According to Oil and Gas Journal (OGJ), Venezuela had 80.0 billion barrels of proven oil reserves in 2007, the largest amount in South America. Venezuela is a significant supplier of crude oil to the world market: in 2006, the country had net oil exports of 2.2 million barrels per day (bbl/d), sixth-largest in the world and the largest in the Western Hemisphere. In recent years, crude oil production in the country has fallen, mostly due to natural decline at existing oil fields.

Venezuela nationalized its oil industry in 1975-1976, creating Petroleos de Venezuela S.A. (PdVSA), the country's state-run oil and natural gas company. Along with being Venezuela's largest employer, PdVSA accounts for about one-third of the country’s GDP, 50 percent of the government’s revenue and 80 percent of Venezuela’s exports earnings. In recent years, the Venezuelan government has reduced PdVSA’s previous autonomy and amended the rules regulating the country’s hydrocarbons sector. An example of this trend is the November 2004 appointment of Rafael Rodriguez, the energy minister, as chairman of PdVSA.

Nearly one-half of PdVSA’s employees walked off the job on December 2, 2002 in protest against the rule of President Chavez. The strike severely impacted PdVSA, practically bringing the company’s operations to a halt. PdVSA fired 18,000 workers following the strike, draining the company of technical knowledge and expertise. Industry analysts speculate that the strike did permanent damage to PdVSA’s production capacity and remains the contributing factor to continued declines in production in recent years.

Industry analysts estimate that PdVSA must spend some $3 billion each year just to maintain production levels at existing fields, as many of these fields suffer annual decline rates of at least 25 percent. Affecting PdVSA’s ability to meet its investment goals are the increasing demands placed upon its finances by the Venezuelan government. In 2004, the Venezuelan government established a special development fund to finance infrastructure projects throughout the country; PdVSA will supply billions of dollars per year directly to this fund. The company also funds additional social programs directly from its budget. These new priorities divert billions of dollars per year away from oil-related activities. Along with these directly-administered programs, PdVSA pays billons of dollars each year to the Venezuelan government in the form of income taxes and royalties.

In the 1990s, Venezuela opened its upstream oil sector to private investment. This collection of policies, called apertura, facilitated the creation of 32 operating service agreements (OSA) with 22 separate foreign oil companies, including international oil majors like Chevron, BP, Total, and Repsol-YPF. Under these contracts, companies operated oil fields, and PdVSA paid these companies a fee and purchased the produced crude at a price pegged to market rates. PdVSA also offered eight blocks under risk/profit sharing agreements (RPSA), under which PdVSA had an option to purchase up to a 35 percent equity stake in the project, if the foreign operator discovered commercial quantities of oil in the exploration phase. Finally, Venezuela established four “strategic associations” that produce extra-heavy crude, in which PdVSA held a financial interest.

In 2001, Venezuela enacted a new Hydrocarbons Law that superseded the previous 1943 Hydrocarbons Law and 1975 Nationalization Law. Under the 2001 law, royalties paid by private companies increased from 1-17 percent to 20-30 percent. Further, the law guaranteed PdVSA a majority share of any new projects. Finally, the law stipulated that all future foreign investment would be in the form of joint ventures (JV) with PdVSA, rather than the OSA, RPSA, or strategic associations. In August 2003, Venezuela’s Ministry of Energy and Mines (MEM) transferred PdVSA’s 32 operating contracts, the four strategic associations, and the risk exploration contracts to subsidiary Corporacion Venezolana de Petroleo (CVP). Legislation in 2006 later increased the royalty and income tax rates on the four strategic associations to 33.3 percent and 50 percent, respectively. In 2005, the Venezuelan government began to transition the OSAs to the new JV structure. In 2007, the Venezuelan Congress approved the final batch of JV agreements, with CVP having a 60 percent stake in most of the new companies. The RPSAs were also transitioned to the new JV structure.

In 2007, Venezuela completed the transition of the four strategic associations to new structures in alignment with the 2001 law. PdVSA increased its holdings in the four projects to an average of 78 percent, up from 40 percent. Of the six companies involved in the projects, two reduced their holdings to allow space for the enlarged PdVSA share (Total and Statoil), two maintained their previous stakes (Chevron, BP), and two exited completely from the projects (ConocoPhillips and ExxonMobil).

