Venezuela has the world’s largest oil reserves…

How many times have you read this line? Too many to count?  While it’s plainly true, it’s also deeply misleading. It ignores a glaring fact about the gobs of oil under our soil: most of it will never see the light of day. I’m about to take you through the numbers, so buckle up:

Let’s assume that in 2016 Venezuela produces 2.4 million barrels of oil per day (these are round numbers, deal with it.)  Of these 2.4 million barrels, some 600 thousand barrels go to Chevy Caprices from 1980, (i.e., domestic consumption). That leaves 1.8 million barrels per day for exports, which is roughly $26 billion per year at $40/barrel – assuming we get paid in cash for oil exports!

Since oil is 95% of Venezuela’s exports, and we have no savings left to unsave, we have $26 billion to import what we need to function as a country, compared to $45 billion/year since 2008. To me, that means that to go back to “normal” imports-wise, we would need to increase export revenues by more than 70%!

All things equal, this means increasing oil exports by 70%, from 1.8 million barrels per day to 3.1 million barrels per day, and oil production by more than 50%, from 2.4 million barrels per day to 3.7 million barrels per day (which by the way, is roughly what Venezuela produced in 1998…).

Will we be able to sell this oil at $40/barrel forever though?

Before answering this question, let’s travel to the future.  Imagine it is the year 2100. It’s been 70 years since the world reached peak oil demand in 2030.  Electric cars took over Detroit and the world is running on solar, wind, hydro, hydrogen and some gas rather than oil or coal. The little oil demand left around the world comes from petrochemicals, from back up fuel and from few poor countries that are still trying to catch up.  This caused a collapse in oil prices to let’s say $10 per barrel, with no prospect of ever picking up.

It should be obvious: the notion that we can sustain current production levels for over 200 years is absolutely wrong.  The most likely outcome is that within the century, we will virtually stop producing oil and leave a good share of those reserves (and revenues) forever underground.  

So what should we do if our main export has an expiry date?

Russia and Saudi Arabia know. Rather than working with OPEC to hike prices, they’ve protected their market share by maxing out production and driving out higher-cost producers. They’re trying to  extract all they can can as fast as they can and at the lowest possible cost.

To avoid leaving billion of barrels of reserves (and $$) untapped, we should do the same.

So what does a massive production hike actually look like?  Let’s assume that the current production level of conventional oil (1.2 million barrels per day) is somehow maintained flat through a combination of enhanced oil recovery techniques, development of the proven reserves and some exploration.  That leaves the real production growth to the Faja.  The Faja would need to more than double production from 1.2 million barrels per day to 2.5 million barrels per day.  To put it in context, we would need to double the five Faja projects in operation that were conceived in the 90s.  Achieving this would allow us to produce 3.7 million barrels a day, satisfy the domestic demand of 600 thousand barrels per day, leave 3.1 million barrels per day for exports that @ $40 per barrel would in turn allow for imports of $45 billion (in line with the recent history average).

Sustaining a production level of 3.7 million barrels per day flat over the next 84 years yields 113 billion barrels.  But hold on a second, Venezuela has 300 billion barrels in reserves right?  So even if we take on the mammoth task of producing 113 billion barrels through the year 2100, we would have produced less than 40% of our reserves and had left underground 186 billion barrels of reserves!  

That lazy line about the world’s “largest oil reserves” has begun to disfigure our conversation about oil. Until we realize that the most likely outcome is that a big share of it will stay underground.  If we want to have a chance as a society, to realize the oil wealth that lies underground, we need to move, and quickly, as we are running against the clock here.  We must instill the sense of urgency in our society and in the political class to act boldly and decisively.

55 COMMENTS

    • Based on the laws of supply and demand, the answer is yes. However The world produces north of 90 million barrels per day of oil, if Venezuela increases one million it does not much the dial that much. Secondly and most importantly the question is how to behave in a resource abundant world where the resource in question is going to stop being used in few decades? well, despite dropping the price the logic reaction should be to extract the most of it as fast as possible and at the lowest possible cost. As long as you are barrels are profitable keep pumping.

  1. “…to act boldly and decisively..” Are we talking about Venezuela? Really? Nice analysis but the only decisive and bold moves made by the “leaders” are to steal as much as possible as quickly as possible. They could care less about the future of the country.

