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Gustavo Coronel :Venezuela’s energy
equation: present and outlook

 

Venezuela’s energy programs under President Chavez come under attack in this documented case, arguing that mismanagement, inefficiencies and lack of followthrough have led to a series of missed opportunities.  The article covers oil, renewable energies and hydro facilities, providing figures showing adverse trends.

The Venezuelan energy equation is simple:


Source: IRENA 2000

* US Energy Administration assigns 2% to coal and none renewable sources

This is not unexpected, since the fossil fuel resources of the country are very large and have been under development for over a century.  Venezuela claims to possess the largest oil proven reserves in the world, some 297 billion barrels of recoverable oil.  Most of these reserves are located in the so-called Orinoco Belt, an area of about 54,000 square kilometers, larger than Denmark.  Although this claim is technically questionable since it is based on an arbitrary recovery factor of 20% of the heavy oil in place, there is no doubt that the area contains a significant amount of hydrocarbons.  Natural gas resources are also significant, of the order of 195 trillion cubic feet, the second largest in the Americas after the United States.  However, a large percentage of these reserves, some 85%, are associated with oil.  This means that much of Venezuela’s natural gas cannot be produced independently from oil, which imposes a severe limitation to the capacity of the country to increase gas production at will since its level of oil production is limited by OPEC’s quotas.

The country is also rich in hydroelectricity, with a potential of the order of 80 megawatts (MW), although installed capacity is about 10 MW thanks to a group of dams built during the last 50 years in the Caroni river basin in southern Venezuela, that have supplied for many years up to 70% of all electricity requirements in the country.  This percentage has been declining during the last 5-7 years, to some 60% of total electricity demand, not only due to the expansion of demand but to a combination of severe droughts in the region and lack of adequate maintenance of the facilities.  In 2010 a crisis of hydroelectric generation due to the low water levels in the dams forced the government to take extreme emergency measures, including programmed outages, the installation of numerous small thermoelectric plants in different portions of the country and a drastic reduction of industrial production in the aluminum and steel sectors.  The sector has not recovered from this crisis and severe electricity shortages are frequent throughout the country.  The government has had to resort increasingly to thermal plants. Since natural gas production is insufficient, thermally generated electricity has to utilize significant volumes of diesel oil at a great economic loss to the nation, since the price of electricity in Venezuela is strongly subsidized.

Renewable sources of energy have not been developed

Because of the abundance of hydrocarbons and hydroelectricity, alternative sources of renewable energy have not been developed in Venezuela, in spite of the existence of a high potential for the generation of energy from wind, solar and biomass.  The Venezuelan government has been talking of doing this for several years but no significant concrete action has been taken.  For example, in 2009 the Minister of Energy and Petroleum spoke of eight great renewable energy projects being considered, four of them from biofuels and the other four related to wind energy.  One of the ministry’s directors, Vicente Duran, spoke at the time of a plan to “… convert Venezuela into a world class energy power, by prioritizing renewable energy”.  The projects, he specified, included four wind farms in the states of Sucre, Falcon, Nueva Esparta and Zulia, specifically in the Guajira Peninsula (adjacent to Colombia).  He also announced the installation of 806 photovoltaic systems throughout the country.  In addition, he mentioned that “… a geothermal plant was being evaluated for construction in the State of Sucre”.  Four years later biofuels have not been produced and only one of the wind projects has been partially completed in the Guajira peninsula, so far generating a very modest 500 kilowatts (KW).

Other publications carry high estimates of the potential of renewable energy in Venezuela but also express pessimism about the will of the government to carry out their development.  For example, a report estimates the energy generating potential in Venezuela at anywhere between 1,600-10,000 MW. This report adds that such estimates seem over optimistic, not because the potential is not there but because the government does not follow through on its promises.

Oil and gas will remain the prevailing sources of energy for the foreseeable future

Published articles deal with some of the problems afflicting the Venezuelan economy and, in particular, its petroleum industry and generally paint a rather dismal picture of the current situation.  Their evaluation coincides with my own observations.  I offer below some basic indices related to the state-owned petroleum company, PDVSA.  I compare 1998 indices, the year before Hugo Chavez came into power with those in 2012, his last year in the presidency (all figures are official, unless specifically stated):


italics: estimated figures

These numbers reveal a Venezuelan petroleum and gas industry in decline

What has happened to the Venezuelan oil and gas industry?  Where is it headed?  The numbers tell much of the story but some further explanation is required.

Oil production has significantly declined or, in the best of cases, has remained stagnant for the last 15 years.  In fact, if the corporate strategic plan existing in 2005 had been executed the company would be producing about 5 million barrels per day today.  The loss in income for not executing this plan has been staggering, considering that the price of the barrel has been over $100 for several years.  Exploration activities have been greatly curtailed.  Refining capacity has decreased, after the sale of three refineries in the U.S. and the closing down of the Bahamas refinery, where the Venezuelan company had a 50% share.  The foreign partners of the Venezuelan company in the Orinoco heavy oil fields are from ideologically “friendly” countries but lack the technology, management capability and financial muscle required to develop these resources in the proper manner.

The number of employees has quadrupled.  This is especially negative because many of those employees are not engaged in oil and gas activities.  The government decided to convert the company into a “socialist” enterprise, engaged in importing and distributing subsidized food, agricultural production, house building and diverse social programs that have distracted the company away from its core activities.  The impact of this change in philosophy on the efficiency of the company has been clearly negative.

Most of the income derived from the marketing of the oil has been transferred to the central government and proper re-investment in the company has been neglected.  While comparable companies such as Petrobras, ExxonMobil and Shell invest an average of $40 billion per year in their core activities, Petroleos de Venezuela has been investing only $12-15 billion per year during the last 4-5 years.

The political decision by the Venezuelan government to send subsidized oil to Latin American countries, especially Cuba, where 100,000 barrels of oil are sent every day, practically free due to the nature of the agreement, has inflicted a dramatic loss to the  Venezuelan oil and gas industry.  All in all about half of Venezuelan oil exports going to Latin America and to China are not receiving a proper payment.

As financial demands from the central government have siphoned oil income away from the company its debt has mounted.  Today I estimate the total debt of the company, including contingencies for probable future payments to debtors, in no less than $80 billion, an amount that already exceeds the company’s assets, officially listed as $75 billion in its 2012 annual report.

Outlook

Venezuelan energy security presents no problems, given the immense size of its oil and gas resources.  Development of alternative sources of renewable energy seem condemned to permanent stagnation for many years to come.  Clearly the country has failed to build a viable and prosperous economy by using oil income in a proper manner.  As the country sits on an enormous reservoir of undeveloped heavy oil, while the world is already in a transition into new forms of energy, Venezuela will require a drastic revamping of its energy policy in the short term, if the country is to put its fossil hydrocarbon resources to good use before they become museum pieces.
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Gustavo Coronel is a 28 years oil industry veteran, a member of the first board of directors (1975-1979) of Petroleos de Venezuela (PDVSA), author of several books. At the present Coronel is Petroleumworld associate editor and advisor on the opinion and editorial content of the site. All his articles can be read in Gustavo's blog. Las Armas de Coronel . Petroleumworld does not necessarily share these views.

Editor's Note: This commentary was originally published by Latin American Energy Review, on June 2013 . Petroleumworld reprint this article in the interest of our readers.

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 07/31/2013

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