Venezuelan Crude in the Pits

Executive Summary

Since 2 December 2002 Venezuela has been paralysed by a general strike aimed at forcing early Presidential elections. The action has brought the country’s oil & gas sector to its knees, with implications far beyond Venezuelan shores. As the strike continues without any sign of a lasting solution to the political crisis which sparked the protest, Wood Mackenzie has analysed how the key players in the Venezuelan upstream sector are being affected, and what they are losing with each passing day. We have found that the top ten International Oil Companies in Venezuela are currently losing a combined US$6.7 million/day in net revenue.

Shut-Down

The general strike has reduced exports from the world's fifth largest oil exporter to a trickle. Current national production is thought to be in the region of 400,000 – 600,000 b/d, down from a 2003 forecast of over 3 million b/d. Of this, International Oil Company (IOC) operated fields were expected to contribute a combined annual average of around 980,000 b/d gross production in 2003. However, the strike action has forced PDVSA to declare force majeureon a number of IOC fields, leading to the shutdown of operations and significant cutbacks in production. In light of the crisis, Wood Mackenzie has reviewed the current production of each of the top ten IOCs active in the Venezuelan upstream and has analysed the financial cost to those companies based on a comparison of current output and pre-shutdown 2003 production forecasts.

Based on a comparison of current output and Wood Mackenzie’s (pre-shutdown) production forecasts and economic analysis for 2003, the top ten IOCs in Venezuela are currently losing a combined US$6.7 million/day in net revenue (after royalty, but before tax and costs).

  • The most exposed company is TotalFinaElf, which – with the loss of 74,650 b/d net production through a 47% interest in Sincor and a 55% interest in Jusepín – is currently losing around US$1.4 million/day as a result of the strike. Sincor, along with Venezuela’s other Strategic Association Contracts (Cerro Negro, Hamaca and Petrozuata), has been shut-in since mid-December and is currently costing TFE the loss of 72,850 b/d net production. Output from the TFE operated Jusepín field was reduced to zero in mid-December, pushing average production for the month down to 8,772 b/d. However, the field is currently producing around 33,000 b/d, only 3,000 b/d shy of Wood Mackenzie’s forecast average for 2003.
  • With a 50.10% interest in Petrozuata and a 40% interest in Hamaca, ConocoPhillips is currently losing an estimated US$1 million/day as a result of the crisis. Both projects have been shut-in since mid-December, resulting in a net production loss of 53,000 b/d and 20,000 b/d respectively.
  • ENI has been hit hard by the crisis. The Dación field, which it operates with a 100% interest, has been shut-in since 17 December, with the loss of 84,200 b/d net production. While output remains at zero, ENI is losing an estimated US$0.87 million/day.
  • ExxonMobil is currently losing 47,700 b/d net production through its 41.65% interest in the Cerro Negro Strategic Association. The company also has a 25% interest in the Repsol-YPF operated Quiamare-La Ceiba field, which has been shut-in since 18 December with the loss of 4,000 b/d net. Wood Mackenzie estimates that ExxonMobil is currently losing around US$0.77 million/day as a result of the strike.
  • As Venezuela’s largest producing IOC, ChevronTexaco has been relatively shielded from the effects of the crisis in terms of production cutbacks. Up until recently, output from the Boscán field, in which ChevronTexaco has a 98% operated interest, was running at around 95,000 b/d, (only 10,000 b/d shy of Wood Mackenzie’s forecast average for 2003). However, current net production from Boscán is around 45,000 b/d, with the heavy oil being stored in pits rather than exported. ChevronTexaco also has a 27% operated interest in LL-652, currently producing at around 65% of capacity – around 2,700 b/d net to ChevronTexaco. Wood Mackenzie estimates that ChevronTexaco is currently losing around US$0.64 million/day as a result of the strike.
  • Current production losses of 45,000 b/d from its 100% operated interest in Urdaneta Oeste are estimated to be costing Shell around US$0.53 million/day. The field is currently producing around 10,000 b/d, having been shut-in completely between 8 December and 1 January.
  • Statoil is exposed to the crisis through a 15% interest in Sincor and a 27% interest in LL-652. Net production loss is currently around 24,900 b/d, costing Statoil an estimated US$0.47 million/day. Latin America Upstream Insights January 2003
  • Repsol-YPF net production is currently around 20,300 b/d. Production losses of 25,200 b/d are currently costing Repsol-YPF an estimated US$0.38 million/day. The Mene Grande field, which Repsol-YPF operates with a 100% interest, was completely shut-in from 18 December to 1 January. The field is currently producing a stable 8,500 b/d, (16,500 b/d shy of Wood Mackenzie’s forecast average for 2003). The 100% operated Guárico Oeste field and 50% operated Quiamare-La Ceiba field have both been shut-in since mid December, resulting in a current combined net production loss of 8,700 b/d. The Quiriquire gas-condensate field, which Repsol-YPF operates with a 100% interest, is at full production (300 mmcfd), supplying much needed gas to PDVSA for re-injection. As such, the field is also producing around 11,800 b/d of liquids.
  • BP is exposed to the crisis through a 45% interest in Jusepín, a 36% interest in LL-652, a 60% interest in Boquerón, and a 100% interest in DZO. Boquerón and DZO are thought to be producing at around 50% of capacity. Total net loss to BP is currently estimated at around 25,500 b/d, equivalent to around US$0.31 million/day.
  • PetroCanada is exposed to the crisis through a 16.7% interest in Cerro Negro. Net production loss is 17,500 b/d, costing PetroCanada an estimated US$0.29 million/day.
  • The Longer Term Cost to the Upstream Sector

