Water Water Everywhere, But Will Chavez Allow a Drink?
I like to highlight on this blog anytime an oil & gas exploration company finds a big-ass shitload of 'hydrocarbon resources'. I like to do this to stick it to the Peak Oilers, the greens and the luddites who moan all the time that "we can't drill our way out of our energy problems." Um, yes we can, and for a very long time to come. Frankly, though it's getting old. Big discoveries are coming at a fast and furious pace (the consequence of almost a decade of serious drilling - most countries love drilling, and the one country that matters that doesn't like drilling, had a Texas oil man in the White House for eight years) that it has become so routine.
But today brings news of a massive discovery with an interesting twist. The discovery is of natgas and it is a monster - something like 7-8 trillion cubic feet. And it is in Venezuela. I know what you're thinking - 'Great, more petro-wealth for sociopathic communist nutball Hugo Chavez!' Not so fast. This almost certainly doesn't mean instant wealth and power for the Bolivarian Bozo and it might actually be bad for Chavez. This is a classic example of Dan Yergin's claim the the principal risks in the energy business are above ground.
Let's start the analysis with the basics. OK, the gas is there, but how do you get it out? Offshore natural gas extraction is incredibly expensive and technologically demanding. Not every O&G company is good at it and very few companies have the massive capital resources required to secure the extraction equipment and build out the infrastruture needed to get the gas to market. Sure, state-owned energy companies like PDVSA have large resources, but Chavez has turned PDVSA into a basketcase by purging talent and skimping on reinvestment. There is no way that PDVSA could undertake gas extraction on such a large scale on its own. It would need outside help. Can Repsol do it? Unlikely. The majors - Exxon, Chevron, Shell, BP - are really the only players to have taken on massive offshore natgas projects. Many of these companies have gotten the shaft from ole' Hugo recently as have numerous, smaller oil service players. Needless to say, there will not be a stampede of capable players beating a path to Hugo's door to tap this big gas play. His only hope is Asia, but even if Japan (long shot) or China are willing to pony up the billions needed for investment, they will still have to hire some outside help. I doubt any oil service firm is going to do business with PDVSA, so some other entity, like a CNOOC, will have to be in charge of the project, depriving Chavez of the opportunity for patronage and graft.
The next sticking point is what do you do with the gas once it is out of the ground. The domestic economy in Venezuela is on its knees and could not possibly provide adequate demand for that much gas, nor could it support prices that would make the investment economical. Chavez is already tapped out on subsidizing his economy; so either he has to create demand by investing further billions into petrochemical plants, an option which suffers from that same "I've already screwed everybody" problem (who's going to build a multi-billion $ petrochemical complex on Venezuelan soil given the current political situation there?) or he has to send that gas abroad. Essentially that means it has to be compressed into LNG and put on boats. That's several more billions for the gasification infrastruture and those nifty boats. And then he'll have to get off that pesky shipping black list.
Having pissed off the global energy industry, all Chavez really brings to the table is the real estate. To get this project done, he'll need some very gullible and very deep pocketed partners, but they just don't exist. The gullible don't have deep pockets and the deep pockets aren't gullible anymore. If he gets a partner, it is likely to be the Chinese and they won't allow themselves to get ripped off, so they'll be in control. Chavez will become just another ward of the Chinese state's energy strategy. You don't go around rattling your sword and stirring up the pot when you're hosting tens of billions of $ in Chinese state property - you shut up and keep the factory running. This is not how Chavez operates, he would have to change his stripes or the partnership will crash.
Furthermore this is not a clear homerun for Chavez even if he can find a partner. If anybody does invest in tapping this big natgas find, it will almost certainly be with an eye toward the post-Chavez era. You don't want your investors yearning for the day you are gone.
Finally there are the people of Venezuela. They know what living standards are around the world in nations with huge energy deposits. If they see Chavez failing to make use of the country's resources because he has cut himself off from the civilized world, they will demand leadership that can.
For Chavez this could be an embarassment of riches.
But today brings news of a massive discovery with an interesting twist. The discovery is of natgas and it is a monster - something like 7-8 trillion cubic feet. And it is in Venezuela. I know what you're thinking - 'Great, more petro-wealth for sociopathic communist nutball Hugo Chavez!' Not so fast. This almost certainly doesn't mean instant wealth and power for the Bolivarian Bozo and it might actually be bad for Chavez. This is a classic example of Dan Yergin's claim the the principal risks in the energy business are above ground.
Let's start the analysis with the basics. OK, the gas is there, but how do you get it out? Offshore natural gas extraction is incredibly expensive and technologically demanding. Not every O&G company is good at it and very few companies have the massive capital resources required to secure the extraction equipment and build out the infrastruture needed to get the gas to market. Sure, state-owned energy companies like PDVSA have large resources, but Chavez has turned PDVSA into a basketcase by purging talent and skimping on reinvestment. There is no way that PDVSA could undertake gas extraction on such a large scale on its own. It would need outside help. Can Repsol do it? Unlikely. The majors - Exxon, Chevron, Shell, BP - are really the only players to have taken on massive offshore natgas projects. Many of these companies have gotten the shaft from ole' Hugo recently as have numerous, smaller oil service players. Needless to say, there will not be a stampede of capable players beating a path to Hugo's door to tap this big gas play. His only hope is Asia, but even if Japan (long shot) or China are willing to pony up the billions needed for investment, they will still have to hire some outside help. I doubt any oil service firm is going to do business with PDVSA, so some other entity, like a CNOOC, will have to be in charge of the project, depriving Chavez of the opportunity for patronage and graft.
The next sticking point is what do you do with the gas once it is out of the ground. The domestic economy in Venezuela is on its knees and could not possibly provide adequate demand for that much gas, nor could it support prices that would make the investment economical. Chavez is already tapped out on subsidizing his economy; so either he has to create demand by investing further billions into petrochemical plants, an option which suffers from that same "I've already screwed everybody" problem (who's going to build a multi-billion $ petrochemical complex on Venezuelan soil given the current political situation there?) or he has to send that gas abroad. Essentially that means it has to be compressed into LNG and put on boats. That's several more billions for the gasification infrastruture and those nifty boats. And then he'll have to get off that pesky shipping black list.
Having pissed off the global energy industry, all Chavez really brings to the table is the real estate. To get this project done, he'll need some very gullible and very deep pocketed partners, but they just don't exist. The gullible don't have deep pockets and the deep pockets aren't gullible anymore. If he gets a partner, it is likely to be the Chinese and they won't allow themselves to get ripped off, so they'll be in control. Chavez will become just another ward of the Chinese state's energy strategy. You don't go around rattling your sword and stirring up the pot when you're hosting tens of billions of $ in Chinese state property - you shut up and keep the factory running. This is not how Chavez operates, he would have to change his stripes or the partnership will crash.
Furthermore this is not a clear homerun for Chavez even if he can find a partner. If anybody does invest in tapping this big natgas find, it will almost certainly be with an eye toward the post-Chavez era. You don't want your investors yearning for the day you are gone.
Finally there are the people of Venezuela. They know what living standards are around the world in nations with huge energy deposits. If they see Chavez failing to make use of the country's resources because he has cut himself off from the civilized world, they will demand leadership that can.
For Chavez this could be an embarassment of riches.
posted by Donny Baseball at 3:00 PM
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