Venezuela Tar Sands

Strategic Significance

Discovered in 1979, Venezuela's Orinoco tar sands hold an estimated 2.26 trillion barrels of oil but development remains in an early stage due to the country's political turmoil, insufficient infrastructure, and insufficient foreign investment. Using current technology the Venezuelan government estimates there are 316 billion recoverable barrels of oil, according to Bank Track. More recently, the US Geological Survey placed the mean estimate of recoverable resources from Venezuela's heavy oil in the Orinoco Oil Belt at 513 billion barrels. The USGS did not attempt to provide an estimate of how much of this quantity would be economically recoverable; that portion will vary depending on the global price of oil.

Venezuela's tar sands oil, also known as heavy oil, is in a position to play a major role in the global market because of the fact that it complements the light sweet that dominates the new production unleashed by the US shale oil boom. Since the US's own refineries are more suited to heavy oil, the US is expected to direct its production toward Europe, where refineries are better suited to light sweet crude. This opens up the demand by the US for either Venezuelan or Canadian hevay oil.

CO2 Emissions

The development of the tar sands would dramatically increase global GHG emissions, with estimates of up to 84 MT CO2e per year. Another estimate is 1.84 million barrels per day of surface extraction, and 2.96 million barrels per day of in situ extraction by 2040. Applied to a 40-year period, that amounts to 70 billion barrels, or 30.10 billion tonnes of carbon dioxide, based on .43 metric tonnes of CO2 per barrel of oil or natural gas liquids, and 0.0550 metric tonnes of CO2 per thousand cubic feet of natural gas. Full extraction of the recoverable reserves would result in the release of 221 billion tonnes of CO2, based on the US EIA median estimate of 513 billion barrels of recoverable oil (see above) and the US EPA conversion factor of .43 metric tonnes of CO2 per barrel of oil.

International Pressure on Venezuela

Since nationalization of its oil industry, Venezuela has come under growing international pressure. In November 2017, the European Union prohibited arms sales, set up a system for freezing assets and announced new travel restrictions on some government officials. In February 2018, the United States banned exports of heavy naphtha to Venezuela, a key diluent needed in oil production.

Companies Involved

After nationalization of the Orinoco Belt in 2007, all projects are majority-controlled by Venezuela's national oil company, Petróleos de Venezuela (PDVSA).

After the decree, ExxonMobil, ConocoPhillips, and PetroCanada abandoned their involvement in the country and initiated lawsuits to recover the value of the assets they had lost. Other companies, including Chevron, Total, Statoil, and BP chose to remain in the country. From 2007 to 2016, Venezuela also received $56 billion in cash injections from China, which took oil payments in lieu of cash.

BP's main license is for the Petromonagas block, which currently produces around 110,000 barrels of oil per day, and may contain up to 1.2 billion barrels in total. BP controls 16.66% of the project, with the rest being held by PDVSA. BP is also developing proposals for commercial production of the Ayacucho 2 block, as part of the conglomerate TNK-BP92.

In 2017, Venezuela selected the little known Dutch company Stichting Administratiekantoor Inversiones Petroleras Iberoamericanas to be its 40% partner in a new joint venture at the Junin 10 oil block in the Orinoco Belt region. The new joint venture will be called Petrosur.

In January 2010, Italian oil company Eni and PDVSA signed an agreement to develop the Junin 5 block, with Eni holding a 40% stake in the joint venture. This block is one of the most lucrative, with an estimated 35 billion barrels of oil. The plan is to produce 75,000 barrels per day by 2013, with a long-term goal of 240,000 barrels per day, and to construct a new refinery for upgrading as much as 350,000 barrels of tar sands oil per day. Eni is investing $300 million for the project initially, rising to $646 million as the development achieves certain milestones. It is worth noting that the Venezuelan government compensated Eni with a $700 million payment for the nationalisation of the Dacion oil field in 2006.

As of mid 2018, Spanish company Repsol continues to be heavily involved in Venezuelan heavy oil, iwth an 11% share of a consortium known as Petrocarabobo that includes the Venezuela Petroleum Corporation (CVP) and other oil companies.

