Venezuela Oil and Gas Report Q1 2012

BMI View: Venezuela’s oil sector operates at the extremes. Few, if any, countries can match it in terms of untapped growth potential. The Orinoco heavy oil belt, which covers a vast swath of the country’s heartland, holds tens of billions of barrels of reserves that are only now starting to be developed. At the same time, President Hugo Chavez has implemented some of the most demanding fiscal and operating terms in the world for foreign companies, has repeatedly nationalised assets, severely damaged state-run PdVSA’s ability to manage the oil industry and generally sown a highly volatile and unpredictable operating environment. Indeed, those policies have plagued Venezuela’s oil sector and threaten to derail development of the Orinoco heavy oil belt, which is likely to be the last hope for the country to turn around its flagging oil sector. With that said, our view is that sustained oil prices above US$90/bbl will provide a sufficient financial incentive to sustain much-needed foreign investment in the Orinoco belt. As a result, we are fundamentally bullish about the future oil production, with forecasted growth of 67% over the coming decade pushing production over 4mn b/d, although we note the significant downside risks to this forecast.
Main trends and developments we highlight for Venezuela’s Oil and Gas sector are:
• Venezuela’s oil production is a long way from its peak of around 3.5mn b/d in the late 1990’s. Output in the OPEC member country has fallen steadily from the time Hugo Chavez took power in 1999, as a series of reforms to the sector have proven nothing short of disastrous for the country’s oil sector. State-run PdVSA has lost much of its senior management over the period, and seen much-needed funds diverted to popular social programmes and other Chavez initiatives. Moreover, repeated nationalisations and harsh fiscal terms have chased many foreign investors out of the country.
• Nevertheless, with a number of the country’s Orinoco Belt heavy oil projects taking shape, particularly in the Junín and Carabobo regions, we see a turnaround in production on the horizon. We forecast oil production ticking up from 2.44mn b/d in 2011 to 2.52mn b/d in 2012 and 2.81mn b/d in 2013. From that point, production is forecast to accelerate, with the country potentially breaking 4mn b/d in 2019.
• Key projects to watch over the short-term, as a barometer for project execution success, include the PdVSA/Chevron Carabobo 3 project, the PdVSA/Russia consortium Junín 6 project, the PdVSA/China National Petroleum Corporation (CNPC) Junín 4 project and the PdVSA/PetroVietnam Junín 2 project, all of which are scheduled to start production in 2012.
• Although we are broadly optimistic on oil production growth, the risks to this outlook are myriad and welldocumented. PdVSA, which by regulatory mandate holds a 60% in all Orinoco Belt projects, remains underfunded and understaffed and will rely increasingly on its foreign partners to fund its share of development costs. At the same time, PdVSA is turning to its partners for more funding, the government is imposing more stringent fiscal terms, as evidenced by a 95% windfall tax imposed on all crude sales over US$100/bbl imposed in April 2011. Our primary assumption is that long-term oil prices above US$90/bbl will provide sufficient economic incentive for foreign investors to remain in the country and continue with their projects in spite of the difficult operating environment. Moreover, Chinese companies, which will play a crucial role in developing the Orinoco heavy oil belt, will see much of their production increases shipped to China.
• Indeed, one need not look much further that Venezuela’s gas sector to see the perils of doing business in Venezuela. After years of touting the countries liquefied natural gas (LNG) export potential, the government was forced to radically scale back plans for the gas sector in September 2011. This has led to one of the most significant revisions from last quarter’s report. Whereas we had forecast some small-scale LNG exports starting in 2015, we now see no scope for LNG exports. In fact, without the financial incentive of LNG exports, we see relatively limited investment in gas projects, and as a result we forecast production growth lagging consumption, ensuring that the country continues to rely on its neighbour Colombia for small-scale imports.
• On the corporate side, the industry will continue to be dominated by state-run PdVSA. However, PdVSA will rely on its foreign partners for funding and technical expertise, and those foreign partners will increasingly come from nations ideologically aligned with Chavez’s government. China’s state-run companies CNPC, Sinopec and China National Offshore Oil Corporation (CNOOC) will play a vital role in developing and funding the oil industry after signing a series of deals in late-2010 that sets out plans for as much as US$40bn of investment through 2016. From Russia, state-run Rosneft, as well as privatelyheld TNK-BP and Lukoil will be major players in the Orinoco heavy oil belt. Of the industry majors, Chevron and Eni have the most exposure to Venezuela. Their risk tolerance has given them stakes in largescale projects, but they will be exposed to serious risks to disruption in output and financial returns.

