Oil companies compete for projects that will boost Venezuelan production quickly. A real grind is in store

A rig that drills wells in shallow water completed its long journey from China to Venezuela’s oil-producing Lake Maracaibo region. Residents and workers were excited to see the passage of a big old rig called Alula, which passed just inches below a bridge that connects Maracaibo with the oilfields on the eastern shore of Lake Maracaibo. This was due to U.S. sanctioned.

The rig struck an oil pipeline while it was passing through the lake, and also over the metallic spaghetti that was 20,000 kilometers worth of pipes below the water. The oil leaked out for several months before repairs were made. It was only last year that the rig was installed in the polluted water. Since then, the crude production has increased only modestly.

The Alula's story is a cautionary one for foreign energy companies, such as U.S. major oil company Chevron, that want to expand quickly in Venezuela and undertake short-term projects to boost the country's output of oil. Every step forward brings with it a whole new set of challenges.

Maurel&Prom, ENI of Italy, Spain's Repsol and China National Petroleum Corp. are also foreign companies that have a foothold in the country.

Donald Trump has asked American companies to invest $100 billion in rebuilding the oil industry, which was neglected for 20 years by socialist presidents Hugo Chavez & Nicolas Maduro. Washington has eased sanctions since its early January military invasion to snatch Maduro by issuing a few general licenses to energy companies that allow them to invest, export, and import oil and gas in the OPEC-member.

Two executives of companies with assets in the country said that early expansion could result in a crude oil output increase by as much as half a million barrels per day (bpd). The current production is 1,000,000 bpd.

The U.S. Secretary for Energy Chris Wright stated this month that he expected to receive a positive response from Venezuela.

"dramatic increase"

Venezuelan production is expected to increase in the next few months.

Houston, the U.S. capital for oil, and Venezuela's oil regions are a buzz, mobilizing to take part in the largest repair job ever undertaken by the energy sector. This is a massive undertaking comparable to the work undertaken to increase Iraq's oil production following the second Gulf War, or to restore the Kuwaiti oilfields that Saddam Hussein had set ablaze. According to a half dozen industry workers and oil employees who have experience in Venezuela, as well as executives planning to move there, along with numerous industry experts, analysts and other industry professionals interviewed for this article, the first phase of the project in Venezuela will involve relatively simple projects that can increase oil production quickly. These include refurbishing dilapidated oil wells, upgrading crude oil upgraders which are not working at full capacity, and repairing the ports and pipelines owned by the state oil company PDVSA. Even the "easy" projects, according to the experts, are difficult, and the rest of the work will be even more challenging. A reporter touring the Lake Maracaibo region in early February saw oil industry junk. Tanks overflowing with oil, abandoned oilfields. Blackened shorelines. And long lines of cars waiting to buy gasoline near storage terminals. The squalor and soiled shorelines, abandoned oilfields, tanks overflowing with crude, and long lines of vehicles waiting to buy gasoline near storage terminals or PDVSA operational sites were visible reminders that much work remains, even for what could be considered the "low-hanging fruits" in a region which is home to Venezuela’s oldest production facilities, as well as having the second largest output capacity.

The first step that companies anticipate is to implement projects such as the one planned by China Concord Resources Corp., which brought the Alula drilling rig to Venezuela in 2017. The company wants to increase the combined light and heavy oil output from two fields from 16,000 bpd to 60,000 bpd this year through a $1billion program. This would require refurbishing up to 875 inactive rigs before drilling new wells. A source with the project stated that the company is currently addressing many unplanned problems, including insufficient gas supply to maintain pressure on wells and the loss of technical data.

After Trump stated that companies from U.S. political rivals - China and Russia - are no longer welcomed in Venezuela, it is not clear if the project will go ahead. Companies from these countries were the only ones willing to work in Venezuela under sanctions.

Chevron, on the other hand, has been the sole U.S. oil major to produce crude in the United States for many years and is now in a prime position?to make early gains. The company is in a race with its rivals for supplies of the light crude produced by China Concord.

Energy companies in Venezuela are able to make a profit by importing fuels and light oil that can be used to dilute Venezuelan tar-like crude oil. The country's vast reserves of extra-heavy crude oil cannot be exported or transported without expensive upgraders and diluents. Foreign oil companies are more interested in producing barrels that are relatively simple to produce than those produced by PDVSA, who has ignored these regions for decades to focus on the Orinoco Belt and its heavy-oil wealth. Former employee of the Venezuela operations said that oil from Maracaibo would be more cost-effective for Chevron, as it doesn't need to be treated prior to export. This is especially true when crude prices are low. The former employee stated that other options included reopening wells closed due to lack of power or specialized equipment, reconditioning wells with low output to increase production, and drilling new ones.

