Francisco Monaldi: ‘Venezuela Won’t Even Get to Exploit 5% of Its Oil Reserves’

Now that oil prices are recovering, Francisco Monaldi analyzes the truth of the nature and magnitude of what lies beneath the Faja del Orinoco (Orinoco Belt) and the historic use of fossil fuel to determine the role of oil in our future

It’s true that there are over one trillion oil barrels in the Venezuelan subsoil. That’s why Nicolás Maduro brags about the “world’s largest reserves,” although he says that only a fraction of them are “proven” and exploitable; between 20 and 25 percent of the total amount: 300 billion barrels. But it’s also true that, if things stay the way they are, most of it will remain underground forever. The carbon dioxide won’t be released into the atmosphere nor will that wealth be used.

Francisco Monaldi, Venezuelan economist and director of the Latin American Energy Program for the Baker Institute of Rice University in Houston and of the Centro de Energía del Instituto de Estudios Superiores de Administración  (IESA) in Caracas, PhD in Political Economy from Stanford, is one of those who believes that 21st century socialism killed the golden egg goose, PDVSA, and he also warns that even if the oil industry were to be in order again, there’s a worldwide event which surpasses it: the fossil fuel era is coming to an end. A handful of countries have sped up the decarbonization of their economies to try to stop the ever worsening effects of climate change.

Several European countries, for instance, have established a deadline to end production of gasoline and diesel fuel cars: 2030. Therefore, Venezuela is racing against the clock.

The Venezuelan oil industry is producing and exporting around 700,000 barrels per day, according to the Organization of the Petroleum Exporting Countries (OPEC), which uses official numbers given by Venezuela. This is 20 percent of what was produced when Chávez came into office. If the country keeps this production rate, we’ll need 1,643 years to deplete the proven reserves. And if it manages to go up to 3 million barrels per day, or 6 million barrels per day, we would need at least 150 years to exploit them entirely.

Monaldi believes it’s more realistic to talk about those proven reserves, which range between 80 and 100 billion barrels and could be extracted in the next 50 years if Venezuela manages to raise production to 6 million barrels per day. How much money are we talking about? Venezuelan oil closed at over 50 dollars per barrel in August; at that price, it would mean up to 5 trillion dollars.

Venezuela is still quite competitive in terms of cost; if there were to be a transition or change that would allow for sanctions to be lifted and investment to come back, the country could substantially increase production to 2 or 3 million barrels per day. The infrastructure, while deteriorated, would allow to raise production by four, five or even six-fold. The question is if there’s time to sell those 300 billion oil barrels and the 6.3 trillion cubic meters of gas which make up the entire Venezuelan hydrocarbon reserve.

Because the time window could close. “There’s a lot of uncertainty about the time frames and how fast the energetic transition will go,” Monaldi says, “but I can give you an idea. Today, about 100 million barrels of oil are consumed each day. In 2050, maybe only 25 million will be consumed, to abide by the 1.5 degrees Celsius against climate change established by the United Nations. In another scenario, things don’t change much and consumption would be 95 million oil barrels per day. This would already be a new situation since never has oil consumption gone down instead of up, except for relatively short periods of time and for very specific reasons. The truth probably lies between both scenarios, but it still poses a huge challenge for Venezuela because the country has its reserves confined to the Orinoco Belt, whose oil is more polluting; it generates higher carbon emissions. This makes its price, be it by taxes or any other mechanism which affects carbon profits, less competitive in the long run.”

In reality, how much oil and gas is in Venezuelan subsoil?

Official sources talk about 303 billion in proven oil reserves, but not as defined by the U.S. Securities and Exchange Commission (SEC) or by oil engineers. Venezuela says that the recovery rate (percentage of how much a deposit can be exploited) of the reserves in the belt is 20 percent, but in reality they have only reached 9 percent. In second place, reserves must be adjusted to the prices, and there are areas of the belt where last year’s prices made it non-profitable.

So there are 1.2 trillion from which, technically, you could recover up to 10 percent, but the profitability of its exploitation is subject, in practice, to the sale price.

The government had estimated to extract about 20 percent of the reserves, what they use as “proven reserves,” but I estimate that they won’t make it to even five percent of all those global resources, of those trillion barrels. A more reasonable version of those reserve numbers would be to talk about 80 to 100 billion oil barrels. There’s no doubt that the oil demand will drop and that Venezuela will have to adapt to the circumstances. In any case, because of the low cost, Venezuela will be able to produce some of it, and there’s one scenario in which we’ll at least be able to make use of part of the wealth by producing between two and three million barrels per day in the next 20 to 30 years. But in the short term, we will remain well below that, for sure.

Developing the gas exporting business could also bring a lot of wealth to the country. Now that the Panama Canal has been widened and you can use PostPanamax tankers to transport huge amounts of liquefied gas from America to Asia in each shipment, it would mean a great opportunity for Venezuela if we were in a normal country and didn’t have international sanctions

For the most part, Venezuela has gas associated with oil and it could be extracted at the same time as oil, except for these important reserves discovered in Paraguaná and are being developed. The ones in Paria are also important reserves. Gas would have a longer lifespan than oil because it’s not carbon-intensive; if we do things right, those reserves could be developed a lot, a portion of it for exporting and another portion for domestic use. The Venezuelan gas reserves are 6.3 trillion cubic meters.

What would you recommend to the government and opposition who are in talks in Mexico, so that they don’t miss out on this wealth and are able to steer the oil industry in the right direction during this situation?

Ideally, there should be a way to guarantee that projects in Venezuela, especially those involving international companies—two European companies; Total and Equinol, left the country, unfortunately—are allowed to continue. To find a way for Venezuela to continue its oil production and the upkeep of its facilities, but at the same time use those funds for humanitarian purposes. That would be a desirable policy.

