652 billion bbl, with a mean case of 513 billion bbl. Despite a nationalization of Orinoco operations just three years ago, those mind-boggling figures attracted several multinational oil companies to a round of bids that, after many delays, took place on Jan. 29.

In a televised speech on Feb. 10, Energy and Petroleum Minister and PDVSA President Rafael Ramírez announced that PDVSA will form joint ventures with two consortia to develop two projects in the Carabobo. Each consortium will hold 40%, with the remaining 60% going to PDVSA.

Chevron will develop the Carabobo-3 project along with two Japanese companies, Mitsubishi and Inpex, plus Venezuela’s Suelopetrol CA, Ramírez said.

Repsol will develop the Carabobo-1 block along with Malaysia’s Petroliam Nasional Bhd. and three Indian state companies: Oil & Natural Gas Corp., Indian Oil Corp. and Oil India Ltd. The Carabobo–2 block was not awarded.

Ramírez said the consortium agreements will be sent to Congress for approval after they are finalized and signed in March. Under the terms, the successful bidders are required to produce 400,000 bpd from each block. They also must finance the entire costs of the projects, estimated at $10–12 billion each.

Speaking after Ramírez, President Chavez sought to assuage oil companies’ fear of a new round of nationalizations. “Foreign oil investment is absolutely necessary to develop our reserves, and the investments by foreign companies will be respected under the law,” Chavez said.

Despite Chavez’s reassurances, past experience to the contrary led several oil companies to avoid risking large amounts of money. BP, China National Petroleum Corp., Brazil’s Petrobras, Italy’s Eni, Portugal’s Galp Energia, Royal Dutch Shell, Norway’s Statoil, France’s Total, and a consortium of Russian firms did not participate in the auction.

However, Eni and the Russian companies inked separate deals with the Venezuelan government around the same time to develop projects in the Junin area, elsewhere in the Orinoco belt.

The Venezuelan government is finally figuring out how to successfully reach out to foreign investors to help develop its heavy oil resources after years of animosity. At the same time, however, it is becoming apparent that another energy sector—the country’s electricity generation and supply system—is in desperate need of investment, with no help in sight.

This year started on the wrong foot for Venezuela’s electricity sector. On Jan. 1,
Chavez implemented measures rationing electricity amid a severe drought that threatens the country’s main source of electricity. Ironically—for an OPEC member—Venezuela depends primarily on hydroelectric dams to power its grid.

Experts attribute the drought to oceanic and atmospheric changes linked to the El Niño phenomenon. Last year, these weather shifts caused four nationwide blackouts, with daily failures common in several cities. The new regulations, including rate hikes and reduced limits for business consumption, are likely to remain in effect until May, when seasonal rains are expected to return.

The problem has been exacerbated by a major decrease in gas imports from Colombia, which fell to just 60 MMcfd from 179 MMcfd in January 2009.

Electricity demand in Venezuela is more than 16,500 MW. It has increased by about 5,000 MW since 1998, according to numbers cited by Chavez in October during a nationally televised meeting with his Council of Ministers.

Venezuela’s government estimates that the power sector requires $18 billion in investment through 2014. Chavez has asked Cuba for help in resolving Venezuela’s electricity problems—curiously, since the island nation also faces frequent power outages.

Other countries in the region are also being approached for assistance. Ecuador’s energy minister, Miguel Calahorrano, recently told state newspaper El Ciudadano that his country may export electricity to Venezuela via Colombia, which lies between the two countries. However, Ecuador also suffered from shortages from November to January, sparked by the same drought, which hurt water supplies to its main hydroelectric plant in Paute.

Venezuela recently spurned an offer to buy directly from Colombia, indicative of the increasingly strained relations between the two countries. Long-standing tensions have worsened in recent months over Colombia’s agreement to give the US military more access to its military bases—a deal that Chavez calls a threat to Venezuela. However, Venezuelan officials have since said that they are considering the deal. Another offer from Brazil is also under consideration.

Importing electricity from one of these countries will probably be necessary for Venezuela in the short term, but in no way is it sufficient in the long term. The state electrical company, Corpoelectric, has struggled from a lack of investment since it was created by the merger of regional electrical companies in 2007.

What Venezuela really needs is an influx of private investment to help it diversify its electricity supply base and modernize its transmission network—the kind of private investment that is finally yielding results in the country’s oil sector. Finding ways to lure foreign companies to invest there was a long and arduous process, with many starts and stops. For Venezuela’s electricity sector, the learning curve will have to be much steeper to keep up with the country’s ballooning demand. WO