Caracas Chronicles

Original art by @modográfico

“The Stone Age did not end for lack of stone,
and the Oil Age will end long before the world runs out of oil.”
– Sheikh Ahmed Zaki Yamani

For decades now, Venezuelan oil watchers have been mesmerized by the Faja, the Orinoco Oil Belt, an extra-heavy oil reservoir with riches on a mind-boggling scale. But what if that single-minded obsession is nothing but a strategic blunder?

That’s part of the argument Leopoldo López and Gustavo Baquero make in their book, Venezuela Energética, aiming not only to raise Venezuela’s production to 5 million barrels per day by 2035, but making half of that production from conventional crudes, not Faja extra-heavies.

It’s an ambitious goal and, I think, the right one.

Shifting emphasis back onto conventional crudes would represent a complete reversal of a thirty year trend. See, after inheriting the five Faja projects from the apertura petrolera of the 90s, chavismo focused on further developing the Oil Belt. The grandiloquently named Magna Reserva project saw drilling on a massive scale to prove Venezuela’s position as holder of the greatest oil reserves in the world.

The goal is not only to raise Venezuela’s production to 5 million barrels per day by 2035, but to make half of that production from conventional crudes, not Faja extra-heavies.  

This bit of vanity exploration makes little economic sense nowadays. The cost associated with developing new Faja reserves are twice the current rates delivered through conventional production. New Faja projects would require oil prices above $70 per barrel to justify the massive upstream and upgrading investments required, according to IHS Markit. Of course, the licensing round generated juicy bid bonuses for the government and diversified the geopolitics involved, with none of the blocks awarded going beyond early production schemes.

When you combine the economic challenges of developing new Faja projects with the ongoing global energy revolution forecasting peak demand in 10 to 20 years, it isn’t too hard to see that much of Venezuela’s oil resources will stay underground.

A strategic irrelevance

The Faja was strategically relevant back when there was no end in sight for oil demand and we thought conventional oil was going to run out. That’s no longer the case; according to BP’s Energy Outlook, proven oil reserves globally have more than doubled over the past 35 years (for every barrel of oil consumed, over two new barrels have been discovered). Technically recoverable oil – a broader category aiming to measure resources that could be extracted with today’s technology – is estimated to be around 2.6 trillion barrels. Around 65% of those resources are located in the Middle East, the former Soviet Union and North America.

This abundance of resources contrasts with slowing growth of demand. Cumulative oil demand for 2035 is expected to be around 0.7 trillion barrels – significatively less than the recoverable oil in the Middle East alone. Looking further out to 2050, cumulative global oil demand amounts to less than half of today’s technically recoverable oil resources. In other words, the world has more oil than it will ever need. That means that only the “best” barrels will see the sun.

From a Venezuelan point of view, this means the Orinoco Oil Belt is no longer the be-all, end-all of production growth. In fact, López and Baquero argue that, rather than one país petrolero, we need to become three: a conventional oil powerhouse, an extra-heavy heavyweight and a natural gas hub.

López and Baquero argue that, rather than one país petrolero, we need to become three: a conventional oil powerhouse, an extra-heavy heavyweight and a natural gas hub.

Personally, I’ve long been an advocate of pivoting to natural gas, and López and Baquero share this view, discussing it mostly in terms of decarbonizing the domestic electric grid. In terms of energy exports, they want to shift emphasis onto conventional crudes, those that, unlike the extra-heavy gunk in the Faja, don’t need to be upgraded or “cooked.” They are lighter and more fluid than the gooey stuff on the Belt, making it easier to produce and refine, more profitable to sell, and much less carbon-intensive than extra-heavies.

Because our total reserves are so massive and Faja-centric, we often forget our conventional reserves are huge too; Venezuela has almost as much conventional crude as the U.S. (55 billion), over twice as much as Brazil’s overall reserves (16 billion) and almost four times of those  of Mexico (11 billion). Even if we had zero extra-heavy crude, Venezuela could still be a major oil producer on the back of conventional oil reserves alone.

Why do conventional crudes matter?

In a world where demand for oil is running out faster than oil supply, the real question Venezuela faces is prioritization: which oil to pump out and which oil to leave under the ground. A no-brainer: you want the easier-to-produce stuff, more profitable and less polluting than the energy intensive Faja oil.

And there’s little exploration risk with conventional oil. We know where most of it lies, some is discovered but undeveloped and more can be produced through Enhanced Oil Recovery techniques.

But there’s more. Conventional crude production can also help maximize output from the Faja. Why? Because Faja crude is so viscous and dense that it doesn’t flow naturally through a pipeline. To transport it, you have to mix it with lighter hydrocarbons. Focusing on conventional would put an end to our constant investment in expensive new upgraders to render our oil marketable; and you know what makes even better diluents? The extra-light liquids – also known as condensates – associated with Natural Gas production. We’re three oil countries, not just one!

Venezuela Energética gets the strategy right. Our obsession with the Faja is outdated; oil seemed scarce and new discoveries were vital, but the world has moved on. The future of the oil industry will center on advantaged barrels, the conventional ones, and López and Baquero see it clearly, a sober perspective on exploiting our potential.