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BMI Industry View 6
SWOT Analysis 8
Venezuela Oil and Gas SWOT 8
Global Energy Market Outlook 9
Table: Global Oil Consumption (000b/d), 2009-2016 12
Table: Global Oil Production (000b/d), 2009-2016 13
Regional Energy Market Outlook 14
Oil Supply And Demand 14
Table: Latin America Oil Consumption (000b/d), 2009-2016 16
Brazil is doing it 17
Table: Latin America Oil Production (000b/d), 2009-2016 17
Oil: Downstream 18
Table: Latin America Oil Refining Capacity (000b/d), 2009-2016 18
Gas Supply And Demand 19
Table: Latin America Gas Consumption (bcm), 2009-2016 20
Table: Latin America Gas Production (bcm), 2009-2016 20
Liquefied Natural Gas 21
Table: Latin America LNG Exports (bcm), 2009-2016 21
Venezuela Energy Market Overview 22
Upstream Projects Database Table 25
Industry Forecast Scenario 27
Venezuela Oil And Gas – Historical Data And Forecasts, 2009-2016 27
Oil And Gas Reserves 29
Oil Supply And Demand 29
Gas Supply And Demand 31
Liquefied Natural Gas 32
Refining And Oil Products Trade 32
Revenues/Import Costs 33
Oil And Gas Infrastructure 34
Oil Refineries 34
Table: Refineries In Venezuela 34
LNG Terminals 35
Gas Pipelines 35
Regional and Country Risk/Reward Ratings 37
Latin America Region 37
Composite Scores 37
Table: Regional Composite Risk/Reward Ratings 37
Upstream Scores 38
Table: Regional Upstream Risk/Reward Ratings 38
Downstream Scores 39
Table: Regional Downstream Risk/Reward Ratings 39
Competitive Landscape 40
Executive Summary 40
Table: Key Players In Venezuela’s Oil And Gas Sector 41
Overview/State Role 42
Venezuela Oil & Gas Report Q1 2012
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Licensing And Regulation 42
Government Policy 43
Licensing Rounds 47
International Energy Relations 50
Table: Key Upstream Players 54
Table: Key Downstream Players 54
Company Monitor 55
PdVSA 55
Market Position 56
Strategy 58
Chevron 59
Market Position 60
Strategy 61
Total Venezuela 62
Market Position 63
Strategy 64
Repsol YPF Venezuela 65
Market Position 66
Strategy 66
BP – Summary 68
Statoil – Summary 68
Eni – Summary 68
Petróleo Brasileiro (Petrobras) – Summary 69
CNPC/Sinopec/CNOOC – Summary 69
Perenco – Summary 70
Galp Energia – Summary 71
BeloVenezolana – Summary 71
Others – Summary 71
Former IOC Partners – Summary 72
Appendix: Oil And Gas Long-Term Forecasts 74
Regional Oil Demand 74
Table: Latin America Long-term Oil Consumption (000b/d), 2014-2021 74
Regional Oil Supply 75
Table: Latin America Long-term Oil Production (000b/d), 2014-2021 75
Regional Gas Demand 76
Table: Latin America Long-Term Gas Consumption (bcm) 2014-2021 76
Regional Gas Supply 77
Table: Latin America – Long-Term Gas Production (bcm), 2014-2021 77
Methodology And Risks To Forecasts 78
Glossary Of Terms 79
Oil And Gas Risk/Reward Ratings Methodology 80
Ratings Overview 80
Table: BMI’s Oil & Gas Business Environment Ratings – Structure 81
Indicators 81
Table: BMI’s Oil & Gas Upstream Ratings – Methodology 81
Table: BMI’s Oil & Gas Business Environment Downstream Ratings – Methodology 82
BMI Methodology 84
How We Generate Our Industry Forecasts 84
Energy Industry 84
Venezuela Oil & Gas Report Q1 2012
© Business Monitor International Ltd Page 5
Cross checks 85
Sources 85
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