It is unclear how these recent events will influence foreign investment in Venezuela’s oil sector. Most of the foreign oil companies have accepted the contract changes. Several factors that could influence oil company decisions include high world oil prices, increasing efficiency of operations (especially the strategic associations), and a desire to maintain access to Venezuela’s large oil reserves. The future of foreign investment in Venezuela could shift to national oil companies (NOC), with the country’s reserve classification plan for the Orinoco Belt (see “Magna Reserva” below) focused almost exclusively on other NOCs.

Venezuela’s actual level of oil production is difficult to determine, with the country and independent industry analysts offering differing estimates. Most industry analysts and EIA estimate that the country produced around 2.8 million bbl/d of oil in 2006. These estimates conclude that the country has not fully recovered from the strikes of 2002-2003. Another factor that complicates comparisons of Venezuelan oil production estimates are methodological and classification issues. For example, EIA estimates that, of Venezuela’s 2.8 million bbl/d of oil production, 2.5 million bbl/d was crude oil and 300,000 bbl/d was condensate, natural gas liquids (NGL), and Orimulsion (see below). On the other hand, it is unclear what “other liquids” are included in official estimates of oil production. Another methodological issue is the measuring of crude oil production by the four extra-heavy strategic associations (see below). Some analysts count the extra-heavy oil produced by the associations as part of Venezuela’s crude oil production. Others (including EIA) count the upgraded syncrude produced by the four as part of Venezuela’s crude oil production, which is about 10 percent lower than the volume of the original extra-heavy feedstock.

It is difficult to assess how much oil PdVSA actually produces, due to the issues discussed above. Independent analysts and EIA estimate that the company produced around 1.6 million bbl/d of crude oil in 2006, or around 60 percent of Venezuela’s total crude oil production. This amount also includes 100,000 bbl/d of oil production that was transferred from the former OSA companies to PdVSA. This represents a decrease of 30 percent below independent estimates of pre-strike PdVSA crude oil production of 2.2 million bbl/d.

Venezuela has four major sedimentary basins: Maracaibo, Falcon, Apure, and Oriental. The crude oil held in these fields has an average API gravity of less than 20°, making Venezuela's conventional crude oil heavy by international standards. As a result, much of Venezuela’s oil production must go to specialized domestic and international refineries. The Maracaibo basin contains slightly less than half of PdVSA’s oil production. The fields in this area are very mature, requiring heavy investment to maintain current capacity. Centers of production in the area include Tomoporo, Lagunillas, and Tiajuana. In order to mitigate steep decline rates in the Maracaibo Basin, PdVSA re-injects natural gas into the reservoirs in order to increase pressure. In general, the fields in the Oriental basin are less mature than those in the west, and they were some of the first fields brought online after the 2002-2003 strike.

According to industry estimates, the fields operated by the JVs produced around 400,000 bbl/d of oil. Many of these fields are small and marginal, with steep decline rates. Production in recent years has fallen from 600,000 bbl/d, due to reduced investment levels prior to the transition from the old OSA structures and the transfer of some former OSA fields to direct PdVSA operatorship.

Of the eight RPSA contracts originally awarded by PdVSA, three resulted in the discovery of significant amounts of oil reserves: La Ceiba, Golfo de Paria Este and Golfo de Paria Oeste. ConocoPhillips had planned to bring the 55,000-bbl/d Corocoro field onstream in Paria Oeste, along with equity partners PdVSA and Eni. Despite ConocoPhillips’ exit from the Venezuelan oil sector, PdVSA has stated that it will bring Corocoro onstream by the end of 2007. Corocoro would represent Venezuela’s first offshore oil production.

Venezuela contains billions of barrels in extra-heavy crude oil and bitumen deposits, most of which are situated in the Orinoco Belt in central Venezuela. Estimates of the recoverable reserves from the Orinoco Belt range from 100 to 270 billion barrels. Venezuela has established four strategic associations to exploit these resources. The strategic associations convert the extra heavy crude and bitumen from approximately 9° API to lighter, sweeter crude, known as syncrude. According to industry estimates, the four projects have installed production capacity of 580,000 bbl/d of syncrude (see table). However, production in the first half of 2007 was lower than this amount: OPEC decided in late 2006 to enact cuts in oil production, and media reports indicated that the four strategic associations were asked to bear most of Venezuela’s contribution to this cut.

