Venezuela’s Production Difficulties

I think this speaks for itself:

Venezuela drops 2007 rig count target by 40 pct

CARACAS, July 20 (Reuters) – Venezuela’s difficulties in acquiring oil rigs amid soaring global demand could lead to lower oil production amid a nationalization crusade by leftist President Hugo Chavez.

Chavez has forced the hand of foreign energy companies in Venezuela with an aggressive campaign to take over oil projects that last month pushed Exxon Mobil (XOM.N: Quote, Profile, Research) and ConocoPhillips (COP.N: Quote, Profile, Research) out of multibillion-dollar heavy crude ventures.

Apparently, for some odd reason the nationalization campaign 1). Seems to be scaring some foreign firms off; and 2). Is being met by falling production.

The problem comes amid growing concerns that PDVSA’s output may fall after it took over operations at four multibillion-dollar heavy crude upgrading projects previously run by foreign oil companies.

Venezuela’s official figures show output at 3.07 million bpd, though international energy agencies say it is only around 2.5 million bpd.

PDVSA’s figure is below its official figure of 3.3 million bpd reported in 2005, when Venezuela launched a plan to raise production to 5.8 million bpd by 2012.

So, the plans were to raise production to 5.8 million bpd by 2012. Yet production has actually fallen since they kicked off the plan. Time to make another prediction: Venezuelan production will not reach 5.8 million bpd by 2012. Any Chavez-cheerleaders want to make a bet on it? Truth be told, it will probably languish where it is right now, if it doesn’t continue to fall. That’s great news for me on 2 counts. It will help drive up world oil prices by restricting supply (encouraging conservation) and it will make Chavez look like an idiot.

He specifically mentioned Schlumberger as one of the companies that had refused to participate in tenders.

What, they don’t trust Chavez?

16 thoughts on “Venezuela’s Production Difficulties”

  1. I know you posted this because you don’t like Chavez, but isn’t this good for Venezuela in the long run? Doesn’t lower production now mean that they’ll have more oil left later when the price inevitably goes up?

  2. Brad,

    If you are correct, why doesn’t HC just tell PDVSA — “stop production”? We’re leaving teh oils in the bank for a rainy day. Wouldn’t that make more sense?

    If you are correct, why doesn’t Evil Big Oil just buy up assets and *not* produce?

  3. Doesn’t lower production now mean that they’ll have more oil left later when the price inevitably goes up?

    Yes, good for the country as a whole. And by no means am I suggesting that I want them to ramp up their production just so we can waste it. But that’s not what Chavez is trying to do. He has bitten the hand that was feeding him, with predictable results. That heavy oil extraction is not easy. But he thought he could just kick all of the expertise out, alienate the entire industry, and continue to expand production. I just think he is getting his just rewards.

  4. Robert,

    The real question is whether the U.S. will invade Venezuela by 2012, either directly or using Uribe and Colombia as cover. Again, I strongly suggest you read, “The Sorrows of Empire” by Chalmers Johnson.

    The U.S. has allowed energy policy and foreign policy to become completely intertwined. Anyone commenting on energy policy must become educated on U.S. foreign policy.


  5. Robert,

    I think you are missing a subtlety of Brad’s post.

    If Chavez operated like, say, Conoco, then he would have a profit motive to produce at optimal rates and time. But he doesn’t, so he won’t.

    Suppose Conoco owns Oilacre, which they “know” has a certain amount of oil. Just a hypothetical situation, so bear with me. Conoco, being a corporation, has one real duty — maximize profit for the shareholders. Being purely greed-motivated, they will try to maximize the revenue they can get out of Oilacre. If that means getting all the oil out today because the price of oil will be lower tomorrow, they’ll do that. If that means leaving all the oil in the ground because it will be worth lots more in ten years, they’ll do that. In reality, the right answer is somewhere in between the two extremes for lots of reasons.

    “Worth more,” of course, really means that the value of the oil has to appreciate faster than anything else they could think of doing with the money they’d make if they sold that oil today. In other words, is it more lucrative to leave the oil in the ground or to get it out now and use that money to do something else (find more oil, invest in Microsoft, buy gold bullion, whatever) — that’s the real question.

    Brad is positing that what Vz. is doing is more profitable than what every profit-driven oil company–and every other entity with access to capital in the entire world–is doing. I find that hard to believe. If Brad was right, then even investors like Warren Buffet would be buying up oil fields and letting them sit idle until the coming crunch. Microsoft would take their cash hoard and buy oil fields.

    Of course, all that idleness => production would decrease => today’s price would go up => people would start producing oil again => ad infinitum until equilibrium.

    Maybe during the 90s when oil was $10/bbl — sure, no one was spending money to produce more oil back then. Telling drill rigs to take a hike was a good plan. I don’t see that happening right now, instead I see practically 100% utilization rates at all the drillers.

    Bottom line: Chavez’s screw-ups were not the stroke of genius Brad says they are.

    Side point: if they were, then why did Vz. try to get 190 rigs drilling and only end up with 120? Alienating the drillers of the world was part of the master plan? Hiring fly-by-nights from Columbia who don’t deliver was just part of the brilliant scheme? That’s a convoluted way to run things. Why not just set the target for 120 and hire…..120?

    Third point: if someone believes that owning oil reserves and sitting on them is such a good investment, then they should so invest. It’s a sure thing, right?

  6. “Jon said..

    I think you are missing a subtlety of Brad’s post.”

    🙂 heh, there were no such subtleties intended I promise. Although I mentioned price, what I was really thinking about was oil availability in the future. My guess is that if oil producers would limit their production, it might create a long plateau, sort of a soft peak. That’s as opposed to a situation where oil producers pump as much as they can and we end up with a sharp drop off in production, a hard peak.

