Are Venezuela's Oil Reserves Overstated--Does it Matter?
By Oliver L Campbell
Venezuela has recently increased its oil reserves to 297 billion barrels and makes much of the fact it now has the world's largest, even larger than those of Saudi Arabia.. This has caused some excitement in the press and sparked off comments from experts that the reserves are based on false premises and overstated.
Someone asked me a couple of years back how much oil there was in the Orinoco Belt. Not recalling the official figures, I replied "a hell of a lot " and this remains my opinion today. I cannot get agitated, like some of my geologist colleagues, about the figures Venezuela has just announced. I certainly believe geologists when they calculate the oil in place, but that is as far as I go. The calculation of recoverable reserves is something else since it is based on a set of rules made only for the purpose of establishing a common standard so everybody supposedly reports them on the same basis. I say "supposedly" because, in fact, we don't know exactly how most countries have calculated their reserves, and the set of rules is applied mainly by companies when reporting their financial results. In 2004, Shell was fined $120 million by the SEC for overstating its reserves according to the rules in place, but that has never been done with a country. The reserves in Venezuela belong to the state, of course, and not to PDVSA.
The rules are sensible enough but their drawback is that they take into account only current conditions--present technology, production costs and oil prices--whereas we know the recoverable reserves will vary as technological and economic circumstances change. The aspect most criticised by my geologist colleagues is the recovery factor, This is currently about 10% but Venezuela has assumed 20%, with no specific justification, thus departing from the rules. However, it is quite possible, over time, that recovery could reach 20%. The recovery could increase from advances in technology, but more likely it would result from greater efforts, depending on the money that could be spent which, in turn, would depend on oil prices. So, assuming a scenario of high oil prices--between $80 and $100 a barrel--and a production/upgrading cost of $20 a barrel, that would seem to indicate an ample margin, way ahead in the future, for spending more to increase recovery. I say way ahead because so much oil can be produced with a 10% recovery rate that it makes no sense to try to increase that rate by enhanced recovery methods such as steam injection.
The other criticism of the new reserves' figure is that the amount is unlikely to be produced in the foreseeable future--say the next 50 years. For instance, a production of 10 million b/d for 50 years would consume 182 billion barrels and, in its current plan "Siembra Petrolera" Venezuela is not expected to reach a production of 2.5 million b/d from the Orinoco Belt till 2021. Who knows how long it will take to produce 10 million barrels per day?
However, to the average Venezuelan these are all technicalities and he is not worried about the rules established by the Securities Exchange Commission. He is happy to believe Venezuela has the largest oil reserves in the world and whether they are 297 billion barrels or only half of that will not really affect him. What will affect him is the speed with which the country can increase production from the Orinoco Belt and, if past experience is anything to go by, the production target will keep slipping. But I stress that for Venezuela it is production capacity that is important. Saudi Arabia and Venezuela have similar huge reserves but, while Saudi Arabia can produce 12 million b/d, Venezuela can only produce 3 million b/d. As a PR measure, there is nothing wrong with Venezuela's vaunting its huge oil reserves, but what it needs to do quickly is increase production capacity. Not to do so risks leaving large amounts of oil unproduced in the ground should alternatives to oil be found in the next 50 years.
In brief, my geologist colleagues are right to point out Venezuela has not adhered to the SEC rules but, on the other hand, the average Venezuelan will not be affected by it.
The amount of oil that can be produced is huge whatever figure the government likes to place on the reserves. If a Venezuelan asked me today how much oil there is in the Orinoco Belt, I would say "bastante" and leave it at that--a precise figure is not that important.
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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Petroleumworld News 01/23/11
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