AREA SPOTLIGHT

Venezuela: energy and growthVenezuela was one of the OPEC producers that stepped up oil production, soon after the Gulf war

cofllmenced. It is now seeking to transforrn its oil and gas industry, wlth substantlal investment, some ofwhlch must come from overseas. Addltionally, Venezuela has been active in tryins to establlsh greaterco-operation between the produclng and consumlng nations. Ttris detailed survey has been specially

written by Dr. Brian McBeth.

n the last two and a half years, there

has been a complete transformation inthe fortunes 0f Latin America's largest

oil producer. When the new government of Car-

los Andrez took office in 1989, it inherited an

economy thatwas almost bankrupt. The current

account deficit was $S.S bn. and the budget

deficit was 9.5 per cent of gross domestic product.

After one 0f the country's worst-ever recessions, in1989, when it was gripped by three days of insti-

tutional panic by the forces of law and order,

which left an official, but prob ably understated

death toll of 300 people, the economy has turned

around. It grew by 4.5 per cent in 1990 and 9.2

per cent last year, the highest since 1964. With

higher oil prices, intern ational reserves stand at

$tO bn., double those of 1989, and the current

account surplus for last year is likely to be some

$3 nn. compared with $lOO m. when Pdrez took

over in 1989.

New , economicpackage

Much of the success of

the perform aoce of the

country's economy over the

last two and a half years has

been attributed to the new

government's F'ebruary

1989 policies. A number of

radical changes were insti-

tuted, such as the liberalisa-

tion of domestic interest

rates, the introduction of afloating exchange rate, a

substantial rise in the

domestic gasoline price,

which was one of the lowest

in the world, higher charges

for public services, the low-

ering of protective import

tariff barriers and the provi-

sion of greater incentives to

non-traditional exporters.

The new economic package,

which was more acceptable to internationalftnancial institutions and was endorsed by the

International Monetary Fund, IMF, prompted,

inter aha, the reflow of some of the assets held by

Venezuelans in foreign banks, conservatively

estimated at $39 bn., and a reduction in the

budget deficit. Weaker demand and the lowering

of tariff barriers limited the inflatronary pres-

sures arising from the measures. Finally, itimproved the country's credit-worthiness inobtaining new loans from the internationalfrnancial community.

IIre social and political impact ofthe new economic measures

The social impact of the February 1989

package was extremely negative , as many 0f itselements, such as the inerease in gasoline prices,

were socially regressive and hit middle and low

income groups severely. The resulting urban

riots, and the very large death toll, were the

background for an unsettled social and poli ticalclimate as the new government sought to find itsfeet. Inflation soared to a record 2I per cent, inMarch 1989, and organised social groups started

mobilising to gain concessions and exemptions.

The Confederation of Venezuelan Workers, CW,

the largest workers' federation in the country,

and tradition all:y' controlled by Acci6n

Democrdtica, AD, the ruling party, took an

unusually independent stand in opposition to the

package and its call for a general strike on May

18, 1989, won widespread public support. The

government, although standing firm on the

original package, made some concessions, such

as softening the impact of interest rate liberalisa-

tion 0n mortgages, increasing the number ofgoods, the prices of which were frozen, and con-

senting to wage rises

above those originallyplanned in both the pub-

hc and| fivatesectors.

Venezuela has been

a democracy since 19SS

when the dictator P&ez

Jimdnez was forced to

leave the country. This is

the second time that Cav

los Andr6s P6rez has been

president. He has under-

gone a radical transfor-

mation: no longer is he

the free-spending presi-

dent of his first period in

office between 197 4-79 ,

when oil prices were rela-

tively high and the indus-

try was natiohalised.

Since taking office in

1989, the president has

been anxious to promote

an image of responsibility.

Recognising that very dif-

ferent circumstances

18 PIPEUNE Wrr\TER 1gg2

Production areas, Lake Maracaibo, State of Zulia

dominated his first period in office at the height

of the oil boom, he has been at pains to stress the

magnitude of the country's current economic

problems. Moreover, given the changed ideologi-

cal clim ate in Venezuela today, he is keen to earn

himself a place in the country's history books as

a serious-minded statesman.

