Monaldi Presentation 2

8/9/2019 Monaldi Presentation 2

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Venezuela’s Oil Outlook

Francisco Monaldi, Ph.D.

Visiting Professor and Roy Family Fellow, Harvard Kennedy School

Nonresident Fellow, Baker Institute, Rice University

Faculty Associate, School of Government, Tecnologico de MonterreyDirector, International Center on Energy and the Environment, IESA

Center for Hemispheric Policy, University of Miami, February 2015


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Key Takeaways

• Venezuela wasted the largest windfall in its history and created the

conditions for the worse economic collapse in its history.

• Venezuela is the oil exporter in worse shape to face this oil price collapse.

It had deficits of 15-20% of GDP at peak oil prices. It dramatically

increased its debts and oil dependence. It destroyed the private sector.

• Most resource exporters behaved much more prudently during this cycle,

saving, investing and not increasing their liabilities.

• More pragmatism would lead to some increase in investment in extra-

heavy oil production, but total production is unlikely to increase in the

next year or two, due to continued decline in conventional areas. The

production basket will get heavier and less profitable. The pre-tax

breakeven of most Venezuelan production is below current prices at


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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


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The current situation

• Government deficit estimated at 20% of GDP in 2014 (about 16% 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% of GDP.

• Current account breakeven at around $70-80.

• Average Venezuela basket for 2014 $88 ($98 in 2013). $39 last week.

• President’s popularity in free fall. From 51% in 2013 to 22% today, and

falling.


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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 slow to materialize.

5. Although Venezuelan oil is still competitive at current low prices. The

price collapse puts the government and PDVSA under tremendous stress.


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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 theOrinoco Belt, for 257 billion barrels). The USGS estimates that 510 billion barrels would be ultimatelyrecoverable in the Orinoco Belt (using a 45% recovery rate). Even using a 10% recovery rateVenezuela 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

B i l l i o n s o f b a r r e l s


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Reserves/production comparison

Venezuela still offers an outstanding potential as an oil producer. The question ishow 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


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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

MexicoBrazil


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Traditional Areas Decline. Orinoco partly compensates.

14

Source: PDVSA, IPD


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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


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• 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

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The Reputational Legacy

Fraser Institute Ranking2009 2010 2011 2012 2013

Ranking Venezuela 141 132 135 146 157

Considered jurisdictions 141 133 135 147 157


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Investment and Social Spending


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20

26.14

19.32

30.37

0.00

20.00

40.00

60.00

80.00

100.00

120.00

1 9 9 4

1 9 9 5

1 9 9 6

1 9 9 7

1 9 9 8

1 9 9 9

2 0 0 0

2 0 0 1

2 0 0 2

2 0 0 3

2 0 0 4

2 0 0 5

2 0 0 6

2 0 0 7

2 0 0 8

2 0 0 9

2 0 1 0

2 0 1 1

2 0 1 2

b/d per employee

Daily production per employee

PDVSA PEMEX Petrobras


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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 2013Source: BP


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Gasoline subsidies

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

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

1 9 8 9

1 9 9 1

1 9 9 3

1 9 9 5

1 9 9 7

1 9 9 9

2 0 0 1

2 0 0 3

2 0 0 5

2 0 0 7

2 0 0 9

2 0 1 1

2 0 1 3

MM US$

(2013 =100)

Gasoline Subsidies

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


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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 i n 2019


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Venezuela: Production Forecast IEA

24Source: 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


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0

0.5

1

1.5

2

2.5

3

3.5

M B D

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

23%

16%


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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


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Financing Agreements for $12 billion have been signed betweenPDVSA and JV partners during 2013-14, but not all will imply new cash.

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)


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Conclusions on Oil

• More pragmatism might lead to some increase in investment

and extra-heavy production, but total production is unlikely to

increase in the next year or two, due to continued decline in

conventional areas.

• The production basket will get heavier and less profitable.

• The pre-tax breakeven of most Venezuelan production is

below current prices. >$25 per barrel.

• 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.

Documents

Monaldi Presentation 2