Orinoco Belt Strategic Associations
Project Name (New Name)	Petrozuata (Petroanzoategui)	Cerro Negro (Petromonagas)	Sincor (Petrocedeno)	Hamaca (Petropiar)
Partners (percent)	PdVSA (100)	PdVSA (83.34), BP (16.66)	PdVSA (60), Total (30.3), Statoil (9.7)	PdVSA (70), Chevron (30)
Startup Date	October 1998	November 1999	December 2000	October 2001
Extra-Heavy Crude Production (bbl/d; API)	120,000; 9.3°	120,000; 8.5°	200,000; 8-8.5°	200,000; 8.7°
Syncrude Production (bbl/d; API)	104,000; 19-25°	105,000; 16°	180,000; 32°	190,000; 26°

Venezuela plans to aggressively develop the Orinoco Belt oil resources in the coming years. PdVSA has begun a reserves certification program to increase the amount of proven oil reserves held by the country. The program, dubbed “Magna Reserva,” includes seismic studies conducted by their company and several foreign partners in 27 blocks, and it is the first step towards more aggressive development of the Orinoco Belt reserves: companies that participate in the Magna Reserva will likely be the first considered for new upstream developments. PdVSA has teamed almost exclusively with foreign national oil companies for the program, including Petrobras (Brazil), Petropars (Iran), CNPC (China), and ONGC (India). In total, PdVSA estimated that the program could certify up to 260 billion barrels of total oil in place, though proven reserves would likely amount to no more than 20 percent (52 billion) of this total.

The certification program has begun to yield some concrete project proposals. In 2006, Petrobras (40 percent) and PdVSA (60 percent) established a joint venture to develop the Carabobo I block, which Petrobras is exploring as part of the Magna Reserva program. The project would initially produce 20,000 bbl/d of extra-heavy crude oil, peaking at 200,000 bbl/d. An offsite upgrader would further process the crude oil into lighter syncrude. According to media reports, the project has an estimated 28.6 billion barrels of oil in place, with an expected recovery rate of 20 percent. Production at the field could begin by 2009.

Orimulsion® is a patented product developed by PdVSA for use as a boiler fuel. It is a mixture of approximately 70 percent natural bitumen, 30 percent water, and less than 1 percent surfactants (emulsifiers). Bitumen is a non-oil hydrocarbon and not counted towards Venezuela's OPEC crude oil production quota. Venezuela ceased Orimulsion production at the end of 2006, stating that it would be more profitable to sell the heavy oil directly or blending it with lighter oil streams. PdVSA marketed Orimulsion as an alternative to coal or fuel oil, especially in power plants.

In 2006, Venezuela consumed 620,000 bbl/d of oil and exported around 2.2 million bbl/d. The United States is the largest destination of Venezuela’s petroleum exports. In 2006, the United States imported 1.41 million bbl/d of crude oil and petroleum products from Venezuela, 8 percent lower than the previous year. Over the long term, Venezuela’s exports to the United States have increased, but its share of U.S. total imports has fallen from 50 percent in 1960 to 10 percent in 2006. However, in recent years, Venezuelan petroleum exports to the United States have fallen, particularly exports of refined petroleum products. The U.S. Gulf Coast is the largest recipient of Venezuelan crude oil imports, with refineries there specifically configured to handle Venezuelan heavy crude varieties.

Besides the United States, other important destinations of Venezuelan petroleum exports include South America, Europe, and the Caribbean, though much of the crude oil that is exported to the Caribbean is later re-exported as petroleum products to the United States. One of the fastest growing destinations of Venezuelan crude oil exports has been China. In 2006, China imported about 80,000 bbl/d of oil from Venezuela, up from 39,000 bbl/d in 2005. In recent years, Venezuela has prioritized the diversification of its petroleum export destinations away from the United States, but the U.S. market will likely remain Venezuela’s most important market for the foreseeable future.

