Caracas Chronicles

Here’s a factoid you’d do well to squirrel away: through a crazy quirk of geology, there’s more recoverable oil under Southern Guárico, Anzoátegui and Monagas States than anywhere else in the world.

296 billion barrels or so.

At current prices, that’s worth something in the order of $25 trillion: a crazy number, almost twice the US’s yearly GDP. It works out to $860,000 for every man woman and child in the country.

It’s a transcendent story – world-almanac worthy in some ways.

From a Venezuelan political economy point of view, it’s really the only story that will matter for the next generation or so. What happens to that oil, usually called the Orinoco Tar Belt or Faja, and what happens to the impossible riches we’ll (hopefully) get in return for it, will be a determining factor in the lives of Venezuelans for decades to come.

Back in 2005 Chávez had one look at this ocean of money and decided to … drill, baby, drill! And who could blame him? Announcing a kind of Red Apertura to bring in foreign capital to help develop the faja, he vowed to vastly increase Venezuela’s production capacity within a few years.

So how’s that all going?

Well, the good news is that at least one Red Apertura project is now “shovel ready”. There’s just one catch: it’s in China!

That’s right, the only Orinoco Tar Belt project that’s actually ready to start work (i.e., project finance in place, basic engineering worked out, permits cleared, work ready to start this year) is the construction of a massive new refinery in Guandong province.

As for the rest, well, it’s a funny story.

Just looking at PDVSA’s Apertura map, you’d think there are dozens of deals already in place and just rearing to go.

In fact, the map glosses over an extremely heterogenous picture, showing projects that are basically cancelled (hello, Junin 10!) alongside others where broad Memorandums of Understanding (MoUs) have been published but detailed terms are still being haggled over, and others still that really are ready to go as soon as a project finance deal is in place.

Take Carabobo 1 and Carabobo 3. Supposedly, PDVSA has put together two big consortia that are rearing to run, ready to pump as much as 240,000 b/d out of each block within a few years.

The catch? They haven’t actually worked out such small details as where the tar is supposed to be processed after it’s out of the ground. PDVSA’s Management Report 2010 treats it as a settled fact that it will go to two new high tech upgraders to be built in the town of Soledad, in southern Guárico. But the foreign partners have never agreed to that and continue to grumble that it’s lunacy to try to build an upgrader in a tiny town in the middle of nowhere that has neither the roads, the electrical grid, the sewers, or even the population to sustain it.

Operational disputes of this kind seem to plague the Red Apertura projects. Take Junin 5. Italy’s ENI has signed on to develop that field together with PDVSA, and has a second agreement to build a refinery in Jose to handle the tar. But the refinery deal is supposed to have capacity for 350,000 b/d, and Junin 5 is only meant to pump out 240,000 b/d. The remainder is supposed to come from “somewhere else” in the region, but PDVSA is exquisitely vague on where, and ENI has no clear indication of whether it will be able to get those supplies.

Serious as all that is, these kinds of operational problems pale in comparison to the real bottleneck these projects face: where’s the money gonna come from?

It’s now six years since the Red Apertura was announced, and at this point the project finance is worked out for a grand total of one deal: ENI’s Junin 5 block.

For the rest of the Red Apertura, what you have is a bunch of flighty MoUs without financing deals in place. Obviously work can’t start until you know how you’re going to pay for it. But project finance is extremely hard to nail down here because PDVSA’s borrowing costs are so astronomical now that nobody sane would lend to them on the scale needed.

The result is one of those Chávez-era impossibilities come true: PDVSA’s honest-to-goodness negotiating position now is that for much of the Red Apertura, PDVSA will retain 60% of each joint venture’s ownership but will put up none of the start-up capital, because it can’t.

Now, I’m no MBA. What I understand about finance fits on the small-print on the back of my credit card contract. But I do know this – that’s batshit insane.

Remarkably, though, that’s what ENI signed up for in Junin 5. The Italians are basically spotting PDVSA the $2 billion it was supposed to put up in development costs. But as to the exact conditions of the deal? Well, those aren’t published, of course.

I guess the oil industry is so profitable a deal like that can be made to work, but it’s rough going, and it makes it impossible to develop the region at anything like the pace the government keeps saying it wants to achieve. I mean, it’s taken six years to finance a single project to pump 240,000 b/d out of the richest untapped oil reserve in the world. And, keep in mind, even the ENI project isn’t really shovel-ready: none of the supporting infrastructure in roads, bridges, electrical grid, etc. that PDVSA was supposed to build are in place.

So now are you starting to see why Venezuela keeps putting back its production targets?

The oil is there, but the conditions – both financial and physical – are so far from ready for prime time that getting foreigners to risk money in the Faja is one tough slog.

This way of managing the Faja is storing up an enormous amount of future trouble in terms of Venezuela relationship with China, our soon-to-be economic overlords. Because, remember, within a few years, the Chinese will have built their big refinery in Guangdong, and the Venezuelan side is going to be late. Very late. The shiny new $8.6 billion piece of kit is going to just sit there.

Except, don’t forget, China’s already paid for that oil! That’s where the Fondo Chino money comes from. If Venezuela doesn’t ship it, we’re looking at defaulting on bilateral debt with a country that will soon be as globally economically dominant as the U.S. was in the early 70s.

Something about this dynamic puts me in mind of that interview Moises Naím gave Mirtha Rivero a few months back. You remember, the one where he talked about the panic attacks he’d get as a minister for CAP II due to,

that never-ending feeling that all the time there was a atomic bomb waiting for the minister to disarm. It’s like you got there, sat at your desk, and they brought you a box that said “there is a atomic bomb here, you have to disarm it because it’s going to explode exactly at such and such a time.” And while you were trying to figure out how to disable it, they’d bring in another bomb. And another one, and another one. And the pace at which the atomic bombs that needed to be disarmed immediately were coming in was much higher than our ability to disarm them…

That Chinese Refinery is an atomic bomb in the making. Pity the poor Capriles minister who gets called in to deal with it.