Jorge Carnevali
Petroleos de Venezuela SA
Caracas
The Congress of the Republic of Venezuela on July 4, 1995, approved the conditions for an Exploration Association Contract. This action opened Venezuela to exploration for light and medium crudes by private companies in association with a special-purpose affiliate of Petrleos de Venezuela (Pdvsa).
This decision is a landmark event for Venezuela and the international petroleum industry. It provides the single most significant exploration offering in many years.
From the initial discoveries in Lake Maracaibo in 1914 to the more recent giant discoveries in eastern Venezuela, the country has been widely acknowledged as one of the more geologically attractive areas in the world.
This recent initiative is the latest step in the opening of the countrys petroleum sector. Already, with the Orinoco Faja strategic alliances and the reactivacin program, more than 20 companies from the U.S., Canada, U.K., France, Netherlands, Argentina, Chile, Australia, and Japan are operating in Venezuela.
Venezuelas opening
The objective of the apertura, or opening, is to attract private capital to Venezuelas petroleum sector and thereby accelerate exploration and development of light and medium crude oil. An important parallel objective is for this incremental investment into the country to stimulate the domestic economy and encourage development and growth across all sectors.
With the added investment, Venezuela can maintain its key role as a global energy supplier in the face of rapidly increasing world oil demand. As demand grows 1-2%/year the next 10 years, the world will require 12-16 million b/d of production over and above todays levels. This growth increment is equivalent to the current combined production of Latin America, including Mexico, and western Europe.
Given this outlook, Pdvsa has targeted an increase in production capacity from the current level of close to 3 million b/d to more than 5 million b/d by 2005. Approximately 1 million b/d will come from development of new areas--about half from Pdvsas current exploration program and the rest from activities by third parties.
It is recognized that to attract private capital, Venezuela must vigorously compete with other areas in the world. In the upstream petroleum business, this is best achieved through long-lived, stable relationships built on a competitive and straightforward contract mechanism, and a simple, fair, and demonstrably transparent process--all, of course, firmly and clearly within the existing legal framework in Venezuela. Accordingly, the centerpiece of the current exploration round is the prospectivity of the areas being offered.
Geological overview
There are four primary sedimentary basins in Venezuela (Fig. 1) (94266 bytes). The Northern Venezuela basin (actually a collection of smaller basins) is largely unexplored.
The 10 areas being offered (Fig. 1) (94266 bytes) in this bidding round, which between them comprise some 18,000 sq km, are all located in the key producing basins of Venezuela: Lake Maracaibo in the west (Catatumbo and La Ceiba areas); the Eastern Venezuela basin (El Sombrero, Guarapiche, Delta Centro, Punta Pesca- dor, and the two Gulf of Paria areas), and the Barinas-Apure basin (Guanare and San Carlos areas).
The average size of each is quite large--about the same as 100 Gulf of Mexico blocks or 10 North Sea blocks.
The Sub-Andean-Caribbean basins have a rich and productive history. Since production first began from the Lake Maracaibo area in 1914, almost 48 billion bbl have been produced in Venezuela (about one of every 15 bbl produced in the world).
At yearend 1994, Venezuela had proved reserves of some 64 billion bbl--over 95% of it in the Eastern Venezuela and Maracaibo basins--making Venezuela the largest reserves-holder outside the Middle East. This statistic excludes the vast heavy and extra-heavy reserves of the Faja oil belt along the Orinoco river--currently thought to be on the order of 270 billion bbl. If those are included, Venezuelas reserves exceed even those of Saudi Arabia.
Sub-Andean perisutural basins related to A-subduction boundaries run the length of South America for more than 5,000 km. They lie between cratonic areas and the Andean mobile belt. While the majority of these basins are oil and gas productive, Venezuelas basins are the most favorable for the entrapment of giant oil and gas accumulations.
The architecture of these basins generally shows a thrust fold belt/foreland pair, where deep prospective structures can be identified (Fig. 2) (45081 bytes). Giant accumulations are found both in the gently dipping strata of the foreland, such as the Orinoco heavy oil belt or Bolivar Coastal field, and in the more structurally complex thrust fold belts, such as the El Furrial-Carito trend or Quiri-quire field.
The concentrations of giant fields in a relatively small area is remarkable. Some consider this a sign of insufficient exploration; others see geological processes at work.
The dominance of marine sedimentation throughout the Tertiary stratigraphic record of the key producing basins in Venezuela is atypical of the Sub-Andean provinces of northern South America. This stratigraphic contrast within the Sub-Andean provinces reflects major differences in the timing and nature of the tectonic events that shaped the basins.
The Venezuelan Sub-Andean basins maintained direct communication with marine environments into Neogene time. Deformation is a product of right oblique arc-continent collision, which asserted a strong control over Neogene marine depositional patterns, at the same time dislocating much of the pre-Neogene sediments.
This tectonic-stratigraphic association of dominant marine sedimentation and collision tectonics is not seen in the Neogene stratigraphic record of other Sub-Andean areas and could therefore at least partly explain why the Venezuelan basins are, by far, the most prolific hydrocarbon producing province of the Sub-Andean region.