Potential ESG Risks

Corruption issues

President Maduro has aggressively purged and arrested executives at PDVSA under the banner of weeding out corruption, and put a military general with no experience with oil in charge of the company. PDVSA has a long-held reputation for shady conduct, and Maduro’s regime has argued that the company needs to root out graft to become more efficient and deliver more revenue for the government. But analysts say that arrests also serve another purpose: consolidating power for a beleaguered president who has lost the trust of the country’s population as it endures widespread food shortages and teeters on the edge of a debt crisis. Venezuela is currently struggling to service about $120 billion worth of debt as its economy remains locked in a tailspin due to plunging global oil prices.

Environmental

The Orinoco River is 2,140 km long, and the surrounding area is a wetland of high biodiversity and home to many endangered species. In 2012 Heinrich Böll Stiftung found that "while there is a legal requirement in Venezuela for all oil projects to carry out environmental impact assessments (EIA), including baseline studies, these studies do not appear to have been published and there is no information on any more recent EIAs carried out by PDVSA in relation to operations in the Orinoco Belt."

Local Opposition

Local opposition is minimal due to the country's dire economic situation.

Status of Project

Venezuela's Orinoco Belt occupies a much smaller footprint than tar sand basins in Canada and is easier to extract and export because it is warmer, closer to the surface, has more uniform viscosity, and can be more easily transported. Production was 600,000 bpd in 2015 with a goal of 2.1 million bpd by 2019. Overall, national oil production had dropped from 2.3 million barrels per day in January 2016 to 1.6 million barrels per day in January 2018; specific figures for production in recent years for heavy oil production as a share of overall national oil production are not available.

Infrastructure

The decrepitude of Venezuela's energy infrastructure is a major obstacle to increasing tar sands production and oil exports. More than 80 percent of Venezuela's exports leave from one of two ports — Puerto Jose or Puerto La Cruz — located near each other on the coast of Anzoategui state. Puerto Jose handles two-thirds of the country's oil exports and also hosts an upgrading facility. Venezuela is now seeking foreign investment to upgrade this infrastructure.

Domestic Political Situation

Tax Revenue

With the nationalization of its oil industry in 2007, the Venezuelan government promised to better distribute oil revenues for social programs. “We guaranteed that the country would have fair profits like other nations of the world, by increasing the royalty rate from 1 percent to 33 percent. Previously, for each 100 produced oil barrels, they [the transnational companies] would take 99 [percent] and the Venezuelan people would take 1. This figure became the lowest rate ever paid in the world for oil exploration,” said Oil Minister Rafael Ramírez. Between 2001 and 2011, the amount of oil taxes collected reached $356.76 billion, compared to $23.4 billion in the previous decade."

The dire state of the country's economy has created a situation in which the government and popular opinion favor increasing economic production at any cost, with the use of revenues being a distant, secondary consideration.

Alternatives

Venezuela's Guri Dam is the largest hydroeletric power project in the world and supplies most of the country's electricity. Climate-change-induced drought has caused the dam's reservoir to fall below critical levels and is contributing to power shortages. The country's economic situation makes it unlikely to that new renewable projects can be funded or completed in the near future.

Project Economics

Subsidies

Under President Chavez, the majority of a US$20 billion long-term loan agreement from the China Development Bank (CDB), half of which is renminbi-denominated, was received by PDVSA in return for crude oil or diesel. A large proportion has also gone into funding Venezuelan infrastructure projects. Resources channelled into the ‘China Fund’ – which has received around US$51 billion from CDB – were spent on big infrastructure projects, such as the addition of new lines to the Caracas Metro system. Similar projects were introduced in Maracaibo, with the construction of two new bridges over the Orinoco River and Valencia, with the development of its rail network. To ramp up tar sands production, it is likely that the current government will seek to subsidize its energy infrastructure on an even greater scale.

Financing

The successful campaign to convince HSBC, RBS, and other European banks to reduce or stop financing oil sands projects might limit development of Venezuela's tar sands, but not very dramatically if the country leverages its relationships with China and other countries where such campaigns have not gotten much traction.

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