¡La cumbre del petróleo! Venezuela-Style!

AKA: Peak Oil, Venezuela-Style!

Guest socialism bashing by David Middleton

Venezuela is in a state of collapse due to its embrace of socialism.  Once the wealthiest nation in South America, it is now in financial ruin.  Despite having more proved oil reserves than any other nation on Earth, they can’t even afford to produce and export their own oil… And Venezuela’s economy is almost entirely dependent on revenue from oil exports.   When Hugo Chávez  took office, Venezuela was producing nearly 3.5 million barrels of oil per day (bbl/d).  By 2015, it was down to about 2.4 million bbl/d and dropped below 1 million bbl/d in March.

How did this happen?  In some ways, it’s déjà vu all over again.  Robert Rapier has a nice summary in this Forbes article:


Venezuela’s oil production reached an all-time high in 1970 when the country produced 3.8 million barrels per day (BPD). In 1971, Venezuela nationalized its natural gas industry, and began taking steps to nationalize its oil industry. The oil industry was officially nationalized in 1976. At that time, the Venezuelan state-owned oil company Petróleos de Venezuela S.A. (PDVSA) was formed.

Between 1970 and 1985, oil production in Venezuela experienced a decline of over 50%. But then production there once again began to grow. In 1997, as it sought to attract foreign investment and develop the heavy oil in the Orinoco Belt, Venezuela opened up its oil industry to foreign investment.

By 1998, Venezuela’s oil production had recovered to 3.5 million BPD, nearly reaching its former high. In 1999, Hugo Chávez began serving as President of Venezuela. During the Venezuelan general strike of 2002–2003, Chávez fired 19,000 employees of PDVSA and replaced them with employees loyal to his government.

[…]

In 2007 oil prices were rising, and the Chávez government sought more revenue as the investments made by the international oil companies began to pay off. Venezuela demanded changes to the agreements made by the international oil companies that would give PDVSA majority control of the projects.

ExxonMobil and ConocoPhillips refused, and as a result, their assets were expropriated. (These expropriations were later ruled to be illegal, and compensation was granted to both companies).

Forbes
Source: Robert Rapier

To paraphrase Margaret Thatcher, “Socialism only works until you run out of other people’s money.” By replacing PDVSA’s skilled workforce with political cronies and then driving foreign expertise and capital out of Venezuela, he was left with a lot of heavy oil that is difficult to produce and a steadily diminishing means of producing it.  But this only took the production down to about 1.2 million bbl/d by January 2019… Then the bottom really dropped out.

The Naptha Cliff!

U.S. sanctions against PDVSA deprived them of two critical things:

  1. Their #1 export customer.
  2. The naptha and other diluents required to transport their heavy crude oil.

This “double whammy” had a serious impact in less than 1 month…


US sanctions are a double-whammy for Venezuela.

Not only was the United States Venezuela’s No. 1 customer, but it was the country’s main source of naphtha, the liquid hydrocarbon mixture used to dilute crude. Without it, Venezuela’s heavy crude can’t be readily transported. Rystad Energy forecasts that some operators in Venezuela will run out of diluent by March.

CNN

Sorry Peak Oilers… Venezuela as a nation may have already jumped off Seneca Cliff into the Olduvai Gorge; but it has nothing to do with Peak Oil.  Venezuela’s oil production will eventually recover.

Rystad Energy’s “Low Case” scenario had Venezuela oil production dropping to 800,000 bbl/d this year and down to 680,000 bbl/d next year before beginning to recover.  The recovery will be slow, even with regime change, but it will occur…

Rystad Energy


**Short term: Production will slow its downward trend. Fields in the Orinoco Belt, which are currently operating below capacity, will be relatively easy to rejuvenate. Further production increases become much more complicated as mature fields have reached their natural production decline and significant damage has been done to a large number of wells.

