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Editorial-Opinion

 

 

Oliver L Campbell : Three mistakes
that PDVSA should rectify

 

 

The government has made mistakes affecting the country's finances, but I want to comment on just three of these.

1) Insufficient effort exploring for light oil. In PDVSA'S filing with the SEC for 2002, it is stated "As part of our business strategy we intend to increase reserves of light and medium gravity crude oil." In fact, production of light oil has gone down significantly from 1,174,000 b/d in 2000, to 776,000 b/d in 2005, and 511,000 b/d in 2011. The objective to find light oil was established in 1976 and has not changed to the present day. Capital expenditure on exploration was £303 million in 2006 and $203 million in 2011. This low expenditure is reflected in the low number of exploratory wells drilled from 2006 to 2012 which is given as 19, 11, 5, 5, 4, 6 and 9. This effort is clearly not enough to increase substantially the reserves of light crude. The snag is PDVSA knows there are huge reserves of extra heavy oil in the Orinoco Belt and so has made the mistake of dropping its effort to find light oil.

Why is finding light oil so important? It sells for a better price than heavier crudes, but that is not the main reason. It is needed because, if there is insufficient capacity for upgrading, it is available for blending with crude from the Orinoco Belt. A blending capacity of 130,000 b/d exists at Jose and at present Mesa crude of 30º API is used to produce Merey 16º.

2) Insufficient upgrading capacity. The four upgraders in operation were constructed during 2001 to 2004.by the four Strategic Associations led by Total, ExxonMobil, Conoco and Phillips. Not one has been constructed since, although PDVSA has set a goal of increasing production from the Orinoco Belt to some 2,500,000 b/d by 2018. This includes 1,800,000 b/d from new entrants which seems highly unlikely. But even if the total figure attained were only 1,500,000 b/d this would still present a problem. The following table shows stated capacities in barrels per day.

 

Upgraders

Stated Capacity

Syncrude Produced

Operational

Capacity

Petrocedeño

(Sincor)

200,000

180,000

70%

Petromonagas

(Cerro Negro)

120,000

105,000

95%

Petroanzoategui

(Petrozuata)

120,000

105,000

90%

Petropiar

(Hamaca)

190,000

180,000

50%

Total

630,000

570,000

450,000

However, because of plant problems, the operational capacity at present is around 450,000 b/d. Add to this the blending capacity of 130,000 b/d and you get a total availability of 580,000 b/d. This is only just sufficient to process the current production of crude from the Orinoco Belt of some 550,000 b/d. As more production comes on stream in 2013 and surpasses upgrading/blending capacity, PDVSA will have to decide what action to take. The quickest solution is to create more blending capacity--an upgrader takes some three to four years to build--and use more light oil. Another option, at present being tried out, is to make a diluted crude oil (DCO) by using a refined product, e.g. naphtha or a middle distillate, to dilute the Orinoco Belt crude and make it transportable. The DCO is then processed in the Lake Charles and Corpus Christi refineries belonging to CITGO.

Experts in gas point out another problem is the amount of additional natural gas that will be needed for the upgrading process. This will entail constructing gas lines from offshore gas fields to Jose and this has not been started.

3) Passing an inflexible law on shareholding. This third mistake has created a straight jacket for the government. The law establishes that PDVSA must own a minimum equity of 60% in all joint ventures with other oil companies. This was a popular, nationalistic measure but, like many such measures, it was not thought through. If the law had given PDVSA the right to decide what shareholding it would take in each case, this would have given it the flexibility to contribute varying amounts of capital. As it is, PDVSA has found it difficult to contribute its 60% in all the Orinoco Belt projects. This has held up progress since the partners are not disposed to finance the whole operation while waiting for PDVSA to contribute its share.

If PDVSA had the flexibility to contribute less capital, this would free up funds for social development which is the government's priority. Besides, it is not necessary to hold a majority shareholding, or indeed any shareholding, to obtain an adequate reward--this can be secured from royalty and income tax payments. Of course, the profit element is lost to the equity owners, but you cannot have it both ways. Contributing less capital and freeing up cash would ease the government's present problem of finding the money to finance social expenditure

All three of these mistakes could be rectified. The most important is to start the construction of upgraders right away. That will take the pressure off finding more light oil for blending. Changing a law in Venezuela is difficult, particularly when it has nationalistic repercussions, but the government has only itself to blame for legislating that PDVSA must contribute a minimum of 60%. It is what you get when you let the heart of nationalism rule the head of pragmatism. The lesson to be learnt is not to be prescriptive in future, but allow for flexibility when passing laws on the oil industry.

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Oliver L Campbell MBA, DipM, FCCA, ACMA, CGMA, MCIM was born in 1931 in El Callao, Venezuela where his father worked in the gold mining industry. He spent the WWII years in England, then in 1953 returned to Venezuela and worked with Compañía Shell de Venezuela (CSV). He spent 15 years in the oilfields and ended up as Company Financial Controller. Upon nationalisation of the oil industry, he went to Petróleos de Venezuela (PDVSA) as its Head of Finance. In 1982 he returned to England and was the Finance Manager of the British National Oil Corporation prior to its privatisation. He then worked as an oil consultant and retired in 2002 after fifty years in the oil industry. Petroleumworld does not necessarily share these views.

Editor's Note: All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.


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Petroleumworld News 04/05/2013

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