Venezuela's complex oil terrain

“In terms of reserves, Venezuela is in the first league, not only because of their conventional reserves but more importantly because of the heavy crude oil,” said Roger Tissot, an analyst with Gas Energy Latin America. “There are only two huge sources of heavy crude in the world — the Canadian tar sands and Venezuela's Orinoco. It's much cheaper to develop from the Venezuelan Orinoco because of the technical conditions; the Canadian tar sands have to be mined."

But "what has made Venezuela's Orinoco expensive to develop," Tissot said, "is the policies and the politics."

If Venezuela is to exploit its abundant resources it needs investment from the capitalist oil companies it openly criticizes, said Piero Pitts, editor of the Caracas-based magazine Latin Petroleum.

The Carabobo fields will require four $5 billion upgraders to convert the extra heavy crude oil into a marketable commodity. Production costs are relatively low, but the initial outlay will be massive — about $10 billion for each of the three projects. In addition, Venezuela is demanding that partners finance the state oil company’s 60 percent share.

PDVSA does not appear to have the money to finance the projects alone. Despite record revenues of $134.6 billion and a healthy $12.5 billion profit in 2008, a preliminary version of PDVSA’s 2008 annual report revealed that the company owes $8.5 billion in tax payments and $13.9 billion to its providers.

The debts are signals of cash flow problems and partly explain the short-term motives for nationalizing the service industries, said Maikel Bello, an analyst at the Caracas-based financial consultancy firm Ecoanalitica.

After riding high for five years thanks to record oil prices, Venezuela’s gross domestic product shrunk to just 0.3 percent for the first quarter of this year. If prices don’t rally soon to at least $80 per barrel, Venezuela — which depends on oil for 90 percent of its exports and more than half the government’s budget — faces difficult times, Tissot said.

The long-term prospects are also reason for concern. Oil production appears to be in steady decline since an oil strike in 2003 that paralyzed the entire country. Chavez won the strike, but he also fired 12,000 of PDVSA’s 38,000-person staff, replacing them with workers who are loyal to his cause, but who lack experience.

Since then, PDVSA’s operations have been marked by a lack of transparency. In a first stab at accountability, PDVSA released production figures to OPEC which it allowed to be audited by an independent agent in London. The figures suggest that production is greater than the total claimed by the International Energy Agency, the U.S. State Department and OPEC itself. But at about 2.6 million barrels per day, production is still fall far below the 3.3 million barrels per day Venezuela claims to produce.

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