“I wanted the whole world or nothing.”

Charles Bukowski

Drive half an hour along the flat, sweaty lands west of Maturín and you come to the little town of El Furrial. Known as the birthplace of Diosdado Cabello, El Furrial is more properly famous as the site of one of the richest, but also most challenging oil fields in Venezuela.  It’s not the only big field in Monagas, of course —there’s also the rest of the Norte of Monagas’s mighty fields, including Santa Bárbara, Jusepin, Carito, Pedernales and Quiriquire. They’re some of the most valuable and productive oil fields in Venezuela, with the added bonus that they produce light and medium grade crude, not the gunky extra-heavy oil you find further south in the Orinoco belt.

Even in an area of hugely rich oil fields, El Furrial stands out. It’s the newest and largest field around, and it’s the most recent onshore non-Faja giant field to be discovered in Venezuela. At the time of its discovery in 1985-6 its proven reserves were about ~4 billion barrels. That’s enormous: at that time, that single field had oil reserves as big as Indonesia —an OPEC member, no less— and almost twice as much as all of Colombia. El Furrial has so much oil that PDVSA has an entire division dedicated to keeping this monster as the top producing field in Venezuela. It reached its peak in 1998 when it produced 453,000 b/d —a little less than Ecuador produces now. You get the picture: El Furrial is a monster.

But it’s not just about the quantity of oil that comes out of El Furrial, it’s about quality, too. The field produces light and medium crude. That’s key. As you know if you’ve read “The Shocking Potential of Natural Gas and Condensate” by a guy who goes by the nom-de-blogue Guevara de la Vega, Venezuela has been increasing its extra-heavy oil production and suffering acute shortages of lighter oil to mix it with.

PDVSA Production 2008-2015

In the same period, Iraq, increased its total production in 1,58 million b/d (+54%).
In the same period, Iraq, increased its total production in 1,58 million b/d (+54%).

A Challenging Giant

Although prolific and large, El Furrial’s geology is notoriously challenging. It’s very deep and asphaltene is a big problem. Asphaltene is something you don’t want with your oil because it plugs into the wellbore tubing and valves and makes a mess of your operation (a lawyer talking about reservoir engineering and well management, fin de mundo).

The asphaltene problems at El Furrial are notorious. So much so that every reservoir engineer in the world knows about them. El Furrial is in every oil field management textbook, the Society of Petroleum Engineers (SPE) has published a number of papers on it. Go to an oil field management/engineering reservoir conference and chances are you’ll run into someone presenting a paper on this topic.

The details get technical very fast, but the for-dummies version is that to keep oil flowing out of El Furrial, you need some sophisticated techniques collectively known as enhanced oil recovery (EOR) —you gotta keep the pressure up, you have to handle the asphaltenes, the associated water, the sand, a whole mess of details. First a water injection project was introduced in 1992. Later, a gas injection program called Planta de Inyección de Gas a Alta Presión El Furrial (IGF) came online in 1998. That last project was built, owned and operated by Wilpro El Furrial, a consortium of two American companies (Williams and Exterran).

Wilpro El Furrial managed to accommodate the revolution relatively effectively for a decade. Although PDVSA had owed it money (la mala costumbre of not honouring its debts is nothing new) relations were relatively stable until early 2009. That’s when the wheels came off, when the government decided it wanted to nationalise the oil services industry in one go, including of course, the gas injection projects.

The risks were clear. According to two Wikileaks cables from March and April of 2009, the US Embassy, after a meeting with consortium representatives, said that,

PDVSA’s ability to assume operation of the water and gas injection services of the Wood Group and Williams respectively is doubtful. The technology involved  in the Wilpro projects, however, is markedly more complex  than that used by the Wood Group [a water injection project on the Maracaibo Lake, also nationalized] and that would, we assume, enter into any calculation to nationalize the plants. A take-over of these facilities would undoubtedly affect future oil production [US Embassy in Caracas – Cable  09CARACAS362 – 23 March 2009 – Wikileaks.]

PDVSA did nationalise the project and the predictions in the Embassy’s cables turned out to be accurate. It was a mistake.

By losing Williams’ expertise in operating and maintaining these high technology facilities, PDVSA stands to see a significant hit on production in the short-medium term.” [US Embassy in Caracas – 09CARACAS545_a – 30 April 2009 – Wikileaks]

PDVSA and Williams couldn’t reach an agreement on compensation for the nationalisation-turned-expropriation. The consortium partners filed an ICSID arbitration against Venezuela. Eventually they settled for $420 million. Apparently, though, compensation has not yet been paid in full, because the arbitration appear as “pending” on the ICSID web page. (Or is there another explanation for that?)