**Mid-term: Arresting production declines and well damage in mature fields – which were the biggest contributors when Venezuelan production stood at more than 2 million bpd – will be a major challenge, both technically and financially. Therefore, to increase production Venezuela will have to further develop fields in the Orinoco Belt.

**Long term: Rystad Energy does not expect to see growth on a massive scale, but does see significant upside potential over time. Venezuela sits on massive proven reserves. The cost structure is relatively low and exploration risk is minimum. Furthermore, the Orinoco Belt oil sands are less energy-intensive than the oil sands in Canada given Venezuela’s warmer climate, which means less energy is required to enable the heavy crude to flow. Finally, we expect demand for heavy oil to remain high despite potential carbon regulations and IMO 2020 restrictions on shipping fuel, as complex refineries such as those in the US could still process this type of crude in compliance with environmental regulations.

Rystad Energy

It might be tempting to look a a graph like this and conclude that a Peak Oil Seneca Cliff has materialized out of thin air.

H/T Javier

However, if you step back and look at the bigger picture…

Venezuela oil production 1920-2017 (millions of bbl/yr and thousands of bbl/d). Data from BP and Restuccia, 2018

The “Seneca Cliff” turns out to be more like a Hubbert curve. Peak Oil is real. At some point global petroleum production will peak and then it will slowly decline… But it won’t fall off a Seneca Cliff into Olduvai Gorge.

Petroleum liquids production (includes crude, condensate, oil shale, oil sands and NGL). USA in red, Venezuela in yellow.

References

Egan, Matt. “How US Sanctions on Venezuela Are Rippling through Oil Markets.” CNN, Cable News Network, 19 Feb. 2019, www.cnn.com/2019/02/19/investing/venezuela-oil-sanctions-pdvsa/index.html.

Hubbert, M. King. “Nuclear Energy and the Fossil Fuels. Presented before the Spring Meeting of the Southern District, Division of Production, American Petroleum Institute, San Antonio, Texas, March 7-8-9, 1956.” Nuclear Energy and the Fossil Fuels. Presented before the Spring Meeting of the Southern District, Division of Production, American Petroleum Institute, San Antonio, Texas, March 7-8-9, 1956, 1956. https://debunkhouse.files.wordpress.com/2017/03/1956_hubbert.pdf

Peak Oil. “The Seneca Cliff of Oil Production”. Exploring Hydrocarbon Depletion. June 7, 2016. https://peakoil.com/production/the-seneca-cliff-of-oil-production

“Peak Oil And The Olduvai Gorge.” Peak Oil And The Olduvai Gorge  |  Peak Oil News and Message Boards, peakoil.com/generalideas/peak-oil-and-the-olduvai-gorge.

Rapier, Robert. “Charting The Decline Of Venezuela’s Oil Industry.” Forbes, Forbes Magazine, 5 Feb. 2019, www.forbes.com/sites/rrapier/2019/01/29/charting-the-decline-of-venezuelas-oil-industry/#1be7ec664ecd.

Restuccia, Diego. “The Monetary and Fiscal History of Venezuela: 1960–2016.” SSRN Electronic Journal, 2018, doi:10.2139/ssrn.3237748. https://www.economics.utoronto.ca/diegor/research/MFHLA_paper.pdf

“Short-Term Energy Outlook > International Petroleum and Other Liquids > Supply > OPEC.” U.S. Energy Information Administration (EIA) – Qb, www.eia.gov/opendata/qb.php?category=1039874.

“Statistical Review of World Energy | Energy Economics | Home.” BP Global, www.bp.com/en/global/corporate/energy-economics/statistical-review-of-world-energy.html.

“Venezuela-Related Sanctions.” U.S. Department of State, U.S. Department of State, www.state.gov/e/eb/tfs/spi/venezuela/.

“Venezuela Update: Production Could Fall below 700,000 Bpd by 2020.” Rystad Energy, www.rystadenergy.com/newsevents/news/press-releases/Venezuela-update-Production-could-fall-below-700000-bpd-by-2020/.