The pol itical stability of the country, and

that of its democratic institutions, seems assured

as there is no major disruptive force on the cur-

rent political landscape. Small left-wing parties

have concentr ated their efforts on the all pewa-

sive issue of corruption which, currently, is not

thought to have a destabilising impact on the

major parties. There is n0 right-wing anti-democratic party 0r movement and, more

importantly, the armed forces are strongly com-

mitted to the existing regime and not interested

in assuming executive power for themselves. But

the grip of the old parties, such as Acci6n

Democrdtica and Copei, is being loosened. The

spate of corruption scandals which surface with

tedious regularity involving the military, €X-

president Lusinchi, and close associates of Pdrez

would indicate a growing dissatisfaction with the

old political system which is perceived to be cor-

rupt. In the last few years AD has lost a number

of state governorships and soon state assemblies

and half the national Congress will be elected

directly and not appointed by the parties, thus

weakening the stranglehold of the two mai n parties. This could just possibly lead to a period

when the country becomes ungovernable as the

old political alliances crumble.

In the past it has been argued that as the

presidential elections of 1993 approach, P6,rez

would appoint loyal members of AD to replace

the current, largely independent, economic team.

But this is unlikely as Pdrez would probably notwant to jeopardise his government's hard-won

economic gains for short-term political advan-

tage. If the current reforms are allowed to worktheir way through, and there is no larye increase

in opposition, the country's non-oil economy

could reap the benefits for many years to come.

The oil industry

Venezuela is one of the oldest and biggest

oil producing countries and currently ranks sixth

in the world. As long ago 0s 1928 it was the sec-

ond largest exporter of crude oil after the US and

it remained in this position until the mid-1950s.

The Ven ezuelan economy is dominated by

crude oil. In 1990, it was responsible for 81 per

cent of total export earnings and for 83 per cent of

government revenues. It accounted fot 23 per

cent of GNP. Petroleum revenues in l99O

increased to $14.4 bn., compared with $9.9 nn.

the previous year, reflecting larger export volumes

AREA SPOTLIGHT

and higher crude oil and product prices, which

averaged $20.33 per barrel. Venezuelan oil rev-

enues in 1991 could be around $tl bn.

Oil has been known in Vene zuela since

seepages were found 0n the shores of Lake

Maracaibo during the colonial period. The

development of the oil industry up to the end of

197 5 was in the hands of private oil companies

with three of them, Exxon, Shell and Gulf 0i1,

dominating production and refining.

Venezuela was one of the main instigators

behind the ueation of OPEC in l95O and has

always sought to play the role of mediator,

counselling moderation am0ngst its m0re

aggressive partners. Such a role is likely to

continue with Venezuela seeking to show the

benefits of mutual c0-operation with the

world's largest privately owned oil companies.

Nationalisation of the oil industry

0n lst January 1975, the country's oilindustry was nationalised by Carlos Andrds Pdrez

during his first period of office. $ t . t5S bn., based

on the net book value of the assets at December

I975, was paid to the ex-concessionaires.

The nationalisation of the industry

required the creation of a functional structure

that would maintain norm ality within the new

legal scheme. Petr6leos de Venezuela SA, PDVSA,

was designated the parent company of the

national oil industry, responsible for planning,

co-ordin ating and supervising all the activities of

its subsidiaries, which were made up of the 14

former operating companies. PD\rSA's oil would

be marketed through the major international oilcompanies, thus guaranteeing the company a

stable market share. The new company would

also receive technical assistance, in exploring

and refining, from the former operating compa-

nies, who would be paid al a rate which varied

between 15 and 30 cents per barrel produced.

The original 14 operating companies were inte-grated in 1977 into four maior companies,

Lagoven (ex-Exxon), Mar ayen (ex-Shell), Men-

even (ex-Gulf) and Coryoven (the remaining

companies).

0n March 1st 1978, PDVSA assumed

responsibility for the country's petrochernical

industry when the government transferred the

ownership of Petroqui mtca de Venezuela SA,

Pequiven, to the state oil comp any.

Although PDVSA is a state enterprise, it is

expected to finance its normal investment pro-

gramme from its own resources. The company

pays royalties and income tax. Income tax levels

are set at 57 .7 per cent and levied on the earnings

from exported crude and products. However , pay-

ments can be offset, by up to two per cent, for new

investment. PDVSA does not en joy any tax

privileges except 0n export sales made by its sub-

sidiaries. Ten per cent of such income is tax

free, being deemed as costs incurred by the com-

panies. The government's fiscal' take, composed

of royalties, income tax and other taxes, amount-

ed to 83 per cent of pre-tax profits in 1990.

Crude oil and gas reserves

In 1990, Venezuela increased its crude

oil reserves to 50. t bn. bbls. compared with 59

bn. bbls. the previous year. Most of the

increase in reserves came from Eastern

Venezuela, Apure state and from Lake Mara-caibo. Venezuela now holds the largest

reserves in Latin America, with a reserves/pro-

duction ration of 58.5 years, compared with 45

for the overall region, but well below OPEC's

figure of just over 100 years.