From 2009, PDVSA took over the water and the gas injection operations…and production began to fall fast almost immediately.

The High Tech Bit of the Oil Industry

El Furrial’s troubles are the troubles of a whole industry. As Venezuela’s production operations have become more complex, the country’s been forced to rely more and more on high tech oil field service contractors like Halliburton, Schlumberger, Williams and Wood Group.

The problem is that these companies have long been owed huge sums in unpaid invoices, so some have scaled down operations or left the country for good. The companies used to complain to PDVSA discretely, but more recently they’ve learned it pays to go public early. This sets off alarm bells in La Campiña. PDVSA puts on a charm offensive: offering token payments and repeatedly make promises that they will pay up. Recently, the company seems to have settled on a solution: paying off old bills with bonds or promisory notes. Haliburton recently agreed a deal along these lines, others are under discussion. Comida pa’ hoy, hambre pa’ mañana.  

Schlumberger plays a special role in all this. The company has been in Venezuela forever: it made the first electrical well log in the Americas in Cabimas in 1929. The company seems to have been brought back in to patch up the mess PDVSA made in El Furrial. It listed a well intervention there as one of the highlights on its 2015 4Q Results.

That PDVSA is still relying on the likes of Schlumberger to keep El Furrial in production is an especially bitter irony. The government has long accused the service companies of a “silent sabotage”. From 2006 on, in order to lessen this dependence and to shield itself from an improbable second paro petrolero, PDVSA started to acquire drilling rigs, well completion equipment, gas and water injection facilities, etc. This was just a piece of the “total sovereignty over oil” puzzle. As then President of PDVSA-cum-Minister, Rafael Ramirez, put it, they wanted to create “Our own Halliburton, the Bolivarian one”.

But plans didn’t go as planned.

A Botched Nationalization

In May 2009, as part of this buying and expropriation spree, the PDVSA roja-rojita made what I personally consider the worst tactical mistake in 17 years full of mistakes: nationalising the oil service sector.

Oddly, I’m not the only one who thinks so. Just yesterday, PDVSA’s President and Minister of Petroleum, Eulogio Del Pino went in front of Venezuela’s Petroleum Chamber, where all oil service providers are reunited, that what PDVSA did in 2009 was a mistake, especially for the Maracaibo Lake oil service providers and operations. Too bad his little flash of insight didn’t extend to El Furrial, though.

Let’s look at the facts. The 2009 nationalizations took aim at three specific activities: gas compression in Oriente (including the PIGAP and El Furrial gas projects), water injection projects (including the Wood Group-lead SIMCO project) and the Maracaibo Lake maritime support companies.

The result? Starting in 2009, production began to decline much faster. The Maracaibo Lake and Norte de Monagas fields were the worst hit. PDVSA’s own data show that. 

The Maracaibo-Falcon basin went from producing 1,084 million b/d in 2008, just a year before the nationalisation of the oil service companies, down to 706,000 b/d in 2015 or a whooping 35% less in less than a decade.

As for El Furrial, brace yourselves. Working from PDVSA’s Annual Reports, I charted the historical production and reserves of El Furrial and guess what? The production decline was massive. From 408,000 b/d in 2008, production declined to just 198,000 b/d in 2015. That’s a 51% fall in just seven years.  This could only suggest that things haven’t been done properly. It’s normal that the production decline rate of a mature field increases as years pass. But not on this scale.

El Furrial - Chart Produccion - CBellorin
El Furrial – Production

The fall in reserves is even harder to make sense of. El Furrial’s reserves have gone down 58% from 2.19 billion barrels in 2000 to 907 million barrels in 2015.  In the seven years after the nationalisation of the gas injection project, reserves fell a shocking 43% from 1.61 billion barrels in 2008 to 907 million barrels in 2015. PDVSA’s data on this are hard to make sense of: in 2012 reserves were put at 2.24 billion barrels, only to then collapse again.

Why? They don’t tell us.

El Furrial - Reserves
El Furrial – Reserves

You can check PDVSA’s Annual Reports yourself: the trend is repeated everywhere the service companies were nationalized.

 

The chickens are coming home to roost

PDVSA is paying the price for bad management and disastrous strategy choices at a time when every single barrel counts. The company cannot hope to build its “own Halliburton” if it won’t maintain high standards of professionalism, won’t pay specialised oil field workers properly and won’t get serious about Research and Development (R&D).

Between 2013-2015 PDVSA only invested $388 million in R&D (and a measly $74 million in 2015!). That’s nothing. For reference, Petrobras invested $2.8 billion and Halliburton, the company PDVSA wanted to emulate, $1.67 billion in R&D over the same period.

PDVSA could have gotten serious about crafting an efficient oil service subsidiary —why not? But it didn’t. There’s too much money to be made, virtually no oversight and no shame.