Source rocks, maturity
Integrated geochemical studies show that most crudes were primarily sourced from Cretaceous limestones and shales of the La Luna and Querecual formations, which occur in each of the key producing basins (Fig. 1) (94266 bytes). Each of the areas being offered in the current round fall within, or adjacent to, the established active oil kitchens.
The source rocks are highly oil-prone and contain essentially amorphous marine, type II organic matter. Total organic content and maturity are quite high. Generation and migration of hydrocarbons occurred in several pulses from Paleocene to recent times.
Increasing the possibility of having medium to light crudes in any potential reservoirs, is the presence of a major single oil-rich source interval of Cretaceous age, active generating conditions for more than 45 million years, a multilayer stratigraphic configuration, and the existence of excellent cap rocks.
Giant fields
In a global context, the significance of the foredeep basin-type for oil and gas accumulation is important to note.
Authors of an American Association of Petroleum Geologists paper published in 1986 classified the giant oil and gas fields (over 500 million bbl of oil equivalent) into Bally basin-types. They explained the overwhelming significance of the type A foredeep and folded-belt basin-types to the incidence of giant oil and gas fields.
Some 250 fields--over 50% of the worlds giant fields--are either foredeep (and this is by far the largest) or folded belts. It is also true that more than 50% of the total oil and gas in the giant fields is found in these types of basins.
Another key characteristic is that the incidence of oil in the foredeeps and folded belts is much more significant than that of gas, comprising more than three-quarters the recoverable petroleum in those basin types. The most recent additions in this category in Venezuela have been the fields in the folded belt El Furrial trend, which were discovered in the late 1980s and have greatly invigorated the exploration outlook in eastern Venezuela.
The prospectivity of this geology is evidenced in the recent track record. In the last 10 years, five oil fields of more than 500 million bbl were discovered and Pdvsa has added about 6 billion bbl of proved reserves--despite materially constrained exploration activity (Pdvsa drills about one-fifth the number of exploration wells typically drilled by major oil companies).
Lake Maracaibo basin
Two areas are offered within the Lake Maracaibo basin, La Ceiba and Catatumbo, both of which are located along the southern edge of the lake. A range of non-Pdvsa companies operates under service contracts in the areas, including Shell, Tecpetrol, Pennzoil, Samson, and Occidental.
There has been a string of recent discoveries in the southern part of the lake, most of which are making more than 3,000 b/d of light oil (34-45). These wells targeted the Tertiary and Cretaceous reservoirs at depths ranging from 15,000-18,000 ft. Pdvsa estimates yet-to-find reserves in this basin of 7-10 billion bbl. This compares to 62 billion bbl of total reserves produced and booked to date. Both of these blocks enjoy good access to oil field and general infrastructure.
Barinas-Apure basin
Within the Barinas-Apure basin, a relatively intensive current drilling program is under way along the southern limb of the Venezuelan Andes. These wells are in the foothills along the mountain front.
Potential targets of Cretaceous age are at shallow depths ranging from 10,000-13,000 ft. A number of discoveries have been made in recent years in the area north of the Barinas fields--these, too, have been light crudes of greater than 35.
The areas offered in this basin, Guanare and San Carlos, also enjoy good access to infrastructure and benign topography. For this reason, although--so far--a less prolific producer than the other two key basins, this basin has the lowest cost production in the country (less than 30/bbl).
Pdvsa estimates yet-to-find reserves in the Barinas-Apure basin on the order of 6 billion bbl, with 3 billion bbl produced or booked to date. In the southern part of the basin, Guafita field is the larger extension of Cao Limn field across the border in Colombia.
Eastern Venezuela basin
Discovery of the El Furrial trend had a significant impact on the activity in this basin and, indeed, on Pdvsas activities throughout Vene- zuela.
In the last 5 years, more than 50% of Pdvsas exploration budget has been focused on evaluation of the fold belt. This trend, though far from fully explored, has so far yielded more than 5 billion bbl. Flow rates as high as 13,000 b/d have been recorded.
The recent discovery just to the west of Delta Centro block of Piedritas No. 1, which flowed 2,700 b/d of 26 gravity oil, has meant the discovery of a new trend in the central portion of the basin. A large number of private companies are already active operators in this basin, including Teikoku, Total, Perez Companc, Astra, Benton, Maxus, and Mosbacher.
The areas vary significantly in their environmental and topographic settings, as well as in the level and amount of nearby infrastructure. El Sombrero in the western part of the basin enjoys flat, savannah pasture land with excellent infrastructure and access.
The Gulf of Paria blocks are, of course, offshore and therefore have conventional near-shore logistics considerations with easy marine access to most of the area. Guarapiche is the closest to the key oil infrastructure triangle of Maturin, San Tome, and Tucupita.
Parts of that block, along with Delta Centro and Punta Pescador blocks, extend across coastal, deltaic, and mangrove swamp settings. At the end of 1994, 45 billion bbl had been produced or booked in the basin. Pdvsa estimates another 15 billion bbl remain to be found in Eastern Venezuela. Based on the basins history and the distribution of the field sizes, Pdvsa expects these reserves to come in fairly large increments.