PDVSA's increase in proven reserves, from

18.2 bn. barrels in 1975 to 50.1 bn. barrels in1990, was due primarily to an increase in explo-

ration activify and to the addition of 25 bn. bar-rels from the Orinoco 0i1 Belt. Before nationali-

sation, only 33 explo ratory wells had been drilled

during the previous five years, compared with 58

wells in 1975. 0nly seven exploration wells were

completed during 1990, the lowest since nation-

alisation, but seismic lines shot increased consid-

erably, however, to 8,)47 kilometres compared

with the previous year's total of 2,000 kilometres,

which was the lowest since nationalisation.

PDVSA's exploration success has been due

mainly to discoveries made in the eastern state of

Monagas at El Furrial, with estimated reserves of

538 mn. barrels and with an upside potential of

1.12 bn. barrels. Another important discovery

was the Ceuta South-Southeast field in Lake

Maracaibo, with estimated recoverable reserves

of 1 bn. barrels, and in the Gmfita field inApure, next to the Caflo Lim6n field in Colom-

bia, with estimated recoverable reserves of 500

mn. barrels. Additions from the 0rinoco 0i1 Belt

have augmented the company's reserves. These

discoveries have added between 10 bn. and 12bn.

t9

H oucn,,,effi.,,oililffi' 'i 'i

,i tilii l': r

:::l

(milliinn: i;biafiels),,,

(.billton,.,..cfi.bic .ffi6*rcS),, .,.,.

PIPELINE WTNTER 1gg2

AREA SPOTLIGHT

barrels of light and medium crude oil

to a reserve base which was dispropor-

tionately biased towards heavier oils.

The finds will have a profound impact

on the country's crude export mix, as

the Mon agas prospects, which current-

ly produce 80,000 barrels a day, (b/d)

of light oil, are expected to reach a

plateau level of 500,000 b/d in 1994,

and the Ceuta field, currently yielding

100,000 b/d, is expected to reach

200,000 b/d in 1993.

Venezuela has the ninth largest

reserves of gas in the world with

proven reserves of 3.43 trn. cubic

metres, implying a reserves/produc-

tion ratio of over 100 years. Current

gas production is betwee n 3.6 and 3.8

million cubic feet per day, of which a

third is sold locally and a third is re-

injected into the reservoirs. A fifth is

used by the oil industry and five per

cent is flared. Maf or switching from

oil to gas is not envisaged until later

this year, after the Nurgas pipeline

from Anz6ategui to the West is com-

pleted. Gas will ultimately replace

about 100,000 b/d of refined products,

mainly light heating oil.

Venezuelan oil production,

including condensates and naturalgas liquids, is currently 2.2 mn. b/d.

PDVSA supplies the domestic market

with approxim ately 351,000 b/d of

petroleum products. This represents

around 16 per cent of total production

and the rest is expoited.

The proportion of light and

medium crudes in Venezuela's

export package declined between

1975 and 1984 with a complementary increase

in the volume of heavy crude exports. PDVSA,

after nationalisation, began to adjust its export

package, seeking to increase its supply of white

products which are traditionally more in'demand

and offer a higher profit margin. With

this goal in mind, between 1978 and 1987 , the

company upgraded its refineries in Amu ay, Car-

don and EI Palito, t0 reduce the proportion of

residual fuels obtained in the refining process

and to increase the proportion of naphtha,gasoline and distillates. With greater upgrad-

ing and conversion facilities, the refineries

could use a higher proportion of heavier crudes

which represented the major volume of reserves

in the country. The upgrading of the country's

refineries came to a temporary halt in 1986

because of severe cash flow problems as oilprices crashed.

20 PIPELINE WTNTER tgg?

.:iG#Hff U;u$il,,:;;*fl fl ,,.$ ...'

p#Oduction:,:::ii: ,,. ,:

, ,:,r

crude oil (000 b/d) l9s6' 1987 1988 1g,8g 1gg0: ' :::'

ul$ht].::ifuver $iUu. iE I yry;B 535", ,i i ,.: ::i6}8 . 840

Medium (22:139" nrl; f.r,3 5A$, ZOA 774 828

Heary & Extra-Heavy 553 5s9 3lgi T:g5 430

(unde,r 22" API)

Total brude I,G/+j, I,;534, 1,VL,.S 1,741 2,0gg

Gdfid€ns#te .... tt: , '.. ,t$r51' .l88.,.,.'.i ,i6.0 i7

NGIs &;ethane 97 94 98' 1CI8 114

NAfii, E, GAS f,Mfl;,.ilUbi6,mntren) ..