But it’s not the end of the world.

Thank God (literally) Venezuela has plenty of oil and gas, and its industry has everything it takes to remain competitive for quite some time —though not forever.

Sorting this out isn’t rocket science, but it will take time. PDVSA has to get rid of both non-core and complex operations. It has to pay decent wages, invest in its people and invest a lot more on R&D. When it comes to recovering INTEVEP, PDVSA’s R&D arm, pa’yer es tarde. The reform agenda is long. We need a more accountable and transparent industry. This is what I spend my days thinking about, so I’m going to be dealing with it in future posts.

Right now, the A.N. is discussing a bill to “de-nationalize” some of the oil service companies. The bill gives PDVSA more leeway to bring in subcontractors to take on tasks that were nationalized in 2009. I hope PDVSA is on board with this. There is nothing wrong with back-pedaling on a catastrophe.

51 COMMENTS

  1. Have heard that for El Furrial to keep its production flowing at optimum rates IT must have pressure maintained at a particular level …….in actual fact pdvsa management kept the pressure down some 30% less than required for various years (dont knonw the reason , could just be that they didnt have the money to invest in keeping the pressure up or that they just plain forgot) , the result is an irreversible clogging in part of the reservoir areas causing a loss both in potential and production !! THIS IS CRIMINAL !!

    • I’ve heard these stories too, and would *love* to confirm them. But man, it’s hard! An ocean of rumors, but so hard to get a dato.

      • Francisco I got this piece of information from a friend , a former Pdvsa employee hired by one of the big service companies to work as an underground employee ( without lettiing Pdvsa formally know he is in the payroll) , as a technical man he was more specific about what happened at El Furrial than I can ever hope to understand or explain , the gist of the explanation was the one I set out above , the pressure wasnt kept at the optimal point for several years and ultimately that damaged parts of the reservoir impacting its long term productive capacity ……!! Wish I could be more concrete …!!

        • Maintaining pressure is critically important to what will ultimately be extracted at the surface. As pressures are allowed to drop in the reservoir, gas flashes from the oil thereby making it more viscous. The more viscous the oil, the harder it is to produce it to the surface and the greater the losses in recovery at the surface. A loss of pressure also affects asphaltene precipitation within the pore space of the reservoir. And while I know little of Furrial’s aphaltene profile, rest assured that losses of pressure in the reservoir are doing no good to ultimate recoverable reserves.

          • you got it rigth MRubio, the prodcution of asphaltene is by pressure loss and temperature drop also, but mainly pressure…

        • Bill!!!

          I need to talk to your friend!!!!!!!

          Tell him we can offer anonymity. I just need to confirm this from an insider.

          Email me!

  2. You say that “the A.N. is discussing a bill to “de-nationalize” some of the oil service companies.”, as though this was in some way significant. Any bill passed by the Assembly will be rendered null and void by the Executive and the TSJ.

  3. Great insight, thanks a lot for the article. One question though: it seems that production at El Furrial was maintained even for a few years after the 2009 nationalization – arguably, up until 2012 it still looked reasonable – but then collapsed in 2013 onwards. What could be the reason for this “delay” between the nationalization and the actual drop in production? Is it a technical thing?

    • Thanks, Gaston. I would also like to know what exactly happened. Although the nationalisation took effect in May 2009 there were a negotiation and handover period. So lets say that PDVSA was in total control of the project in 2010. What happened next is still to be heard from PDVSA.

      • Williams Cos people predicted exactly that when leaving the country. The machinery that maintains pressure at the field is essentially a series of huge turbines, like 747 engines, that run day and night, pumping natural gas into the ground. Such machines need routine maintenance and spare parts, as well as diligent monitoring. I don’t think you need me to complete that thought.

  4. Just a comment, Pedernales is an old marginal oil field located in the Orinoco Delta, near Pedernales island. Is not located in Monagas but in Delta Amacuro. It was an important asset in the 50s but now is a very low producer. BP left the asset to a French company in the early 2000s due to low reserves and value.

  5. PDVSA’s nationalization and production loss is mainly due to lack of know-how. Why was it “nationalized”? Because some Chavista crooks wanted the PDVSA positions to get rich while doing nothing. Corruption, as always in Vzla.

    “PDVSA has to get rid of both non-core and complex operations. It has to pay decent wages, invest in its people and invest a lot more on R&D. ”

    But there’s no money to steal there. Maintenance, higher personnel wages, R&D doesn’t fill their bank accounts, you see? Long-term investments for the good of the country are not part of the plan. Chavista crooks want to get rich Now.

    They could hire 100 highly qualified oil extraction engineers from all over the world to teach local people how to extract more oil in El Furrial, and everywhere. But that’s less money in their pockets, and the proper ways to extract the oil are complicated and expensive. So why bother?

