Venezuela Oil and Gas Report Q1 2012

BMI View: Venezuela’s oil sector operates at the extremes. Few, if any, countries can match it in terms of untapped growth potential. The Orinoco heavy oil belt, which covers a vast swath of the country’s heartland, holds tens of billions of barrels of reserves that are only now starting to be developed. At the same time, President Hugo Chavez has implemented some of the most demanding fiscal and operating terms in the world for foreign companies, has repeatedly nationalised assets, severely damaged state-run PdVSA’s ability to manage the oil industry and generally sown a highly volatile and unpredictable operating environment. Indeed, those policies have plagued Venezuela’s oil sector and threaten to derail development of the Orinoco heavy oil belt, which is likely to be the last hope for the country to turn around its flagging oil sector. With that said, our view is that sustained oil prices above US$90/bbl will provide a sufficient financial incentive to sustain much-needed foreign investment in the Orinoco belt. As a result, we are fundamentally bullish about the future oil production, with forecasted growth of 67% over the coming decade pushing production over 4mn b/d, although we note the significant downside risks to this forecast.

Main trends and developments we highlight for Venezuela’s Oil and Gas sector are:

- Venezuela’s oil production is a long way from its peak of around 3.5mn b/d in the late 1990’s. Output in the OPEC member country has fallen steadily from the time Hugo Chavez took power in 1999, as a series of reforms to the sector have proven nothing short of disastrous for the country’s oil sector. State-run PdVSA has lost much of its senior management over the period, and seen much-needed funds diverted to popular social programmes and other Chavez initiatives. Moreover, repeated nationalisations and harsh fiscal terms have chased many foreign investors out of the country.

- Nevertheless, with a number of the country’s Orinoco Belt heavy oil projects taking shape, particularly in the Junín and Carabobo regions, we see a turnaround in production on the horizon. We forecast oil production ticking up from 2.44mn b/d in 2011 to 2.52mn b/d in 2012 and 2.81mn b/d in 2013. From that point, production is forecast to accelerate, with the country potentially breaking 4mn b/d in 2019.

- Key projects to watch over the short-term, as a barometer for project execution success, include the PdVSA/Chevron Carabobo 3 project, the PdVSA/Russia consortium Junín 6 project, the PdVSA/China National Petroleum Corporation (CNPC) Junín 4 project and the PdVSA/PetroVietnam Junín 2 project, all of which are scheduled to start production in 2012.

- Although we are broadly optimistic on oil production growth, the risks to this outlook are myriad and welldocumented. PdVSA, which by regulatory mandate holds a 60% in all Orinoco Belt projects, remains underfunded and understaffed and will rely increasingly on its foreign partners to fund its share of development costs. At the same time, PdVSA is turning to its partners for more funding, the government is imposing more stringent fiscal terms, as evidenced by a 95% windfall tax imposed on all crude sales over US$100/bbl imposed in April 2011. Our primary assumption is that long-term oil prices above US$90/bbl will provide sufficient economic incentive for foreign investors to remain in the country and continue with their projects in spite of the difficult operating environment. Moreover, Chinese companies, which will play a crucial role in developing the Orinoco heavy oil belt, will see much of their production increases shipped to China.

- Indeed, one need not look much further that Venezuela’s gas sector to see the perils of doing business in Venezuela. After years of touting the countries liquefied natural gas (LNG) export potential, the government was forced to radically scale back plans for the gas sector in September 2011. This has led to one of the most significant revisions from last quarter’s report. Whereas we had forecast some small-scale LNG exports starting in 2015, we now see no scope for LNG exports. In fact, without the financial incentive of LNG exports, we see relatively limited investment in gas projects, and as a result we forecast production growth lagging consumption, ensuring that the country continues to rely on its neighbour Colombia for small-scale imports.

