¡La cumbre del petróleo! Venezuela-Style!

AKA: Peak Oil, Venezuela-Style!

Guest socialism bashing by David Middleton

Venezuela is in a state of collapse due to its embrace of socialism.  Once the wealthiest nation in South America, it is now in financial ruin.  Despite having more proved oil reserves than any other nation on Earth, they can’t even afford to produce and export their own oil… And Venezuela’s economy is almost entirely dependent on revenue from oil exports.   When Hugo Chávez  took office, Venezuela was producing nearly 3.5 million barrels of oil per day (bbl/d).  By 2015, it was down to about 2.4 million bbl/d and dropped below 1 million bbl/d in March.

How did this happen?  In some ways, it’s déjà vu all over again.  Robert Rapier has a nice summary in this Forbes article:

Venezuela’s oil production reached an all-time high in 1970 when the country produced 3.8 million barrels per day (BPD). In 1971, Venezuela nationalized its natural gas industry, and began taking steps to nationalize its oil industry. The oil industry was officially nationalized in 1976. At that time, the Venezuelan state-owned oil company Petróleos de Venezuela S.A. (PDVSA) was formed.

Between 1970 and 1985, oil production in Venezuela experienced a decline of over 50%. But then production there once again began to grow. In 1997, as it sought to attract foreign investment and develop the heavy oil in the Orinoco Belt, Venezuela opened up its oil industry to foreign investment.

By 1998, Venezuela’s oil production had recovered to 3.5 million BPD, nearly reaching its former high. In 1999, Hugo Chávez began serving as President of Venezuela. During the Venezuelan general strike of 2002–2003, Chávez fired 19,000 employees of PDVSA and replaced them with employees loyal to his government.

[…]

In 2007 oil prices were rising, and the Chávez government sought more revenue as the investments made by the international oil companies began to pay off. Venezuela demanded changes to the agreements made by the international oil companies that would give PDVSA majority control of the projects.

ExxonMobil and ConocoPhillips refused, and as a result, their assets were expropriated. (These expropriations were later ruled to be illegal, and compensation was granted to both companies).

Forbes

Source: Robert Rapier

To paraphrase Margaret Thatcher, “Socialism only works until you run out of other people’s money.” By replacing PDVSA’s skilled workforce with political cronies and then driving foreign expertise and capital out of Venezuela, he was left with a lot of heavy oil that is difficult to produce and a steadily diminishing means of producing it.  But this only took the production down to about 1.2 million bbl/d by January 2019… Then the bottom really dropped out.

The Naptha Cliff!

U.S. sanctions against PDVSA deprived them of two critical things:

  1. Their #1 export customer.
  2. The naptha and other diluents required to transport their heavy crude oil.

This “double whammy” had a serious impact in less than 1 month…

US sanctions are a double-whammy for Venezuela.

Not only was the United States Venezuela’s No. 1 customer, but it was the country’s main source of naphtha, the liquid hydrocarbon mixture used to dilute crude. Without it, Venezuela’s heavy crude can’t be readily transported. Rystad Energy forecasts that some operators in Venezuela will run out of diluent by March.

CNN

Sorry Peak Oilers… Venezuela as a nation may have already jumped off Seneca Cliff into the Olduvai Gorge; but it has nothing to do with Peak Oil.  Venezuela’s oil production will eventually recover.

Rystad Energy’s “Low Case” scenario had Venezuela oil production dropping to 800,000 bbl/d this year and down to 680,000 bbl/d next year before beginning to recover.  The recovery will be slow, even with regime change, but it will occur…

Rystad Energy

**Short term: Production will slow its downward trend. Fields in the Orinoco Belt, which are currently operating below capacity, will be relatively easy to rejuvenate. Further production increases become much more complicated as mature fields have reached their natural production decline and significant damage has been done to a large number of wells.

**Mid-term: Arresting production declines and well damage in mature fields – which were the biggest contributors when Venezuelan production stood at more than 2 million bpd – will be a major challenge, both technically and financially. Therefore, to increase production Venezuela will have to further develop fields in the Orinoco Belt.

**Long term: Rystad Energy does not expect to see growth on a massive scale, but does see significant upside potential over time. Venezuela sits on massive proven reserves. The cost structure is relatively low and exploration risk is minimum. Furthermore, the Orinoco Belt oil sands are less energy-intensive than the oil sands in Canada given Venezuela’s warmer climate, which means less energy is required to enable the heavy crude to flow. Finally, we expect demand for heavy oil to remain high despite potential carbon regulations and IMO 2020 restrictions on shipping fuel, as complex refineries such as those in the US could still process this type of crude in compliance with environmental regulations.

Rystad Energy

It might be tempting to look a a graph like this and conclude that a Peak Oil Seneca Cliff has materialized out of thin air.

H/T Javier

However, if you step back and look at the bigger picture…

Venezuela oil production 1920-2017 (millions of bbl/yr and thousands of bbl/d). Data from BP and Restuccia, 2018

The “Seneca Cliff” turns out to be more like a Hubbert curve. Peak Oil is real. At some point global petroleum production will peak and then it will slowly decline… But it won’t fall off a Seneca Cliff into Olduvai Gorge.

Petroleum liquids production (includes crude, condensate, oil shale, oil sands and NGL). USA in red, Venezuela in yellow.

References

Egan, Matt. “How US Sanctions on Venezuela Are Rippling through Oil Markets.” CNN, Cable News Network, 19 Feb. 2019, https://cnn.it/2Gijyft.

Hubbert, M. King. “Nuclear Energy and the Fossil Fuels. Presented before the Spring Meeting of the Southern District, Division of Production, American Petroleum Institute, San Antonio, Texas, March 7-8-9, 1956.” Nuclear Energy and the Fossil Fuels. Presented before the Spring Meeting of the Southern District, Division of Production, American Petroleum Institute, San Antonio, Texas, March 7-8-9, 1956, 1956. http://bit.ly/2VBzJK2

Peak Oil. “The Seneca Cliff of Oil Production”. Exploring Hydrocarbon Depletion. June 7, 2016. http://bit.ly/2D7pQwx

“Peak Oil And The Olduvai Gorge.” Peak Oil And The Olduvai Gorge  |  Peak Oil News and Message Boards, peakoil.com/generalideas/peak-oil-and-the-olduvai-gorge.

Rapier, Robert. “Charting The Decline Of Venezuela’s Oil Industry.” Forbes, Forbes Magazine, 5 Feb. 2019, http://bit.ly/2ItsXSM.

Restuccia, Diego. “The Monetary and Fiscal History of Venezuela: 1960–2016.” SSRN Electronic Journal, 2018, doi:10.2139/ssrn.3237748. http://bit.ly/2aIm0OY

“Short-Term Energy Outlook > International Petroleum and Other Liquids > Supply > OPEC.” U.S. Energy Information Administration (EIA) – Qb, http://bit.ly/2Iu9AJd.

“Statistical Review of World Energy | Energy Economics | Home.” BP Global, https://on.bp.com/1RSrHnr.

“Venezuela-Related Sanctions.” U.S. Department of State, U.S. Department of State, http://bit.ly/2Ip8PRO.

“Venezuela Update: Production Could Fall below 700,000 Bpd by 2020.” Rystad Energy, http://bit.ly/2GkbhI1.

via Watts Up With That?

http://bit.ly/2IqSZWY

April 11, 2019 at 10:06PM

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