What is this, some parlor game? Not at all. This is the launching point for a serious talk about energy strategy. How?

Vamos por partes. 

Hugo Chávez

No, not the galactic comandante. The Hugo Chávez I’m talking about is the name some over-eager PDVSA official gave the Faja del Orinoco after the reserves certification known as Proyecto Magna Reserva.  Despite the recent challenges to these reserve numbers from the Norwegian group Rystad Energy, I know first-hand that hundreds of wells were drilled and the reserves there are enormous.  Regardless of what the exact number is, a big proportion of Venezuela’s reserves are in the Faja.  Let’s assume for now that of the 300 billion barrels in reserves, ¾ are in the Faja.

Oil reserves calculations assume a 20% recovery factor: of every ten barrels underground, you assume just two will actually get pumped out.  Such a recovery factor assumes you’ll use enhanced oil recovery techniques, like heating the reservoir to reduce the oil’s viscosity and maximize its recovery.  Even though this technology (e.g. Steam Assisted Gravity Drainage) has been successfully tested in Canada, in Venezuela we still produce the Faja cold: we drill a well and the oil flows naturally to the surface.  With cold production the recovery factor is less than 10%.

Maximizing recovery, removing contaminants and reducing the viscosity of extra heavy oil from the Faja is an energy-intensive process.  Venezuela has experience upgrading extra heavy oil thanks to the apertura of the oil industry in the 90s. Back then, four extra heavy oil upgrading projects were built in the Jose Complex with private participation, together they pump some 500 thousand barrels of upgraded “synthetic crude” per day.  

These days, those kinds of upgraders have fallen from favor: they’re just too expensive to set up. Current practice favors just mixing extra-heavy crudes with lighter crudes, to produce a more refinable blend.

If Venezuela wants to increase its oil production from the Faja, it will need diluent to transport and sell diluted crude oil as well as sources of energy to maximize recovery and upgrading capacity.

Mariscal Sucre

The next character is Mariscal Sucre.  I am not referring to the patriot born in 1795 but to the offshore natural gas field discovered in 1980 that holds some 12 trillion cubic feet (Tcf) of gas and 150 million barrels of condensates (condensates are ultra-light liquid hydrocarbons with 40 to 60 degrees API that surface together with the natural gas).  

To put it in perspective, Mariscal Sucre’s 12 Tcf could cover Venezuela’s entire natural gas demand for five years. They’re also about as much gas as the entire proven reserves of Trinidad & Tobago – one of the region’s greatest natural gas producers, and a country whose economy is based on exports of Liquefied Natural Gas (LNG), Methanol and Ammonia – three downstream derivatives from natural gas.

Mariscal Sucre was the biggest non-associated gas offshore field discovery in Venezuela’s history.  Free gas —gas that’s not associated with oil production— is useful because its production can be managed to match with the specific demand for gas, rather than being left to the vagaries of the oil market.  

That matters when you need a predictable supply: it opens up all kinds of downstream integration possibilities such as power generation, petrochemicals (like Methanol, Ammonia and Urea) and Liquified Natural Gas (LNG).  Since Mariscal Sucre, other material offshore free gas discoveries have been made in Venezuela such as the big Loran and Perla fields.

Gas fields generally also contain condensates that can be used as light end feedstock for refineries or diluent to transport extra heavy oil. That’s what they do in Canada.

Mariscal Sucre’s condensates could clear the production bottlenecks that have plagued Faja production now that the 90’s upgraders are running at maximum capacity. Light natural crudes to use as diluent are in short supply in Venezuela (given the sustained decline in production of medium-light conventional crudes from Western and Eastern Venezuela) and financial pressures limit PDVSA ability to import light crudes.

Finally, Mariscal Sucre, just like Loran and Perla, sit on top or close to an international border next to markets that value gas at international prices.  Imagine the export options this creates, particularly in the current context where Venezuela is in dire need of hard currency!  Its a matter of developing and piping the across the border, that’s all.

