Venezuela wants to boost its gas production, but operators need a lot of answers before putting their money on the table.

Like nearly every other country in the world, Venezuela would like to sell its oil to other countries and use cleaner, and usually cheaper, natural gas to power its own economy. Unlike many other nations, it has reserves and it has a plan.
Last year, the Western Hemisphere's biggest oil exporter produced an average 5.685 Bcf/d of gas, ending the year at about6 Bcf/d. Of that gas, 30% went to industry and manufacturing and 70% came back
to the petroleum industry for injection and pressure maintenance, refining and the production of natural gas liquids (NGL).
It sold 181,000 b/d of NGL and exported 32%.
It sold the gas to some 1,500 industrial customers and 460,000 residential or commercial buyers, primarily in large
cities.
For the future, the Venezuelan Ministry of Energy and Minerals (MEM) plans to expand the nation's use of energy, and it wants gas to bear all the weight of that expansion. Venezuela consumed the equivalent of 1.13 million b/d of oil in 1999. Hydroelectric power supplied 32% of that, liquids another 26% and gas 42%. By 2009, Venezuela plans to consume the equivalent of 1.8 million b/d of oil with hydroelectric's share dropping to 28%, liquids falling to 17% and gas making up the remaining 55%.
Supply
Supply is not a problem. Venezuela estimates its gas resources at 227 Tcf, and 146 Tcf of that is proven reserves. That places it seventh in the world in gas reserves just behind the 167 Tcf in reserves claimed by the United States.
During a Venezuelan Business Opportunities Seminar in Houston, Texas, a delegation of Venezuelan energy executives explained their plans for that gas.
Venezuela wants to maintain control of the gas associated with the production of oil -the only gas supply in the country - and it wants to farm out the production of nonassociated gas to private companies. Associated gas makes up 132 Tcf of total proven reserves, leaving 14 Tcf in nonassociated reserves for private production. The nation also wants to transfer the gas transportation and distribution systems to private parties.
To make the package more attractive, the country passed a new gas law late last year that cuts taxes on production of nonassociated gas to 34% from 67%. It also set royalties at 20% and allowed a 10% tax credit for new investments.
Nonassociated gas licensing will begin this year with registration and prequalification in July, bid preparation in November and licensing in December.
Under the new gas law, it is legal for an international company to own 100% of a project, "but I hope they will see the advantage of participating with a Venezuelan company," said Bernardo Alvarez, vice minister of hydrocarbons in the MEM.
The MEM plans to offer more than 7,500sq miles (12,000sq km) of leases in 14 prospective areas, some near existing transmission systems and markets.
Consumption
Venezuela's domestic natural gas market is growing at a rate of 7% a year, and Petroleos de Venezuela SA (PDVSA) expects it to more than double by 2009. The petrochemical industry consumes nearly all the NGL produced.
The country's literature, talking about future supplies, says, "It is important to point out that the estimated growth in the country's domestic demand practically guarantees the placement of the volumes of gas expected in those areas."
Those areas are four divisions of the northern part of Venezuela corresponding to four transmission and distribution companies the country hopes private parties will establish. One is in the east surrounding Lake Maracaibo. Another area is immediately east and contains the cities of Barquisimeto, Acarigua and Maracay. The third includes Caracas. The fourth and largest segment contains the major industrial complex at Jose, Anaco, Maturin, El Tigre and Perto Ordaz.
Only Caracas, Maracaibo and parts of Puerto La Cruz and El Tigre receive gas for commercial and residential use. That could expand to Maracay, Valencia, Barquisimeto, Maturin and Puerto Ordaz.
Venezuela also anticipates at least one new gas-to-liquids or NGL plant at Jose to provide liquids for export.
Investment
To fund this massive network of production, transmission, distribution and export, Venezuela sees a need for about US $1.9 billion for the near-term projects and another $4.6 billion for the long-term projects.
For a return on those investments, the MEM will set the price of natural gas sold in the country and assure the operator of a reasonable profit, said Domingo Marsicobetre, vice president of PDVSA and president of PDVSA Gas. That payment will be made up of the commodity price, plus the transportation and distribution tariffs.
PDVSA Gas will be a minor partner in the pipelines. For instance, it is setting up a joint venture in the pipeline system from Anaco to Jose. It has qualified 59 companies, including 21 international firms, and expects to have $120 million in investments in that line to double capacity in the next 5 years, said Nelson Nava, business development director for PDVSA.