    And it’s the same everywhere else: Why invest in Agriculture, do R&D, buy equipment to plow fields, produce corn, vegetables, employ local people to raise chickens and cows? That is a long-term plan, takes work, and doesn’t get easy money for the crooked Chavistas.

    Why don’t they invest in diversifying the economy, build manufacturing plants to produce industrial goods and consumer goods of all kinds? Why don’t they Free the economy, no exchange controls, no price controls, make dollars available from companies like Polar, and let them work and produce? Because they could steal much less money in those cases, and those projects are long-term, expensive, so no immediate gratification. Chavistas want everything to be twisted, malfunctioning and corrupt. They don’t like honest, efficient, private businesses. They kick they out or force them out of business. That’s the plan. Why? $$$$ of course. Guisos, tigres, palancas, as always.

    • Thanks, you just explained a lot.

      I’m used to thinking that people think that by producing more, it makes things better for everyone. There is some competition, yes, but that is to be a better producer, to come up with better solutions, to be a bit smarter. That’s the basis for free markets and capitalism: you get new companies with better ideas, better ways to do things, better products. In game terminology, it’s a plus-sum game = everyone wins.

      There are, apparently, people who think that knocking someone down, getting them out of the way, making them comply, and establishing themselves as “boss”, that makes things better for them. More important than actually producing, is that other “believe” they produce. These guys h-a-t-e bright people with new ideas.

      I think it’s Biblical, that by the fruits of their labors, ye shall know them. I think most people are plus-sum, most of the time, but being good people, do not think in terms of aggression, or taking advantage of others, and so tend to be a bit sheepish. The way to handle the office bullies is just to look at them, and see what they are actually doing (or NOT doing). Their facade is thin to begin with. Really, it is paper-thin. It gives way rather easily. And if not, it’s better to find another place to work.

      The problems is when you end up with a country run by these morons. Then there is no “other place to work” and you have to throw THEM out.

      (Just thinking out loud.)

  6. Carlos: El Furrial’s reserves fell gradually as the field was produced. Every year we take the previous year’s reserves, reduce them by actual production, and revise what is left (up or down) depending on the field performance and the investment that’s being made or we are planning to make in the near future.

    The oil column has variable properties, so it’s hard to generalize, but what’s clear is that reservoir pressure has to be maintained, it’s managed to keep the in situ oil density as high as possible while avoiding degassing the crude in the reservoir (which is really hard to because pressures do drop in the near well region).

    This is fairly tricky, it’s so complex most petroleum engineers don’t really understand the physics, and even less know how to model what happens (reading a few papers and going to conferences doesn’t really give full insight, plus we must consider that each reservoir has its own individual system (El Furrial has multiple systems and therefore it has to be managed by sector).

    I knew some of the remaining PDVSA management, and I know the service companies, and even if they get paid they simply can’t perform as a prudent operator. Most large oil companies keep reservoir description and management as a core knowledge and expertise area because they understand that service companies do have limits. I’ve managed fully integrated head to toe teams managing reservoirs for many years, and I can vouch that PDVSA is at about 30 % of top capability. They can reinforce what they do with the service companies, but that strategy simply fails to deliver full performance. When it comes to El Furrial the only sensible outcome would be to have a company with expertise in this type of field to operate it using a Service Contract. Total, BP, ENI, She’ll, are in country and they have the muscle to handle it. Rosneft lacks the capability, but maybe BP, part owner of Rosneft shares, can serve as technical advisor. I’m not sure if Repsol or the others have the manpower to deal with El Furrial.

    • Thanks for this useful comment, Fernando. I think that you agree that El Furrial is a complex reservoir, has not being properly managed and PDVSA doesn’t have the technical capacity to do it. A Service Contract could work but is a very unattractive (and rather rare nowadays) contract for upstream operations. A Mixed Company in which one of the companies you mentioned can be appointed as operator and hold more than 49.9% of the shares could be more attractive/suitable (…provided the Hydrocarbons Law Article 22 is amended). There are plenty of options but we have to change the model and more importantly the mindset.

  7. Aspheltene precipitation is mainly present due to falling reservoir pressure and possibly some bacteria. It tends to plug the wells in the reservoir-wellbore contact. Because these wells are very expensive (HighPressureHighTemperature-HPHT) they sometimes are treated with Xylene or similar components until they become too expensive to maintain and are shut-in to protect well and near-wellbore reservoir. The lack of operation in water and gas injection must have dropped reservoir pressure and caused a sudden cumulative effect of asphaltene flocculation. In the early 2000s the area also had a shortage in gas to inject. At that time gas production was far to be developed and became a complex operation for a broken-down, teared-apart pdvsa. In 2013 marginal production had a high environmental cost due to excessive flaring. Important to mention that H2S (poisonous and highly corrosive gas) is present several fields of The Furrial trend, leading to facilities failure if not well monitored.

