Plummeting Oil Prices and Venezuela’s Energy Outlook

-- Agenda --

All times are Pacific Times (GMT/UTC – 8 hours)

11: 00 – 11:05 am Review of agenda & logistics by Alexis Arthur, Energy Policy Associate at the Institute of the Americas

11:05 – 11:10 am Introductory remarks by Jeremy Martin, Energy Program Director at the Institute of the Americas

11:10 – 11:30 am Presentation by Francisco J. Monaldi, Harvard Kennedy School

11:30 – 12:00 pm Question & answer session

12:00 pm Session close

Follow the conversation on Twitter @IOA_Energy

Venezuela Oil Industry Outlook

Francisco Monaldi, Ph.D.

Visiting Professor and Roy Family Senior Fellow, Harvard Kennedy School

Non-Resident Fellow, Baker Institute, Rice University

Faculty Associate, School of Government, Tecnologico de Monterrey

Director, International Center on Energy and the Environment, IESA

Institute of the Americas, December 2014

Consumption and Popularity

-25

-20

-15

-10

-5

0

5

10

15

20

25

25

35

45

55

65

75

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14

Chavez popularity (lhs)

Maduro (lhs)

Real consumption growth (rhs)

Source: BCV and Datanalisis

The current macro situation

• Government deficit estimated at 20% of GDP in 2014 (about 16-17% before the price decline).

• Inflation rose above 65% in 2014 and estimates are above 100% for 2015.

• Fiscal breakeven at more than $170 with current exchange rate mix (about Bs. 12), can be reduced with a major devaluation to Bs. 35, but deficit still would be above 14%.

• Current account breakeven at around $70-80.

• Average Venezuela basket for this year $91 ($98 in 2013). Last week $62.

• President’s popularity in free fall. From 51% in 2013 to 24% today, and falling.

Oil industry’s performance: key points

1. Private investment boom in the decade before 2003 added 1 mbd of production. That and the price boom made expropriation very attractive.

2. A decade of very favorable conditions for development of the oil sector was wasted. High oil prices, very large reserves, and new investment projects in the pipeline.

3. Reality of decline and mismanagement. Production declining, subsidized domestic consumption increasing, exports declining, large external subsidies, costs increasing, number of workers increasing, arrears and debt going up.

4. Uncertain future. Conventional production keeps declining. Extra-heavy requires large investments that are unlikely to materialize.

9

Venezuela will continue to produce oil… until the world demands it

Sources: PODE hasta 2008, (*) Informe Operacional y Financiero de Pdvsa (2009), (**) Informe de Gestión PDVSA 2010 e (***) Informe de Gestión PDVSA 2011.

Venezuela’s official proven oil reserves are 298 billion barrels (using a 20% recovery rate on the

Orinoco Belt, for 257 billion barrels). The USGS estimates that 510 billion barrels would be ultimately

recoverable in the Orinoco Belt (using a 45% recovery rate). Even using a 10% recovery rate

Venezuela would have the second largest reserves after Saudi Arabia, at around 190 billion barrels

297.6

0.0

50.0

100.0

150.0

200.0

250.0

300.0

1980 1985 1990 1995 2000 2005 2010

Bill

ion

s o

f b

arre

ls

Reserves/production comparison

Venezuela still offers an outstanding potential as an oil producer. The question is how to take advantage of that potential.

Source: BP Statistical Review of World Energy (2013)

0 50 100 150 200 250 300 350

US

Venezuela

Russian Federation

Iran

Kuwait

Saudi Arabia

United Arab Emirates

Nigeria

OPEC

Non.OPEC

Years of production

298 TOTAL

257 0 – 9.9 X Heavy

18 10 – 21.9 Heavy

10 22 – 29.9 Medium

11 30 – 38.9 Light

2 >39 Condensates

Reserves Grav, API Type

Orinoco

H = 4

XH = 255

Venezuela: Proven Reserves (billion barrels)

Source: PDVSA

Net oil exports

Source: BP Statistical Review of Energy

3007

2760

1846

855

-858

-1500

-1000

-500

0

500

1000

1500

2000

2500

3000

3500

Venezuela

Mexico

Brazil

Traditional Areas Decline. Orinoco partly compensates.

14 Source: PDVSA, IPD

Declining production, declining exports,

and more than one third of total production is not paid for…

15

Not paid (MBD) Cuba 90 Others 60 Domestic market 750 (Smuggling 100, Imports 100) China loans 350 Total ~ 1.25 MMBD Cash flow production 1.5 MMBD

Source: PDVSA

0 200 400 600 800 1000 1200 1400 1600 1800

Others

Africa

South America

Europe

Asia

Central America & The Caribbean

North America (St. Croix included)

2012 2011 2010 2009 2008 2007 2006

• Texas 5

• Qatar 33

• United Arab Emirates 39

• Colombia 48

• Alberta 51

• Trinidad and Tobago 58

• Brazil 66

• Alaska 83

• Angola 118

• Nigeria 124

• Algeria 126

• Russia 127

• Libya 128

• Iraq 129

• Kazakhstan 131

• Iran 132

• Bolivia 133

• Ecuador 134

• Venezuela 135

Fraser Institute Global Petroleum Survey 2011: Jurisdictional rankings according to the extent of investment barriers

(based on All-Inclusive Composite Index values) 136 jurisdictions ranked

16

The Reputational Legacy

Fraser Institute Ranking 2009 2010 2011 2012 2013

Ranking Venezuela 141 132 135 146 157

Considered jurisdictions 141 133 135 147 157

Investment and Social Spending

PDVSA’s Debt (US$ Millions)

Source: PDVSA

18

• PDVSA’s current external debt at ~US$44 billion

• > US$10-15 billion in accounts payable

• >US$6-8 billion in probable arbitration settlements. Exxon $2.1 bn.

