2. pdtt0
Resource Rich, Cash Poor
PDVSA needs to inyest more to keep current production ot its present /eve/, Rising operoting ond production costs,
combinedwith o new low thot/lmlts forergn inyestment ore mol<ngthotgoolmore e/uslye,
enezuela is one of the oldest oil
producing countries in the world,
accounting for 470 of global crude
oil production. The country has
oil reseryes of almost 78 billion barrels and
gas reserves of 148 trillion cubic feet, ac-
counting for approximately 8Vo and 470 re-
spectively of world supplies.
More than half of Venezuela's oil re-
serves are extra-heavy crude that is not as
valuable as conventional light, medium and
even heavy crudes that account for 4?billion
barrels. What's more, much of the 78 billion
barrels of reserves cannot be brought into
production quickly. Only 17 .3 billion barrels
are proven in-production reserves, with just
under a third of these as extra-heavy cmdes.
Venezuela nationalized its oil industry
in 197 6 which has since been run by
Petr6leos de Venezuela S.A, (PDVSA), the
national state oil company, with important
by Brian S. McBeth
refining and marketing assets in the US and
Europe. In 2001 PDVSA reported net in-
come of $4.3 billion compared to $2.+ billion
the previous year. In the same year PDVSA
paid $11.8 billion to the government in roy-
alties, dividends and taxes, and invested
$S.g billion boosting production capacity t0
4 million barrels per day (bpd) from 3.85
million bpd in 2000. In 2000, operational
cash flow was just under $9.0 billion, the
highest level between 1995 and 2000.
Operating expenses for PDVSA have
been creeping up from $5.41 per barrel in
1998 to $7.65 per barrel in 2000. Direct
production costs have also risen from $2.89
per barrel in 1999 to $3.93 per barrel in
2000, and other costs have risen as well.
PDVSA finances its normal invest-
ment program from its own resources. Un-
til 1990, most of PDVSAs investments were
met from cashflow with a minimum of debt
taken on mainly to fund certain overseas
acquisitions. In 1990, the government
opened the industry to a limited amount of
private capital to help achieve production
targets and develop new refining capacity
with all joint ventures majority-owned by
overseas private companies and PDVSA
holding typically a 35%o stake.
The strategic associations agreements,
structured to develop the Orinoco Oil Belt,
are subject to a flexible royalty payment fee
and income tax of 347o.Fow developments so
far
-Petrozu*d,Sincor,
Hamaca and Cerro
Negro
- have been entered into under this
agreement, with limited success. Few of the
companies that entered into the various
agreements have made money or achieved
the expected production rates. The British oil
company LASMO, which was taken over by
the Italian giant EIII last year, paid ap-
proximately $454 million for its contract and
has struggled to achieve acceptable rates of
return and production figures. Similarly, BP
acquired the Pedernales marginal field de-
velopment contract expecting to reach pro-
A Supplement to LatinFinance . July 2002
3. pdt*
I
Urude Uil (billion barrels)
Venezuela's Crude 0il & Gas Reserues
2000 1 999 1998 1997 1996 1995
$SO billion and $SS billion was needed for
the Venezuelan oil industry during the first
decade of the millennium, with PDVSA
contributing $22.3 billion.
Under the plan, PDVSA wanted the
country's productive capacity t0 rise to 5.8
million bpd in 2009 from 3.6 million bpd in
2000, with most of the increase coming
from the private sector. PDVS,{s own pro-
duction was expected to increase to 3.9
million bpd from 2.8 bdp, while private sec-
tor production was expected to rise to 1.9
million bpd from 0.8 million bpd, with the
Orinoco Oil belt contributing 700,000 bpd.
Total capital expenditure for such a large
increase in productive capacity would be in
the order of $40 billion, with the private
sector contributing $20 billion.
One of the major issues for the 2000-
2009 plan was the development of the gas
business based on private participation.