^'"i :,Source: Petr6leos de Venezuela S& Mnual Repo*, 1991

uru:ilu

0ffidc,,,dill, ,

,fudffiifuveq..r.6' #l} ....

Med,itrm,{!,2:iA" API)

Heav)r &,Extia-Hearry

(under 22" AP:[)

Reconstituted

t ! ': I.

l CItil cruoe:' :::'= "::ri ii rr:

Reiined products

,,,4s,. $1.,,,,,,,,, .$.!, 4S

!1088, 1j6,il'* $8 ,,, ;',242

::

uililrlffilp#0 uffi....e bffi.,{:il66 h }lfis.6 , .lgBE i,98fi....,, .t19.89 1990,

25,4 7gg 31,t 417 351

15,5 in 196 185 34s:4s!g 4to 457 332 4gr

5.8

949

Htgh sulphur.residual 1S9 13t 227 21i zAT

Totat products 585 4j2, 65$ ,,, 6Sa 65'9

ffioffi..9xpoms ,,,, ,.,1r.#fi,il .il.fi'fi.$ .: . ..;. .$e t,6I;rA 1,88,I

isduilcei Ufurcu1.'d;..i,VEil€ruelh,,sn, tuinual

*a#,i.q9ti

..

;,::Crude oilr,,& producfs,,,,ffiorfs by

, ,,1d#ffi**at* lil;,., t990

US

ced#ral. e###i.ry,. e ub*l*n

Eur0pe

Sou,th kerica

,.v"oilume..' , ,'Yi:

ffinu,,.nm}...,,

1":294 :,68..:::;::i,

.,::i!::

Z;fiS..1 ti$

.2$.,I .,,., '..1fi.: l.e6'5 3,' "',,,. -

l.'.59,,l ""361] ffief$

IADANir ::t :':::!

:;;.1iiilir;;;1 1

,.ff ,,.....,,,.l.; Si. ...... '..lI.s{}

luu:*rd+ l,:::putil ildti deiil#Milueiil*..$g"**^=- Ai#tial ftfiri|*"^I "' "

As a result of PDVSA's exploration

record since 1985, the trend towards

heavy crude exports has been reversed

so that in 1990 exports of light and

medium crudes accounted for 57 per

cent of PDVSA's crude export package.

The US is PDVSA's main market,

accounting for 57 per cent or 1.3 mn.

b/d of total exports in 1990, with Cen-

tral Amerrca and the Caribbean in sec-

ond place with 235,000 b/d, or 13 per

cent, and Europe in third place with

231,000 b/d or 12 per cent. Around 54

per cent of the company's crudes went

to its own subsidiaries.

Orimulsion

Nthough Venezuelan crude oil

production in recent years has shifted

from predominantly heavy to lighter

crudes, the country continues tomake consider able efforts to find

ways of marketing heavy crudes. One

such method is the development of

Orimulsion, as the treated hear1, oil

from the 0rinoco 0i1 Belt is called.

This will be used primarily for elec-

tricity generation. The bitumen is

extracted from the 0rinoco Oil Belt as

a primary emulsion which is then

degasified, dehydrated and desalted

before being turned into 0rimulsion,

which is a mixture of 70 per cent

bitumen and 30 per cent water, with

an emulsifying agent.

PDVSA is developing its large

Orinoco Oil Belt using a new patented

production method. This field, which

covers arr arca of approxim ately

42,000 square kilometres, is consid-

ered one of the most important untapped

reserves of heavy oil in the world. The estim ated

oil in place is around truo trn. barrels. The spe-

cific gravity of the crudes range between 8 and

14 degrees API, and recoverable reserves are esti-

mated at 267 bn. bbls. 0n a thermal basis, this

is equal to about all of South Africa's coal

reserves or North America's entire crude reserves.

According t0 PDVSA, Orimulsion's main

competitor is coal, not heavy fuel oil. For politi-

cal reasons, the Ven ezuelan government have

argued that Orimulsion should not be consid-

ered crude oil because the latter is define d at 14

degrees celsius, so anything that is not liquid at

this temperature cannot be considered as crude

oil. Orimulsion, which flows at a rclatively low

temperature, and burns very well, is more widely

available and conceivably cheaper than coal or

fuel oil.

Because of its low price, it could

displace large volumes of fuel oil and

rtlso coal, in power generation. Howev-

er. one potential problem is its perceived

impact on the environment, with some

critics aheady dubbing it the 'dirty fuel',

and the extent of its economic potential

u'ill remain unclear for some years.

\evertheless, Orimulsion has been test-

ed in the UK and in Japan and commer-

cial marketing has started at the modest

level of 20,000 b/d. The more opti-

mistic suggestions predict sales of

600,000 b/dby mid decade.