    • For sure not the current administration, but I have hopes that when the political change happens the new leadership could be bold and decisive. Thats the optimist in me…

  2. This was Pdvsa thinking all along before it became roja rojita , They understood the days of oil as a great source of wealth were numbered and it was important to prolong the life of the resource as much as possible , this meant keeping prices rationally moderate , becoming good at producing high volumes efficiently at low costs , creating and maintaining commercial distribution networks inside the consuming countries so that whatever the competirors prices there would always be a market for our oils , making the whole process of producing refining marketing so optimized that the maximum money yield could be obtained for every bl , ( which meant a really superb integration of all phases of the Pdvsa business world wide to maximize the money yield ) , creating new market outlets for our heavy faja crude outside the conventional narketing channels ( e.g. Orimulsion) , trying to convince the pols in govt of the need to hike gasoline prices, concern about making the use of oil as least polluting as possible thru technical innovations etc etc

    All these strategies were applied because the realization was there that Venezuela had such quantum of resources that it was in its best interest to take the development of replacement technologies as far into the future as possible in order to be able to profit from Venezuelas oil wealth for the longest possible period and not have a large of those resources remain unnexploited by the time oil became largely replaceable …..

      • When they built the mejoradoras in Jose, Orimulsion died. It is a lot more profitable to improve heavy oil than to mix it with water. Now they are in ruins, but they were producing up to API 41 oil and selling it at a premium over Brent.

    • Excellent context, thanks for sharing. I never worked for PDVSA but I could not agree more with your points.

  3. Although the central message, that much of the faja del orinoco oil will be left in the ground as stranded assets is correct, there are some assertions in this article that merit some comments:
    1. The most important is that Venezuela does NOT have the largest proven oil reserves in the world. This is repeated in parrot like fashion all over the world but it is not true. The certification that led Chavez to claim this was fraudulent, it did not conform to the internationally accepted definition of proven reserves. I have been denouncing this for years now and the Venezuelan Society of Petroleum Engineers has done it and Anibal Martinez, the best Venezuelan expert in oil reserves has said it, but people will not care. The main error has been to use a recovery factor of 20% for the oil in place, an assumption which is totally unscientific and about twice as large as what the currently known performance and nature of the reservoirs would lead us to believe.The oil sands of the Orinoco region are laterally discontinuous and many more wells will be required to be drilled in order to know more about their behavior. A recovery factor of 10-12% will place our proven reserves below those of Saudi Arabia, Canada and Iran.
    2. Increasing oil production in the Faja, even to 2.5 million barrels per day is impossible under today’s operational setup. We must remember that oil production of heavy oil reservoirs such as this naturally declines by some 25% per year. This means that to double the production we have to start by maintaining the one we already have. We would have to increase net production by 1.5 million barrels of oil per day in order to reach the desired level. And this would assume that the increase is done in a very short time, which is also impossible. There are not enough drilling rigs, not enough pipe, not enough personnel, water, houses, roads, to sustain such an increase in activity. In particular, there is no money to do anything like this and, of course, there is no political climate that could allow it.
    3. The article points out, correctly, that even if this volume of oil production was attained much of the Orinoco oil would be left in the ground since the window of opportunity for this type of oil is getting shorter every year.I have called this Faja situation the Florinda syndrome, in reference to the poem by Andres Eloy Blanco about the girl who had enough flowers to laugh about spring but ended up in the winter, alone and old. Florinda en Invierno.

    The conclusion is clear: Venezuela will have to think of a new source of national income, a new way of life, and this radical change starts in the minds of our leaders who are still very much petroleum oriented. They have not yet assimilated the new reality.

    • Gustavo, thank you for your excellent observations. The amount of investment necessary to develop/maintain Faja oil production is so massive that it would require ideal political/legal/market conditions. The $40/bbl price figure does not factor in the much higher cost of producing Faja oil compared to historical light/medium oil production, producing much less net to pay for imports than historically. Nor is their mention of paying off/servicing the massive Venezuelan Chinese/international bonds/commercial debt. Venezuela could develop petrochemical/natural gas production, with adequate investment, and especially international tourism, but the latter would require a sea change in the Venezuelan socio-cultural ethos, which, from my viewpoint, I’m not sure is even possible.

    • agreed… also clearly there are only (the original) four upgraders at Jose.. the rest of the Faja production is dragged out of the ground through the use of dilulent at the wellhead – expensive stuff that should ideally be returned from upgrader and reused…. of the 1.2mmbd Faja production you mention, I’d guess more than half is just being sold as diluted crude… hardly an efficient solution, and certainly you couldn’t get enough dilulent in the country to ramp up to 2.5mmbd

      • Cerro Negro was built near the fields to avoid the diluent problem. Why would Faja Oil be so expensive to produce, they have been doing it for 70 years. It is not that deep.

