Venezuela’s Oil Sword

This week, the U.S. slammed Venezuela’s state oil

company PDVSA with sanctions in an attempt to
deter its trade with Iran. “Sanctions against the
Fatherland of Bolivia? Imposed by the Gringo
imperialist? Well, welcome Mr. Obama, don’t forget
we are the children of Bolivar!” responded
Venezuelan president Hugo Chavez via his Twitter
account.

Chavez has long antagonized the United States, and the sanctions he faces are
nominal. As an energy economist would say, they’ve been factored into the cost of
business. The back-and-forth is expected and therefore inconsequential to oil markets.

It’s the uncertain quantity and quality of Venezuela’s oil reserves that keep U.S.
foreign policy analysts and energy forecasters up at night. Like Saudi Arabia’s national
oil company, PDVSA operates behind a cloak of secrecy. The Venezuelan constitution
strictly forbids foreign investment in upstream oil activities. U.S. oil companies
ExxonMobil and ConocoPhillips exited Venezuela in 2007 due to nationalization
reforms.

The U.S. can estimate Venezuela’s oil capacity. Currently, Venezuela comprises about
10 percent of U.S. oil imports; it ships about 45 percent of its oil to the United States.
CITGO Petroleum Company, a subdivision of PDVSA, markets gasoline to U.S.
customers through 14,000 independent retail outlets in America. According to Oil and
Gas Journal, right now Venezuela boasts 211 billion barrels of proven oil reserves, the
second largest such reserves in the world behind Saudi Arabia. Its 2010 production
totaled 2.36 million barrels per day.

Venezuela and Saudi Arabia’s true petroleum potential, however, depends on

responsible well stewardship.

It’s been six years since the late U.S. energy banker Matthew Simmons released his
detailed analysis of Saudi well quality, Twilight in the Desert: The Coming Saudi Oil
Shock and the World Economy. Simmons, founder of the Houston-based energy
investment bank Simmons & Company International, died last year, depriving the
world of a precious resource for novice energy researchers. His colorful, lucid slide
shows on global oil production appeared regularly on his firm website. Thirty years of
field experience backed his warnings for the oil industry. Simmons distinguished
crude varietals with the zest of a wine aficionado and built economic models with the
precision of a banker. Twilight in the Desert offers a context for judging Venezuela’s
oil production.

After studying an archive of hundreds of petroleum engineering papers, Simmons

projects rapid production declines from Saudi Arabia’s greatest oil fields—the “super-
giants” that have sustained world economic growth for the last fifty years.
Overproduction, he fears, has spoiled most Saudi fields, lowering their final
recoverable volume. Coaxing out their last barrels would require considerable time,
money, and energy for secondary and tertiary oil recovery techniques. Diminished
long-term production would threaten the Saudi government’s ability to add spare
capacity to the world oil market and provide a cushion in times of supply shock.

The U.S. depends on spare capacity from Venezuela, too. Only four to five days by
tanker, the U.S. market is the most cost-efficient destination for 1.5 million barrels per
day of Venezuelan oil. In an emergency, Saudi crude is six weeks away from the
United States. But Venezuela’s oil may be closer to its twilight than Saudi Arabia’s.
The handful of major oil fields that produce the Venezuela’s exporting capacity are
even older than the Saudi ones that Simmons condemns as “mature” and “aging” in
Twilight in the Desert. The oldest Venezuelan field, Lagunilla, was discovered in 1926;
its prime production years were long ago. The U.S. Energy Information
Administration estimates that PDVSA spends $3 billion a year to maintain current
production levels from old fields.

Even if Venezuela has maintained its wells, the bulk of its oil reserves are poor in
quality—perhaps worse than we know. High-grade petroleum, or light, sweet crude in
industry parlance, easily refines into high-demand end-products like gasoline and jet
fuel. Sweetness refers to low sulfur content; lightness refers to low density. Saudi
Arabia prides itself on its geysers of light-sweet crude gushing from Jurassic rock.
Low-grade petroleum, or heavy, sour crude, is Venezuela’s specialty.

The use of Venezuela’s heavy oil reserves in the Orinoco Belt depends on the sufficient
refinery capacity in the United States to convert that raw crude into the jet fuel,
gasoline, heating oil, and diesel that power our energy-intensive lifestyles. The largest
number of refineries in the United States can economically process light, sweet crude
oils, while only a small fraction of refineries can effectively use heavy, sulfurous crude.
Because of its proximity to Venezuela, the majority of these U.S. heavy-oil refineries
are concentrated along the Gulf of Mexico. Were another hurricane like Katrina to
inundate the Gulf coast, the U.S. would have no capacity to process most Venezuelan
oil.

The latest news out of Caracas casts doubt on the ability of Chavez’s government to
manage its energy sector.

Earlier this month, Venezuela began rationing electricity after blackouts afflicted
nearly half the country. The sudden power outage halted operations at its largest oil
refinery complex. Venezuela’s oil sector actually shrank during first quarter 2011, even
as crude price averaged $91/barrel and its economy posted GDP growth of 4.5
percent. The International Monetary Fund projects the country to grow slower than
any other major economy in Latin America. The bottom line: Venezuela’s petroleum
exports have dropped almost 50 percent since peaking in 1997.

There are sources of hope. Soon, when Mexico becomes a net oil importer, the U.S. will
surely pressure Venezuela to accept foreign oil inspectors and advisers who can help
PDVSA maximize its recoverable reserves. Hugo Chavez could lose re-election next
year, if democratic fever spreads from the Arab world to Latin America.

If they ultimately help us discover the true measure of Venezuela’s oil affluence, then
perhaps we can declare the U.S. sanctions against PDVSA a success.

This article was written by John Dos Passos Coggin.