Oliver L. Campbell:
What is unconventional about crudes in the Orinoco Oil Belt?

The USA Securities & Exchange Commission (SEC) rules for disclosing oil reserves allow only proved reserves to be reported. Because probable reserves are excluded, many observers (including myself) believe the rules are too conservative.

The reason they are so conservative is to protect individual investors and the banks which provide funds on the strength of the producible oil.

So we are stuck with the rules, written out below, until such time as the SEC has second thoughts.
The SEC permits oil and gas companies, in their filings with the SEC, to disclose only proved reserves that a company has demonstrated by actual production or conclusive formation tests to be economically and legally producible under existing economic and operating conditions.

The important phrase is “under existing economic and operating conditions.”

This means using current technology and applying current oil prices. Any breakthrough in technology that reduces operating costs and/or any permanent increase in oil prices immediately bring further reserves into play.

This is what has happened in the Orinoco Oil Belt.

Firstly, there was a fast improvement in oil production methods and this was followed by a notable advance in crude oil upgrading technology (Sincor upgrade a 9º API crude to one of 32º API).

Secondly, and more importantly, crude oil prices have risen substantially, particularly in recent months.

The received wisdom is that oil prices will not fall below US$30 in the foreseeable future and the Oil Minister, Rafael Ramirez has recently announced that Venezuela’s oil reserves will be restated.

However, I would like to suggest that the title “Conventional and extra-heavy crude oil reserves” be changed to just “Crude oil reserves” ... the present reporting of light, medium and heavy crudes as one figure, and extra-heavy crude as another, can be maintained.

The existing title gives the impression that extra-heavy crude reserves are unconventional i.e. atypical or unusual. In fact, extra-heavy crudes, defined as those with an API below 10º, are produced in much the same way as heavy crudes and have similar characteristics. In practice there is little difference between a crude of 9.5º API (extra-heavy) and one of 10.5º API (heavy).

The crude that is produced in the Orinoco Oil Belt has a subsurface temperature of around 50ºC and flows naturally to the surface. It is only there, as it cools down, that it congeals. The only notable difference with lighter crudes is that it needs to undergo an upgrading process to increase its API ... but that hardly warrants classifying it as a non-conventional crude.

The Orinoco Oil Belt and the Athabasca Sands are frequently coupled together as being non-conventional reserves of oil ... but this is a fallacy.

The Orinoco crudes are produced in a conventional manner by drilling holes in the ground, whereas the Athabasca crudes are found close to the surface and mined by huge scoops. The mixture of sand and oil is transported in enormous trucks and then processed to separate out the oil. The fact that a typical mining procedure is used justifies calling these crude reserves non-conventional. Similarly, the fact that extra-heavy crudes from the Orinoco Oil Belt are produced in the traditional manner means they can be classified as conventional.

Incidentally, the Oil Minister has categorically declared that the liquids found in the Orinoco Oil Belt are extra-heavy crudes and not a bitumen ... something which this writer has maintained in previous articles.

It is now up to the geologists to reach a consensus on the quantity of new reserves to be incorporated, taking into account current technology and economic conditions. The former is no problem ... but the latter means taking a view on oil prices. The figure of reserves will also have to be acceptable to, and subject to possible scrutiny by the SEC. However, it would be a very great achievement if the new reserves could be incorporated in the figures at December 31, 2004.

We will have to wait and see whether other countries increase their crude reserves in the light of the substantial rise in oil prices.

It will also be interesting to learn to what price they assumed as being a floor for the calculation.

The past has shown us oil prices have considerable volatility.

Oliver L. Campbell
oliver@lbcampbell.com

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. Campbell returns frequently to Venezuela and maintains an active interest in political affairs: "I am most passionate about changing the education system so that those who are not academically inclined can have the chance to learn a useful skill ... the main goal, of course, is to allow many of the poor to get well paid jobs as artisans and technicians." You may contact Oliver L Campbell at email: oliver@lbcampbell.com

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