Oil's Next World Player

By CHRIS KRAUL

June 14, 1998 12 AM PT

TIMES STAFF WRITER

PUERTO LA CRUZ, Venezuela —

To grasp the magnitude of Venezuela’s growing power in the world oil market, this scenic Caribbean beach town is a good place to start.

A $14-billion “oil city” is rising in the sand and desert scrub country at a town called Jose just west of here, a refining complex and depot that will rival the largest energy installations on earth. It will handle crude oil piped from the Orinoco Belt oil fields 125 miles to the south. From there, tankers will haul it to the United States and elsewhere.

Orinoco is home to oil reserves that seem to grow by the day. It is a cache of uniquely tar-like crude that is yielding itself up to today’s oil-recovery technology and launching Venezuela into the top rank of oil-producing nations.

The Jose complex and the Orinoco Belt are keys to Venezuela’s strategy to double its oil production over the next nine years and challenge the hegemony of Middle East producers in world markets. It is already the largest exporter of oil to the United States.

What might surprise those who know Venezuela’s recent history is that most of the big dollars being invested in Jose and in the Orinoco are coming from foreign companies such as Arco, Conoco, Mobil, Total of France, and others that were ordered out of the country in the mid-1970s when Venezuela nationalized its oil industry.

Their presence in this balmy, sun-splashed resort town is evidence of a 180-degree turn in Venezuelan policy. Venezuela has reopened its doors because the state-owned oil company Petroleos de Venezuela, or PDVSA, needs foreign money and technology to attain its lofty production goals.

It is part of a broad new apertura, or openness, including privatization and liberalized investment laws, designed to repair an economy that for the better part of two decades has been one of South America’s basket cases. State control of many industries brought highinflation, economic stagnation and political turmoil.

Venezuela is among the last South American countries trying to introduce free-market principles, especially so since the 1994 election of President Rafael Caldera. State-owned businesses ranging from banks, shipping fleets and aluminum mills have or are being sold to the highest bidder.

Oil development is a national imperative in a country that depends on oil for up to 60% of the federal budget and nearly half of its economic output. This year’s steep decline in oil prices has underscored Venezuela’s dependence: Oil revenues have tumbled by at least $4 billion, leading to a loss in investor confidence. Venezuelan stocks were trading at a 19-month low last week.

The good news is that Venezuela’s proven oil reserves--the amount considered recoverable at current prices and technology--have surged from 15 billion barrels in 1976 to 75 billion today. The government has said Orinoco may someday add up 270 billion barrels more.

“Frankly, they didn’t have the cash to develop the oil sector to its full potential on their own. It’s better for their long-term survival to gain market share, even if you have to give foreigners a piece of the action,” said Rafael de la Fuente, Latin American economist for Paribas investment bankers in New York.

Venezuela has been laying the groundwork for an expanded global role, buying the Citgo network of 15,000 gas stations in the United States and 16 overseas refineries, becoming a vertically integrated company from wellhead to gas pump. The state-owned company has drawn a stream of industry plaudits as a leader in technology and strategic policy.

Now basic economics dictate that there is no reason for Venezuela to continue to accept the role it took two decades ago as deferential junior partner to the Middle East members of OPEC, said Rafael Quijano, a Latin American specialist with Petroleum Finance Co. in Washington.

“The truism in economics is that more is better than less and sooner is better than later. When you have the reserves that Venezuela has, the question becomes: How fast can you exploit the resource? You can increase the value of it by producing faster,” Quijano said.

Venezuela’s push has implications for prices and even the future of OPEC, the oil exporters’ cartel, of which Venezuela is an ambivalent and blatantly quota-breaking member. Venezuela currently pumps out 3.1 million barrels a day, 25% more than its OPEC quota.

The output from Jose will be a major addition to the pool of oil available to the United States and other importing nations and is one key reason many analysts see stable or declining oil prices continuing for years into the future.

Said De la Fuente of Paribas: “Can they do this in a vacuum without it having a negative impact on oil prices? My sense is they are not operating in a vacuum and that these production plans have been one of the dampening effects on prices in recent months.”

PDVSA President Luis Giusti insists prices won’t suffer long-term and that rising global demand and falling or stagnant future production in such areas as the North Sea, Algeria and the United States will counterbalance Venezuela’s added capacity. His country is simply trying to expand its market share, maintaining that it’s justified by his country’s expanding reserves.

“Why not? We have the markets, we have the reserves, and we have the industry. Why shouldn’t we invest in our most competitive economic sector when we have the largest competitive advantage?” said PDVSA chief economist Ramon Espinasa in an interview. Espinasa described Venezuela’s oil resources as “practically infinite.”

If Venezuela is to reach its targets, it will need some $30 billion in investment by foreign companies over the next several years. To attract it, the government has had to convince outside firms that nationalizations are a thing of the past.

