All is not doom and gloom at Petroleos de Venezuela (PDVSA)

<a href=www.vheadline.com>Venezuela's Electronic News Posted: Monday, May 26, 2003 By: Oliver L. Campbell

VHeadline commentarist Oliver L. Campbell writes: One of the advantages ... and there are not many ... of growing old is that one is allowed to reminisce.

I remember as a young, trainee oil field accountant in the early 1950s just how credulous I was.  What little I knew about the technical aspects of oil field operations was limited to what I had learned at a week’s induction course, subsequently augmented by what I picked up accounting for the operations.  I took what the technical experts -- geologists, reservoir engineers, petroleum engineers, production engineers, etc -- wrote and said as gospel.

However, it was not too long before I realized the experts’ opinions were often based on some pretty shaky evidence.

My first doubts were raised when eminent geologists predicted that, at the then current production rates, the world’s oil reserves would run out in 40 years.  For some reason, 40 was the magic number agreed ... or at least not contradicted ... by many geologists.

However, this went against my experience because, in the oil fields where I was working, our oil reserves steadily increased i.e. more oil was found than had been extracted.  The same was happening elsewhere in the world so ... despite increased oil extraction ... that quoted figure of 40 years did not go down. In fact, at the end of the 1950s and into the 1960s a number of new and substantial oil provinces were discovered including Nigeria, Libya, the North Sea and Alaska (Prudhoe Bay).

After these discoveries, the predictions of how long oil reserves would last were quietly dropped.  This was just as well, because many more oil provinces have since been found, and who can say how much more oil exists in deep sea waters and in the Arctic and Antarctic?

So it was with a certain skepticism that I pondered on the experts’ prediction of gloom and doom for PDVSA’s immediate future.  The first was an article on February 6 entitled “Venezuela’s PDVSA becomes a shadow of its former self” in which two distinguished economist, both working for well-known organizations, predicted that PDVSA:

a) “would need another year to raise its output to 2.2 million barrels per day”

b)  with the year’s limited investment “will barely maintain 1.2 million barrels per day” in crude output

c) “to restore output to 3.2 million barrels per day by end 2004 it will take $6 billion in investment next year alone”

The second occasion was on February 11 when I attended a meeting, sponsored by the Anglo-Venezuelan Society, to discuss the political and economic panorama for Venezuela in 2003 in the light of recent developments, basically the effects of the strike. I suspect several people had read the article because the prognostications were equally pessimistic, particularly as regards restoring oil production.  The general consensus was that production would not reach 2,000,000 barrels per day before the end of the year.  Much was made of the fact that you cannot turn oil wells on and off as you can a water tap and that some wells would never produce again.

The third time was when I read another article on April 4, entitled “The Venezuelan outlook for 2003.” This referred to a workshop organized by the Venezuelan-American Chamber of Commerce (VenAmCham), and I was surprised to see the same picture of gloom and doom repeated even though oil production had been steadily climbing. The stated forecast for 2003 of a production of 2.3 million bpd has already been surpassed and the estimated fiscal participation of $6-7 billion, as compared with $12 billion in 2002, certainly needs to be updated.

You may ask why I was highly skeptical of these pessimistic views.

Well, I spent 15 years in the oil fields and lived through situations when ... for commercial reasons ... our company had to close wells to reduce production.  Of course, opening them up again required considerable effort, but the technology to do so existed. We temporarily redirected rigs from new drilling to well repairs for the most serious cases of damage in the sub-surface, and increased the number of swabbing machines (pulling hoists) to change down-hole pumps, replace damaged rods and pump out accumulated water.  The gas-lift wells generally came back on stream without difficulty, and it was the pumping wells that needed particular attention.  The only real trouble was from wells with a high water cut where production could be permanently affected.

PDVSA’s problems were on a very much larger scale since so much oil had been shut in.  However, they responded with resilience and dedication to get oil production back up, and it is good to know that ... despite the serious problems at the higher echelons ... there are still capable technicians at the oil-field level.

