VENEZUELA'S GAS INDUSTRY POISED FOR LONG TERM GROWTH

June 19, 1995
Gregory D. Croft Pantera Petroleum Inc. San Leandro, Calif. Venezuela's enormous gas resource, combined with a new willingness to invite outside investment, could result in rapid growth in that industry into the next century. The gas could supply domestic growth in the electric power generation industry and in enhanced oil recovery. The development of liquefied natural gas exports will depend on the future course of gas prices in the U.S. and Europe, but reserves are adequate to supply

Gregory D. Croft
Pantera Petroleum Inc.
San Leandro, Calif.

Venezuela's enormous gas resource, combined with a new willingness to invite outside investment, could result in rapid growth in that industry into the next century.

The gas could supply domestic growth in the electric power generation industry and in enhanced oil recovery.

The development of liquefied natural gas exports will depend on the future course of gas prices in the U.S. and Europe, but reserves are adequate to supply additional projects beyond the proposed Cristobal Colon project.

Venezuela's gas reserves are likely to increase if exploration for nonassociated gas is undertaken on a larger scale.

GAS IN VENEZUELA

About three fourths of Venezuela's natural gas reserves are in the eastern Venezuela basin in the northern part of the states of Guarico, Anzoategui, and Monagas.

Recent large gas-condensate and high-GOR oil discoveries in northern Monagas have added greatly to Venezuela's gas reserve base (Fig. 1)(41223 bytes). A desire to avoid flaring gas has encouraged major gas cycling projects, but these are costly. Gas production in the cast, currently 2.4 bcfd, is expected to rise to more than 8 bcfd during the next 15 years.

Gas associated with oil reserves in the Lake Maracaibo area accounts for about one fifth of Venezuela's gas reserves and about 1.8 bcfd of production. Production is expected to rise to 2.2 bcfd during the next 10 years and decline thereafter.

The area is considered gas-short because of extensive local demand in the Amuay and Cardon refineries and for oil production operations in and around Lake Maracaibo. One proposed solution is a 350 km gas pipeline connecting the eastern and western pipeline systems.

Maraven, a subsidiary of Petroleos de Venezuela, is now drilling exploratory wells in the Maracaibo basin specifically for the purpose of finding gas, a first in Venezuela's long drilling history.

Offshore eastern Venezuela's Sucre state accounts for about one twentieth of Venezuela's gas reserves. This is the only area where export development is currently in progress, with the proposed Cristobal Colon LNG project.

Venezuela's Gas Reserves chart (7808 bytes)

INTERNAL GAS MARKETS

The gas in western Venezuela is developed mostly for oil field and refinery usage and for gas liquids extraction. Refineries at Amuay and Cardon and the petrochemical complex at El Tablazo are supplied by Maracaibo basin gas.

Oil industry usage for injection and for fuel still accounts for most of Venezuela's gas consumption. The use of gas in Venezuela's oil industry could increase substantially if it is used to generate steam for enhanced recovery of heavy oil, both in the Maracaibo basin and in eastern Venezuela's Orinoco heavy oil belt.

Eastern Venezuelan gas has been developed to a greater extent, produces a large portion of the country's electricity, and helps power the metallurgical complexes of Bolivar state. The cities of Caracas, Valencia, and Barquisimeto are supplied with gas from the east.

Projections of increasing electricity demand suggest that there is potential for substantial internal market growth in that sector, but gas will have to compete with Venezuela's abundant hydroelectric potential for the electric generation market.

Another market expected to grow is the petrochemical industry; two large joint venture methanol projects are on production in Jose on the eastern coast, and it is anticipated that more petrochemical joint ventures will follow.

POTENTIAL FOR EXPORT

The most advanced proposals for the export of Venezuelan gas are the Cristobal Colon LNG project and a proposed export pipeline to Colombia.