Reftning & marketing

PDVSA owns 12 refineries with an

or,erall processing capacity of 2.6 mn,b/d. Venezuelan capacify is LI57 mb/dand I99O out-turn was 917,000 b/d.

AREA SPOTLIGHT

The remainder of capacity is located in the US,

Europe and Dutch Antilles.

One of PDVSA's most important interna-

tional marketing strategies has been its jointventure pafiicipation in refining and marketing

companies abroad. This ploy accelerated signifi-

cantly after 1986, when oil prices fell below

$10/bbl. and it was difficulr ro place oil.

PDVSA's investments in overseas down-

stream assets were motivated by a desire to secure

and increase market share in both the US and

Europe. Its first downstream venture outside

Venezuela was in 1983 in West Germany when itentered into a joint venture partnership with Veba

Oil to supply 155,000 b/d. PDVSA also owns a

320,000 b/d refinery at Lake Charles, Louisiana

and a 155,000 b/d refinery at Corpus Christi,

Texas, together with a 153,000 b/d deep conver-

sion refinery rrear Chicago as well as distribution

and marketing facilities in Illinois, Michigan,

Iowa, Ohio and Wisconsin. PDVSA also has a

minority stake in two refineries in Sweden and

one in Belgium. In 1990, through Veba 0il, itacquired an interest in a 230,000 b/d refinery at

Schwedt, formerly in East Germany, and it also

purchased a 12 million barrel tank farm in the

Bahamas, from Chevron, to increase its market-

ing flexibility in the US.

PDVSA's ambitious ftve-year plan

PDVSA has- a very ambitious investment

programme over the next five years as a result ofwhich it hopes, inter aha, to increase its crude oilproducti on capacity by 25 per cent. Its $48 bn.

investment programme, spread over five years, is

analysed in the next column..

The plan calls for alarge increase in crude

oil and gas during the 1990s and increased

investments in refining and marketing in the US,

Europe and other areas. A large rise

in exports of natural gas, petrochem-

icals and coal is also planned.

PDVSA expect to contribute atotal of $l+ bn., with the remaining

$t4 bn. coming from joint-venture

projects between the state oil compa-

ny and future partners. PDVSA's

annual investment will be $5.4 bn.

This means that the company,

which currently generates net cash

flow of $2.3 bn, will not be able to

finance its investment programme

from internal sources, especially as

oil prices are expected to remain

static over the next few years. PDVSA

will need to find an annual net capt-

tal requirement of $3 bn. over the

next five years, although most of the

investment is scheduled to take

place towards the end of the quinquennium. Ifthe investment strategy is maintained, PDVSA is

likely to assume atotaldebt burden of $16.0 bn.,

assuming oil prices remain static up to 1995.

The imp act on future government revenues

of such alarge debt increase by the state oil com-

Investment plan

Sector Capitd,

requirement($ bn')

Exploration & production L7

Production of crude oil and gas 16.2

Oil refining 10.0

Petrochemicals j.T

Intemational investments 4.5

Orimulsion 2.5

r-NG 2.5

Oil tankers 1.4

Coal 1.9

Domestic market 0.9

Other investment A.7

pany, despite its current low debt gearing of under

five per cent, has not been fully explained by the

oil company and could well lead to a morc acri-monious relationship between the two parties.

PDVSA has repe atedly called for its tax burden tobe reduced, but this is likely to go unheeded as the

government depends for over 80 per cent of itsrevenues from this source. The flexibiliry of the

investment plan though, with the bulk of the cap-

ital requirements in many instances scheduled

towards the end of the five year period, and with

the possibility of postponing some items, willallow PDVSA to vary its capital requirements if oilprices do not strengthen during the mid 1990s.

Reftning capaciq & out-turn in Ven ezuela(ooo b/d)

1986 L}ST lg8S lgSg rgg0

Refining capacity 1,224

0ut-turn 924

Products obtained:

LPG 5

Naphtha/gasolines 306

Kerosene 55

Distillate s 232

Low sulphur residual 7

High sulphur residual 233

Special products 47

1,225 l,2}rs54 1,002

8gz9t 309

66 72

ztr 258

7 11

L9l 27A

46 47

1,157 1,157

9ot 9t7

98329 335

65 74

230 244

37253 243

46 75

Source: Petr6leos de Venezuela SA, Annual Report, lggl

PDVSA's refineries outsideYenezuela

Installed PDVSA

capacity share

(ooo b/d) (,/,)

