Caracas Chronicles

I want to convince you that the way out of Venezuela’s current economic impasse transits straight through a Natural Gas field. But first, I just want to say: I get it. I understand that writing about long term energy policy at a time when people can’t find Harina PAN in the shops can look totally ridiculous. Painfully desubicado. Nobody has time for the long-term when people are rioting for food, right?

 
One reason people at the Mercado de Coche can’t find food right now is that some of the dollars that should have been used to import food are being diverted, instead, to buying light crude abroad.

Wrong. And it’s important to understand why it’s wrong. It’s wrong because one reason people at the Mercado de Coche can’t find food right now is that some of the dollars that should have been used to import food are being diverted, instead, to buying light crude abroad. That’s an outrage with a logic, a logic we could break relatively quickly.

How?

By centering our energy strategy on Natural Gas and the condensate that come out with it.

The case for natural-gas and condensate isn’t just about the far-off future.  A Natural Gas and Condensate-centered strategy is one of those rare policy areas where what you need to do to meet today’s crisis and what you need to do in terms of long-term energy policy coincide.

The Trouble with the Faja

First off, you have to understand how Venezuela got into this bizarre, coal-to-Newcastle position of importing crude from far off places like Algeria, Nigeria, Russia, Angola, and even, more recently, from the Great Satan itself: the USA.

Why do we do that? Because three out of every four barrels under the ground in Venezuela are what is euphemistically known as “extra heavy oil”.  And of the 2.4 million barrels per day currently produced in Venezuela, around half come from the Orinoco Tar Belt, better known as the Faja.  So the bulk of Venezuela’s reserves and the majority of our production are made up of extra heavy oil.

 
If you pour a drop of WTI and scoop a bit of Faja crude into a glass of water, the WTI will float elegantly to the surface while the Faja gunk will settle in the bottom of the glass.

“Heavy” and “light”, by the way, are ways of describing oil’s density. In technical terms, density is measured in the industry in API degrees.  The more API degrees, the lighter the crude.  WTI – a very light crude – is approximately 40°, while water is 10° and the Faja extra heavy is around 8°. That means if you put a drop of WTI and scoop a bit of Faja crude into a glass of water, the WTI will float elegantly to the surface while the Faja gunk will settle in the bottom of the glass. This density explains why Faja crudes are more challenging to transport and much more expensive to “digest” in refineries than normal oil.

Just moving Faja oil is a challenge: this gunk so thick and goopy it won’t even flow through a pipeline unless you mix it with something lighter first. So just to move it from Southern Guárico state to the seashore, you’re going to need to mix it with something. You’re going to have to dilute it.

The usual choice of diluent is light crude, but because our light crude production is also down and out, we’re stuck importing light oil to mix the Faja stuff with. That’s why, rather than importing food and medicines; Venezuela is now devoting some of the desperately scarce dollars it has left to buying oil: a total absurdity. And it’ll keep getting worse, now that PDVSA’s production is now declining at a terrifying rate.

 
As production of light crudes in Lake Maracaibo in the West and in Anzoategui and Monagas in the East continues to decline, the need for something to dilute the extra heavy Faja crude can only keep rising.

As production of light crudes in Lake Maracaibo in the West and in Anzoategui and Monagas in the East continues to decline, the need for something to dilute the extra heavy Faja crude can only keep rising.  It’s a vicious circle, at a time when dollars for imports are more needed than ever by a starving and ailing society.

Managing Venezuela’s increasingly heavy mix of crude production is a long term problem, and I’m not here to peddle easy answers.  The consensus is that building more Upgraders —big facilities able to pressure cook extra-heavy crude into just “synthetic” crude— like the ones built in Jose in the late 90s, is unrealistic given the intense capital requirements and the time required to build them.

Increasing the processing capacity of Venezuela’s existing refineries so they’re able to process extra heavy crudes and export refined products faces similar problems: that also takes enormous capital and time, not to mention the capability required to safely operate the refineries. We don’t have the money, or the time, or the expertise to do it that way.  

The simplest and fastest solution would be to increase production of light oil that serve as diluent for the extra heavy oil. If you just mix in the better crude from, say, El Furrial with the gunky crude from the Faja you can sustain production and export levels without sending a fat check to Algeria once a month. But to really increase light oil production you’d need to change Venezuela’s oil law, a fraught and politically explosive detour that, again we don’t have time for.

Here, a little detour into Venezuela’s hydrocarbons legal and fiscal frameworks becomes inevitable.