Venezuela provides a sizable amount of crude oil and refined products to its regional neighbors at below-market prices and with favorable financing terms. Under the auspices of the San Jose Accord, Venezuela and Mexico provide eleven Central American and Caribbean nations (Barbados, Belize, Costa Rica, El Salvador, Guatemala, Haiti, Honduras, Jamaica, Nicaragua, Panama and the Dominican Republic) with crude oil and products under preferential terms. Venezuela also has additional bilateral agreements with Cuba and Jamaica, sending those countries 92,000 bbl/d and 21,000 bbl/d, respectively, of crude oil and petroleum products under favorable terms.

The PetroCaribe signed in 2005, provides some 70,000 bbl/d of discounted crude oil and refined products to numerous countries in the Caribbean. PetroCaribe allows the importing countries to pay for a portion of the oil imports with long-term, low-interest loans or barter oil for other goods.

Venezuela has also targeted bilateral deals towards South America. In 2005, PdVSA signed deals with Paraguay and Uruguay to supply discounted petroleum products and work to upgrade the countries’ refineries to process Venezuelan crude varieties. In August 2005, Venezuela agreed to provide Ecuador with a temporary crude oil loan to help the country through a disruption to its production facilities.

Venezuela has an extensive domestic oil pipeline system, providing transportation from production centers to refineries and coastal export terminals. Currently, the country does not have any export pipelines, but there has been discussion about constructing an oil pipeline to port in Colombia along the Pacific Ocean. This would facilitate greater Venezuelan crude exports to Asia, bypassing the Panama Canal bottleneck or the high costs of shipping around Cape Horn.

According to OGJ, Venezuela had 1.28 million barrels per day (bbl/d) of crude oil refining capacity in 2007, all operated by PdVSA. The major facilities include the Paraguana Refining Center (955,000 bbl/d), Puerto de la Cruz (195,000 bbl/d), and El Palito (126,900 bbl/d). Through PdVSA and its subsidiary CITGO, Venezuela also controls significant refining capacity outside of the country.

CITGO is a wholly-owned subsidiary of PdVSA that has some 14,000 branded retail outlets (both directly owned and affiliates) in the United States. CITGO operates three product refineries (Lake Charles, LA; Corpus Christi, TX; Lemont, IL), with a combined crude oil distillation capacity of 755,400 bbl/d. CITGO also operates two asphalt refineries (Paulsboro, NJ; Savannah, GA), though the company is reportedly interested in selling those facilities. CITGO sources most of its crude oil under long-term contracts with PdVSA, though the Lemont facility receives most of its feedstock from Canada. Besides its holding through CITGO, PdVSA also owns shares in some U.S. crude oil refining capacity directly, including a 50 percent stake in the Chalmette facility in Louisiana and certain units at ConocoPhillips’ Sweeny, Texas refinery.

In October 1998, PdVSA acquired a 50 percent equity interest in the Hovensa refinery, located in St. Croix, U.S. Virgin Islands. Amerada Hess holds the other 50 percent interest in the refinery, which has a capacity of 495,000 bbl/d. The U.S. Virgin Islands imported around 300,000 bbl/d of crude oil from Venezuela in 2006. In the Netherlands Antilles, PdVSA leases the 320,000-bbl/d Isla refinery on the island of Curacao. Most of the products produced by these refineries are exported to the U.S. or other regional markets.

PdVSA has looked toward South America to further increase its regional refining capacity. In February 2005, PdVSA signed an agreement with Petrobras to build a new, 200,000-bbl/d refinery in the northeastern Brazilian state of Pernambuco at a cost of $4 billion. In September 2007, Brazil officially broke ground on the facility, even though the two countries had not reached a formal agreement concerning the project. The facility will have units designed to process the very heavy varieties of crude oil produced by Venezuela and Brazil.

PdVSA participates in two joint refining ventures in Europe, with the company holding equity interest in 294,000 bbl/d of refining capacity in the region. PdVSA holds a 50 percent stake in AB Nynas, a Swedish company that operates five refineries: Nynashamm (Sweden), Gothenburg (Sweden), Antwerp (Belgium), Eastham (England), and Dundee (Scotland); PdVSA’s share of this capacity is 50,500 bbl/d. PdVSA also holds a 50 percent stake in Ruhr Oel, in partnership with BP. Ruhr Oel holds ownership stakes in five German refineries, Gelsenkirchen, Neustad, Karlsruhe, and Schwedt, with PdVSA’s share of this capacity at 243,000 bbl/d.