Oliver L Campbell :
Cash a scarce resource to be used efficiently
When I studied economics in the 1950s, scarcity definitions were in vogue. These stressed unlimited wants against limited resource, that all wants cannot be pursued at the same time, and that choices must be made to allocate limited resources efficiently. Times have moved on and scarcity definitions are seldom quoted. However, economic scarcity is still a fact of life at the macroeconomic level where governments need to allocate resources, and at the microeconomic level where companies have to prioritise their investment decisions. Let me refer to just two of the latter which PDVSA has been contemplating.
1) Abreu e Lima refinery. I have said before it makes no commercial sense to invest in a refinery in Brazil. This refinery was originally estimated to cost $2 billion, then it increased to $4.5 billion and has now jumped to $14.4 billion. It is little wonder PDVSA has balked at putting up $5.8 billion as its 40% share. The joint venture was to be part of a political deal whereby Brazil invested in the Orinoco Oil Belt and Venezuela invested in a refinery to process heavy crude from that region. Petrobras pulled out of the deal, probably because it preferred to develop the oil recently discovered in the pre-salt formation offshore Brazil. That being so, PDVSA has no commitment to invest in the Abreu e Lima refinery and should not do so. With a refining capacity of 230,000 b/d, PDVSA will be entitled to refine 92,000 b/d. There is no commercial justification for paying $5.8 billion for such a low throughput.
2) Liquefaction plant. This started as part of the Cristóbal Colón project, subsequently renamed Gran Mariscal de Ayacucho when Christopher Columbus fell out of favour with the present government, and it has been on the drawing board for some twenty years. Initially Exxon, Shell and Mitsubishi were to be PDVSA'S partners, but the project to build a liquefaction plant stalled because of the uncertainty about the quantity of offshore gas reserves and, more importantly, because priority of gas supply, at highly subsidised prices, was to be given to the local market. It was far from clear how much gas would then be available for liquefaction and export at international prices. Without these assurances, Exxon and Shell were not willing to sign a contract. PDVSA then excluded them from participation and announced it would go ahead with the project on its own. In fact, no progress has been made and the latest news is that PDVSA is putting the plant on hold because of falling prices which make the investment uneconomic, Had PDVSA not procrastinated, it could have had a viable investment up and running years ago. Trinidad constructed the first of its four trains in 1996 and has been exporting LNG, mainly to the USA, since 1999. However, with the development of shale gas in the USA, the price of LNG there has fallen. Though prices in Europe and Asia are higher, so is the cost of transportation in specially refrigerated tankers to those areas. Trinidad's finance minister has just announced "My number one priority is to increase national oil production." He commented production of natural gas was seven times that of oil, on an equivalent basis, and that "The time has come to adjust this balance and tilt the energy sector back towards oil."
PDVSA is strapped for cash and it will have problems finding the 60% required to fund development of the Orinoco Oil Belt. Its total investment during 2011-2015 is estimated at $142 billion and its goal is to increase production by a million barrels per day during this period. But what will the company do with this extra production? The upgraders will not ready during this time, so blending the crude with a light oil seems the only option--going back to the manufacture of Orimulsion is highly unlikely.
Reverting to my original point about scarcity and the efficient allocation of limited resources, I believe investment in the Brazilian refinery is unnecessary. I also believe upstream investment in oil--at present priced at $100 a barrel--gives a much better return than liquefying natural gas. PDVSA has missed the boat as regards LNG production, though it should press ahead with development of the offshore gas which is required for domestic use, industrial consumption, petrochemical manufacture and reinjection into the reservoirs. This does not mean LNG production does not provide an adequate return--Trinidad has proved that it does--but rather that crude production produces a much better one. It is a fact the price of oil has steadily gone up while the price of LNG has moved in the other direction.
The cost of these two investments, some $10 billion, would pay for two upgraders and their. construction should start right away otherwise crude will be produced ahead of the capacity to upgrade it. The only upgraders in use at present are those constructed by the former private oil companies and PDVSA has been at fault for not constructing any more. An efficient allocation of resources means crude production, upgrading plants and deep conversion refineries should go hand in hand.
Read more on :
1) Abreu e Lima refinery. I have said before it makes no commercial sense to invest in a refinery in Brazil.
2)Trinidad's finance minister has just announced "My number one priority is to increase national oil production."
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Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM was born in El Callao in 1931 where his father worked in the gold mining industry. He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA). In 1982 he returned to the UK with his family and retired early in 2002. Petroleumworld does not necessarily share these views.
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