It’s not just a good idea, it’s the law

The key thing to understand is that existing law treats oil and gas differently. The oil law requires the State (through PDVSA) to keep a minimum stake of 50% and attracts higher government take (i.e., the proportion of the free cash flow that the State collects through taxes of all sorts).  The gas law, in contrast, gives the State the option to participate (not the obligation) and is more competitive tax wise than the oil law.

 
There is zero chance it can afford its share of the enormous investments it would take to raise light crude production significantly given the fiscal terms on offer.

This distinction is especially relevant now, because the State is virtually broke. There is zero chance it can afford its share of the enormous investments it would take to raise light crude production significantly given the fiscal terms on offer. The stock of capital available for this kind of investment is limited at current prices, and the oil majors face much more fiscally attractive opportunities elsewhere, from Brazil and Mexico to Colombia, the USA and Canada.  

One fascinating footnote to this debate is that the gas law (in Art. 45) allows you to apply its more advantageous terms to oilfields that are deemed sub-commercial under the oil law.

The final piece of the puzzle is a fact few Venezuelans know and whose strategic relevance even fewer understand: Venezuela holds the 8th largest gas reserves in the world and the biggest in South America and the Caribbean.  Granted, most of Venezuela’s gas reserves are of associated gas, that is, is gas that is associated with oil. Associated gas is produced alongside oil as it comes out of the ground, so for legal and fiscal purposes it comes under the oil law.

But not all our gas is associated. We also have substantial reserves of free gas, mostly lying untouched under the sea off of Zulia, Sucre and Delta Amacuro states.  For example, the Mariscal Sucre project (composed of the Rio Caribe, Mejillones, Patao and Dragon fields) and the Loran field are close to the border with Trinidad, and the Perla field is close to the border with Colombia. (Perla, by the way, is the only offshore gas discovery currently production, thanks to the efforts of the private initiative of Italy’s Eni and Spain’s Repsol, each holding 50%).

 
Each one of Venezuela’s discovered free gas fields has reserves equivalent to the all of Trinidad & Tobago, the largest gas producer in the neighborhood.

We tend to overlook these Free Gas fields, because the enormous ocean of oil under the Faja draws away all of our attention. But they’re not small: each of these discovered free gas fields has reserves equivalent to all of Trinidad & Tobago, the largest gas producer in the neighborhood. If Venezuela’s free gas was in any other country, it would be a national obsession.

And here is where it all comes together: some of these free gas fields contain substantial reserves of natural-gas condensate – liquid hydrocarbons that come out together with the gas. Sometimes known as ultra light crudes, natural-gas condensate comes in at 40° to 50° API. They’re the ideal diluents to enable production of extra heavy oil from the Faja.

Condensate Squares the Circle

So let’s look at this all again. We have:

1. Huge reserves of extra heavy crude we can’t exploit without extra light crude to mix it with,  
2. Substantial reserves of gas and associated condensate we’re just mostly ignoring at the moment, and;
3. A legal framework that would allow you to mobilize large international and national private investments for gas and condensate without even needing to change the existing laws.

The answer, in other words, is staring us in the face: Venezuela needs to fast track development of offshore gas fields (for example, by exporting the gas for liquefaction in Trinidad & Tobago rather than building costly LNG plants of our own) rich in condensate, such as Rio Caribe, as well as of marginal light oil fields under the gas law’s article 45.

 
We could do this now, tomorrow, without changing any laws, if we had the political will to let the private sector play the leading key role.

We could do this now, tomorrow, without changing any laws, if we had the political will to let the private sector play the leading key role. That’s not as improbable as it sounds – Perla shows that even Chávez was willing to allow this to happen in the gas industry when the government doesn’t have the money to participate.

Going big into gas and condensate wouldn’t just clear the diluent bottleneck: it would put money into the Venezuelan State from the start, in the form of taxes (34% of corporate income tax rate) and royalties (20% of produced hydrocarbons).  And by increasing gas production Venezuela could also feed its gas fired power generation plants to help reduce the prevalent power shortages and substitute the diesel that is burnt for power generation rather than exported, also increasing export revenues.  Instead of the Faja’s endless thirst for diluent sucking up scarce dollars by diverting them to light crude imports, it could be generating an excedent, both in terms of electric energy, taxes and even gas exports to our neighbours!

Because Venezuela is in such dire straits right now, this post focused on the short-term. But there are excellent long-term reasons to focus on natural gas as well: that’s how you strategically position Venezuela for the unstoppable energy transition brought on by climate change and technology. I’ll write more about that in some other post —I’m obsessed with this subject, in case you hadn’t noticed— but for now, let’s be clear: the case for a gas-and-condensate-focused strategy is enormously compelling not just in the long term, but in the mid and short-term as well.