Gas transmission was to receive a major ex-
pansion estimated at $1.6 billion, and there
was also encouragement to distribute gas to
households at a cost of $2 billion. The
biggest investment however was ear-
marked for gas exports at a cost of $4.6
billion. In the refining and marketing di-
visions, a total of $2.7 billion was expected
to be invested for the period.
Nsw OilLaw
In November 2001 the government
passed a hydrocarbons law to accelerate
further transfers of oil revenues to the gov-
ernment and also as a nationalist gesture
to increase control of its natural resources.
The new law increased royalty rates on oil
production from 16.770 to between2}%o and
3070, compared with a global average of
7 .l%o.It prohibited private companies from
having a majority share in any joint ven-
ture and reduced income tax to 3470 from
677o.In order to attract foreign investment,
most current projects under development
have a lower income tax of 34%o,In addi-
tion, many of the current heavy oil proj-
ects have royalties of only l7o. The state
expects something like $0S niUion of foreign
investment to develop the country's oil and
gas reserves but this is a forlorn hope.
To maintain its current production
77 685 76 308 76 25 74931 72661 66 328
Gas (billion barrels of oil equivalent) 25.445
Source: PDVSA
25 216 25 069 24 665 ?4149?5.283
Reserves/Prod ucti on Ratio
1999 1998
Heserves/Prod ucti on ratio 13 29 12 90 11 90
Reserves/Production ratio excludi
serves/Production ratio on tota
crude
59 4? 59 15
Source; The 1xford Consultancy Group
PDVSA's Producing Capacity
1999 1998 1997 1996 1995
rnrn0 tmrllr0n
trochemicals
PDVSA Financial History, ($ nillion)
2000 1999 1998 1997 1996 1995
Net orofits 4 505 4387 3 373
7 1 85 921 5774
nvestments re in agreements)
Source: PDVSA
5 905 5 388 5 301
Taxes
lncome tax ($ billion) 57 48 7521 1 602
Productron & other taxes ($ billion) 4 986 3 008 2078
Total 10.734
Production Costs
Total production costs per barrel
Source: PDVSA & The 0xford Consultancy
3.68
duction of 1000,000 bpd but only managed to
achieve 20,000 bpd.
Prior to the enactment of a new hy-
drocarbon law in November 2001, PDVSA
drew up a business plan in 2000 that esti-
mated that capital expenditure of between
il
I
L-
mtllt0n
PDVSA's 0perating Gosts, Taxes and Production Costs
A Supplement to LatinFinance . July 200)
4. Productivity per Active Well (barrels per well)
2000 1999 1998 1997 1996 1995
Source: PDVSA & The 0xford Consultancy Group
Venezuela needs to replace around 520,000
bpd every year at acost of between $b bil-
lion and $0 Uittion because of its overall
depletion rate of aroun d 20V0. It is however
getting more expensive to replace these
barrels as productivity per well is declining
from 229,5 barrels per well in 1998 to 183.4
barrels per well in 2000. As a mature oil
province, Vene ntela needs to drill more
w'ells for a given amount of oil production.
In order to redress this problem, 0X-
ploration activity has increased, with 2L
exploratory wells drilled in 2000 compared
to five in 1996. However, the overall num-
ber of wells drilled has fallen from a peak
of 1,058 in 1997 to 474 wells in 2000.
As part of its exploration program,
PDVSA in February 2002 started the
S375 million Deltana Platform Project,
located near the offshore border with
Trinidad. Over the next two-and-half
)'ears it will drill between 10 and 14 wells
off the country's eastern coasts. The area
could hold additional reserves of 38 tril-
lion cubic feet (tcfl. If commercial quan-
tities of gas are found, production could
-rtart in 2007 at one billion cubic feet per
day for domestic and international con-
sumption at a cost of $4 billion.
In recent years there have been some
notable exploration successes such as the
SINICOR heavy-oil project, where TotalFi-
naElf is the lead investor with a 4870 stake.
