VENEZUELA: REPSOL CONFIRMS SIGNIFICANT NATURAL GAS

C O N F I D E N T I A L SECTION 01 OF 02 CARACAS 001361 SIPDIS ENERGY FOR ALOCKWOOD AND LEINSTEIN, DOE/EIA FOR MCLINE HQ SOUTHCOM ALSO FOR POLAD TREASURY FOR MKACZMAREK COMMERCE FOR 4332/MAC/WH/JLAO NSC FOR DRESTREPO AND LROSSELLO E.O. 12958: DECL: 10/21/2019 TAGS: EPET EINV ENRG ECON VE SUBJECT: VENEZUELA: REPSOL CONFIRMS SIGNIFICANT NATURAL GAS DISCOVERY REF: A. 05 CARACAS 2807 ¶B. CARACAS 239 ¶C. CARACAS 853 ¶D. CARACAS 1017 ¶E. CARACAS 1208 CARACAS 00001361 001.2 OF 002 Classified By: Economic Counselor Darnall Steuart, for reasons 1.4 (b) and (d). ¶1. (C) SUMMARY: President Chavez's recent claims that Repsol and ENI's natural gas discovery in the Gulf of Venezuela will catapult Venezuela into place as the country with the fourth largest natural gas reserves in the world appear to be true. Furthermore, Repsol and ENI expect to produce sufficient liquid condensate from the natural gas project to make it economically viable. If Repsol secures a production agreement for the natural gas discovery and closes a crude oil production deal in the Junin area of the Faja extra heavy oil belt, it does not see a need to submit a bid in the Carabobo bid round. END SUMMARY. NATURAL GAS SUPERPOWER -------------- ¶2. (C) President Chavez, in his weekly column on October 18, lauded the accomplishment of Spain's Repsol and Italy's ENI in discovering what Chavez characterized as Venezuela's largest natural gas reservoir in the Gulf of Venezuela. He continued, claiming that the discovery would make Venezuela "a natural gas power, an energy power." He described the discovery as giving Venezuela the fourth largest natural gas reserves (estimated and certified) in the world. PDVSA, he added, would not only be able to provide 14,000 homes in Caracas with natural gas in the first state of development but would quickly be able to supply 50 per cent of the domestic automotive fleet with natural gas supplies. (NOTE: Repsol secured exploratory rights to Cardon Block 4 during the 2005 Rafael Urdaneta natural gas bid round. The Rafael Urdaneta project was intended to produce natural gas for domestic consumption. Colombia currently exports natural gas to Western Venezuela; long-term plans have held that Venezuela would start to export gas to Colombia in 2012. See Reftels. END NOTE.) ¶3. (C) Petroleum Attache (PetAtt) interviewed Cosme Vargas Macias (Repsol's Director of Reserve Development),on October 20 when he was identified on the visa line by an alert Consular Officer. Macias (protect throughout) confirmed that the Perla 1X well in the Cardon 4 block of the Gulf of Venezuela had identified the largest natural gas reservoir in both Venezuela and Repsol's history, containing 8 trillion cubic feet (tcf) of natural gas. Even though Repsol and ENI have completed only one well, he was confident that the estimates of the reservoir's size were accurate. He added that the reservoir contains "wet natural gas" with an impurity content of 2 per cent CO2 (carbon dioxide) and 0.0 parts per million of H2S (hydrogen sulfide),meaning it will be easy to produce. ¶4. (C) According to Cosme, Repsol estimates the "wet natural gas" will yield 20 barrels of condensate per 1 million cubic feet (mcf) of natural gas produced per day. Thus, he said, Repsol expects to produce 500 mcf/d of natural gas and associated 10,000 barrels of condensate/day. Even though natural gas production will be prioritized to meet domestic Venezuelan needs, Cosme claimed that the potential condensate production would be sufficient to make the project commercially viable. Finally, Cosme noted that he expects that PDVSA will not take all the gas to meet domestic demand so that Repsol and ENI could successfully secure rights to export some portion of the natural gas to Europe. According to a Eurasia Group report however, Venezuelan natural gas production at the end of 2008 was shy of 7 billion cubic feet per day (bcf/d),which according to industry estimates leaves a domestic natural gas shortage of 1-2 bcf/d in Venezuela. CARACAS 00001361 002.2 OF 002 ¶5. (C) While seemingly a foregone conclusion, Cosme admitted that Repsol and ENI are still negotiating with each other and PDVSA whether to exercise the contract clause with rig operator Ensco to drill a second exploratory well for Repsol/ENI following its work for Japan's Teikoku in the Gulf of Venezuela. He expected that the formal decision would be taken this week as Ensco is preparing to move the Ensco 68 rig to the Teikoku block. In addition, Cosme expects that PDVSA will exercise its right to back-in to the development phase of the field, taking 35 per cent of the project, leaving the two foreign firms each with 32.5 per cent ownership. PETROQUIRIQUIRE -------------- ¶6. (C) Cosme also described Repsol's other activities in Venezuela ) namely its Petroquiriquire joint venture (JV) with PDVSA and its progress towards developing the Junin 7 block in the Faja heavy oil belt. Cosme shared that Petroquiriquire operates in both the east and west of Venezuela. In western Venezuela (Zulia state),the JV produces 12,000 b/d of crude (split 60-40 between PDVSA and Repsol, respectively). In Monagas (eastern Venezuela),the JV operates under a natural gas license, producing 300,000 mcf/d and 5,000 barrels of condensate/day. JUNIN DEVELOPMENTS -------------- ¶7. (C) Cosme stated that Repsol and PDVSA are negotiating a new JV to develop and produce heavy crude oil in the Junin 7 block. Based on a certification study already completed, Repsol estimates cold production could result in 50,000 b/d of 8-degree API heavy crude. He noted that if PDVSA agrees to build steam injection infrastructure, production could be elevated to over 150,000 b/d. Using steam injection to increase production, Cosme estimates they could achieve a recovery rate of 10-15 per cent, short of PDVSA's goal of a 20 per cent recovery rate, but also better than what he described as the current 8 per cent recovery rate being achieved in other operational heavy oil Faja joint ventures. He stated, however, that Junin 7 is not a very good reservoir, claiming that within the block areas to the north are better than the areas in the south. Other issues under discussion with PDVSA include the Venezuelan oil company's goal to have Repsol include the construction of an upgrader in the project and downstream marketing plans. Cosme believes that Repsol corporate wants to integrate crude oil production vertically from Junin 7 with refineries in Spain. In response to PetAtt's question about Repsol's possible interest in bidding on the Carabobo blocks in the Faja, Cosme stated that if Repsol were able to move the Junin project and the Gulf of Venezuela projects forward, it would be sufficient. ¶8. (C) COMMENT: The Gulf of Venezuela natural gas discovery is significant for Venezuela, but even if PDVSA, Repsol, and ENI had already negotiated a production JV agreement, it would take several years before natural gas production would arrive on the domestic market. Since the government provides subsidized natural gas to domestic users, condensate production appears to provide an economic offset for an international oil company developing a profitable business model. Faced with a natural gas deficit, it appears unlikely, however, that Venezuela will quickly develop a natural gas export capability. Furthermore, Venezuela's record of developing its offshore natural gas resources remains poor. It has been talking about the development of natural gas off Eastern Venezuela for the last twenty years but has yet to build a natural gas train. During the same period, Trinidad & Tobago has completed at least four LNG trains. DUDDY