Venezuela holds some 200 Tcf of gas reserves, the eighth in the world and the first in Latin America and the Caribbean.  Even though <20% of these reserves are of free gas and mostly offshore (some 35 Tcf), they are still massive and a clear indicator of the huge unexplored gas potential that lies mostly offshore.

Elon Musk

Finally, we come to Elon Musk, the legendary Sillicon Valley entrepreneur. Musk is the creative genius behind companies such as SpaceX, Paypal and —most importantly, for us— Solar City and Tesla.  

Tesla, founded in 2003, is one of the largest producers of Electric Vehicles (EVs) in the world.  Tesla has managed to develop EVs just as fast and powerful as a Porsche or Corvette.  Today there are one billion internal combustion vehicles in the world, alongside a paltry 1.3 million are EVs.  

But that’s changing.  

In March of 2016 Tesla announced its Model 3: a $35,000 family sedan, price competitive with a BMW 3 series.  In one week Tesla received 300,000 orders for a car that doesn’t even exist yet!  

In the next decade the expectation is that EV technology will continue to advance until the cost of ownership of EVs is below that of an petrol-powered car.  The latest forecast from Bloomberg projects that by 2040, 35% of new car sales globally will be EVs.  But we don’t need to wait so long:  today in Norway, one in four cars are already EVs and in Japan there are more EV charging stations (40 thousand) than gasoline filling stations (36 thousand)!

The electricity to charge EVs increasingly comes from cleaner sources of energy, either renewable (such as hydro, wind or solar), nuclear and natural gas (which produces half of the carbon emissions of oil or coal).  Actually Musk wants to go further and not use fossil fuels at all by combining his solar homes (SolarCity) with his electric cars (Tesla) -that might be an extreme scenario for this century, but who knows?!

As a consequence, coal and oil fired power generation will shrink, and even more after global policy agreements have been reached to limit the use of fossil fuels such as COP21 in Paris last year. All on the back of a more environmentally conscious society.

The use of natural gas for power generation will only increase. In an EV world, that means natural gas will compete head on with oil as transportation fuel.  This massive shift in the energy space, partly fueled by the US Shale revolution, explains why demand for natural gas is expected to grow at twice the rate of oil. In fact, demand for oil is projected to peak by year 2030, while there’s no peak in sight for gas.  

Today, Venezuela plays no role whatsoever in this unstoppable global energy transition. The good news is that we have the gas resources to hop on the bandwagon. What we lack is the vision.

Bringing it all Together

What does this all mean for us? Venezuela is recognized as an important global oil producer and resource holder. 90% of oil is used for transportation. Venezuela effectively exports mobility to the world. That is what we effectively do today: move cars, planes, motorbikes, trucks and ships.

But there’s an energy revolution afoot towards lower carbon footprint forms of energy use, and natural gas plays a big role in that revolution.

For Venezuela, the implications are enormous.  

First, we need to lean on the Faja and our other conventional crude oil now. It makes no sense to save it for a future that will never be.  As it is, most of our oil reserves will never see the light of day.  To increase production from the Faja and sustain mature conventional oil fields we will need a lot of condensates and natural respectively to maximize extraction.  Natural gas is a lever to drive our oil industry in the short and medium term.

The more important implication is longer term.  If we don’t participate seriously in the natural gas business, Venezuela will be gradually marginalized in the global energy arena as oil loses its relevance over time.  

Venezuela needs an energy strategy aimed at securing our place through the global transition towards more sustainable energy use. I’m thinking of my kids and my grandkids when I say we have to explore and develop Venezuela’s gigantic gas potential.

That is what these three characters can teach us about our future, a new vision for our national hydrocarbon industry, in which we urgently shift the emphasis and direction towards natural gas as a central axis of the Venezuelan hydrocarbon strategy.

21 COMMENTS

  1. Interesting post. But as usual, it does not mention the Reason why none of the good decisions happen: Corruption, everywhere. It’s not ineptitude, as this article explains, or know-how. So what else is it? Why is is so hard to articulate the real reason? .

