Tuesday, May 01, 2007

Replacing Venezuela

When Venezuela takes control today of the Orinoco oil fields largely developed at the expense of American oil companies, it is sending a clear signal that it is time for us to diversify our supplies. This event doesn't come as a surprise, but as yet another milestone on the path that President Chavez began when he turned the country's formerly independent national oil company, PdVSA, into an instrument of state policy. This coerced transfer of ownership ends a long period in which Venezuela was an important bulwark of US energy security. While we will continue to receive Venezuelan oil for years, because of its proximity to and suitability for US Gulf Coast refineries, we can no longer count on them to be there in a pinch, or to honor contractual commitments made in good faith. But where do we find another Venezuela, in resource terms?

A recent op-ed in the Wall St. Journal explained that the essence of energy security lies not in self-sufficiency--which hasn't been practical since the 1950s--but in a diverse supply base. Some might look to ethanol to fill the gap, but even at its expected production rate of 6 billion gallons this year, ethanol provides less volume than the oil we import from Algeria and contributes the energy equivalent of just one medium-sized offshore oil platform. For the near term, only more oil--or the conservation that has yet to materialize--can replace lost oil. As important as it has been in bolstering our diversity of supply for the last several decades, it is fortunate that Venezuela only supplies about 10% of our crude oil imports, making its gradual shift toward supplying its Latin American neighbors and China in preference to us a challenge, but not a crisis.

With resource owners such as Russia enjoying the negotiating power that high oil prices bring, many of the companies being displaced from Venezuela are looking to Canada's oil sands, where Statoil has just acquired a $2 billion stake. There aren't many other opportunities at this scale that aren't controlled by national companies. Although technically quite different from Venezuela's heavy oil reserves, the oil sands require the kind of process-intensive techniques at which the international oil majors excel. A dependable legal system makes them even more attractive. Oil sands production is growing fast enough eventually to offset any lost supplies from Venezuela, though at an environmental cost that includes large quantities of greenhouse gas emissions.

The situation in Venezuela illustrates some important lessons about the role of publicly-traded oil companies and the challenges they face. Although earning disconcertingly large profits at the moment, these firms face daunting risks and deteriorating terms in the countries where most of their future production lies. Russia's recent "renegotiation" with Shell over the Sakhalin LNG project looks little different from what Sr. Chavez has just done to ExxonMobil, Chevron and ConocoPhillips. At the same time, the direct country-to-country ties that are emerging as a threat to the prevailing commercial model of oil development carry their own risks. If the web of petroleum links between the US and Venezuela were at the government-to-government level, rather than between large international oil companies and PdVSA, would we now be looking at a complete cutoff of supply, rather than a partial nationalization?

Given all the geopolitical risks and environmental challenges that are piling up around the world, we need large, financially-sound US-based energy companies that can find and develop oil and gas under a variety of geological and political conditions, in a large number of countries. Whether we like it or not, these companies will provide the main sources of our energy security for years to come, until alternative energy eventually grows large enough to displace them from this function.

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