  8. Amazing to see than even on a blog, several people know exactly what’s going in the oil industry, the technicalities, and how to improve production. Delegation and hiring the right experts from anywhere in the world is always the right move, for any business, when you don’t know how to do something well and competitively.

    “A Service Contract could work but is a very unattractive (and rather rare nowadays) contract for upstream operations. ”

    “When it comes to El Furrial the only sensible outcome would be to have a company with expertise in this type of field to operate it using a Service Contract. Total, BP, ENI, She’ll, are in country and they have the muscle to handle it.”

    And why don’t they employ these Service Contracts? It’s not just incompetence.. Or ideologies.. or ignorance. No. It’s special interests, massive corruption.

  9. “Pdvsa, la operadora estatal, es hoy un inmenso conglomerado de empresas ineficientes, burocratizadas y corruptas, con actividades que van de la petrolera, la inmobiliaria, la agricultura hasta la comercialización de alimentos.

    En el área petrolera propiamente dicha, Pdvsa presenta una brutal caída en su producción propia, de millón y medio de barriles en los úlitmos diez años. El Lago de Maracaibo apenas produce y el crimen ecológico es de proporciones mundiales.

    Las refinerías, las plantas de distribución, oleoductos y poliductos presentan graves problemas de operación y mantenimiento. Su gerencia profesional fue desmantelada, sustutuída por camaradas que a nadie rindieron cuentas. Sus centros de investigación fueron clausurados. Hoy está tan endeudada, que incluso no puede pagar sus deudas comerciales, mientras enfrenta varios juicios internacionales por confiscación de activos de ex socios y contratistas.

    Lo mucho o poco que hoy produce Venezuela, no se debe al esfuerzo propio de Pdvsa, sino al de las empresas extranjeras que son socias, principalmente en la Faja del Orinoco y sus mejoradores, inversiones hoy demostradamente imposibles en la “revolución” depredadora. Fueron 6 los planes “revolucionarios” para aumentar la producción nacional y todos fracasaron.”

    http://www.lapatilla.com/site/2016/07/27/venezuela-ya-es-marginalmente-petrolera/

  10. Services nationalization was a snap shot in time of the technology and equipment available in country at the time. You don’t get the most recent, you don’t get the know-how and you don’t get the maintenance and upgrades.

    Think about taking Apple by the time of the iphone 4 release and hope to keep producing and evolving with half od the people, no-core know-how and zero R&D. Guess what you are going to get at the end of the production line: A vergatario

  11. Excellent posting. Guido’s recent posting on Chavista-supported destruction of genetically modified fields of papayas shows that the Chavista bias against facts, science, and technical expertise runs deep. This posting reinforces Guido’s. Chavismo had the fantasy that by simply wishing it so, Chavista-controlled service companies could so just as well as in the private sector. Pressure maintenance? Just one more example of obsessive-compulsive Gringos who don’t know how to enjoy themselves. 🙂

    A further point about oil companies and service companies is that most oil companies decided that it was cheaper to farm out a lot of services because specialized service companies would have more personnel flexibility, being able to transfer personnel from one oil company job to another. Moreover, the concentration of service companies meant that it would be easier to finance R&D for a given service sector. As a rough guide, consider 100 oil companies, each with a given service department versus 4 service companies for that same service. That concentration of revenue will make R&D more feasible.

    colomine’s point about oil service nationalization resulting in a stagnation of technology and equipment at the time of nationalization is a point well taken. Schlumberger, for example, has had a near-monopoly on wireline services for nearly a century. Schlumberger has been the market leader through its continual R&D. Schlumberger has remained the leader in wireline services because it has not sat on its laurels but has kept innovating so that it has long had the most-up-to-date equipment and services in the industry. Schlumberger doesn’t play catch-up. By its continual investment in R&D, Schlumberger forces other companies to play catch-up. Not even Chavismo would suggest nationalizing Schlumberger. I think.

    http://www.caracaschronicles.com/2016/07/26/famine/

  12. Carlos, Drilling Jusepin, part of Furrial trend, took PDVSA almost 2 years and 40mm USD for a dry well. Jusepin was awarded to Total and Amoco (later BP) with low expectation. Shallow area was heavy and low in reserves. Bringing top-of-the-line seismic and exploration investment brought the field from a ZERO deep production of light oil, 45K bopd in just 5 years and a top-class production facility handling H2S. All this effort did happen in the Apertura years, where private effort produced almost 700k bopd (nationwide) at a much lower cost of extraction due to knowhow and technology.

