The big news last week in Venezuela oil and gas was that Repsol and Eni will spend $1.5 billion to develop the ginormous offshore Perla gas field, which they discovered two years ago. The field alone, with about 8 trillion cubic feet (Tcf) of reserves, has more than half as much natural gas on tap as the entire country of Argentina, South America’s top gas producer. Amidst Repsol’s rather hypey PR campaign — with an exaggerated reserves figure (talking about gas in place, rather than recoverable reserves) and lacking any timeline — the figure that jumped out at me was $3.69.
That is, Venezuela is now going to pay $3.69 per million BTU for the gas from this field. That is more than twice as much as the company has traditionally been willing to pay producers. For example, here (on page 32) you can see that Harvest Natural Resources’s Petrodelta joint venture receives a steady $1.54 per thousand cubic feet of natural gas in the country. $3.69 is enough to make my prior prognostication wrong, wrong and wrong.
So Venezuela has changed. It is now, apparently, willing to pay the kind of prices that will actually get gas out of the ground, rather than insisting on prices so low that companies can’t justify development. This is mostly good news for the country and its private partners. Venezuela needs gas to keep pressurizing oil fields, fueling new electricity generators, making chemicals and cooking food. The country could even, with the biggest reserves in South America, one day export gas. But paying $3.69 per million BTU (which is roughly the same as 1,000 cubic feet), now, is bizarre, because gas prices are lower than they have been in years. The average US wellhead price rose from 2003 through 2008, peaking at over $10 for that quanitity of gas. The price than collapsed in early 2009 and has since hovered around $4. Spot prices are even lower, with US benchmark Henry Hub spot down to $3.05.
Through the boom and bust in gas, Venezuela has kept paying the same low price for gas, saving money while limiting new development. Companies such as Chevron and Statoil, which had access to the offshore fields, have always said that they needed at least $3 per mmBTU to economically justify developing the offshore fields (here’s Mitsubishi saying the same thing to the US embassy, thanks be to Wikileaks). That price was available if Venezuela had wanted to charge ahead with LNG export, as international buyers have routinely paid upwards of $5/mmBTU for LNG since 2003. But Venezuela’s policy has been to promote domestic development rather than international trade. The first part of any produced gas, the government insisted, had to go to the domestic market, where prices have been fixed at less than $1 for ages. The government can’t rightly justify buying gas for $3 and selling for $1, can it now?
There were other problems as well. The initial plan to develop the fields with Exxon and Shell broke down among disagreements. There were many changes of plans in how to develop the various offshore fields. (Later, after development finally began, there were other issues such as probable corruption in PDVSA’s drill rig contracting and even a shipwreck.)
The Venezuelan government finally decided to go ahead with LNG production in about 2006, with the goal of bringing gas ashore by 2008. But it was already too late — the 2008 crisis hit when the LNG plant was still just a big cleared spot on the coast of Sucre state. Work on the undersea pipeline from the offshore fields to the coastal processing plant was halted.
Venezuela fell into a natural gas crisis. Old oil wells need natural gas injection to keep producing. Power plants need natural gas. Residential consumption rose as more and more people took advantage of a consumption boom driven by oil windfalls to buy gas stoves. Nearby Trinidad got its fields into development and exported heaps of LNG during the period when gas prices were high. But Venezuela’s fields were stuck between a government without the money to develop them, and private companies that were uninterested unless they could sell their output at a higher price. So Venezuela took the pipeline it had built to export gas to Colombia and Ecuador and Panama and beyond, and reversed it to import gas from Colombia (at prices above $4, most recently at $5.30/mmBTU). Those imports continue today.
More recently, PDVSA has continued drilling the Mariscal Sucre fields on its own to try and get some offshore gas production going. According to a reader familiar with the situation, PDVSA drilled 8 wells, but it’s more like “5.5 wells.” That is because one well failed because there was an accident between its drill ship and a ferry under tow during drilling, another has the shipwrecked Aban Pearl rig almost atop it, and another had a completion problem that will probably limit it to half its projected output. PDVSA could have been finished with the project by now, but instead is expecting half the gas in late 2012 and the other half in 2015. In any case, PDVSA is trying to get some Mariscal Sucre gas ashore in late 2012, and is spending big bucks to do this “accelerated production” ahead of the full production in 2015.
Now, international gas prices have fallen hard, thanks in large part to the US’s push for “unconventional” gas, mostly from extracting gas from historically useless beds of coal and shale. The US is importing less LNG, creating a glut on the market. Imports are down 24% year over year, according to the Energy Information Administration. And now that prices are depressed, PDVSA pays more than it has ever been willing to pay. I suppose you could argue that it’s all good business — they have a stronger negotiating position with the oil companies now than they did with gas at $10. On the other hand, Venezuela is also now in a weak position, with its desperation for gas.
So now, after years insisting on paying oil companies prices way below international prices for natural gas, now, it’s $3.69/MMBTU. Well, you know, “a foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines.”