Belgium

Anfwerp/N Nynas Petroleum L5 50

Germany

Scholven/Ruhr Oel GmbH 110 50

Horst/Ruhr Oel GmbH 100 50

Neusradr/Ruhr Oel GmbH 144 IZ.5

LarlsruheAuhr Oel GmbH I4Z t5

Sweden

Nynashamn/AB Nynas

Petroleum

Gothenburg/AB Nynas

Petroleum

US

Lake Charles/CITG0

Petroleum Corp

Corpus ChristirCITGO

Petroleum Corp

Z5 50

50IZ

3ZA 100

165 100

PaulsborolSeaview Oil Co. S4 100

Chicago/The UNo-Ven Co. tsj 50

Netherlands Antilles

Curacao/Refineria Isla SA 310 leased

TOTAI 1,590

Source: Petr6leos de Venezuela SA.Annual Report, ig g1-'- -''

PIPEUNE WTNTER rgg2 2t

tsl-L.4Rilfidr-\\\ t\--

r.sr-.;q.\ \ J rsr.r

e {,ltazo\ u fl(}'\1.1/Rr"

I.COJEDES

C

Oil exports (000 bd)1 985 1 990

Crude Oil .,,lffi Products

Source: PDVSA and "Oil & Energy Trends"

2500

2000

1 5001 980 1 981 1982

Source: British Petroleum

MaraeaiBosciih

..'!r,r..'-' a

E'ffiEY: '

, 'Las Merce*s

t-::

GUAR,ICO

APURE

Gol-

oE.9_ofoc€g

206()fEoo_@(d(,(U

f(Uz

a)_oOOoCoofEoI-

o_

o

,-711

*-e*;.

t. \).\

t

(

.z'\ '1

/' \., \\.\\.\!rri'-'-\

t'a.. ..,-)'f

VENEZUELA

..<: ^.-"2),r' .a;^nen ,.r'{-* tt tf o d e,i t" \ Yenezuelu/

a-'1 a' Amana

Oil and natural gas production

15

Source: Atlas de Venezuela

1 983 1 984 1 985 1 986 1987 1 988 1 989

/

ERGY RESOURCES)DUCTION

=l Cnaurael?'

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SUCRE

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f,,,) tst,+

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' 72'

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.r llt, ll:' '

.-.J

O oilfietds

llfffi Orinoco oil belt

Oil pipelines

O Gasfields

Gas pipelines

D Oil refineries

Power Stations

@ Diesel

O Thermal

@ Hydroelectric

0 kilometres 100

€)d

tfi tSLa

#- TOBAGO

4I

^_: oDtrtr EOB

.'.ili:j..it::ii rt" r,

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a

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PDVSA's exploration effort is directed at

finding light and medium crude, and the country

intends to increase its share of the world's oil mar-

ket by a very aggressive investment programme

over the next five years. PDVSA's aim is for proven

reserves and crude oil producti on capacity to rise

in a concerted effort to gain a bigger market share.

Over the next five years, it expects to add nine bn.

barrels of reserves by a mixture of frontier explo-

ration and revision of reserves from existing fields,

to boost crude oil production capacity from 2.8

mn. b/d to 3.6 mn. b/d. This requires a substan-

tial investment of $1.5 bn. in exploration expendi-

ture and $t5.2 bn. in production facilities. Crude

oil production is expected to show a 25 per cent

increase to 2.8 mn. b/d in 1996, of which only

800,000 b/d will be hearry and extra-heavy crudes.

Most of the exploratory work will be concen-

trated in the eastem states of Anzdategui and Mon-

agas, around Lake Maracaibo, the Andean flank

south of the lake, the Perijd sector of Zulia and

Gudrico state. Over the next five years, exploration

alone is expected to yield five bn, barrels of addi-

tional light and medium crude, while increased

recovery from existing oil fields could yield another

four bn. barrels. PDVSA intends drilling 7,550

wells, carrying out more than 10,000 well repairs

and workovers and adding 120 mn. cubic metres

per day of gas compression.

The goal of increasing oil reserves by 25 per

cent over the next five years is formidable, requir-

AREA SPOTLIGHT

Gas r,njection plant, Lake Maracaibo

ing extensive exploration and production mainte-

nance to keep the wells flowing, even in old fields,

to offset annual depletion of 17 per cent. PDVSA

will be assisted by a number of foreign service

companies in drilling wells and a number of joint

ventures will develop inactive wells. The foreign

companies will operate the wells and be paid a fee

per barrel produced. Friction between PDVSA and

the govemment could also develop over the open-

ing up of new exploratory zones to foreign compa-

nies who would take all the risks. Another con-

tentious subject, awaiting a decision from

Congress, is a proposal for a $l nn joint venture

between PDVSA and Shell, Exxon and Mitsubishi

to develop the Crist6bal Col6n natural gas field, off

the north east coast. A 50 km. pipeline would be

built along with a gas liquefaction plant which

would enable liquid natural gas to be exported

after 1995 4.4 mn. tonnes per annum could be

shipped to the US.