- On the corporate side, the industry will continue to be dominated by state-run PdVSA. However, PdVSA will rely on its foreign partners for funding and technical expertise, and those foreign partners will increasingly come from nations ideologically aligned with Chavez’s government. China’s state-run companies CNPC, Sinopec and China National Offshore Oil Corporation (CNOOC) will play a vital role in developing and funding the oil industry after signing a series of deals in late-2010 that sets out plans for as much as US$40bn of investment through 2016. From Russia, state-run Rosneft, as well as privatelyheld TNK-BP and Lukoil will be major players in the Orinoco heavy oil belt. Of the industry majors, Chevron and Eni have the most exposure to Venezuela. Their risk tolerance has given them stakes in largescale projects, but they will be exposed to serious risks to disruption in output and financial returns.

Business Monitor International's Venezuela Oil and Gas Report provides industry professionals and strategists, corporate analysts, oil and gas associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on Venezuela's oil and gas industry.

BMI Industry View
SWOT Analysis
Venezuela Oil and Gas SWOT
Global Energy Market Outlook
Table: Global Oil Consumption (000b/d), 2009-2016
Table: Global Oil Production (000b/d), 2009-2016
Regional Energy Market Outlook
Oil Supply And Demand
Table: Latin America Oil Consumption (000b/d), 2009-2016
Brazil is doing it
Table: Latin America Oil Production (000b/d), 2009-2016
Oil: Downstream
Table: Latin America Oil Refining Capacity (000b/d), 2009-2016
Gas Supply And Demand
Table: Latin America Gas Consumption (bcm), 2009-2016
Table: Latin America Gas Production (bcm), 2009-2016
Liquefied Natural Gas
Table: Latin America LNG Exports (bcm), 2009-2016
Venezuela Energy Market Overview
Upstream Projects Database Table
Industry Forecast Scenario
Venezuela Oil And Gas – Historical Data And Forecasts, 2009-2016
Oil And Gas Reserves
Oil Supply And Demand
Gas Supply And Demand
Liquefied Natural Gas
Refining And Oil Products Trade
Revenues/Import Costs
Oil And Gas Infrastructure
Oil Refineries
Table: Refineries In Venezuela
LNG Terminals
Gas Pipelines
Regional and Country Risk/Reward Ratings
Latin America Region
Composite Scores
Table: Regional Composite Risk/Reward Ratings
Upstream Scores
Table: Regional Upstream Risk/Reward Ratings
Downstream Scores
Table: Regional Downstream Risk/Reward Ratings
Competitive Landscape
Executive Summary
Table: Key Players In Venezuela’s Oil And Gas Sector
Overview/State Role
Venezuela Oil & Gas Report Q1 2
© Business Monitor International Ltd Page
Licensing And Regulation
Government Policy
Licensing Rounds
International Energy Relations
Table: Key Upstream Players
Table: Key Downstream Players
Company Monitor
PdVSA
Market Position
Strategy
Chevron
Market Position
Strategy
Total Venezuela
Market Position
Strategy
Repsol YPF Venezuela
Market Position
Strategy
BP – Summary
Statoil – Summary
Eni – Summary
Petróleo Brasileiro (Petrobras) – Summary
CNPC/Sinopec/CNOOC – Summary
Perenco – Summary
Galp Energia – Summary
BeloVenezolana – Summary
Others – Summary
Former IOC Partners – Summary
Appendix: Oil And Gas Long-Term Forecasts
Regional Oil Demand
Table: Latin America Long-term Oil Consumption (000b/d), 2014-2021
Regional Oil Supply
Table: Latin America Long-term Oil Production (000b/d), 2014-2021
Regional Gas Demand
Table: Latin America Long-Term Gas Consumption (bcm) 2014-2021
Regional Gas Supply
Table: Latin America – Long-Term Gas Production (bcm), 2014-2021
Methodology And Risks To Forecasts
Glossary Of Terms
Oil And Gas Risk/Reward Ratings Methodology
Ratings Overview
Table: BMI’s Oil & Gas Business Environment Ratings – Structure
Indicators
Table: BMI’s Oil & Gas Upstream Ratings – Methodology
Table: BMI’s Oil & Gas Business Environment Downstream Ratings – Methodology
BMI Methodology
How We Generate Our Industry Forecasts
Energy Industry
Venezuela Oil & Gas Report Q1 2
© Business Monitor International Ltd Page
Cross checks
Sources

- PdVSA

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