OFFERING CIRCULAR CONFIDENTIAL
Petróleos de Venezuela, S.A.
Unconditionally and Irrevocably Guaranteed by PDVSA Petróleo, S.A.
9% Senior Notes due 2021
In a 250-page PDVSA prospect offering a new emission of senior notes to potential investors, the Venezuelan state-owned company Petroleos de Venezuela, PDVSA, has this to say about their oil and gas reserves:
“Venezuelan proved crude oil and gas reserve estimates involve some degree of uncertainty and may prove to be incorrect over time, which could adversely affect our ability to generate income”.
My Comment: Proved reserves of oil and gas are, by definition, those existing with a high degree of certainty (more than 90 percent), technically and economically recoverable within a given period of time. It seems unlikely, therefore, that proven resreves, defined as such today, might become less certain in the future. All logical expectations indicate that what is certain today, tomorrow it would be even more certain. The caveat by PDVSA clearly suggests that what they define as proven is based on insufficient knowledge. If so, why did they do it?
And they add:
“The proved crude oil and gas reserves set forth in this offering circular are our estimated quantities of crude oil, natural gas and natural gas liquids that geological and engineering data demonstrate with reasonable certainty to be recoverable from known reservoirs under existing economic and operating conditions (i.e., prices and costs as of the date the estimate is made). Our proved oil and gas reserves have not been verified by any independent third party. Venezuelan proved developed crude oil and gas reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Recently, we have revised our expected recovery factor from 8% to 20%, based on existing economic and operating conditions, as well as on the availability of improved recovery technologies and broader information regarding reservoir performance parameters such as cumulative production, production rate, reservoir pressure and gas oil ratio behavior. The foregoing led to an increase in our internally certified proved reserves of 219,500 million barrels over the past five years.
There are uncertainties in estimating quantities of proved reserves related to prevailing crude oil and natural gas prices applicable to our production, which may lead us to make revisions to our reserve estimates”.
My Comment: PDVSA admits that their proven reserves have not been verified by independent third parties. However, this is not what they have been claiming all the time. They have said in multiple ocassions that the reserves of the Orinoco area have been certified by independent third parties, foreign oil companies and independent companies that do this type of work (for example: Ryder Scott). Which is the truth?
They add that they have recenly revised their recovery factor from 8 to 20 percent based on existing economic and operating conditions. Although oil prices have certainly increased, operating conditions/reservoir performance in the larger Orinoco area are still sketchy. Development is still incipient. How much more can they know now that allows them to more than double the recovery factor? I maintain that this increase in the recovery factor is arbitrary, unprofessional and borders on fraud. It has been done to position Venezuela as the country with the “largest oil reserves in the world”, for geopolitical reasons.
“Moreover, many of the factors, assumptions and variables involved in estimating proved reserves are beyond our control and are subject to change over time. Consequently, measures of reserves are not precise and are subject to revision. Downward revisions in our reserve estimates could lead to lower future production, which could affect our results of operations and financial condition”.
My Comment: They say that measurements of reserves are not precise. Wrong. Reserves are defined as proven, probable and possible, on the basis of decreasing certainty. If they say that their proven reserves are not precise, it seems obvious that they are talking about probable, not proven reserves. They have problems with language and with management.
Furthermore, they say that downward revisions in their reserves estimates coud lead to lower future production. Again, this is wrong. Venezuela is the oil country that shows the most undeveloped reserves in the world. Even if the proven reserves of the Orinoco area were estimated on the basis of a recovery factor of 8 percent, Venezuela could triple the production from this area if PDVSA got its act together. Low Venezuelan production is not a problem of reserves. It is a problem of mismanagment and ineptitude.
These equivocal statements made by PDVSA (the prospect we refer to is full of them) confirm what we have been saying all along, certainly for the last two years, about the improper, unprofessional manner PDVSA has been managing their estimates of proven reserves, with purposes that are clearly more political than technical. This issue has not merited much attention from the public since it is very specialized but it reveals a style of doing things at the company that deeply erodes their overall credibility.