Caracas Chronicles

What is this, some parlor game? Not at all. This is the launching point for a serious talk about energy strategy. How?

Vamos por partes. 

Hugo Chávez

No, not the galactic comandante. The Hugo Chávez I’m talking about is the name some over-eager PDVSA official gave the Faja del Orinoco after the reserves certification known as Proyecto Magna Reserva.  Despite the recent challenges to these reserve numbers from the Norwegian group Rystad Energy, I know first-hand that hundreds of wells were drilled and the reserves there are enormous.  Regardless of what the exact number is, a big proportion of Venezuela’s reserves are in the Faja.  Let’s assume for now that of the 300 billion barrels in reserves, ¾ are in the Faja.

Oil reserves calculations assume a 20% recovery factor: of every ten barrels underground, you assume just two will actually get pumped out.  Such a recovery factor assumes you’ll use enhanced oil recovery techniques, like heating the reservoir to reduce the oil’s viscosity and maximize its recovery.  Even though this technology (e.g. Steam Assisted Gravity Drainage) has been successfully tested in Canada, in Venezuela we still produce the Faja cold: we drill a well and the oil flows naturally to the surface.  With cold production the recovery factor is less than 10%.

Maximizing recovery, removing contaminants and reducing the viscosity of extra heavy oil from the Faja is an energy-intensive process.  Venezuela has experience upgrading extra heavy oil thanks to the apertura of the oil industry in the 90s. Back then, four extra heavy oil upgrading projects were built in the Jose Complex with private participation, together they pump some 500 thousand barrels of upgraded “synthetic crude” per day.  

These days, those kinds of upgraders have fallen from favor: they’re just too expensive to set up. Current practice favors just mixing extra-heavy crudes with lighter crudes, to produce a more refinable blend.

If Venezuela wants to increase its oil production from the Faja, it will need diluent to transport and sell diluted crude oil as well as sources of energy to maximize recovery and upgrading capacity.

Mariscal Sucre

The next character is Mariscal Sucre.  I am not referring to the patriot born in 1795 but to the offshore natural gas field discovered in 1980 that holds some 12 trillion cubic feet (Tcf) of gas and 150 million barrels of condensates (condensates are ultra-light liquid hydrocarbons with 40 to 60 degrees API that surface together with the natural gas).  

To put it in perspective, Mariscal Sucre’s 12 Tcf could cover Venezuela’s entire natural gas demand for five years. They’re also about as much gas as the entire proven reserves of Trinidad & Tobago – one of the region’s greatest natural gas producers, and a country whose economy is based on exports of Liquefied Natural Gas (LNG), Methanol and Ammonia – three downstream derivatives from natural gas.

Mariscal Sucre was the biggest non-associated gas offshore field discovery in Venezuela’s history.  Free gas —gas that’s not associated with oil production— is useful because its production can be managed to match with the specific demand for gas, rather than being left to the vagaries of the oil market.  

That matters when you need a predictable supply: it opens up all kinds of downstream integration possibilities such as power generation, petrochemicals (like Methanol, Ammonia and Urea) and Liquified Natural Gas (LNG).  Since Mariscal Sucre, other material offshore free gas discoveries have been made in Venezuela such as the big Loran and Perla fields.

Gas fields generally also contain condensates that can be used as light end feedstock for refineries or diluent to transport extra heavy oil. That’s what they do in Canada.

Mariscal Sucre’s condensates could clear the production bottlenecks that have plagued Faja production now that the 90’s upgraders are running at maximum capacity. Light natural crudes to use as diluent are in short supply in Venezuela (given the sustained decline in production of medium-light conventional crudes from Western and Eastern Venezuela) and financial pressures limit PDVSA ability to import light crudes.

Finally, Mariscal Sucre, just like Loran and Perla, sit on top or close to an international border next to markets that value gas at international prices.  Imagine the export options this creates, particularly in the current context where Venezuela is in dire need of hard currency!  Its a matter of developing and piping the across the border, that’s all.

Venezuela holds some 200 Tcf of gas reserves, the eighth in the world and the first in Latin America and the Caribbean.  Even though <20% of these reserves are of free gas and mostly offshore (some 35 Tcf), they are still massive and a clear indicator of the huge unexplored gas potential that lies mostly offshore.

Elon Musk

Finally, we come to Elon Musk, the legendary Sillicon Valley entrepreneur. Musk is the creative genius behind companies such as SpaceX, Paypal and —most importantly, for us— Solar City and Tesla.  

Tesla, founded in 2003, is one of the largest producers of Electric Vehicles (EVs) in the world.  Tesla has managed to develop EVs just as fast and powerful as a Porsche or Corvette.  Today there are one billion internal combustion vehicles in the world, alongside a paltry 1.3 million are EVs.  

But that’s changing.  

In March of 2016 Tesla announced its Model 3: a $35,000 family sedan, price competitive with a BMW 3 series.  In one week Tesla received 300,000 orders for a car that doesn’t even exist yet!  

In the next decade the expectation is that EV technology will continue to advance until the cost of ownership of EVs is below that of an petrol-powered car.  The latest forecast from Bloomberg projects that by 2040, 35% of new car sales globally will be EVs.  But we don’t need to wait so long:  today in Norway, one in four cars are already EVs and in Japan there are more EV charging stations (40 thousand) than gasoline filling stations (36 thousand)!

The electricity to charge EVs increasingly comes from cleaner sources of energy, either renewable (such as hydro, wind or solar), nuclear and natural gas (which produces half of the carbon emissions of oil or coal).  Actually Musk wants to go further and not use fossil fuels at all by combining his solar homes (SolarCity) with his electric cars (Tesla) -that might be an extreme scenario for this century, but who knows?!

As a consequence, coal and oil fired power generation will shrink, and even more after global policy agreements have been reached to limit the use of fossil fuels such as COP21 in Paris last year. All on the back of a more environmentally conscious society.

The use of natural gas for power generation will only increase. In an EV world, that means natural gas will compete head on with oil as transportation fuel.  This massive shift in the energy space, partly fueled by the US Shale revolution, explains why demand for natural gas is expected to grow at twice the rate of oil. In fact, demand for oil is projected to peak by year 2030, while there’s no peak in sight for gas.  

Today, Venezuela plays no role whatsoever in this unstoppable global energy transition. The good news is that we have the gas resources to hop on the bandwagon. What we lack is the vision.

Bringing it all Together

What does this all mean for us? Venezuela is recognized as an important global oil producer and resource holder. 90% of oil is used for transportation. Venezuela effectively exports mobility to the world. That is what we effectively do today: move cars, planes, motorbikes, trucks and ships.

But there’s an energy revolution afoot towards lower carbon footprint forms of energy use, and natural gas plays a big role in that revolution.

For Venezuela, the implications are enormous.  

First, we need to lean on the Faja and our other conventional crude oil now. It makes no sense to save it for a future that will never be.  As it is, most of our oil reserves will never see the light of day.  To increase production from the Faja and sustain mature conventional oil fields we will need a lot of condensates and natural respectively to maximize extraction.  Natural gas is a lever to drive our oil industry in the short and medium term.

The more important implication is longer term.  If we don’t participate seriously in the natural gas business, Venezuela will be gradually marginalized in the global energy arena as oil loses its relevance over time.  

Venezuela needs an energy strategy aimed at securing our place through the global transition towards more sustainable energy use. I’m thinking of my kids and my grandkids when I say we have to explore and develop Venezuela’s gigantic gas potential.

That is what these three characters can teach us about our future, a new vision for our national hydrocarbon industry, in which we urgently shift the emphasis and direction towards natural gas as a central axis of the Venezuelan hydrocarbon strategy.