    This theme should be constant in the Chronicles section. Oil and Gas Private Development discussions.

    Godspeed

    • Thanks x 16,0000 ft, Fred! We’re going to be writing more about it but you have to keep making this kind of comments. Thanks again.

      • Please, write more! The entire area is promising, well worth drilling into! Seriously … I realize I knew very little about oil. It is so much a part of the world economy, and most people probably think of it as I did: drill a hole, and crude oil gushes out, put it into barrels, heat it a bit somehow, and you have gasoline at the corner station.

        The specifics of the production decline, and the reasons for it that you and other obviously very intelligent and experienced oil industry people have written here are a huge eye-opener – and offer tangible solutions.

        It seems to me that the cost/benefit, the microeconomics of PDVSA nationalized rising marginal cost curves (steeply rising when factoring in costs of damaged fields and accumulation of lack of maintenance), work in favor of 100% foreign ownership by the companies mentioned here, with royalty payments to Venezuela.

        The economics of it all come out very clearly on this page. I feel my knowledge about the oil industry has at least tripled. Very well presented. And great to read the knowledgeable experienced comments. IMO, this is one of the best articles on CC.

        • Thanks, Gringo! I’m humbled and flattered. I’ll be writing more. I hope the new article oil-related published today by Moncho (“We’re Rich!” and Other Myths”) doesn’t make you change your opinion. Huge contender though. Cheers.

  13. Good post.

    One point:

    “For reference, Petrobras invested $2.8bn. bla bla bla….”

    For reference, Petrobras has also 3 times more debt than PDVSA, it’s access to oil reserves doesn’t even come close to that of PDVSA, sells all its production locally and bills in local currency and last but not least, was involved in a massive racket leading all the way up to the president (and ex-president) of the country. So not quite a role model to follow either…Just saying.

    • If there’s one thing that PDVSA could be inspired by Pbras, that would probably be its recent denationalization program (I’m avoiding using the term privatization to not make other readers throw up), but that’s probably a taboo in Venezuela.

      “Petrobras is trying to sell BR Distribuidora, Brazil’s largest fuels distributor, as part of a plan to sell US$15 billion of assets by the end of this year. It is selling assets to reduce its debt, the largest of any oil company, in the face of a financial crisis caused by a corruption scandal and falling oil prices”

      http://en.mercopress.com/2016/07/26/petrobras-announces-plans-to-sell-voting-control-of-its-distribution-network

      • Um … that would be “nationalization repurchase agreements with infinite time horizons” wouldn’t it? Sounds better …? (I.e no one can figure out what that means, but in order to avoid the appearance of stupidity, would never ask.)

  14. Excellent breakdown and presentation of the facts. Essential as well. You can’t fix a problem till you understand the magnitude and fine points. But questionably an even more intriguing piece of investigative journalism – and one that would really stir the pot – is to go after the corruption quotient that has and in still (according to many) dogging the entire petro industry, and in many ways is keeping production on a downward slide.

    When the industry is owned lock, stock and barrel by the government, and when outside operators are no longer pitching in to help, there would seem to be little chance to directly extort of skim monies from the operation itself. From what source? Kickbacks from who? When there is basically no funds to put INTO the fields, from where is the money stolen? This points to accounts receivable – that is, whatever money is earned from selling oil, is where the skimming is presently going on.

    Just a guess, but like they say, when you follow the money, strange things turn up. Trying to follow the path of the oil money these days is a bound to be hard if not impossible, but a look in that direction might be telling. And probably dangerous…

  15. This is a very well structured and informative summary on El Furrial. Thank for this work, Carlos.
    Some of the points raised:
    1. Reserves in El Furrial: As seen in the chart the reserves do not go down in a smooth manner but jump up and down. There is a jump upwards in 2010, coinciding with the “nationalization” of the activity and another jump upwards from 2011 to 2012. These fluctuations are the result of revisions made by the production engineers and, as the Orinoco “proven” reserves have shown, they are often manipulated politically or, worse, in a negligent manner. Because of the inconsistencies we don’t know if the latest figures are the true ones, yes or no.
    2. The takeover/confiscation of the contractors in Lake Maracaibo and other places in 2009 was certainly an act of madness, the responsibility of Ramirez and Del Pino, who was the Vice-president in charge of E&P. Now he repents, seven years too late. He was a coward for accepting to do this, in the first place. But the main error was, of course, converting PDVSA in a “social” company around 2005-2006.
    3. Having an oil services company as part of the main company would not be desirable. PDVSA does not have to have her “Schlumberger” and her “Halliburton”. This is the type of activity that is best left to outside contractors that can compete among themselves and have an incentive to keep both cost and operationally efficient.
    4. The idea that Venezuelan oil still can remain competitive for a long time has to be taken with caution and our future leaders should take into account the new global trends in the use of fossil fuels. The Orinoco heavy oil will probably be largely left in the ground as stranded assets, as the replacement of fossil fuels by cleaner forms of energy progresses. The window of opportunity for Venezuela to sell this oil might not extend much beyond the next 4 decades. This is a scenario that no one in the political sector seems to be thinking about in Venezuela, where happy talk of 6 million barrels per day keep alive. Saudi Arabia, with much better quality oil is already thinking ahead to a non-oil driven economy.