51 thoughts on “¡La cumbre del petróleo! Venezuela-Style!

    • Right now, Alberta is between a rock and a hard place. The province needs a pipeline to tide water and it is being blocked by the province of BC (British Columbia). There’s no good reason to believe that Jason Kenney’s approach will work any better than Notley’s. link

      Before the fracking revolution, Alberta could get a good price for its oil south of the border. Alberta’s wealth was driving the Canadian economy. Workers from all over the country could go to Fort McMoney and that reduced unemployment everywhere else. The NIMBYs in Quebec should remember that. Anyway, things have changed.

      The thing hurting Alberta is the NDP government of BC. But even there, it is because the NDP relies on the Green party to stay in power. It’s actually the Greens who are forcing BC to block a pipeline to tide water.

      Several Canadian provinces have survived NDP governments over the years. Some have even prospered at times. By the same token, some conservative governments have royally mucked things up. It all depends on the prevailing conditions and the people involved.

      Will Kenney do any better than Notley? I have no clue and neither do you.

  1. Unfortunately the January 28, 2019 “Harsh Sanctions” imposed upon the Maduro government gives him an excuse to claim that the U.S. is “responsible” for Venezuela’s misery, masking the destructive socialism that really crippled their economy.

    Adding insult to that injury is the resulting rise in world oil prices that the PVDSA cannot take advantage of without necessary diluents.

    • Regardless of what the US actually did, the socialists would still be making the same claims.
      They can’t admit that they are failures, so they have to invent an external enemy to blame everything on.

  2. “with regime change”

    There’s less of a chance of this than you think. Big oil powers (like Russia and Saudi Arabia) have a vested interest in keeping oil off the market. Who’s supporting the current Venezuelan regime? Russia, and their allies China, among others.

    Don’t count on oil production reaching any level much above zero, any time soon.

      • Why?

        A piece of the largest proved oil reserves on Earth.

        Another opportunity to cause problems for the US.

      • China is moving agressively into Central and South America. They are offering shiny objects to the natives in return for . . .

        At some point, the Monroe Doctrine may need to be applied.

      • China is in a multigenerational program to eat our economic lunch. Forget Russia as a threat in 2050. China has already reserved the spot for number 1, replacing America.

      • Actually Russia and China are allies, plus China sees a giant pool of oil up for grabs, a commodity that they are deficient in. Don’t think altruism plays a part. Atruism seems to be largely a Western construct.

    • IMO it’s less about oil and more about maintaining a counter-American influence in the region.

  3. Anyone that needs proof before Venezuela’s downfall that Socialism destroys economies and lifestyles either isn’t paying attention or doesn’t know the difference between prosperity and failure. Venezuela is just the new poster country for Socialism failure.

  4. Peak oil is very real. All fields follow a normal distribution in terms of production. That normal distribution was the basis of the book about US production. What happens as the production goes down, prices goes up, and other exploration options come on stream and produce another normal distribution and start the peak oil production curve all over again. To say peak oil does not exist is to say that discovered fields have infinite reserves, which is asinine.

  5. Trouble in paradise? Incidental news:

    Tesla and Panasonic are suspending plans to expand the capacity of their $4.5B U.S. plant in the face of uncertain demand for electric vehicles, the Nikkei reports. The two had intended to raise capacity 50% by 2020 to the equivalent of 54 gigawatt-hours, but financial problems forced a re-think. Panasonic also intends to suspend planned investment in Tesla’s battery and EV plant in Shanghai, and instead provide technical support and a small number of batteries from the existing Gigafactory. TSLA share price declined 2.77% on the day.

  6. I wonder about the relationship between Socialism and Corruption. Prior to Chavismo coruption was rampant in the “Cuarta Republica”. During the period of Lusinchi’s and Caldera’s presidency 10’s of billions of dollars were stolen via a corrupt govt. exchange rate system (RECADI) that offered preferential dollars to those that were plugged into the system. These dollars were converted back into Bolivars at the market rate and recycled back into preferential dollar rate. Only one person was arrested, a poor Chinese guy who tried to game the system for a couple of hundred bucks (“el Chino de RECADI”).