Next the joint ventures will build a new line to the Margarita Peninsula. The third step will be a system extending west to Barquisimeto. The fourth should extend the Anaco line south to Puerto Ordaz. The fifth step will be a line to Colombia, and the sixth will be a line from northern gas fields at Paraguana.
PDVSA will handle development of the Anaco area from 2001 through 2005.
After assigning licenses late this year, MEM anticipates initial production from the Yucal-Placer area south of Caracas in early 2003. That area will have two licenses of 348sq miles (900sq km) each, and each has 1 Tcf of gas in proven reserves. It's 12 miles (20km) from a pipeline.
Southwest of Barquisimeto on the South Andean Flank, the Guarico-Cojedes group includes 10 license areas of 386sq miles (1,000sq km) each with each containing an estimated 500 Bcf of gas. In the same area, Barrancas, southeast of Lake Maracaibo, is a single 761sq mile (1,970sq km) area with up to 10 Tcf of gas, and Ambrosio, north of the lake, contains 203sq miles (527sq km) and an estimated 2 Tcf to 3 Tcf of gas.
Exploration areas require bids on exploration activities with licenses going to the best programs. Development areas must include an Venezuelan operating company, and bids will be made in terms of special payments that represent a percentage of the value of the hydrocarbons produced at the wellhead to two decimal points, said Jesus Aboud, upstream development manager for PDVSA Gas.
Further into the future, Venezuela would like private companies to develop the offshore gas area north of the Gulf of Paria and the offshore Deltan Platform off the northeast coast just south of Trinidad. Those two projects, with associated liquefaction plants, should be open for tender in 2003.
Questions
In spite of the plans and optimism by Venezuela, operators who attended the Venezuelan conference had substantial questions about the natural gas projects. Primarily, they would like more assurance that the markets for produced gas will develop as the nation says they will.
The industry still worries about potential instability from the relatively new government, although government officials repeatedly assure executives that they will stick to all contracts previously made.
For instance, earlier this year, Moody's Investors Services confirmed PDV Americas Inc.'s Baa3 senior debt rating but changed the rating outlook to negative. According to the rating agency, the Venezuelan government's fiscal needs "will continue to put pressure on PDVSA to generate higher cash flows...In addition, Moody's believes there is restructuring risk and uncertainty about the future configuration of PDVSA's overseas assets and investments."
At about the same time, Kirby Hedrick, upstream executive vice president for Phillips Petroleum Co., told an energy conference in New York that top officials of Phillips and Texaco planned to meet with Venezuelan President Hugo Chavez to talk about concerns they had about the unpredictability of the government and how that might affect their joint venture with PDVSA in the Hamaca heavy oil project.
And Conoco Inc.'s Gary Merriman, president of upstream for the Americas, told a chamber of commerce group in Venezuela that Venezuela ranked ninth toughest in terms of fiscal terms in a survey of 150 counties. He also said he hadn't seen many positive signals from the government about the climate for investment in Venezuela.
Conoco's top executives later apologized to Chavez for the remarks, and Chavez staunchly maintained that Venezuela always had upheld its end of contractual agreements with companies working in that country, even when those contracts had been signed by the previous government administration. Venezuela officials just as staunchly maintain that they will continue to honor all agreements.
Those protestations have received a lukewarm reception from operators and from the financial community. An Associated Press story about the postponement of elections in June - another cause of market uncertainty about the country - said business leaders were less than enthusiastic about efforts Chavez has made to boost the economy. They singled out his verbal attacks on private industry.
Hugo Hernandez, vice president of the Venezuelan Petroleum Chamber, said 600 medium and small petroleum-related businesses shut down in 1999, but he didn't make it clear whether those shut-downs were the result of government policy or from low prices in 1998 and early 1999.
Industry executives also worry about the substantial overhang of associated gas produced with Venezuelan oil and the competitive factor that might pose.
They also voice concerns about markets for liquids from new LNG plants at Jose and Paria. Venezuela says it is near settlement on a 2-million-ton-per-year LNG plant at Jose with Enron, and there is potential for a 4-million-ton-per-year plant at Paria. At the same time, however, Trinidad and Tobago is tripling its LNG production capacity to increase exports to the same Western Hemisphere markets.
Potential operators also worry about the prices MEM will set on the gas they produce and whether MEM's definition of a reasonable profit will be the same as their own.
That was one reason PDVSA set the symposium in Houston. It wanted to find out what questions industry representatives wanted to ask, and it wanted to provide answers to those questions.
The bidding round will tell whether it was successful.