Big Oil
Venezuelas rich endowment of giant fields is striking. So far, Venezuela has discovered 25 fields of more than 500 million bbl recoverable reserves--about the same as all the rest of Latin America including Mexico.
Analysis of the distribution of field sizes in Venezuela indicates that 53 fields larger than 300 million bbl of proved reserves have been discovered to date. The 53 include 23 larger than 1 billion bbl recoverable re- serves and 3 of more than 10 billion bbl. The largest is 16.6 billion bbl Tia Juana field in the Maracaibo basin.
Analysis by Pdvsas explorationists of the areas included in the current exploration round suggests that the typical area can expect a recovery of from 300 million to more than 1 billion bbl.
Contract and economics
Many industry observers will have had, at least, a passing familiarity with the countrys well-established technical attributes enabling it to achieve a production capacity of close to 3 million b/d.
Of equal importance, however, to the geological setting and petroleum system is the mechanism by which such resource potential is converted into wealth and shareholder value.
The costs
In a flat price world, costs have been a key focus of the industry. Venezuela remains a very low-cost environment in the global context. Operating costs in Venezuela have averaged $1.40/bbl over the last 5 years, while capital/ development costs have averaged $2.15/bbl. These are competitive by any standard--especially when placed in the context of the per-barrel finding costs of 23/bbl.
The costs are low for a number of reasons. Foremost, perhaps, is the fact Venezuela has been blessed with a large number of prolific fields with typically high per-well productivity. But the country also has a comprehensive national oil industry infrastructure, which, coupled with the high proportion of local content (in terms of equipment, supplies, and services) in the cost structure, has contributed to the low-cost environment.
The terms
The structure of Vene- zuelas contract is a straightforward Association Agreement between a Pdvsa affiliate, Corporacin Venezolana del Petrleo, and the private investor(s).
The term of the contract provides for an initial exploration period of 3-5 years, with possible extensions of 2-4 years (these are area-dependent parameters).
During the exploration period, a minimum work program will be undertaken by the private investor. The work program ranges from two to four wells, depending on the area, plus some required seismic.
The exploitation or production phase is 20 years, with a possible 10-year extension subject to an overall maximum duration of 39 years. Companies will have crude lifting rights in proportion to their equity participation and take title to the oil at the point of export.
Upon commercial discovery, Pdvsas affiliate has the right to buy-in to the project at an interest between 1-35%. All investors (including the Pdvsa affiliate) will be subject to the prevailing fiscal regime, which for oil companies is a royalty of 1623% and income tax of 67.7%.
There is also a profitability bonus called PEG, which will be bid by the companies and is the basis for the award of the areas to the qualified bidders. PEG is an additional bonus that companies pay, based on a measure of their profitability--in this case, return on assets. PEG varies between the minimum level (which is bid) and a maximum of 50% along a pre-set slope. There is also a $1 billion PEG shelter where the first $1 billion of production is only subject to minimum PEG. This structure was designed so as not to discourage either early, accelerated production schemes or mid- and late-life investment.
Under current cost conditions ($3.80/bbl finding, development and operating costs) and current price conditions for Venezuelan light and medium crudes ($15-17/bbl) within the contract/ fiscal terms described, one can infer an effective economic threshold on the order of 50-100 million bbl. A project will yield a reasonable rate of return, even under cost conditions substantially higher than those being realized by Pdvsa.
The competitiveness of the contract can be analyzed from a couple of perspectives: One is the proportion of state take where Vene- zuela is on the high side in an overall global context but actually comfortably in the middle of the pack when compared to other areas of well-established prospectivity.
Government take, however, is only one benchmark. A more meaningful comparison is that of project profitability. The graph (Fig. 3) (64949 bytes) is a simple display of the computations from economic models of standard contracts of the U.K., Indonesia, Colombia, and Ecuador. This is a purely mathematical outcome from running identical cost and production profiles (data taken from actual Venezuelan fields) for a range of field sizes between 100 million to more than 1 billion bbl through the various contract models.
This type of analysis does not risk, weight, or take into account which of the areas are more likely to yield fields of these sizesnor does it take into account any cost advantages between the countries.
Accordingly, in a true apples and apples analysis these aspects will also be taken into consideration. The results of the analysis do suggest, however, a contract that is economically competitive.
Summary
- Venezuela has an important role to play in supplying world oil demand growth. To meet this responsibility will require a major acceleration of exploration and development activity which, in turn, will require a significant infusion of private sector capital.
- In order to attract that capital, the areas being offered are highly prospective. This reflects a combination of magnificent source rock and basin architecture that is conducive to giant fields.
- Venezuela is a big oil area. The incidence of giant fields is singular within the Western hemisphere. The country is still lightly explored and there is a lot of oil yet to be found and produced.
- Venezuela is a low cost environment.
- Finally, the contract economic s are competitive with other oily areas.
The congruence of these elements provides a strong case for Venezuela to be an important consideration for the international exploration managers portfolio.
