Venezuela political crisis affects US market

While this is a difficult time for anyone living in Venezuela, Dr. Michael Economides with University of Houston's chemical engineering department points out the repercussions may be felt across the global energy industry.

While this is a difficult time for anyone living in Venezuela, Dr. Michael Economides with University of Houston's chemical engineering department points out the repercussions may be felt across the global energy industry.

Even if the domestic conflicts in Venezuela were resolved immediately, the die is cast. It will take several months of hard work to bring the country's oil production back on line. These are complex systems, and there are technical challenges involved. The fact that most of Venezuelan oil production is heavy crude further complicates matters.

Once the refineries are back on line, there is the question of depleted stocks. The country will need to restock its own domestic oil storage before bringing its export supplies back to pre-strike levels. This means a serious interruption in a major source of heavy crude for overseas markets, primarily the US, which counts on Venezuela for around 2.5 MMb/d of crude. Many of the US refineries on the Gulf of Mexico are outfitted to handle heavy crude from Venezuela. With that supply interrupted through force majeure, the refineries either have to go to their next largest supplier, Mexico, or undergo a costly refit to handle lighter weight oil from other sources. The cost of such a conversion in terms of money and time would further increase once Venezuelan exports resume because the refineries would have to convert back to handle heavy oil.

At the same time, Economides said, Venezuela, under President Hugo Chavez, has not been reinvesting enough money into national oil company Petroleos de Venezuela SA. As a result, oil production is not being enhanced in depleted fields, and there is not enough exploration going on to replace reserves in the ground. To correct this would cost an estimated $2 billion more than Chavez is spending, in addition to the time it would take to implement such a program.

While the 2.5 MMb/d exported from Venezuela to the US could be made up from other sources, such as Saudi Arabia, Economides said he is skeptical that the Saudis, through OPEC, will increase production in the near future. Currently, there is more oil on the market than the world can absorb, due to the economic slowdown in the US and increased production out of Russia. So far, this over-supply has not resulted in lower prices. Prices are being kept high by a fear in the market that the US will go to war with Iraq. Economides said this uncertainty has added a premium of about $5 to what would be the fair equilibrium price of crude. Over time, this premium will be absorbed, either because the US goes into Iraq, or because a decision is made not to invade. In either case, at current production levels, the price would be predicted to drop. In light of this, OPEC would be more inclined to see this glut dry up and prices rise than to offer more production to keep oil supplies at current levels.

Without increased OPEC production, the US will most likely look to Mexico to make up the difference with its vast reserves in the Bay of Campeche. While this heavy oil will come at a premium, it could spur increased activity in that region. In addition to Mexico benefiting from this situation, it is likely independent producers in the Gulf of Mexico would also see increased profits as the price of gasoline rises next spring. Economides said he is not as confident this will benefit the integrated oil companies because they have to contend with the refining difficulties and with the retail market.

Another surprise beneficiary of this situation is the small island nation of Trinidad & Tobago. Not only is Venezuelan crude off line, but its gas production has also been interrupted. Trinidad is a major producer of natural gas exports and should see a steady demand for its products as worldwide use of natural gas continues to rise and Venezuela struggles to recover its political stability.

Correction

Douglas-Westwood has pointed out a number of shortcomings in the representation of the data in the October 2002 Comments piece. It was Quentin Whitfield of Infield Systems who provided the prospect data on new offshore fields, fixed platforms, floating production systems, and pipelines, not Douglas-Westwood. This data is not a forecast of future activity, but an analysis of the current announced intentions of the industry. By the same token, Douglas-Westwood does not predict 138,000 km of new pipeline, 30,000 km of umbilicals, or 1,800 new offshore platforms as implied by the editorial. It is also important to note that the use of "Forecast" in the headline does not accurately describe the prospect data referred to in the piece.

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