    By the governments’ own admission, under revised PDVSA production targets the effects of the strike will cut national average annual production by 23% in 2003 – a disaster for a country that relies on oil for around 25% of GDP, 80% of total exports and 50% of government revenues. However, these production figures are based on an assumed speedy resolution to the political stalemate and an optimistic view on the resumption of operations: In reality, production is likely to average much less than 2.3 million b/d in 2003.

    Most of the IOC fields were shutdown in a controlled manner. However, it is still possible that some reservoirs may have been damaged and that facilities on heavier or more waxy fields may require significant cleaning and wells may require stimulation. In addition to the shutdown of operations, a shortage of gas is limiting re-injection for enhanced oil recovery – critical for pressure maintenance and a high proportion of Venezuelan output. Only upon the resumption of operations will the full implications for both near-term rehabilitation and longer-term reservoir management be known. As an optimistic case, (assuming minimal long-term damage to fields and facilities), it is likely to take at least one or two months to ramp up production of light and medium crude from Marginal Fields to anything approaching normal levels. Production on Dación, for example, is expected to take 30 days to reach 20,000 b/d from re-start and over two months to reach 60,000 b/d.

    Perhaps surprisingly, the four Strategic Association projects are capable of a quick return to pre-shutdown output. The fields were shut-in in a controlled manner and, theoretically, upstream operations could be restarted quickly and easily: reservoir pressure and temperature is not a major problem, and the production capacity of extended reach wells (aided by pumps and the injection of diluent), is well in excess of requirements. Similarly, the ‘downstream’ part of the projects will recover equally as quickly: syncrude production at the upgrader can be ramped up and stabilised at pre-shutdown levels within two weeks.

    Conventional heavy oil fields, such as Boscán, will perhaps suffer the worst long term problems. Pressure maintenance and heat retention is key on this field. As such, Boscán has been producing throughout the crisis in order to keep the oil above pour point and avoid heat loss from facilities. However, with half of the wells on the field currently shut-in and produced oil being stored in pits, it is possible that output will never recover to pre-shutdown levels.

    Where Now?

    Whilst it is possible to quantify daily losses to the IOCs, it is more difficult to measure the cost of the strike to the biggest loser of all – PDVSA. Moreover, it is impossible to predict the damage that is being done to the future of the Venezuelan upstream sector as a whole, both technically and in terms of confidence. How the Venezuelan upstream sector emerges from the other side of this crisis will ultimately be determined by the way in which the current political situation is resolved – surely the biggest and most important uncertainty of them all.

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    This report is published by, and remains the copyright of, Wood Mackenzie Limited ("Wood Mackenzie"). This report is provided to clients of Wood Mackenzie under the terms of subscription agreements entered into between Wood Mackenzie and its clients and use of this report is governed by the terms and conditions of such subscription agreements. Wood Mackenzie makes no warranties or representation about the accuracy or completeness of the data contained in this report. No warranty or representation is given in respect of the functionality or compatibility of this report with any machine, equipment or other software. Nothing contained in this report constitutes an offer to buy or sell securities and nor does it constitute advice in relation to the buying or selling of investments. None of Wood Mackenzie's products provide a comprehensive analysis of the financial position, assets and liabilities, profits or losses and prospects of any company or entity and nothing in any such product should be taken as comment or implication regarding the relative value of the securities of any company or entity.

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