  2. Every time I hear (or read in this case) some one advocating for more oil production (or gas) it gives me the creeps. Not because I am against of it, or because they do not have a point. On the contrary, I wholeheartedly share Andres point of view. The issue is the fundamentals of wealth generation activity in contrast with our recurring and unsolved relationship with corruption, inefficiency, populism and pragmatism.

    I realize that someone may have thought about the potentials of the new discovered wealth when Zumaque I was put in production in 1914. The same way we think to believe our current and squandered potential 102 years later.

    Somehow we need to make Juan Pablo Perez Alfonso thesis of oil being the devil’s excrement a mandatory subject in all petroleum and mining schools in the country. Perhaps we may realize that less oil may be actually better for us.

  3. The general sense of the post is quite rigth: contrary to traditional wisdom, we need to develop our hidrocarbon potential before they get out of fashion. There is one point that is not clear, in my opinion: natural gas will not necessary overtake oil as the main fossil fuel. The rise of renevable energy ( an strong existing trend) could eventually jeopardize the role of gas in the world economy, while oil is only under the threat of electric vehicles ( a future trend, and basically a Musk´s promise). Apart from that, congratulations! we should discuss these kind of topics more often.

    • Totally agree, I was going to post on this but you beat me to it.

      The reality is the oil and gas industry has done a very good Orwellian job at portraying gas (insert the adjective ‘natural’ for that ‘green feel good’ effect) as being ‘green’. The O&G industry has also done an incredible job at creating hysteria around nuclear (consider more people die in coal plants and coal mine accidents per annum than in nuclear related accidents, both on a gross level and when measured as deaths / total energy produced).

      As the original post flags, gas when burnt in a CCGT, well it still produces around 1/2 the CO2 of a coal plant. But 1/2 is still CO2 being emitted, what’s more, gas production, transport (leakage) and combustion releases methane, whilst having a shorter life-span once released into the atmosphere, methan has a more potent GHG effect than CO2.

      Make no mistake about it, and repeat after me: gas is a fossil fuel.
      The future requires de minimis use of fossil fuel.
      The future (in a rational world) is bleak for gas.

      A world with a large quantity of gas being burnt (or where gas has replaced coal and oil fired generation) would still be a world heading for material climate change.

      Nuclear, solar, wind and hydro, coupled with batteries, is the best we can do.

      • The O&G industry has also done an incredible job at creating hysteria around nuclear ..
        You are informing me that all those decades of anti-nuclear energy activists were funded by Exxon?
        You are informing me that Harry Reid and Obama had nothing to do with killing the nuclear waste storage facility in Nevada, that it was all a result of Exxon-funded lobbyists?
        Decime otro de vaqueros.

        The reality is the oil and gas industry has done a very good Orwellian job at portraying gas (insert the adjective ‘natural’ for that ‘green feel good’ effect) as being ‘green’…Make no mistake about it, and repeat after me: gas is a fossil fuel.

        Please inform me where someone in the O&G industry has claimed that natural gas is NOT a fossil fuel. Nancy Pelosi told us on Meet the Press that “I believe in natural gas as a clean, cheap alternative to fossil fuels.” Last I heard, Nancy Pelosi was a Democratic Party Congresscritter from San Francisco, not an O&G big wig.

      • The reality is the oil and gas industry has done a very good Orwellian job at portraying gas (insert the adjective ‘natural’ for that ‘green feel good’ effect) as being ‘green’.

        One example where I agree with you about “O&G-Orwellian-Green” is British Petroleum, which at one time billed itself as “Beyond Petroleum.” As the Macondo blowout in 2010 showed- Gabo couldn’t have named it better- British Petroleum would have been more accurately named as “Beyond Following Accepted Industry Procedures.” Moreover, it turned out that BP’s not going by the book at Macondo was not a bug, but a feature of its operations. Stories mounted about BP Before Macondo.

    • The rise of renewable energy ( an strong existing trend) could eventually jeopardize the role of gas in the world economy,

      Consider the case of wind energy. Wind cannot become a primary source of electrical energy, because of its intermittent nature contrasted with the more constant consumer demands for electricity. Coal or nuclear electricity production cannot easily be turned on or off, which means they would not be a good partner with wind energy. By contrast, electricity production from natural gas can easily be turned on and off, which makes it a good partner with the intermittent nature of wind energy. Natural gas and wind energy play acomplementary role.