    Prior to Chavez’s election people were grumbling that thing’s had never been so bad and couldn’t get any worse. Then Came along this bombastic populist who promised “a chicken in every pot”, a “car in every driveway”, who was going to eliminate corruption. Bingo! Fast forward $1.4 trillion of oil revenues squandered and stolen with oil production down to 732 kbopd. A General is in charge of PDVSA and Venezuela as the new Haiti.
    When power is in the hands of a few, and you have no checks and balances from the supreme court (TSJ) or the national assembly (AN), then the few can do whatever they want…no questions asked and no arrests.
    Here is a case where communism led to unfettered power, resulting in runaway corruption for an entire generation. The Castro brothers did one heck of a job here.

    So the question is how do you rebuild a country that has not had a system of meritocracy for an entire generation where the trained diaspora that fled to work in the U.S, Mexico, Colombia, Canada, Argentian Brazil etc. will never to return and rebuild.

    • It won’t be easy and it won’t happen quickly. It may even require military intervention, preferably by Brazil and/or Columbia.

    • Chile faced the same transition under Allende as Venezuela experienced under Chavez/Maduro (think copper versus oil). All three Socialists/Marxists protected by Cuban comandos. So, Where’s the Pinochet of Venezuela? I cannot imagine external military intervention, other than Russia taking advantage of instability to annoy the USA at low cost to them.

    • “When power is in the hands of a few, and you have no checks and balances from the supreme court (TSJ) or the national assembly (AN), then the few can do whatever they want…no questions asked and no arrests.”

      We almost had that situation in the United States. Had Hillary Clinton won, she would have rigged the system so only she and her fellow Elite Socialists would hold the presidency. We came real close to being governed by just “a few hands”.

      Attorney General Barr must expose the traitorous activities of the Obama administration conspiring with Hillary and the Russians and the Ukrainians and the British and Australians intelligence services (duped into helping by the U.S. intelligence agencies) and God know who else, to rig the 2016 election and having failed to do that, to bring down the duly elected president, Donald Trump, by any means necessary.

      A lot of traitors need to go to jail. We need to set an example for future traitors.

    • It’s more accurate to say that the more powerful the government, the more corruption you will have.

  7. Rystad Energy’s “Low Case” scenario had Venezuela oil production dropping to 800,000 bbl/d this year and down to 680,000 bbl/d next year before beginning to recover.

    Situation already worse in Venezuela. It shows Rystad’s scenarios from February 2019 have no value three months later. Their recovery depends on a change of government.

      • Well, good luck if by March it is already lower than their annual average. With the blackouts and everything. And that’s their low scenario. I would be embarrassed if I had published that in February. But then my standard on predictions/projections is higher than that. To think that the person that drew those curves got paid for it…

  8. But this only took the production down to about 1.2 million bbl/d by January 2019

    From over 3 mbd to 1.2 mbd in 15 years is a cliff. We are talking a 10% yearly decline. So, not “only.”

    At some point global petroleum production will peak and then it will slowly decline…

    That’s what you believe. You have no way of knowing. Every alternative to oil is more costly so the economy might suffer and it is the economy that pulls the oil out of the ground, not the geology.

    • It’s how Peak Oil works…

      If the world suddenly adopted the Green New Deal or got smacked with a large asteroid, production would crash, but that’s not Peak Oil.

      • It’s how Peak Oil works…

        Only your definition of Peak Oil. Peak Oil, and the shape oil production adopts afterwards, is only and exclusively about oil production rates, not about whether the causes are geological, technical or economical. To get the oil out of the ground everything has to be in place. If it is not you get a Seneca cliff. That’s why his observation that the road to ruin is faster has survived 2000 years. Building up complex infrastructures takes time, money, and effort. Their decay is enthropically favored and can happen surprisingly fast.