        • the question is what do the Upgraders do for you… and all the “fields” (upstream areas) are in the Faja, but the 4x mejoradoras are at Jose… there are a couple of several hundred mile pipelines connecting the two.
          Faja crude comes out of the reservoir like toothpaste – 8 degree API. It is mixed at the wellhead with dilulent (Naptha – 60deg API) to make a sludge of about 18 Deg API that it at least transportable (to the coast)…
          An upgrader (wherever built), takes that 18 deg API and converts it (by throwing lots of Hydrogen at it, taking out the sulfur and other shite) to something better. Total / Statoil invested far more in theirs in the 90’s / 20’s… and it sticks out 31 API. Cerro Negro is about 22 API. The difference that you get for selling those two products on the markets is huge… and certainly a shed load more than the 18 deg. sludge (with all that expensive dilulent in it), that is currently being exported. Of course… those little upgraders cost north of $10B each to build now (if you could in Venezuela today)…
          Reservoir depth is the easy part…

          • The last one, Cerro Negro was built in faja close to the wells. Ameriven was producing 41 API back then. Now they are producing crap.

        • Wanley, I worked Cerro Negro (now known as Petromonagas) and the upgrader is in Jose just as the others. The extra heavy oil is diluted at the well head with naphtha, transported to Jose, upgraded and the diluent is piped back to the filed and the cycle goes on. The synthetic crude it produces is not 41 API and is not Ameriven. Cerro Negro is around 16 API. Ameriven produced Hamaca which was around 20 something API. Only Sincor (with Zuata sweet) produced 32 API synthetic crude. In Venezuela no upgraders produces 41 API crude to be clear.

    • Gustavo thanks for your comments and additional context. Let me start from #3 back. We are aligned there. Regarding #2 we also agree, I think we must act urgently in the short term to have a hope of producing the Faja properly in the long term. All the factors you rightly mention create obstacles to realize the Faja potential. In my next piece I will present proposals to help unblock it. But it will take time regardless.

      Regarding point #1 I agree that the recovery factor under cold or primary production is 10%, that would reduce the Faja reserves by half and place us in the top 5 of reserves holders rather than the largest reserves. It is also true though that if enhanced oil recovery techniques are applied, for example steam assisted gravity drainage (SAGD) the recovery factor could increase to 20%. Then it is true that Venezuela has the largest oil reserves. The determining factor would be commerciality of applying SAGD and that will depend on a number of factors such as oil price, capex, opex, etc.

  4. Your points are absolutely valid, however I would be very wary of making predictions too far into the future regarding the usages and demand for oil. To plan as far ahead as 2030 is dicey, but still necessary. Even so, we need to acknowledge that some future technology will likely invalidate all of our current assumptions. For example, it is possible that petroleum will be used as feed stock for food factories and become far too valuable to burn. Or, as suggested, it could become nearly worthless. To plan or even discuss plans for 100 years from now would be futile.

    • Thanks, of course it is impossible to predict however there are trends that go in one direction. For example fossil fuels will be minimized in the future. Technology, regulation and social consciousness point in that direction. It is not a matter of IF it is a matter of WHEN. When will it happen? What will replace them? I do not know but the impact on a country like Venezuela will be big when it does. The idea of such prediction is simply to create awareness and open eyes more than being right about the date.

    • Venezuela is (and has been for decades) on dire need of diversification of its industries (services and manufacture), Not only has this not happened during this disaster, but they have also managed to destroy what we did minimally well.

      The future is dark.

      • And it’s even darker for all the leftist nuts in the country, as one of the very few ways to straighten the economy within a reasonable time (not 50 years as a lot of fatalist folks like to claim, which is basically never in practical terms) would be massive privatizations following the modifications of many laws that since adecopeyanismo and mostly in chavismo have made almost impossible to sustain a working, profitable business.

      • Yes, but it will not be possible, and the only way will be to rush headlong with the oil until the end.

        Everything in Venezuela, from the infrastructure to the mindset of people, is tainted by the oil money.

        Once the price of the oil rises, everyone will forget the current hardship in no time, until the next crisis hits the country again.

    • Excellent question and a source of worry personally when I think about my kids and their kids… in medium term I think the next natural step is to develop our pretty much untouched natural gas industry. This is key to enable extraction of the oil reserves but also fundamental to stay on the energy map of the world when oil starts its inevitable decline.

  5. This makes so much sense that i can’t understand how those who govern us didn’t notice it and simply squandered the bonanza.

    Even a high school kid would understand this.

    • You are correct, that just makes our current situation worse. I guess when the political change happens that Chinese fund deal will need to be renegotiated completely.

  6. Personal transportation is not as big a deal for the future of the oil industry. Long afer all cars are Priuses, all air travel will be still fuelled by oil. All freight trucks and boats will still be using diesel. Public transport will still be massively oil-dependat. And that is just transportation. Let’s not forget that over two thirds of the world’s electricity is produced by burning fossil fuels.

