Venezuela, home to some of the world’s largest proven oil and gas reserves, has been the site of bleak news in recent months as the country grapples with a post-Chavez economic crisis.

Its inflation rate has soared, shortages of basic items have sent citizens scrambling to meet needs and more than 30 people have died in anti-government protests, according to news reports.

But the country is pushing forward with plans to increase oil and gas production. A package of heavy oil projects unveiled this year for the Orinoco Oil Belt, believed to hold 513 Bbbl of technically recoverable heavy oil, could increase oil production in the country by 2.02 MMbbl/d. The projects come as the state-run Petróleos de Venezuela (PDVSA) moves deeper into its Oil Sowing Plan, which crafts oil and gas development projects through 2030.

Having ambitious plans set is one feat, but fostering an environment to see goals to fruition is another. The industry in Venezuela has challenges, including what some call tough fiscal terms imposed by former President Hugo Chávez, who died in 2013. The oil industry, whose investments have funded the country’s social programs, has survived despite falling production. But once-rising oil prices have stabilized, perhaps sparking a call to action.

Yet production targets have been missed. Oil production has slid by about a quarter since 2001, according to figures from the U.S. Energy Information Administration (EIA), which pointed to a natural decline in older fields, maintenance concerns and a need for more foreign investment as reason. PDVSA must shell out $3 billion annually to maintain current production levels at existing fields in the face of decline rates of at least 25%, according to industry analysts’ estimates.

Oil exports also have dropped nearly 50% from their peak of 3.06 MMbbl/d in 1997, EIA statistics show, as one of its top export destinations—the U.S.—increases its own domestic production.

Some believe Venezuela will have to make changes in the oil and gas sector to attract more international players in the long run. Despite the risks, some companies appear to be in for the long haul, even loaning billions of dollars in a couple of instances to cash-strapped, debt-laden PDVSA.

Still committed

Repsol and Rosneft will each spend billions of dollars on projects in Venezuela. The country has set out to boost heavy crude oil production to 6 MMbbl/d, including 4 MMbbl from the Orinoco, by year-end 2019, according to a Bloomberg report.

“Rosneft understands that investment in Venezuela is a long-range investment,” the company told E&P. “Moreover, projects in Venezuela are an important source of expertise for Rosneft. The company will benefit from this expertise in the development of tight oil reserves in East Siberia and the Far East.”

The company called its involvement in projects in the rich Orinoco Oil Belt “a practical step in implementation of the company’s plans to globalize its business and strengthen its positions in the promising Latin American market.”

Among the company’s main priorities is a joint venture (JV) with PDVSA’s PetroMiranda, which was created to develop the Junin-6 Block. Oil-in-place at Junin-6, located at a depth between 120 m and 600 m (394 ft and 1,969 ft), amounts to 8.5 Bmt. A consortium of Russian oil companies known as the National Oil Consortium has a 40% stake in the JV, while PDVSA holds 60%.

The Russian oil giant is also aiming high with plans to develop tight oil reserves with the Carabobo-2 project, the PetroVictoria JV created in 2013. Rosneft has a 40% stake in the JV, with PDVSA subsidiary CVP having the remaining 60%. The project includes the Carabobo-2 North and Carabobo-4 West blocks, which span 342 sq km (132 sq miles) in the Orinoco River’s tight crude belt. The potential for these blocks is great, considering Rosneft said reserves here are estimated at 40 Bbbl.

“Commercial oil production is expected to peak at more than 400,000 barrels per day by 2018,” the company said. “To fulfill the contracted annual production level, Rosneft is planning to build a plant at a cost of up to $7 billion, which will refine the local tight oil to marketable quality.”

Big spenders

Madrid-based Repsol plans to spend about $1.7 billion for its Carabobo and Cardón IV projects in Venezuela through 2016.

But that amount could increase through 2022. The company could invest $4 billion in Venezuela through 2022, with investments peaking in 2017, as it works to increase net oil output from about 40,000 bbl/d currently to about 100,000 bbl/d by 2022, Cosme Vargas, technical manager for crude oil assets for Repsol, said in a Bloomberg article.

The Carabobo oil project, located in the Orinoco, is currently producing about 5,000 bbl/d of extra-heavy crude oil and has a plateau gross production of 370,000 boe/d, according to Repsol.

“Current technologies being analyzed to improve production [in the Orinoco] are downhole electrical heating, alternate vapor injection, chemical stimulation, HASD [horizontal alternative steam drive], SAGD [steam-assisted gravity drainage] and continuous vapor injection,” Repsol told E&P.

But the main challenges specifically facing the Carabobo project, the company said, are “the need for qualified staff to carry out the heavy workload, the need for new infrastructure to handle all Faja projects simultaneously, the Petrocarabobo project competing with other projects to receive financing and simultaneous megaprojects in the country.”

Other projects include those by Chevron, one of the major oil companies operating in Venezuela. The company’s production activities are carried out by three affiliates, and it has interests in two offshore exploratory blocks in the Plataforma Deltana region. Net daily production from the company’s Venezuelan assets averaged 61,000 bbl of liquids and 736 Mcm (26 MMcf) of natural gas in 2013, according to the Chevron Corp. 2013 Supplement to the Annual Report.

In the onshore Boscan Field, operated by Petroboscan, Chevron reported that 21 development wells were drilled last year and a financial agreement was executed to help secure future field development funding—$2 billion to help increase daily output to 127,000 bbl from 107,000 bbl, according to media reports. Net daily production here averaged 26,000 bbl of liquids and 170 Mcm (6 MMcf) of gas that year.

In the Orinoco, where Chevron affiliate Petropiar operates the Hamaca heavy oil production and upgrading project, net daily production averaged 25,000 bbl of synthetic crude, 9,000 bbl of extra-heavy crude oil and 396 Mcm (14 MMcf) of gas in 2013 as EOR studies continued and 62 development wells were drilled. Meanwhile, activities in the Carabobo area focused on assessing development alternatives, Chevron said in the report.