In 1990, PDVSA's domestic refineries generat-

ed a large range of products which included gaso-

line, kerosene, naphthas, distillates, residual fuel oil

and speciallty products. PDVSA's current refining

capacity, at home and overseas, is 2.5 mn. b/d, but

new investment should increase the capacity by

befween 400,000 and 500,000 b/d, of which 200,000

b/d will be in domestic refineries. A new plant in

eastem Venezuela, to process hearry crudes, could be

built at a cost of between $2.5 and $3.0 bn. Another

100,000 b/d could be added atthe Curacao refinery.

Pequiven, the petrochemical company, is

currently in the midst of a major expansion pro-

gramme, with plans to invest $1.6 Un. up to 1995 to

increase production capacify by 10 mn. tonnes to 14

mn. tonnes per annum. These figures include

capacity in wholly owned subsidiaries and joint ven-

ture partnerships. The strategy is to use Venezuela's

large natural gas reserves as raw matenal

The new development plan will produce

compounds such as methyl tertiary-butyl ether,

MTBE, which is used to boost octane in gaso-

line. The demand for such products is growing

rapidly as lead is elimin ated from gasoline in

the US and Europe. PDVSA will face stiff com-

petition, however, from the Middle East and

other oil producers who are following a similar

development path with large increases in petro-

chemical capacity.

Coal production will also rise, which is in

line with PDVSA's long term plan to diversify and

expand its export base. The most import ant coal

deposits in the country arclocated in Zulia in the

Guasare basin, with proven reserves of 353 mil-

lion tonnes, with further identified reserves of two

billion tonnes. Producti on at Guasare, which is

worked jointly with Agip Coal of Italy and Arco

Coal of the US, of 1.5 mn. tonnes, is expected to

increase to 11.5 mn. tonnes of coal in 1995, at a

cost of $t.S bn. Other coal mines which could be

developed by then would add a further 8.5 mn.

tonnes per annum of production.

24 PIPELINE WTNTER tggz

When ?DVSA was created it was thoughtthat it wourd be fiiled to the brim with bureau_crats and jobs for the boys but this has not hup_pened' The com pany has been run well and isefficient, brl it is enteiirg a new era oflrrg;^;;:jects, necessitating sub stintiarinvestment. More_,ver, the frien dly relatronship befween ,h, ,rr_pany and the g'vernm ent reached crisis point inearly 199t with a serious confro ntationbetween.{ndrds Sosa pietri, the president of pDVS 1,, ;n'icelestino Armas, the energy minister. The latterconstrained the company's auton.my to increaseits domestic and internationarindebtedness

andthe acquisition of overseas assets. It arso requiredprior notification of senior appointments. pDvsAdemanded that the tax burJen be reduced, toincrease cash flow. After a series of intense meet-'nry,

the g,vernment withdrew its directive inexchange for pDvsA promising to increase itst'low of inform ation ro rhe *ini"rtry ;:;;,0 .on_sult over major financial decisions. The core ofthe dispure was rhe conrrol of tfrrlrOril; wirhthe government feering that,as the ,wner of theassets, it had been reft out of cruciar decision_making.

The future of pDVSA

4REA SPOILIGHT

,v uullturu res)urce

sacred cow be privatise d,, 15 yearc arterit came intoexistence?

recently been sord to a c,ns.rtium which incrudesAT&T' Butwiil the whoresare adoption of frr,

^ur-ket policies by the current government have animpact on the oir industry?" courd venezuera,s

Conclusion

The yenezuelan economy will remainhighly dependent on hydrocarbons for the fore-seeable future. What is of greater,rionrn.,,ver the next decade is the rore which state oirc,mpanies, such as pDvsA, wiil prayon the inter_national scene and whether, given the new phi_losophy of riberarism, pDvsA wiil eventuaily beprivatised or be forced to compete on equar termsin its domestic market with oth., oit ,orfanies.The ambition and scare of pDvSA,s investmentpr,gramme w,uld suggest that the level of additional foreign capitar needed wi, force both pri-vate companies and pDVSA closer together, possi_bly making the need for a state oil companyredundant.