    • I use gas to heat my home. My Electric Utility uses all gas fired plants. I own a “full sized” truck that gets better millage than my 1971 Pontiac. My wife’s car averages 35 miles per gallon.

      A local gas station/convenience store named Wawa, right off the I295 sells natural gas for trucks and buses now. There is another selling natgas five miles up the highway. Two truck stops on New Jersey side of the Delaware Memorial Bridge will also have natgas by the end of this year.

      Once the infrastructure is fully in place, gas/diesel will have a true competitor.

      There are solar panels everywhere I look.

      Oils days are numbered, at least as far as the main source of energy in the world. Even gas stations are started to put solar panels on all their gas bay roofs. Too many new choices and viable alternatives.

    • Well, 90% of oil in the world is used for transportation. That is why Tesla and Priuses take over oil producers will be toast. Those electric cars will need electricity. Some of it will come from renewable energies but a lot of it will come from burning natural gas and coal (not oil), that is why Venezuela’s future in my view lies in developing its huge natural gas resources.

      • Quite true that most of the oil products are used in transportation ,and that very little of it is used to burn in the generation of power (coal and gas are the main fuels used in this sector) , Not to be forgotten is that a significant portion is used in the production of lubes , asphalt , waxes and other specialty products and another significant portion in the production of chemicals .

        The 90% figure is on the high side but the percentage used in transportation certainly represents the biggest use given to oil products (65%/70%??) . If gasoline use in ground transportation falls , not sure that will affect the use of bunker fuel in marine transportation or of jet fuel in airborne transportation quite so dramatically.

        Oil will probably continue to be used in lubrication and wax products and of course in the production of chemicals ( a potentially big item) natural gas will likely become the biggest kind of fuel used in power generation (unless other alternative sources are made much more economical but to beat gas they will have to work hard at it)

        Shell for a long time now has been betting that crude oil will be phased out of its use as automotive fuel and that natural gas will be the next big ticket item to replae oil in many of its current uses……. Gas is cheaper very abundant and much cleaner…!!

        .

  7. Very good points and clarifications. This fits well with Mr. Urdaneta’s article about bonds. And the brilliant article about how to manage Venezuela’s electric power generation and distribution.

    This article is spot on. Venezuelans could get off of the petroleo fixation And off of the “I can’t do that” thing about a real government free of corruption.

  8. “2.4 million barrels, some 600 thousand barrels go to Chevy Caprices from 1980, (i.e., domestic consumption). That leaves 1.8 million barrels per day for exports, which is roughly $26 billion at $40/barrel.”

    But is the entire 1.8 million barrels per day all profit?
    > How much is going to China to pay off loans?
    > How much goes to the Caribbean to buy votes?
    > How much goes to Cuba for no discernible reason?
    > And finally how much goes to pay for the lifestyle of the many Chavista elites?

    > Should we throw in the fact that production is actually going down as the infrastructure falls apart and all the foreign “help” has left? How much of a decline will there be in production next month?

    I fear that 1.8 mbpd while an official number is also a grossly overstated number.

    • Many Venezuelan crudes are expensive to produce, and you can probably stick a $15-$20 production cost on most of those.

    • You are correct, that just makes our current situation worse. I guess when the political change happens that Chinese fund deal will need to be renegotiated completely.

  9. If you don’t have justice and punishment for crooks, you can produce all the oil you want, break world records, and still be a miserable country.

    Even if they produced millions more barrels per day, they would just steal it all. As they have for decades. Oil money is particularly easy to steal. These are straight bank transfers to one completely corrupt destination – PDVSA. The cash then easily disappears by creating bogus companies, using corrupt family members, through bogus contracts or buying unnecessary equipment at 3000% mark-ups.

    If no thieves n PDVSA and bans go to jail, 10 million barrels per day next year would not improve anything in Vzla. Did anything impprove under Chavismo when the barrel was at over $100? They just stole it all.

    Besides true Justice and Punishment and Jail penalties, you have to diversify the economy and produce other things.. Coffee, steel, papayas and tomatoes, whatever.. Not as easy to steel those profits as it is to steal oil money.

    But in Vzla, arguably THE most corrupt corrupt country on the planet, politicians simply don’t care. I suspect more than half of the “opposition” MUD has already been bribed and got much richer. And every single Chavista official, minister, governor, employee is corrupt in someway. Corpoelec? same thing, rotten to the core.

    Regardless of oil prices or oil production no country can progress without the rule of LAW. And punishment.

    • Thanks, I fully agree. I can only hope that with political change there is a hope of a cleaner administration and of implementing rule of law…

  10. Fully agree that Rule of Law is fundamental to change the outlook. I hope that with political change we will have a shot at improving this situation. The optimist in me…

Leave a Reply