Chevron stated that it has "been a part in Venezuela's history and remains committed to work in partnership for the future of Venezuela." It also added that it welcomed recent U.S. licensing and legal reforms.

PDVSA and the oil ministry of Venezuela did not respond to requests for comments. China Concord was not immediately available for comment.

HEAVIER ORINOCO CRUDDE Oil companies with stakes in projects and oil contracts across the country are vying for access to specialized machinery already present. There are up to 14 drilling rigs that have been in storage for years in Venezuela and are owned by Houston-headquartered SLB, one of the top global oil service providers, three sources with knowledge of its assets said. SLB is the main service provider for Chevron, since 2024 when it started its latest drilling program in Venezuela as part of an earlier U.S. wide license. SLB, like the U.S. giant, has a long history in Venezuela. SLB's rigs in Venezuela were used for PDVSA-related projects before the U.S. sanctions of 2019. U.S. companies, and those who adhered to U.S. sanctioned, could no longer operate rigs in Venezuela.

SLB says it has operational facilities, staff and equipment in Venezuela and is "in the early stages of collaboration" on next steps with customers. We are confident we can quickly ramp up operations under the right conditions.

The vast Orinoco Belt is in dire need of drilling and workover rigs, as the output usually involves clusters of wells. Diluents for blending with extra-heavy crude may be needed more urgently to reduce oil inventories that have accumulated over the past few months and to boost exports. Chevron, along with other PDVSA partners, is focused on securing the drilling equipment and access to crude upgradingrs as well as light oil and naphtha for blending. The U.S. firm would also have to renovate PDVSA-owned infrastructure, such as the Bajo Grande Export Terminal. It would also have to dredge a shipping channel on Lake Maracaibo, which hasn't been done for years due to sanctions that prevented companies from hiring dredges. Chevron would need to overhaul its Petropiar Project's upgrader in order to increase production at Orinoco. This converts the extra-heavy crude into exportable grades. Two Chevron sources also said that the facility hasn't been fully repaired in years.

Five projects, out of more than 40 joint ventures between PDVSA, foreign and local companies and other oil companies in Venezuela, have upgraded or blended the Orinoco extra heavy crude. This region holds over 80% of Venezuela's estimated 303 billion barrels worth of crude reserves. Without upgraders, companies would be forced to import expensive diluents in order to export barrels. This would lower their profits and also present logistical problems due to Venezuelan limitations on discharging and transporting them.

North American Blue Energy Partners has been working on repairing a PDVSA rig for the Orinoco Petrocedeno Project for several months. The company has close ties with American asphalt magnate Harry Sargeant. Two sources said that completing the repairs would allow the equipment to be brought online quickly.

North American Blue Energy Partners didn't immediately respond to a comment request.

Thomas O'Donnell is an independent energy analyst who says that many Venezuelan oilfields which are written off as being depleted still have significant production capacity.

"Many of the plants that were said to have died or been depleted are not actually depleted." He said that PDVSA lacked the skills or equipment to continue running these fields and cherry-picked them.

O'Donnell pointed out mature fields, where seismic surveys using 2D technology were last conducted in the early 1990s and the late 2000s. He said that companies could make substantial gains if they brought up-to-standard fields which were already in operation. This could result in "maybe a 50 or 100 percent increase over what is coming out currently."

LEGAL RISK REMAIN

A Venezuelan oil company executive, who spoke on the condition of anonymity and has worked there, stated that the country's overall production could reach 1.5 million bpd in less than a calendar year, if oil producers obtain the necessary licenses.

Venezuelan oilfields, he said, are "very forgiving. You can increase production a great deal," referring the abundant reserves. The executive did add that there are still supply chain problems and security issues, especially around Maracaibo.

Executives also pointed out that there was still legal uncertainty, since it is not possible to guarantee that agreements made now will be honored by future governments. Venezuela's National Assembly approved in January a comprehensive oil reform that gave autonomy to foreign companies. However, some new contract models, which had been initially promoted by Maduro without much success, are still seen as risky by potential investors. The legitimacy of the passed reform is also questioned from a constitutional perspective. The U.S. and other countries have refused to recognize the results of the rigged parliamentary and president elections in the past.

Investors should also be aware of the possibility that future U.S. government may ease pressure on Caracas and allow it to regain control over oil exports and revenues.

According to a worker who has worked in the area for 22 years, the amount of investment needed will be huge. The worker stated that many companies have the ability to fix the problem, but the willingness to do so will depend on how they react once they see the disaster.

(source: Reuters)