• >VEB Bs.500 billion debt with Central Bank.

2914

43384

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

2006 2007 2008 2009 2010 2011 2012 2013

Mill

ion

s U

S$

19

20

26.14

19.32

30.37

0.00

20.00

40.00

60.00

80.00

100.00

120.001

99

4

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

b/d per employee

Daily production per employee

PDVSA PEMEX Petrobras

Venezuela Domestic Oil Consumption

21

Gasoline price: $0.07 per gallon or $0.005 at black market exchange rate. 1 cent per barrel versus $20 in Saudi Arabia. Domestic subsidies: $24 billion in 2013

Source: BP

Gasoline subsidies

• Gasoline subsidies in 2013 were seven times higher than those of 2000

• Gasoline + diesel subsidies could suffice to cover healthcare, education and social

security budget.

• Subsidies are highly regressive: Most of it goes to rich and middle classes.

• Social costs and externalities: Wasted time in traffic equivalent to US$ 2,000 Millions

1,959

13,094

-5,000

0

5,000

10,000

15,000

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

MM US$ (2013 =100)

Gasoline Subsidies

Source: Menpet, EIA, Bureau of Labor Statistics and own calculations

Source: PDVSA Annual Report. Multiple years

Sowing the Oil Plan, 2013 – 2019

• The Plan Siembra Petrolera requires investments of US$ 257 billion,

US$ 189 billion for E&P. PDVSA would have to fund about 80% of those investments

• 2014 Forecast: 3.300 KBD (Previously 4.000 KBD)

• 2014 Investments: USD 32.7 bn.

• Increase proposal: 600 KBD/year

• Historical record:140 KBD/year (average 1943-1958)

Is it possible to achieve? NO!

  2005 2012 2012 Growth (Decline) 2019

(Planned) (Observed) (Observed) (Planned)

Production (K b/d) 3269 5837 2910 -0,11 6.000*

Refining (K b/d) 3142 4050 2822 -0,1 4600

Exports (K b/d) 2993 4700 2568 -0,14 5600

Natural Gas (MM cfd) 6885 9780 7327 +6.4% 11947

* FPO: 4.000 K b/d in 2019

Venezuela: Production Forecast IEA

24 Source: IEA

2.5

2.7

2.9

3.1

3.3

3.5

3.7

3.9

4.1

2015 2020 2025 2030 2035

2011 Forecast 2012 Forecast

2013 Forecast

0

0.5

1

1.5

2

2.5

3

3.5M

BD

Oil Production by contract, Venezuela 1990-2013

Heavy-weight crudes, Joint Ventures (former strategic agreements)

Conventional crudes, Joint Ventures (former operative agreements)

Pdvsa direct management

61%

Source: Oil and Mining Ministry (PODE 2007-2008); PDVSA Annual Reports, 2009, 2010, 2011 & 2013.

Note 1: Since 2006 the conventional crude operative agreements transformed into Joint Ventures

Note 2: Since 2007, the heavy oil strategic agreements transformed into Joint Ventures.

Note 3: Production data does not include Natural Gas Liquids Source: PDVSA

23%

16%

Joint Ventures

Key partners include:

• Petroboscán

• Petroindependencia

• Petropiar

Chevron

• Petrourica

• Sinovensa

CNPC

• Petromonagas

• Petromiranda

Rosneft

• Petrochiriquire

• Petrocarabobo

Repsol

• Petrosucre

• Petroleras Paria & Guiria

• Petrojunín

ENI

• Petrokariña

• PetroVen-Bras

Petrobras

• Petrocedeño

Total & Statoil

More pragmatism or is it desperation?

Windfall tax reduction in 2013 and waiver in new Orinoco Belt

projects (before investment recovery).

Promise of more operational and project execution control for

partners.

Loans guaranteed by export revenues (Chevron loan to

Petroboscan and others following).

The exchange rate.

Reduction in Petrocaribe subsidies? Domestic subsidies?

Pragamatic move to oil blending instead of upgrading?

But still difficult to get the necessary investments.

PDVSA’s problems: cash flow, infrastructure, and operational issues.

Macroeconomic and political instability.

Credibility and sunk investments.

The fall in oil prices

Maduro’s Oil Policy: The Return of Pragmatism

27

Financing Agreements for $12 billion have been signed between

PDVSA and JV partners during 2013-14

Financing Agreements

Partner Amount (USD) J V

CNPC 4 billion Sinovensa

Chevron 2 billion Petroboscán

ENI 1.2 billion Petrojunín

Gazprom 1 billion Petrozamora

Repsol 1.2 billion Petroquiriquire

Perenco 0.4 billion Petrowarao

Repsol & ENI 1 billion Perla (Gas)

29 Source IHS

Citgo

Conclusions

• More pragmatism might lead to some increase in investment, but production is unlikely to increase much in the next year or two.

• The production basket will get heavier and less profitable.

• The pre-tax breakeven of most Venezuelan production is well below current prices.

• Imports of light oil and refined products will increase.

• The inhibitors of investments are still: PDVSA’s lack of investment capacity and human resources, political and macro instability, and the fall in the price of oil.

• February 3 – 6: Caribbean Clean Energy Symposium, in collaboration with the US Department of Energy – St. Thomas, US Virgin Islands

• February 11 or 12: 6th Annual Dominican Republic Energy Roundtable – Santo Domingo, Dominican Republic

• May 20 – 21: XXIV La Jolla Energy Conference - La Jolla, CA www.iamericas.org/lajolla

• Support the 2015 Energy Webinar Series by becoming a sponsor- for more information, contact jeremy@iamericas.org

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