    Carlos has to be congratulated for his excellent work.

  16. Flurrial is a well-known case of malpractice, incompetence, corruption, and decapitalization, disinvestment; all together makes more than 200 thousand of D/B oil which will stay down under until some technological jumps come about and a good amount of investment could bring out that oil. If we add to that Anaco’s gas loss of around 450 thousand of gas barriers equivalent and Maracaibo Lake Cost oil production collapse due to nationalization we easily can arrive at to one million of oil barrels and gas which disappeared from Venezuela oil and gas production. This shows anyone that the financial problems for PDVSA and the Republique started well before the oil price crashed at the end of 2014. The marginal impact on oil rent for every oil barrel resting in the bed on oil rent -revenues- is enormous. Now you have to add as well the non-cash oil “sold” to China (under the commercial oil agreement) to Petrocaribe -including Cuba- and ALBA, you must count between 580 – 786 thousand barrels of oil -daily- we can see the enormous decapitalization of PDVSA and the gigantic financial hollow which bright us to this stage of “mengua’. When you look at OPEC data -secondary sources- you will get an oil production of around two million barrels, so it is not difficult to jump to some very delicate conclusions. So, together as the twin’s deficits, the budget and the balance of payments deficit, which impacted the real economy at such level that the national income in dollars’ term had reduced in 5 years by a third; and the per capita income, considering 1000 Bs/$ the Power Purchasing Parity -which is the best proxy- around 4000 thousand USD. So the impoverishment of Venezuelan people it came to stay with us for a while. The national oil industry (PODVSA and its partners) is in state of near collapse, with a financial misfortune which will not be removed in the short term, for no Republic and PDVSA has access to financial markets, the risk is huge so the premium will not permit any underwriting new debt at that particular discount. On the other hand, a market for heavy oil is nearly as its top, and the production costs have grown at the levels which will be not easy to find partners, capital, at least in the short term. Recall that since oil is government or Estate property, royalties and dividends are costs as well, if you add it the equation, with CDS 5 year maturity, and country risk premium of 20% to produce and process heavy and extra heavy oil will be well above shale oil. the one with brought the huge supply shock which will stay there for a while. On the other hand, we have human capital issues too, and believe or not, the huge human capital we use to have years ago, is abroad most of them with they own ventures, the only solution for that is IMF’s financial bailout of 56-60 thousand million USD. However, IMF has not lot of sympathies, and banks lobby hard to stop this kind of financial assistance since in the case of IMF some debt is going to be restructured, so banks are not too friendly with them. So the short term outlook is not something to be happy, and for that thousand of Venezuelans are prepared to follow the diaspora.

  17. Flurrial is a well-known case of malpractice, incompetence, corruption, and decapitalization, disinvestment; all together makes more than 200 thousand of D/B oil which will stay down under until some technological jumps come about and a good amount of investment could bring out that oil. If we add to that Anaco’s gas loss of around 450 thousand of gas barriers equivalent and Maracaibo Lake Cost oil production collapse due to nationalization we easily can arrive at to one million of oil barrels and gas which disappeared from Venezuela oil and gas production. This shows anyone that the financial problems for PDVSA and the Republique started well before the oil price crashed at the end of 2014. The marginal impact on oil rent for every oil barrel resting in the bed on oil rent -revenues- is enormous. Now you have to add as well the non-cash oil “sold” to China (under the commercial oil agreement) to Petrocaribe -including Cuba- and ALBA, you must count between 580 – 786 thousand barrels of oil -daily- we can see the enormous decapitalization of PDVSA and the gigantic financial hollow which bright us to this stage of “mengua’. When you look at OPEC data -secondary sources- you will get an oil production of around two million barrels, so it is not difficult to jump to some very delicate conclusions. So, together as the twin’s deficits, the budget and the balance of payments deficit, which impacted the real economy at such level that the national income in dollars’ term had reduced in 5 years by a third; and the per capita income, considering 1000 Bs/$ the Power Purchasing Parity -which is the best proxy- around 4000 thousand USD. So the impoverishment of Venezuelan people it came to stay with us for a while. The national oil industry (PODVSA and its partners) is in state of near collapse, with a financial misfortune which will not be removed in the short term, for no Republic and PDVSA has access to financial markets, the risk is huge so the premium will not permit any underwriting new debt at that particular discount. On the other hand, a market for heavy oil is nearly as its top, and the production costs have grown at the levels which will be not easy to find partners, capital, at least in the short term. Recall that since oil is government or Estate property, royalties and dividends are costs as well, if you add it the equation, with CDS 5 year maturity, and country risk premium of 20% to produce and process heavy and extra heavy oil will be well above shale oil. the one with brought the huge supply shock which will stay there for a while. On the other hand, we have human capital issues too, and believe or not, the huge human capital we use to have years ago, is abroad most of them with they own ventures, the only solution for that is IMF’s financial bailout of 56-60 thousand million USD. However, IMF has not lot of sympathies, and banks lobby hard to stop this kind of financial assistance since in the case of IMF some debt is going to be restructured, so banks are not too friendly with them. So the short term outlook is not something to be happy, and for that thousand of Venezuelans are prepared to follow the diaspora.