This came on stream in December 2001
and is on course to produce 80,000 bpd.
Another heavy-oil success has been
Petro zuatd, d joint-venture between
PDVSA and Conoco, which came on stream
in 2000 producing 1,500 bpd. Conoco also
has the possibility of developing a 500 million
barrel crude oil field offshore the Paria penin-
sula. The concession was awarded in 1996 be-
fore the new hydrocarbons law, and the com-
pany expects its contractto continue under
the previous fiscal regime and thus pay lower
royalties. At the moment it is deciding
whether to go ahead with the project.
In mid-June, Venezuela selected Royal
Dutch/Shell, Mitsubishi Corp and Qatar's
state oil company, Qatar Petroleum, to part-
ner with PDVSA in a $2.2 billion LNG
plant in the Paria peninsula. In a further
lUumberof Exploration andActive Wells drilled, 1995-2A00 20OO
2000 1999 1998 1997 1996 1995
oratron wells com
otalwells drill 474 753 613
Source: PDVSA
development under the new hydrocarbons
law TotalFinaElf (69.5 7o), Repsol ( l57o)
and Venezuela's Otepi SA (5.3 7o) andln-
electra SACA (10.270) were awarded in
January 2001 the right to explore and pro-
duce the Yucal Placer North field, a natural
gas field adjoining the Yucal-Placer South
field. The field is thought to contain 20 tril-
lion cubic feet of gas and the concession is
for 35 years with an option to extend for a
further 20 years. The group is payin g2.5l7o
above the country's 2070 royalty.
Waitingfor Clarig
The Conoco deal and any others how-
ever will remain on hold until the situa-
tion becomes clearer. For example, can
PDVSA under the new oil law come up
with $1 billion investment needed for the
LNG Paria Gulf project? In addition, can
any foreign company take the risk of en-
tering into an agreement with such an un-
stable government that has an ideological
distrust of foreign companies?
PDVSA has insufficient cash flow to
meet the investment needed to maintain
production let alone increase it. In 2000, ac-
cording to the latest detailed figures avail-
able, PDVSA had operating cash flow 0f $9.6
billion. The figures were flattered by a large
provision for employee termination and pen-
sion benefits of $2.1billion. In 2000, PDVSA
spent $2.5 billion in fixed investments and
paid fi2.2billion into a fund set up in 1999 to
minimize adverse effects ofvolatile oil prices,
a debt repayment of $1.3 billion and divi-
dends of $1.7 billion.
This leaves a net cash flow of $Z.Z bit-
lion, which is insufficient to cover the com-
pan/s additional capital expenditure needed
to grow. Its overall investment in fixed assets
of $2.5 billion is around $1.5 billion short
needed to replace its natural depletion of
crude oil production, and does not include
capital expenditure in other areas such as re-
fining and marketing. PDVSAs investment
program has been declining steadily since
1998 when it was $S.Z billion.
The large amount of money owed to
PDVSA by various government agencies
weakens the company's position. The gov-
ernment owes PDVSA hundreds of mil-
Iions of dollars in late payments for prod-
ucts and services. The lt[ational Tax
Institute also owes the company $2.1 bil-
lion in deferred tax payments, known as
drawbacks. Finally, the state power util-
ity also owes PDVSA about $120 million
for heating oil used to generate electricity.
In addition, PDVSA also faces a shortfall
due to government subsidies on its do-
mestic sales of gasoline at a cost of $BOO
million in lost revenues in 2001.
AII this points to the inevitable con-
clusion reached many years ago by
PDVSA that in order to maintain the
country's production or increase it to just
under 6 million barrels per day by 2009,
it will have to rely on foreign investment.
Stiil, foreign companies must cope with
the new hydrocarbon la*, perceived left-
ist policies pursued by Chdvez, his vig-
0r0us defense of OPEC quotas, and his
government's growing instability. But
without foreign investment, the country's
productive capacity will suffer.)
enezuela: Investment, Growth & Diversification
