Replacing the Tar Sands

In the North American energy conversation, there is a narrative that sees the United States imposing a cap and trade regime to curb the growth of greenhouse gases sometime next year. The regulation will force Canada to emulate the regulation, resulting in the tar sands eventually becoming an economic venture beyond the point of profitability. Along the way, the oil produced from the tar sands becomes the energy third rail – no one will want to touch the stuff.

It’s a possibility, but if the North American lust for oil still burns, what will replace the unconventional goop? There is a technical substitution for Canada’s unconventional reserves– deposits similar in size to the tar sands that are cheaper, cleaner and even easier to extract. This oil could even feed North America’s refineries that have gotten accustom to the tar sands’ heavy oil taste.

They are considered unconventional, in the sense that more effort is required than conventional oil extraction, but relative to the effort needed to create oil from the tar sands, they are much ‘less’ unconventional.

Imagine the tar sands with no tailing ponds, no forests and wetlands bulldozed, no small oceans of natural gas and water used to separate the bitumen from the sand; except for the upgrading plants, this black gold almost flows like regular oil.
So where is this magical stuff?

It’s in Venezuela, home to beauty queens and Hugo Chavez, the fiery but popular Latin American leftist. Chavez, rhetorically is anti-capitalist, but is not against the idea of pumping out more oil to fuel his Bolivarian revolution – as long as it flows on his terms.

The rules of the game definitely changed during Chavez’s ten years in office, but they are not unreasonable. Next to Iraq, Venezuela’s investment laws are the most liberal in the Organization of Petroleum Exporting Countries (OPEC), says Mazhar Al-Shereida an oil economist at the Central University of Venezuela (UCV).

According to Venezuela’s oil minister, the petrol-pumping Latin American country is planning on a major ramp up in production, from its current 3.2 million barrels per day (mbd) to 4.25 mbd by 2015. The new oil would all come from their tar sands, or extra-heavy oil as it is referred to in Venezuela. There is less in the ground than Canada’s tar sands, but Venezuela believes over 230 billion barrels could be tapped, larger than Saudi Arabia’s extractable reserves.

As of late, the agreements announced to develop its unconventional reserves have been significant. Venezuela over the past couple of months said it secured $61 billion worth of investment, reports Reuters. As investments in mega projects face tight financing these days, China and Russia have promised $36 billion, France’s Total has pledged $25 billion and Norway’s Statoil and Chevron are also vying for a foot in one of the last great oil prizes.

We might as well shut down the tar sands then and call it a day; Chavez’s multi-polar petrol powerhouse will be soon delivering oil to market, right?

Wrong. A little digging reveals a veritable standstill of new projects and major production declines.

For one, Venezuelan production plans have changed over time, becoming more distant and smaller in scope. The plan to pump 4.25 mbd by 2015 was first projected in 2005 to be 5.6 mbd by 2012, a lofty goal then and undoubtedly elusive for many more years to come.

The $61 billion in investment announcements were made by Venezuela, not China, Russia and Total. Development plans in Venezuela must be greeted with skepticism since so many grand plans have gone nowhere. During the stratospheric rise in the price of oil, Chavez’s spending promises reached approximately $194.59 billion – five times Venezuela’s international reserves, according to the Caracas-based Centre for Economic Research.

Chavez has promised everything under the moon, from a 6,000 km gas pipeline through the Amazon to Argentina to some 30 or more refineries around the globe

“Right now there is a lot of talk and Chavez is yakati yakita all the time, I don’t know if those investments are actually happening,” says Roger Tissot, Latin American oil analyst at PFC Energy.

Bringing production up a million barrels a day in five years is complex enough, but in reality to get to 4.25 mbd the government would need to bring on-line not one but two million barrels per day. Venezuela claims it produced 3.2 mbd in 2008, but the average of six secondary sources pegged Venezuela’s production closer to 2.3 mbd. The Venezuelan government calls these figures “absurd” and a conspiracy orchestrated by enemies of the regime, but most believe it’s the government claiming absurd numbers.

“The explanation they used to give me was you know, really irrelevant and a bit stupid,” says Elie Habalian, Venezuela’s 2003 OPEC governor about the government’s numbers. “I used to tell the [Venezuelan oil] minister that those sources can’t lie; they can’t lie because it’s their job, because their revenues depend on how serious they are.”
Subtracting the oil added from pre-Chavez legacy projects, the oil infrastructure is producing half the amount of oil it did a decade ago.

“Venezuela’s production decline since 2000 is worse than Iraq, so think about how bad that is; Iraq had years of sanctions, then war, then civil war and sabotage,” says Pavel Molchanov, an energy analyst at Raymond James in Houston.
Under Chavez, the state-run oil company, Petróleos de Venezuela (PDVSA), has not initiated and completed any major oil or gas projects: refineries, pipelines, liquid natural gas plants, or anything from their unconventional oil reserves.

The plans would get drawn up, companies would be paid to spec it out, but as it goes along the chain in PDVSA it would get shelved before it would be built, because they don’t have the expertise to execute, said a businessman from an oil service company with 35 years of experience working in Venezuela.

“When you are building a refinery, you can lose $50 million in a day with one wrong mistake,” said the businessman who requested anonymity because of his delicate working relationship with PDVSA.

The decline as a result of an inexperienced PDVSA did not come out of nowhere.

In 2002, the oil elites in conjunction with Chavez’s political opponents organized a crippling strike in an attempt to force Chavez from power. It failed. After the strike, Chavez promptly fired half of all PDVSA employees – those who organized against him – 98 per cent of executives and some 18,000 workers.