The Cristobal Colon project is a joint venture of Lagoven, Shell, Exxon, and Mitsubishi, who are studying the possibility of exporting LNG produced from an area offshore Sucre state in eastern Venezuela. The area is remote with no existing oil and gas industry infrastructure.

These facilities will have to be built for Cristobal Colon at a time when natural gas prices in the U.S. are disappointingly low. The proposed $5.6 billion project includes offshore platforms, gathering lines, a 710 MMcfd, two-train LNG plant, LNG storage, and an LNG export terminal.

The proposal to export gas to Colombia also faces problems; although Colombian demand is expected to grow rapidly, multiple significant gas discoveries in recent years suggest that imports may not be needed for the foreseeable future.

Another export proposal being studied is a pipeline through Colombia, Central America, and Mexico to the U.S. Difficulties with this proposal are the large number of political jurisdictions involved, as well as capital costs comparable to an LNG project. It would have the advantage that Mexican and Colombian gas could help cover part of the cost.

COMPETITION FROM TRINIDAD

An LNG export project in Trinidad appears to be going forward faster than the Cristobal Colon project and will tie up the LNG terminal in the U.S. that serves the highest price gas market.

Although less than half the size of the Venezuelan project, the Trinidad project is less than half as costly because of extensive existing production infrastructure in the area and very high production rates per well.

LNG EXPORT MARKETS

While the European Union imports more LNG than the U.S., the U.S. is the world's largest gas market.

Venezuela has the valuable advantage of being closer to U.S. import terminals than any other prospective LNG supplier except Trinidad.

The key question for any Venezuelan LNG gas export scheme is how long Canada and the Rocky Mountain states can maintain their rapid production growth. As long as they can, gas prices are not likely to be high enough to justify importing large volumes of LNG except during peak demand periods.

Four existing LNG import facilities are located on the Atlantic and Gulf coasts of the U.S. None is fully utilized at present, but Distrigas' Massachusetts terminal may be when the Trinidad LNG export project starts up around the end of the decade.

The largest facility is owned by Columbia Gas in Maryland, but neither it nor Sonat's Georgia terminal is operating. A fourth terminal, at Lake Charles, La., occasionally receives cargoes of LNG from Algeria. Puerto Rico will also import small volumes of LNG when Enron completes its gas fired power plant there.

The European gas market is still dominated by large gas distribution companies in each country. Prices have been much higher than in North America, and the European market allows the large volume, long-term contracts that are the financial core of the LNG business.

However, several major supply areas are closer to Europe than is Venezuela. Four of these areas are Russia, Norway, Algeria, and Iran. All four of these regions have gas reserves sufficient to greatly increase production, and Russia and Algeria are already major suppliers. In addition, Venezuela has no distance advantage over Nigeria in supplying LNG to Europe. For these reasons, Venezuela faces considerable competition in supplying the European gas market.

HIGH LEVEL SUPPORT

Pdvsa Pres. Luis Giusti summed it up by saying,"... we can say that there is a high potential for the development of natural gas in Venezuela, and that step is imminent."

Speaking to more than 500 delegates at the Natural Gas in the Americas conference May 8-10 in Caracas, he went on to discuss the opening to foreign investment of the oil, gas, and petrochemical industries in Venezuela.

Energy and Mines Minister Erwin Arrieta told the conference, "In all of this process, the participation of the private sector is absolutely indispensable in all segments of the [gas] industry, particularly in transmission, distribution, and commercialization."

Venezuela is blessed with the largest natural gas reserves in Latin America more than 100 years (if supply at present rates of consumption. Venezuela's proven natural gas reserves of 140 tcf are greater than its light and medium crude oil reserves on an energy equivalent basis (light and medium crudes account for 19.3 billion bbl out of 64.9 billion bbl total proved oil reserves).

There is also good reason to believe that large additional gas resources remain to be discovered in Venezuela, but questions remain as to how the economic potential of this huge resource can be developed. It will require development of new internal markets, export markets, or both.

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