Arco, whose small refinery here was nationalized in 1975, seems willing to let bygones be bygones, as are dozens of other foreign companies. There is too much money to be made here to nurse a grudge. In fact, Arco is spending $3 billion to make Venezuela its largest source of oil after Alaska over the next decade.

Arco’s plans include the lead role in a $3.5-billion consortium in the Orinoco region to extract super heavy crude, an almost intractable asphalt-like substance that has been likened to “liquid street.” Early next year, Arco and partners will start drilling 1,000 wells and building a refinery to render the crude into something marketable.

Last month, Arco raised its Venezuela stakes by agreeing to buy Union Texas Petroleum in another $3.5-billion deal. UTP’s 150 million barrels of lighter crude reserves in western Venezuela was one of the deal-makers for Arco, said Stephen Mut, Arco’s Latin America manager.

Arco expects Venezuela to eventually provide it with 1 billion additional barrels on top of its current 4 billion total reserves, he said. As early as 2002, one-fourth of Arco’s global daily crude production could be coming from here.

“This is a critically important region for Arco. When you are in the oil production business, you better be where the resource is,” Mut said in an interview in Caracas, where Arco established a South American headquarters office in January.

Dozens of other firms see it Arco’s way. The Chinese, Japanese and Norwegian national oil companies, along with Amoco, Exxon and Texaco, have joined the Venezuelan invasion, paying huge prices for rights to develop oil on this suddenly open market. Chevron and British Petroleum joined Arco recently in establishing regional offices in Caracas.

Venezuela is letting the foreigners “reactivate” oil deposits that PDVSA once thought were depleted but are now exploitable with today’s technology. Outside companies can also explore for oil in new blocks on a shared-risk basis with PDVSA.

But the Orinoco Belt and Jose have attracted most of the recent attention because of the size and cost of the undertaking and because of the technology advances that now make extracting the heavy crude feasible. One key is improved horizontal drilling techniques that involve tapping the reservoir not from directly overhead but from a right angle.

Another key has been the technique of diluting the thick crude with a kerosene-like fluid at the wellhead to make it transportable to Jose by pipeline 125 miles away. The pipeline is actually a loop: The kerosene is re-sent to the oil field after extraction in Jose.

Three other groups led by Conoco, Mobil and Total plan similar Orinoco projects in partnership with PDVSA. Exxon and Coastal may follow. The first, the $2.4-billion Conoco-PDVSA project called Petrozuata, is nearing completion and will begin shipping the first Orinoco heavy crude to Conoco’s Louisiana refineries by the end of this year, Conoco’s Warren Hairford said.

“With 60,000 barrels a day, Venezuela will be the third-largest source of crude for us, after the North Sea and the United States,” Hairford said in an interview at his Puerto La Cruz office. The Petrozuata project set distance records for horizontal drilling of its 500 wells, he added.

PDVSA, the world’s second-largest oil company after Saudi Arabia’s Aramco, is forming a host of joint ventures with foreign companies to ramp up oil development and raise half the $65 billion it plans to spend over the next decade to double oil production. PDVSA is also outsourcing some $10 billion in services that it once tried to perform in-house.

Among the beneficiaries of the new openness is San Diego-based SAIC Corp., which is leading a $1-billion project to upgrade PDVSA’s computerized information management system.

Cheering Venezuela on from the sidelines is the U.S. Department of Energy, which has been seeking to reduce the U.S. reliance on Middle East crude since the 1973 oil embargo. To that end, the DOE has “worked with a number of countries to encourage policy changes” including Venezuela, said Dave Pumphrey, the department’s director for the office of policy for the Americas, Asia and Africa.

Since 1977, the U.S. reliance on Middle East oil has fallen from 28% of total imports to 18%, thanks largely to big increases from Mexico, Venezuela and Canada. The U.S. today imports 9.7 million barrels a day, about 55% of consumption.

“Diversification of oil supplies has been in place for a number of years within our overall energy policy, so you’re less vulnerable to political disruptions in the world marketplace,” Pumphrey said. “It’s like portfolio diversity. You’re not as exposed to any type of interruption in one place.”

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Venezuela’s Black Gold

One of the world’s biggest oil production complex, a $14-billion project near Puerto La Cruz on the Caribbean shore of Venezuela, will refine and ship oil piped from the nation’s Orinoco belt. The region, where Arco is a big player, has helped shift the balance of power in world oil markets away from the Middle East.

Pumping Plans

Venezuela hopes to double its oil production to more than 6 million barrels a day over the next nine years by building a $14-billion “oil city” on its scenic Caribbean shore. The country, which holds the world’s sixth-largest oil reserves, produced an average of about 3 million barrels of oil a day last year.

The World’s Largest Proven Oil Reserves

Proven oil reserves as of Jan. 1, 1997, in billions of barrels:

Saudi Arabia: 259.0

Iraq: 112.0

Kuwait: 94.0

Iran: 93.0

Abu Dhabi: 92.2

Venezuela: 64.9*

Mexico: 48.8

Russia: 48.6

Libya: 29.50

China: 24.0