Afterward, PDVSA dropped to 20,000 employees and then went on a hiring bonanza, buying new assets and starting new divisions, reaching a total employee base today of 80,000 to 100,000 or more. Not all of these employees work on oil however; PDVSA is no longer just an oil company. It now builds ships, runs milk factories and co-ordiantes a nation-wide network of discounted food stores. PDVSA also became a direct manager and funder of social programs and other projects like road building, spending $14 billion directly in 2007.

“That is not the function of an oil industry here or anywhere else in the world – no matter how revolutionary is this government,” says Rafael Quiroz, former director general in the office of the president of PDVSA from 2002-2003, oil economist and author critical of the old PDVSA.

In ten years, the company had a massive contraction and then expansion, while taking on new responsibilities it had no experience handling with new people who had little experience managing. Would any company be anywhere near competent to execute billion dollar mega projects with that kind of a change?

The question is: seven years on, has PDVSA recovered enough to deliver on Venezuela’s production promises? Having a look at a recent expropriation of 74 service companies in the heart of Venezuela’s western oil region, it does not look good.

In May Chavez initiated a policy to control oil service functions traditionally handled by the private sector. He claimed the takeover of the businesses with interests along Lake Maracaibo would reduce costs by 20 per cent and save PDVSA $500 million a year. Most oil analysts at the time predicted not cost savings but production shortfalls.

Overlooking a half dozen piers taken over by Chavez in Ojeda City, Juan Lacorta, the former owner of Gusteca one of the expropriated 74, says the new owners aren’t doing any work.

“Look there is no action, do you see any movement down there,” says Lacorta standing on an office building pointing at the docks below.

The stout, salt-and-pepper mustached man is right. On the lake this weekday morning, the trucks are idle, the boats are moored; there is very little action.

“These cranes you see there, all these cranes are in exactly the same position; all are in the same position they had 90 days ago,” says Lacorta.

Down at the Ojeda city docks, the mark of the new owner is palpable: red the colour of the Bolivarian Revolution is everywhere. The gates, red; the signs, red, the PDVSA flags hoisted above the government’s new prize, those are red too.

Along with the Bolivarian red, came the green-fatigued National Guard. Young guardsmen and women stand watch in front of each gate. Above them is Chavez on a large billboard, saluting and proclaiming: “Proud of the rescue of our docks”.
Fronting the former million-dollar businesses are rows of concrete and tin-roofed dwellings, simple homes for the workers on the docks and fishermen who still trawl the polluted waters of Lake Maracaibo.

In the yard of one of the houses fronting the docks, a worker dressed in a blue jumpsuit says he supports the expropriation of the docks, but since the takeover mismanagement has brought work to a crawl.

“They hire their own relatives, the family of the supervisors, and ‘the people’, they don’t take them into account,” says the worker with 10-years experience working on the lake. “New people have been hired and do not have experience in marine diving on the lake; these people are not trained.”

Up a few blocks from the docks, PDVSA union representative Herman Cortez agrees with the others’ assessment, but he says the greatest problem is the collapse of the health clinics. First the government gave members of Chavez’s party free entrance to the PDVSA clinics, which it could not handle, but now with the addition of the new workers and their families from the expropriated companies, it’s a disaster, said Cortez.

“We are talking about more than 34,000 patients at three clinics that have already collapsed,” says Cortez.
Coming from Cortez, it’s a significant denouncement. For years Cortez stood by his president, but watching the decline of his industry and working conditions, he has become a vocal critic.

“I come to be nine years in the revolution, accompanying the revolution; this revolution is misnamed,” says Cortez. “The expropriation of the contractors, that was thoughtless, that was an assault.”

On the day of the expropriations, Chavez announced an end to the exploitation by the capitalists, captured on camera he promises a casual marine worker social security, but ironically the casual workers have not been migrated over to PDVSA and are out of work.

When oil prices skyrocketed, both Venezuela and Russia took a more aggressive stance towards the private and foreign oil companies. When production decreased in both countries, their responses have been different, says Molchanov, the energy analyst at Raymond James..

“In the case of Chavez, he has become increasingly erratic and belligerent, for example earlier this year seizing some of the oil service providers literally by force and in the case of Russia, they are following a more rational approach and they have begun to make a tactical shift in their stance,” says Molchanov.

In Venezuela, the public sector is a mess, the private sector squeezed and contracts are at the whim of the president; yet the energy resources of the country keep foreign companies and states with deep pockets interested.
The vast unconventional oil reserves in the east is undoubtedly the last great oil prize; the old fields in the west can still be reworked; and, Venezuela – a net importer of natural gas – has the ninth largest reserves in the world. It could be an energy super-power.

Comparably to other oil nations Venezuela is actually quite stable, there is no ethnic strife, no terrorism, the oil unions, though feeling squeezed, have recently voted in a pro-Chavez leader; and, it is a capital-poor country in need of foreign investment.

To add a million barrels per day capacity from the unconventional oil requires about a ten-year lead-time and would require a $30 to 50 billion dollar investment, including the building of four upgrading units, reports Al-Shereida, the oil economist from UCV.

So with project completion dates ten years down the road (twice as long as Venezuela is claiming is needed in their latest production plans) many believe companies and states are taking the long view of things.

“I think a lot of actors are gambling, hoping that it will be the end of Chavez in power,” says Habalian the former OPEC governor.

However, if current trends continue and companies indeed are taking the long view by investing the minimum just to have a foot in the door, the Albertan tar sands can expect no respite in an oil hungry world. Also if there is anything to be learned from Chavez’s rule is don’t wager too much on trying to wait out the big man.

Along the road into Cabimas, another oil town 30 minutes from Ojeda city, is a monument to the gusher that propelled Venezuela onto the international oil scene.

A fountain and a decorative oil pump jack mark the spot of the great oil gusher called Barroso II. Discovered in 1922, it blew 1,500 feet into the air and rained oil for nine straight days. Fittingly today, the monument is crumbling from neglect.