  18. Hi Carlos,
    Great article. Also happy to personally know you and have you as a credible source when it comes to talk about this matters. A bit insightful of what is happening nowadays in Venezuela. I had the great chance to work in projects related to El Furrial and also Jusepin so I know and understand the complexity of the area. I wanted to mention a couple of technical details to reinforce the article, but others like Fred or Fernando Leanme have well explained so there is no need. It is my understanding that early development of the field was due to Norwegian advisors that helped us to develop at its best aiming for maximizing recovery. The deal was: inject water from underneath the oil and gas from above it. This way you might get to the maximize the recovery factor. Apparently this will not be possible anymore as things were described, thus further and perhaps massive expenditure will be need in a post-Chavistas era to recover at least post 2009 P50 estimates. Of course, if you don’t use technical expertise along the way, this will only be ” plowing in the sea”. An addition to your article could have been the number of new wells drilled in the field from 2009 onwards. This fact can also explain the sudden drop in reserves, etc.
    Mis Saludos y afecto para ti y los tuyos.

    • Thanks, Joseph! It’s great to know about you. Thank you for the insight, as well. Coming from someone who introduced me to the greats of “foam injection into oil wells” almost 15 years ago is more than gratifying. Abrazo y afecto a los tuyos, hermano.

    • Joseph Abdev,

      Just to confirm that several efforts went to develop the WAG project (Water and Gas injection). They relied on how each field reserves were accounted for in the books. WAG estimated a major increase and shift from undeveloped to developed reserves, also bringing leverage for top project investment. Because Furrial trend is highly faulted, a surface network had to connect several fields to perform their WAG in the high-reserves compartments. This was also a great challenge for reservoir studies as models were updated in material balance and opened the chance to 4D seismic (3D seismic shots performed over time). Technologies like HIVE (Immersive Visualization) and better downhole sensors were used to sync all data into massive, integrated databases for risk analysis. All this knowledge was property of CVP (PDVSA) and hopefully source of a new light-oil production comeback.

      Interesting to mention, all this projects were big and profitable with bellow 30USD/bbl price (inflation adjusted). The name of the game was operations efficiency.

  19. The picture about this art le is my authority , it was taken from Drillingahead web site on my posts gustavo rivas

  20. […] El recuerdo viene al caso por dos artículos. El primero, el de Carlos Bellorín en Caracas Chronicles, que explica el declive de El Furrial, tres décadas después de que en 1985-6, señala el autor, “sus reservas probadas eran unos 4 mil millones de barriles”. Una barbaridad. “Enorme”, apunta Bellorín. (http://www.caracaschronicles.com/2016/07/28/el-furrial/#comment-122071) […]

  21. I wold suggest that a similar catastrophe is ongoing in the lighter Northern Monagas overthrust belt fields to the west Carito, and Santa Barbara which have significant volumes of condensate and light oil with relatively high pressure Bubble point/Dew point, ~9000 psi, By stopping injection the recoverable fluid go from ~40% to ~7%

  22. Though you didn’t provide the details, I assume that the reduction in reserves in the field is related to the falling price of oil. If reserves is calculated as financially recoverable reserves, then it wouldn’t be surprising to see them drop by half when oil is $40/bbl vs. $100/bbl. This does not suggest that all is well in Flurrial — your production numbers and technical information clearly indicate — but it does suggest that maybe the long-term prospects aren’t quite as dire.

  23. Beyond the technical complexities, EL Furrial is but a mirror of the decline of PDVSA and hence of Venezuela. The result of the pervading ignorance of the former and the indifference of the latter. By the way, El Furrial may be even beyond the hand of God

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