Venezuela's oil reserves kick into reverse: Fuel for Thought

Venezuela’s claim of being home to the world’s largest oil reserves based on its massive Orinoco heavy oil belt has been the subject of industry skepticism for years.

The South American producer estimates it has over 300 billion barrels of proven oil, a figure naysayers believe is grossly overstated as much of its huge bitumen resources are tricky, and hence too costly, to produce.

Now two years after the biggest oil price collapse in a generation, Venezuela’s world-beating oil reserve claims are not only looking increasingly shaky but the country’s current economic and political quagmire means its recoverable oil reserves are now firmly in retreat, according to an independent study.

Norwegian oil consultancy Rystad Energy last week estimated that Venezuela’s total recoverable oil resources stand at 75 billion barrels, 24% below ago levels and less than a quarter of the official 302.3 billion barrels figure for proven reserves.

The shortfall is even more dramatic given Rystad’s approach to classifying recoverable oil resources.

Unlike BP’s touchstone annual Statistical Review, which presents a mix of resource categories based on opaque official sources as  “proven”, Rystad claims to take a more rigorous approach by applying Society of Petroleum Engineers (SPE) standards.

On this basis, Venezuela’s proved reserves actually stand at just 8 billion barrels, a fraction of the claimed total and less than neighboring Brazil. Even on a more generous proved and probable basis—equivalent to 2P reserves cited by oil companies as the most likely estimate of their recoverable oil—Venezuela holds 17 billion barrels, Rystad believes.

Orinoco potential

So why the major discrepancy? Part of the difference stems from differing estimates of the commercial viability of the OPEC producer’s extra heavy oil, a key threshold for proven reserves status.

Venezuela’s “proven” reserves additions had helped by improving oilfield technology and rising oil prices. The figures began creeping up under the country’s late socialist president Hugo Chavez who declared in 2011 that Venezuela’s proven reserves had eclipsed Saudi Arabia as the world’s biggest.

A much-cited US Geological Survey assessment in 2009 lent credibility to the boast, calculating that the Orinoco Belt could  hold up to 650 billion barrels of producible oil. The computation, however, was based on Venezuela’s homegrown estimate of Orinico’s oil in place and sidestepped the issue of whether the viscous crude is cost effective to produce.

With oil selling for over $100/b in 2011, at that time the task of developing Venezuelan heavy crude—which needs to be blended with diluents such as naphtha or upgraded before it can be refined—seemed less onerous.

By contrast, Rystad estimated in 2015 that more than half of Venezuela’s oil was uncommercial to produce with Brent below  $60/b, compared to around 10% for Saudi Arabia’s oil.

Resource reversal

Given oil prices sitting close to year-ago levels at $45/b, the economic recoverability of crude in the ground explains recent Rystad’s resource revisions.

Indeed, the Oslo-based group also looks at production performance, drilling and sanctioning activity to estimate the reserves for individual fields. As a result, the oil price slump since 2014 and the ensuing economic turmoil in Venezuela has severely dragged on its reserves estimates for the country.

The slow pace of development activities in the Orinoco belt and falling production trend is also taking its toll.

Year on year, Venezuela’s recoverable resources on the widest measure have slipped 23 billion barrels, according to Rystad, from 95 billion barrels in mid-2016. The 2P reserves are now 5 billion barrels lower than a year ago.

“The main reason that oil resources in Venezuela has been revised down is due to lower oil price outlooks,” said Rystad analyst Aditya Ravi. “The lower oil price has hit Venezuela especially hard and the production in the country has declined faster than we first estimated.”

Indeed, while Venezuela’s official reserves have jumped since 2000 as higher oil prices fueled optimism, the country’s oil production headed in the opposite direction after Chavez came to power in 1998.

The country was pumping 1.94 million b/d in May, S&P Global Platts estimates, down from 2.7 million b/d in early 2005.

With no new discoveries, production of light and medium crudes needed to dilute the Orinoco’s extra heavy oil has plummeted, forcing Caracas to start importing light crude for blending in 2015. Foreign oil companies have also have balked at committing billion of dollars to new upgraders needed to produce more exportable crude from the region.

Many mature fields have also suffered larger than normal decline rates year on year.

Ravi points to PDVSA’s aging Jobo field on the northeastern edge of the heavy oil belt which was seen as a precursor to the current round of Orinoco heavy oil projects. The steamflood project which launched in the late 70’s is currently producing around 8,000 b/d despite PDVSA reporting its reserves to be 1.3 billion barrels, a level which “seems highly unrealistic,” he said.

Credible or not, Venezuela’s claims of holding the world’s biggest reserves may of little import anyway. IOC appetites to tap costly, heavy crudes may already be on the wane as global climate change initiatives refocus investment on lower-carbon fuels such as gas. This may leave much of Venezuela’s oil in the ground.