Shutting down refinery plants causes many more technical problems. It is not so much the complication of starting the plants up again, as of ensuring the products, particularly the lighter fractions, are on spec. PDVSA has had problems in this respect and one can only hope they still have the qualified technicians to solve the problems quickly.

As regards the permanent loss of production arising from the shut-down, I lack the technical knowledge to dispute the figure of 400,000 barrels per day that has been mentioned.

I do know, however, that if I ask three experts I am likely to get three different answers as the following anecdote illustrates:

I accompanied a reservoir engineer to a meeting with two other oil companies to decide how much oil was due to each company under a unitization agreement in Lake Maracaibo. For those readers who are unclear on such agreements, they arise because concessions are awarded in neat rectangles, or blocks of terrain but, the oil reservoirs, of course, do not conform to that pattern.  When a reservoir stretches over blocks belonging to different companies, it is only fair that no company extracts more oil than its proper share.

This means agreeing on the shape and characteristics of the reservoir ... and this is done on limited data from seismic surveys and wells already drilled. Each company presented its view graphs, flip charts or colored maps showing the form of the reservoir and its oil distribution.

My first doubt was whether we were talking about the same reservoir!

The only common factor was that each company assigned itself more oil than did the other two. The meeting adjourned with the decision to pool all data and arrive at agreed figures.

One cannot blame the reservoir engineers because they are extrapolating from such sparse information ... however, it does show there's plenty of scope for being dubious of the figures the experts present as facts.

Incidentally, I feel the figure of 400,000 bpd lost production is something of a red herring and not so serious as the experts make out. In my life-time, I have seen new secondary recovery methods introduced which substantially increase the recovery of the oil initially in place.

We have seen how successful the oil companies have been in extracting oil from the marginal fields they were awarded under the “apertura” ... the opening up of the industry to foreign oil companies.

In my days, wells were drilled in a grid pattern of nice straight lines and at regular intervals. Now, with the benefit of three-dimensional seismic surveys, they are drilled where the reservoir engineers believe they will best drain the oil. However, with all the new recovery technology, I am told some 50% of the initial oil in place is not currently recovered.  I have little doubt that, in the next 50 years, still newer methods ... combined with better knowledge of the reservoirs ... will increase the ultimate oil recovery even further, and that the 400,000 bpd now “lost” will in fact be produced.

The object of this article is, firstly, to congratulate PDVSA on the way they have restored production to 2.6 million bpd in such a short time ... they have confounded many pundits in the process and shown that there are still capable workers in the fields.

I will not be surprised if PDVSA reach the 3.2 million bpd production level by the end of this year.

Secondly, my message is that you should have a healthy skepticism of what the experts tell you when this does not coincide with your own experience.  This goes whether they are geologists, reservoir engineers, petroleum engineers, economists or accountants.

Look at the 5-Year Plans of the Nation in the 1970s to see what a mess the economists made of the forecasts. See how the accountants published statements purporting to show the Venezuelan banking system was in good order just before it collapsed ... and how they have given a sound opinion of some companies’ financial results just before they went bankrupt.

In my experience, it's very difficult to give an entirely unbiased and dispassionate opinion.

One’s assessments are so often influenced by politics, external pressures, prejudice, self-interest and even a little wishful thinking.

The advice of an old hand is to take all expert opinion with a pinch of salt.

Oliver L Campbell, MBA, DipM, FCCA, ACMA, MCIM  was born in El Callao in 1931 where his father worked in the gold mining industry.  He spent the WWII years in England, returning to Venezuela in 1953 to work with Shell de Venezuela (CSV), later as Finance Coordinator at Petroleos de Venezuela (PDVSA).  In 1982 he returned to the UK with his family and retired early in 2002.  Campbell returns frequently to Venezuela and maintains an active interest in political affairs: "I am most passionate about changing the education system so that those who are not academically inclined can have the chance to learn a useful skill ... the main goal, of course, is to allow many of the poor to get well paid jobs as artisans and technicians."  You may contact Oliver L Campbell at email: oliver@lbcampbell.com