        • That is the definition of Peak Oil… see Hubbert (1956).

          Economics determine how much oil will be produced. Reservoir mechanics determine the shape of the curve.

  9. The biggest opportunity yet provided to China is Venezuela. China is active in providing financial support to countries in need of such, but who are regarded by the west as pariahs. China gives the much needed support, with conditions that the receiving nations, being both desperate and casual about such things, readily accept. The rest, as they say is history, though not yet written. Large swathes of Africa are falling into the Chinese debt trap. The number of Chinese “technicians” now permanently in place in parts of Africa is real, but largely unreported or ignored.
    Venezuela will fall into this debt obligation, as it accepts Chinese money and “technicians” to revitalise its oil and gas industry.
    We do live in interesting times.
    The die is cast.

    • China has built a secret underground special forces base in one African country to protect their interests there.

  10. “U.S. sanctions against PDVSA deprived them of two critical things:
    Their #1 export customer.
    The naptha and other diluents required to transport their heavy crude oil.
    This “double whammy” had a serious impact in less than 1 month…”

    so actually what caused the current crisis? was it USA trying for regime change?

    • I love the way ideologues ignore most of the article in order to focus in one one small point that they can distort to support what they already believe.
      The fact is that Venezuela has been in full blown crisis mode for years.
      The US isn’t the only country that desires regime change, Venezuela’s neighbors also desire it and have a lot more at stake.

  11. “Further production increases become much more complicated as mature fields have reached their natural production decline and significant damage has been done to a large number of wells.”

    I’m curious as to what kind of damage this refers to. Is this deliberate damage by humans or something else?

    • I’m pretty sure it refers to lack of maintenance, yet trying to run the equipment anyway. Like continuing to commute to work everyday in your car and never changing the oil.

      I remember reading before his death that Chavez wasn’t maintaining the infrastructure and that coupled with incompetence was causing part of the decline at the time.

  12. “But he’s done so much for the poor! They’ve all been given a refrigerator!” a friend of mine said once of Hugo Chavez.

    I wasn’t really sure how to respond. I knew it wouldn’t end well, but it’s even worse down there than I could’ve imagined at the time.

    Oh, and those refrigerators don’t do jack squat without electricity, which began getting spotty a long while back.

    • Peter Morris
      “… those refrigerators don’t do jack squat without electricity, …” or without food to put in them.

  13. Is the lead writer actually calling for regime change, the Libya model favored by Hillary?

    That is indeed a heavy crude policy. Oh dear, there is Rubio reading the Old Testament for regime-change, and Pence at the UN breaking all known laws.

    Could it be that hydrocarbons have driven them to the dogs?

    And these brave warriors can’t even deal with Greta and AOC?

    It is high time to return to the Munroe Doctrine with no assault on sovereignty, without any biblical blather like R2P, Tony Blair’s British policy Responsibility to Protect.

  14. I guess the Cuban and Russian enforcers are not so good at oil field mechanics, parts procurement, and related field services. And falling oil production does not work so well as the sole asset pledge for outside help. This is the last place on the planet to think long-term investing.

  15. Chavez famously fired 19,000 striking oil workers in 2002 and replaced them with party members. Party activists seem not to make great oil workers.

    I haven’t seen any news reports on it but I would not be surprised if Chavez and ex-bus driver Maduro have also stacked the electricity generation industry with partisans too. There was another big blackout on Wednesday.

  16. Although I fully agree with this post on Venezuela’s collapse due to Chavez and Maduro, and how Maduro should be kicked out of office tomorrow, this is off-topic for WUWT. Let’s get back to focusing on how AGW is here and now and what this planet needs to do to combat it. US sceptics need to start acknowledging its global impact and the US needs to get back into the Paris climate change agreement – ASAP!
    https://mankindsdegradationofplanetearth.com/2019/04/14/while-the-rich-world-braces-for-future-climate-change-the-poor-world-is-already-being-devastated-by-it/

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