What are the immediate measures that should be taken regarding the case of Monómeros, CITGO, and other relevant PDVSA assets at risk, and avoid Venezuela losing them or them being unavailable to act as a lever in the recovery of the economy?

The thing about CITGO, Venezuela’s main asset abroad, is very complex because there are a lot of creditors in line to take that asset and cash in their debts; from companies that have won arbitrations in CIADI to bondholders, like PDVSA 2020. What separates these groups, especially Crystalex from bondholders, are the U.S. sanctions and the decisions made by the OFAC. The fact that no one knows what’s going to happen to the caretaker government after January 2022 adds uncertainty to what will happen to those assets in the future.

Sadly, although CITGO would be a strategic asset because of its ability to place heavy crude in the Gulf shores, it’s possible that Venezuela will have to let go of that asset eventually, because the debt Venezuela has is colossal compared to its paying capabilities.

Of course, the worst-case scenario would be that 100 percent of the company is taken by one of its creditors, instead of it being part of a great restructuring of the debt. If things were done right, then the asset could be saved.

Guyana has been able to bring in oil profits in the millions from the Esequibo territory and the deep waters of that border between both countries. In fact, that country has had the highest growth in Latin America for several years thanks to these new oil exploitations. If it had been us instead of them extracting that oil, how much money would have entered the treasury in the last five years?

So far, Exxon has drilled inside the Guyana territory, to the east of the Esequibo. Other areas that have been handed to Exxon and other companies are within the determination area, but they haven’t drilled there yet. Those deposits can extend to the Venezuelan side, but so far they’re only extracting from the Guyanese side. Of course, if Venezuela hasn’t been able to develop the largest reserves in the world in the Orinoco Belt, it’s hard to believe they’d develop that area, which required a huge investment from Exxon with big risks. But the oil in Guyana is light, we have little of that. Having it would be tremendously positive for us because we could mix it with the one from the Orinoco Belt. So it would be very good for Venezuela to explore and exploit that light oil and it’s possible that we have it in the determination area. We don’t know that. It’s also possible that there’s nothing, or only gas, but no commercial oil.

How would you describe the steps taken by Tareck El Aissami in PDVSA?

El Aissami starts his job at the Ministry proposing reasonable things anyone would in his position: changing the laws and the contracts to bring in meaningful investments for projects which PDVSA can’t develop at the moment. The report that was leaked by the Dirección de Planificación of PDVSA and suggested just that could’ve been written by any consultant. The nature of the problem is completely different: an untrustworthy government unable to accomplish absolutely anything, and the sanctions. Even El Aissami has personal sanctions against himself and he hasn’t managed to change the basic laws, he has no credibility. PDVSA hasn’t paid anyone. So there are ten thousand reasons why it’s extremely risky to invest in Venezuela. It would be very profitable to invest in Venezuela if the sanctions weren’t in place, but that’s not the case. There are two types of changes suggested by El Aissami. First, helping the joint enterprises. PDVSA’s partners like Chevron, the Russians or the Chinese acquire the majority of the property and thus the capacity to operate, make procurements, control the project’s cash flow and take part of the exports. This is all perfectly reasonable. The question is if they’ll be able to go through with it. Some say that it requires changing the Hydrocarbon Law and others think we’d have to change the Constitution. It also needs the credibility they lack nowadays and, without sanctions relief, those projects won’t increase production significantly. It’s possible that the Chinese would invest some in this context, but not too much, I think. And the other thing El Aissami is proposing is to hand over the operations of a given field to service companies, so production goes up. Contracts of this kind have been signed in the past during the administrations of Del Pino and General Quevedo. Others were recently signed with El Aissami, but so far they’ve had little success for the same problems with the lack of credibility of PDVSA and the sanctions. All this complicates the performance of these mechanisms.

El Aissami even promised that the lines for fuel would end in July, but it hasn’t been the case.

They haven’t been very successful, but they’ve managed to slightly increase production in the refineries, which had reached a minimum level during the Quevedo administration. It’s still a catastrophe compared to what Venezuela produced in the past, close to one million barrels of gasoline per day; today we’re closer to 100,000 and 150,000 barrels per day, less than 20 percent of what production capacity was when chavismo came to power. Although El Aissami has tried and he has had ideas that any sensible person would have suggested, the production increase last summer has more to do with oil prices going up, which has enabled them to dodge the sanctions. And the only success story El Aissami can take credit for is that, with the help of Iran, he dodged the sanctions more effectively than last year, if you can even call that an achievement.

How much of an investment is needed to take advantage of our subsoil’s wealth in time?

If there isn’t a political and institutional change that could bring investment of about 100 billion dollars in a decade—to which the Venezuelan State would only be able to contribute a minuscule amount—the window of opportunity will close and Venezuela will continue producing less than a million barrels per day. That means fewer resources to rebuild the country than what could’ve been generated. We hope that this change happens at some point.

But we also have to say that Venezuela will never be a country that lives off oil again, because it just isn’t enough to cover the demands of the society we have, in terms of population and aspiring to become a middle-class country.

The country has to develop other areas quickly and oil should be used as a lever to raise infrastructure, and to help diversify and develop other industries. If the economy isn’t diversified, which is what we’ve been trying to do for the past one hundred years, we’ll be a very poor country even if we bring back the oil industry and we produce 3 million barrels per day for a couple of decades; that won’t generate the living standards Venezuelans had in the past nor the one they aspire to today. The oil industry still is a great opportunity for Venezuela, but it’s an opportunity that is closing and won’t be enough to develop the country.

A Spanish language version of this interview was published in Cinco8.