      Texas is the highest producer of both natural gas and wind-generated electricity in the US. Wind accounts for about 10% of electricity production in Texas. Wind energy on the Great Plains, from Texas to North Dakota, is a case of if you have lemons, make lemonade.

      https://en.wikipedia.org/wiki/Wind_power_in_Texas

  4. The first thing to realize is that oil is a business , which has to be handled with optimum efficiency and rigorous commercial rationality , that its not simply a matter of producing large volumes of oil and gas but of producing it in the most profitable terms , that transforming it into a grandiose symbol of our national identity , the cure to all our ills , the magic wand to all our utopian illusions is the worst way of looking at it . Chavez saw it as a limitless source of clientelar patronage and narcicistic empowerement and ended up ruining the business………!! But the first thing about a business is that it cant be run by bands of loyal slogan shouting hacks but by a professional organization steeped in the culture of doing things rationally and competently, in short by technocratic organizations ….free from partisan political interference……!!

    The second thing to realize is that even if energy sources decline in importance through out the years they always have a long life because the worlds energy needs (look at the forecasts) aren’t becoming lower they are increasing and even if we use fossil fuels more sparingly they will continue to be needed for a long long time ……look at coal which has survived the advent of much more competitive oil for close to a century….but that means that the oil industry will have to survive and even thrive by becoming more and more efficient in its use of technological resources ……you cant have a second rate organization exploiting the oil and gas , it has to be a really top notch organization which is very hard to build and maintain not to improve it results but very probably to keep it going as a source of modest but useful economic resources. Margins will not be as fat as before , they will likely get much thinner but still be profitable enough to remain a healthy productive business.

    Quite a separate problem is what is done with what that oil business produces that ends up in the hands of a countrys government . even if the business is great if the people getting the benefits don’t know how to manage them rationally its all useless……..!! But this is a separate topic ……..where people I fear are still a bit lost……!!

    • Your conclusion gets to the crux of the matter. So long as the government functions from oil revenues instead of taxes, it can never be accountable. PDVSA must be completely separated from government. All Venezuelan citizens should be considered as stock holders, and paid dividends directly.

      • The oil industry whether private or public or a bit of both cant stop producing income for the state , it did before nationalization , it will always , whether in the form of taxes (which it must pay just as any other business) or by way of royalties (as owner of the resource) but never in the form of politically mandated shoddy deals with govts ideological allies or supporters nor in the form of mass subsidies for what it produces…..thats got to end.

        What REALLY must be separated are the functions of the State (as an institution serving the interests of all Venezuelans thru technocratic organizations ) and the politically driven structures of govt (which driven by considerations of popularity and partisan politics ) . Perhaps part of the shares in the organizations managing the oil industry should be given to funds (much like the funds they have in Norway or other places) which run autonomously from govt ) dedicated to fund and promote activities of public interest such as building of public works or public health or education ,

        We have too much Govt and too little State, , the govts attributes for the management of public resources should be restricted to the basic political functions leaving the handling of public services to Autonomous Funds run on a technocratic basis same as the US Army , or the BBC or Harvard University ……..

        Well probably the above is too bold and unfamiliar for most people to follow but lets hope some may understand it ….!!

  5. I would include hydro power (we have many powerfull rivers), wind power (Paraguana, Margarita and most of the coast is a wind paradise) and solar (we are in the tropics).

  6. The EIA projects that the world’s energy consumption needs (specially among non oecd countries ) will rise some 48% by 2040, while the rate of increase in the use of totally green sources of energy even with the incentives of new technology and more stringent govt regulations will still lag behind this new demand and require the use of coal (in decreasing volumes) and of liquid fuels and gas (in increasing volumes). The rate of increase in the use of natural gas will be higher than the rate for crude oil and the latter much higher than the rate of coal usage which will tend to stagnate and then begin falling…..