, There is little doubt that 'DVSA

is one of uqJ prubruenr wno nationalised such an impr

h'fl:l :,,i::'-'jlfnt companies, bur it,#:#1ffi3,jlT,ilHiiffi;,l,l*

c,mpany , *,*. *nn" *ffi-,Iffi##fl llj fffi,J:,-L,,Tfflx.fl*h;,jil:,;,,1;l1j;1

[:4':,",1"T'H # iffiffi ','#,il;J:il ito'g pt*, m *.^ *^i ri,^pubric scrurin,manase rhe counrry,s r,ra'"r.jru*,,r,*l*, #.tl^fl

fl 11:ffi rrfrr lTfl

.lfi:,X? r,ffiJand suppry energv ro the cfuntry or shourd it act *r,i.r, ,u,r b, ;i#;;n u lirrrnt irprt o

more Iike a private c'rmany, with indjvidual ror.,gn ,up,tur. Furthermore, pDvsA is currentl,:l,ffi"rru'#ff H'J,:::: :' *q iooilns 1

n*ting 5r per cenr or pequiven on thi*,':,,0.r,,#ffi;:'rj,'ff::#ili# caracas stockExci.r* *" *

one being pursu.a ,ra ^1urr,

,, o ., , ,jil., ,,r,r,11 il? ffi-;T*i ;*i, JijXi; r,llii,;

course with a g,vemment which is arp.ra.rt ,, ,ii'r.r*i1, So far the general advancementthe oil industry for oyer g0 per ceniof its rev- oi rrrt. oif companies inio nurope and the USenues. The c,mpany,s proiected r*.f ,f,rirli nrr, ,, ,n. *frrfr, U.., ,rrliJr"ra nrrrrrr, ,,ertness, if it carries through it, iruertr.ripro_ ,orr.rr.r, they were *,iir*., pay a fullSramme' wirl reduce the government's oir iev- price fo, downsiream ,rrrrr'*i,.r, had effec_

f:i,f,:i ?,Tl1f;*,'Ji:T#,;;*:ln ki *t,,,,,r,r,iiJ"'"N0,',r,,, producr

iflil+r:l1l{t;l;,*iH#.1,#itr*tr;,,il: {:;x,}il:i,i.,*H;';',1#:ompanies. Such a move *uia *, nrrnrrrr,r_ #ffiffi:r1lJ,,,;*,i,1ilifffi:Xl[::Tilr#f

curent economic thtnking -in

uifo, u iorrign.srare oil c,mpany ro control a

_., The resrructurin* 0,,n,

l,l]I.Tcror srarred ffi ;fll1 ;1ffi,Tf[,lr:,T,#'ilirther timidly in 1990 wirh the privatisation of a alffi.rl, to reconcile tf,. .rrrrri Venezuelanumber of banla and a ceiluiar ri*grr, lri ;#llr.r,,, adoprion of free market rrade

rind momentum in 1gg1 with_Jhe sale of a stake i.rr," *r,, the prohibition of any form ofr\iasa'rhenationarairrine'r11',1_a;.ffi

ffi,,,,n in rhe domesric oir marker.Ca\ry *,. national telephone company, has rlvie may well welcome such a challenge.

It is unrikery that presiden t p6rez wourdeven consider privatising the oir industry as thiswould cefiainly entail i volte face of historicarproporti,ns as he wourd go down in history as theonly president who natiinarised suc h uo'i^p,r-tant industry and then changed his mind. It isless certain, however, what will happen *irf, sub_sequent g,vernments as there is rittre doubt thata type of creep ing backdoor privatisation, is nowtalnng place in arcu away from publn rrrrtiry,such as offshore gas jevelopments,

a.nd inincreasing rec,ve ry rates from ,rirtrg'olf wellswhich will be achieved with a sizeable input offoreign capitar. Furthermore, pDvsA is currentrylookng atfloating 51 per cent of pequiven on theCaracu Stock Exchange.

Brian McBeth is a consurtant, speciarising in ener_gy and Latin American matters. He hords an ec,-n,mics degree, with hon,urs, from Bruner Univer-sity, an M. phir, in Latin American Studies, fr,m0xford University, and a doctorate. He lived inVenezuela for 15 months, in 19,6_l , whilstresearching his doctorar thesis. subsequenry, hebecame an oir anaryst, working for severar stock_broking firms. His pubrications include ,Juan

vicente G6mez and the 0ir companies invenezuera 1g0B-1g35', and 'British 0i, poricy,1919-1935', He is a contributor to Latin Americain Perspective'.

f,.liffi rgd number, of try,of tfu rcnezuela,

:::,IijiYll,o. and.uaifed'6e

r #;6,|;1,a;it,uajt,

upon reffi ,Foi finrrei'in##iIloni;tlg,ase eontm fu'-" An#;i ineffi.'on (0) 71,4sr 064j, peoffiui*i iitsffi,,

PtPEuilE WTNTER lggz 25