    I don’t really care whether an oil company or country maximizes their profits. I’m concerned about how the world is going to manage when oil production starts dropping off.

  7. Jon – I am convinced that the oil age will end with countries like Venezuela and Saudi Arabia sitting on huge reserves of unneeded oil. But the thing missing from your analysis is time value of money and risk. A barrel of oil produced today is worth more than one produced in the future, unless you believe that oil will appreciate faster than the rest of the economy. Historically speaking that would be a very bad bet. Oil hasn’t kept up with inflation, let alone paced with the growth in the economy.

    You also aren’t counting for substitutes. At $75 Fischer-Tropsch coal-to-liquids is economic. What keeps industry from pushing F-T now is the risk of LOW prices. We can even sequester the CO2 if the liquid price is high enough. Also as price increases, demand goes down. People buy smaller cars or hybrids, new technologies emerge.

    Chavez would do much better to mazimize production now, using some of the oil revenues to diversify the Venezuelan economy. Malyasia is following this model which has substantially reduced poverty. The Malaysian government did not kick out Shell or the other IOCs, rather Petronas gradually took over and managed Malaysia’s oil and gas resources.

  8. I meant Brad.

    Let’s put the Venezuela problems in perspective. The article says they have 118 rigs working Venezuela. Sounds like a lot? According to the Baker-Hughes rig count there are 1,790 rigs working in the US at the end of last week.

    If you knew nothing else about oil, just looking at the rig counts, you would guess that the US must have 15 times more oil than Venezuela. It gets back to risk-reward. By nationalizing and sometimes outright seizing assets in Venezuela (CANTV, Electricidad Caracas, RCTV, heavy oil ventures), Chavez has substantially increased risks for investors, while at the same time he is squeezing profits by increasing the government take. Business are acting rationally in refusing to do business in Venezuela.

  9. Some folks like chavez because he “cares for the poor”.

    They never seem to understand that by effectively wrecking the economy and constraining oil production while prices are high chavez is stealing large amounts of money from the poor.


  10. kingofkaty —

    for a second, I was thinking “that’s what I *was* saying” … then I saw you meant brad.

  11. brad,

    In your first post, you talked about “good for Venezuela in the long run.” So I addressed how to maximize profit in the long run, and clearly laid out that Vz. was *not* maximizing profit.

    Then you backtracked into meaning something vague about oil supply in the future. I don’t quite follow what that has to do with what is good for Venezuela, other than from a maximization of Vz’s potential profit.

    Then you wrote:

    I don’t really care whether an oil company or country maximizes their profits. I’m concerned about how the world is going to manage when oil production starts dropping off.

    Most economists, and most human beings, would measure how well someone is “managing” by measuring material wealth. This creates a contradiction in your statement: you don’t care if they maximize material wealth, but you worry how they are going to have enough material wealth.

    Thus, you don’t measure how well someone is managing in any sort of material wealth (e.g., food, clothing, medical care, Porsches, Playstations, whatever). Instead, you must measure how well someone is managing on…..oh, I am completely befuddled. I have no idea where you are going with this.

    Please let me know some sort of metric to judge “how the world is going to manage,” and I will attempt to address your statement and/or concerns.

  12. Jim Mulva in yesterday’s Houston Chronicle commenting on Venezuela:

    Q: What made ConocoPhillips decide to walk away from its operations in Venezuela?

    A: Well, we didn’t walk away from our operations in Venezuela. It was really an evaluation and a judgment of valuation. We felt that going through negotiation on compensation would result in more value creation for our shareholders than to continue under the new terms of the investment structure. We intend to reach an amicable solution, continuing our long-term business relationship in terms of buying oil from Venezuela and supplying oil through our refineries on the Gulf Coast.

  13. Jon,

    Your problem is that you read a lot more into my first post than was there. I must have touched a nerve somewhere, but I really don’t see how I did that in only two sentences. You’ve chosen to be insulting instead of trying to clear up any misunderstandings.

    Robert’s post actually addressed what I said. I just think Venezuela (and the rest of the world) will be better served with a lower level of production that will last longer. Even if that means they have not maximized their profits.

    ” KingofKaty said…

    Chavez would do much better to mazimize production now, using some of the oil revenues to diversify the Venezuelan economy.”

    KingofKaty, I would tend to agree, except that I don’t think they’ll use the oil wealth wisely. Look what the US has done with it. We’ve invested it in things that are just not sustainable. The underlying idea in my posts is that I fear a sharp drop off in world oil production. My thinking is that more oil left in the ground now means more oil later, and higher oil prices now means (hopefully) a leveling off or decrease in demand. So I agree with your analysis, but I think we are starting off with different assumptions.

  14. We’ve invested it in things that are just not sustainable.

    Brad – I would disagree. We have done a lot of good and sustainable things with oil wealth.

    Most people forget that Howard Hughes was a brilliant innovator who made his fortunes on oil tool rigs. (Baker Hughes Company). He took his wealth and invested it in aviation and other enterprises. Others used their oil wealth to create other things. Like this: Texas Medical Center

    There are hundreds of examples like Hughes or the TMC where oil wealth was used to create other enterprises.

    Right now the IOCs are increasing stock dividends and buying back stock to boost shareholder return. Essentially they are recognizing that the status quo is not sustainable and telling investors to find something better to do with their money.

    That is the brilliance of free market capitalism. Allowing millions of individuals to enter into free transactions will almost always result in a better result than some government planning. Personally, I like this idea:

    Alaska Permanent Fund

    The U.S. was pushing for a similar plan for Iraq’s oil wealth.

  15. Norway’s oil fund is up to $350 billion and should exceed $500b this decade. It’s 8x larger than Alaska’s fund but pretty similar on a per capita basis.


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