The report also showed Chevron affiliate Petroindependiente, which operates the LL-652 Field in Lake Maracaibo, had a net daily production average of 198 Mcm (7 MMcf) of gas and 1,000 bbl of liquids.

Not just oil

While Venezuela is known for its oil, offshore gas potential has attracted attention lately. Venezuela has about 6 Tcm (195 Tcf) of proven gas reserves, the EIA said. And demand is high. The country consumed all of the 31 Bcm (1.1 Tcf) of gas produced in 2011.

Repsol, along with partner Eni, is taking a three-phase approach to development of gas reserves for its Cardón IV project in the Perla Field, believed to hold more than 461 Bcm (16.3 Tcf) of gas in place about 80 km (50 miles) offshore in the Gulf of Venezuela.

“First, a production of 300 MMcf/d [8.5 MMcm/d] starting in April 2015, a second production of 800 MMcf/d [23 MMcm/d] in 2017 and a final phase of an expected maximum production of 1,200 MMcf/d [34 MMcm/d] by 2020. This production includes an estimate of 26 producing wells in total,” Repsol said. “The first molecules of gas to be produced from this field are intended for December 2014 by the launching of a plant with an early production of 150 MMcf/d [4 MMcm/d].”

In addition, Rosneft has undertaken greenfield gas projects offshore Venezuela. An agreement signed between Rosneft and PDVSA allows the two to jointly evaluate the technical and economic viability of offshore gas and condensate production, gas liquefaction for export, and further prospects for JVs for development of gas and gas condensate fields.

“To carry out joint studies the parties will set up a managing committee and working teams, and PDVSA will provide information required for studies to Rosneft,” the company said. “Companies will evaluate the possibility of implementation of joint projects on the Rio Caribe and Mejillones fields (State II of the Mariscal Sucre Project) and exploration in the Venezuelan part of the Caribbean basin and in the Gulf of Venezuela as well as near the Atlantic Coast of Venezuela.”

Seeking assets

Latin America-focused Pluspetrol is in the process of acquiring $400 million worth of producing Venezuelan conventional assets from Houston-based Harvest Natural Resources. Pluspetrol has closed on the first phase of the deal and was involved in the second phase, which involves some government and shareholder approvals, Pluspetrol CEO Steven Crowell said during the IHS CERAWeek conference in Houston.

“Why Venezuela? It’s chaos,” Crowell said. “But for us, that’s where the resource is.”

Waiting for banks to grant loans for Venezuela is not a chance the company wants to take. Crowell said the field is open to everyone in Venezuela. Delaying could mean getting trampled by the competition.

“We’ve got to be first movers. We’ve got to be contrarian,” Crowell said. And luckily for Pluspetrol, he added, the company has shareholders who take a long-term view. “Looking at political risks from inside out is different from looking at political risks from a boardroom in Houston or London or wherever. We understand there are going to be cycles. We understand there are going to be times when it’s difficult. We are incredibly apolitical in our approach and do not make deals with any given government because we know that will change.”

The bulk of Pluspetrol’s assets are in Peru with some assets in Argentina, but the company wants to diversify.

“Philosophically, we try to go where the resource is. If we need to do something different later, it’s OK, but we’ve got to go where the resource is,” he said. “If you are not willing to take risks, then you’ve got to wait until everything is perfect and be prepared to pay a lot.”

Long-term solutions

Despite some companies’ abilities to see the big picture, looking past today’s risk to long-term investments and in between Venezuela’s ability to close finance deals in the energy sector, signs of tough times and desperate measures are apparent.

In November 2013, for example, the Venezuelan government seized two of Houston-based Superior Energy Services’ hydraulic snubbing units from its facility in Anaco. At the time, Superior said PDSVA owed the company about $9 million. PDSVA reportedly seized the units after they were shut down because of the overdue payments.

As the country’s economic situation appeared to worsen with escalating protests, IHS provided insight from an oil industry perspective. Carlos Bellorin, a senior petroleum analyst with the firm, described how Venezuela has changed since the death of Chávez.

“While Chávez entailed some sort of a political stability but tough fiscal terms for oil industry participants, Nicolas Máduro’s government might mean the opposite; less political and economic stability might force him to relax the fiscal terms for oil industry participants,” Bellorin said in a prepared statement. “Máduro’s government faces very tough challenges in order to fulfill the late President Chávez’s promises of finally increasing oil and nonassociated gas production.”

Hefty investments from international oil companies are needed, but such investors are not willing to pursue major capital projects in Venezuela because of factors that include “tough fiscal conditions, a very unattractive exchange regime framework and galloping inflation,” according to Bellorin.

The current administration’s approval of the Exchange Regime Law could improve investor sentiment toward the country, but it will not solve the problem, he said.
Bellorin acknowledged the fact that the Venezuelan government has been active in entering several financial agreements such as the one with Chevron and a $4 billion loan agreement with China’s Development Bank Corp. to increase production in the Orinoco Belt. Such agreements, he said, give more operational and financial control to partnering international companies to increase production.

“However, long-term solutions, honoring current contracts and more incentives are needed in order to really meet the country’s plan to increase production. This is even more important and urgent now when other oil-producing countries in the region are either opening their doors to foreign investors, such as Mexico, or offering very attractive fields with very competitive terms, such as Brazil,” Bellorin said.

“Many international players in Venezuela apparently have understood this situation and have been strengthening their stance in negotiations with the government. How to use this newly gained leverage will very much depend on their success in negotiating better conditions for their projects. Nevertheless, the pace of these inevitable changes will depend on the oil prices level in the short to medium run.”

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