    There is a headwind towards rapidly and totally replacing fossil fuels a a source of energy , one it takes a lot of money to build and create the infrastructure to accomplish that replacement , money that has to be produced by a world economy which is showing signs of having developed a structural pattern of much lower growth and even of stagnation ( the new normal) ……while technology and new regulations will slow the increase in the use of fossil fuels (foremost the use of coal , second that of crude oil and last of natural gas) its difficult for the world to make a sharp 180 degree turn in the manner in which its energy infrastructure uses these natural resources .

    The comment that natural gas includes the production of methane which if allowed to leak in great amounts to the atmosphere can have certain polluting effects is true , what isnt mention is that methane is also produced by accumulations of garbage and the offal of cattle and other life processes which have nothing to do with the production of natural gas and that a reasonably well run natural gas operation can truly reduce those leaks to negligible amounts so they become irrelevant…… Also not always mentioned is that methane can be used in the production of chemicals so that not allowing it to leak is economically beneficial for whoever produces or handles natural gas. A big incentive for any business organization to keep those leaks to a minimum.!!

    Inevitably the world must move towards the use of ever increasing green sources for the production of energy , but the time for that to result in a total shut down in the production of energy from fossil fuels may be longer than most of us would like …….this gives countries like Venezuela a time window in which to use the income produced by its crude oil and natural gas resources to advance the construction of an economy which meets the national needs for economic growth and is independent of from the exploitation of those resources. We should not waste that vanishing window of opportunity…..!!

  7. Be careful using Norway as an example of automotive future. They have a very distorted car market there. The tax incentives for buying an electric car are huge. They are so distorted that that buying a new Telsa S (which run north of $100K USD in the US is cheaper than buying a BMW 5 series or Mercedes E class.

    This is because Norway has a huge duty on vehicles that almost triples the price that you would pay anywhere else in world. Electric vehicles are exempt from this tax, hence they have an unnatural price advantage.

    Other countries around the world offer incentives to move to electric. But none come close to what Norway has done.

    My source is my Norwegian relatives. They explained to me why I saw so many Telsas on the road the last time I visited them there.

    • Just returned from Norway.
      A meal for four at a StatOil gas station, consisting of 4 drinks and 2 sandwiches and 2 hot dogs? $69.
      We researched it. To buy a Ford F-350 V8 engined pick up for hauling runs in excess of $199,000 due to taxes and fees. Vehicles are taxed according to their weight, engine size, fuel consumption, etc etc.
      I saw tons of Teslas. All were incentivized. I even talked to an owner who lamented that while the Tesla is great, he wouldn’t have bought on if it wasn’t paid for by… (wait for it…) OIL EXTRACTION. And Norway wants to go totally green within the next 15 years. Hypocritical of a country that exists as anything other than a backwater slough due to oil.
      I was in Norway as a boy in 1970. Brought there by a “rich aunt”. There was NOTHING except sheep. Roads were single lane… and not paved. At least the Norwegians are building infrastructure with what money they have left from hiring people for the sake of hiring.
      Oh yes. Socialism. Everyone is entitled to a “job”. Which is why the state is the biggest employer of losers

  8. Q. How many psychologists does it take to change a light bulb?

    A. None. The light bulb has to want to change itself.

    The problem in Venezuela is a culture of acceptance. It doesn’t want to change. And the problem starts at the top. No one near the top is visionary. I don’t own a Tesla, and I think that they are expensive and in the United States… a mere status symbol for hypocrites. That being said, my wife and I have a remote lake property that is entirely “off the grid” (generator for emergencies, solar and wind for DC power and cisterns for water accumulation. Candles and kerosene lamps for light at night)
    The point is, you have to sacrifice mightily in order to walk the walk. Venezuelans have sacrificed… but for what? A promise of Utopia???
    FWIW, my wife is a Venezuela expat, and my ancestors are from Norway. We just returned from Norway and I can say that Norwegians are very dedicated… but insular. Homogeneous to a fault. Everything is exceedingly expensive in Norway… but that is the price they pay for infrastructure that takes them away from oil and into tourism that will be their future.

    Vision is the problem.

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