Venezuela - Heavy Crude Production Will Grow

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Includes: EMHY
by: The Value Portfolio

Summary

Current Venezuelan crude costs are seen as being to expensive for extraction.

Venezuela has significant crude reserves.

In the future, I expect Venezuelan crude production to grow to meet demand.

Introduction

Heavy crude oil is oil that is that is highly viscous and cannot easily flow to production wells under normal reservoir conditions. The definition of heavy is mainly arbitrary - it is defined as heavy oil because its density is higher than that of light crude oil.

Light v. Heavy Oil - Geo Chem Bio

Heavy crude oil is normally tied as being a part of a select few countries and different types of production. Traditionally, heavy crude oil is closely related to natural bitumen from oil sands. Oil sands which are located in Canada traditionally have a higher cost of production.

Production Costs

Before we can talk about why production costs will not hold back heavy crude, we must first talk about the current production costs of heavy crude oil.

Crude Cost of Production - Business Insider

Above you can see the production costs of different types of oil formation. However, looking above, onshore Middle East production is the cheapest with a cost of just $27 per barrel to produce.

In contrast, oil sands are several times more expensive requiring a production cost of $70 per barrel Brent. In fact, at current oil prices, the oil sands do not even break even.

Increase of Breakeven Prices - Crude Oil Peak

More significantly, Venezuela has seen its breakeven costs rising. In recent years, the country has seen its breakeven prices rise an astounding 12%. This represents the company needing significantly more production to make the same amount of earnings.

OPEC Fiscal Breakeven Prices - Gail The Actuary

Here you can also see OPEC's Fiscal Breakeven Prices. Venezuela experiences higher than average break-even costs for its oil. In fact, the country needs oil prices of roughly $113 per barrel to meet its costs. These prices are significantly higher than current prices. As a result, the country has two choices.

First, it can deal with the lower prices. However, the financial situation in Venezuela means it cannot really do that. Secondly, with the exception of costs, the country can continue pumping out huge amounts of oil and lower costs to make its budget meeting ends.

National Budget Breakeven Prices - BBC

Above, you can see the specific breakeven prices by country. Looking specifically at Venezuela, we see that the breakeven price is $118.

That means Venezuela needs a breakeven price significantly above current prices to achieve breakeven. That means should oil prices not recover - especially in a financially weaker country like Venezuela - the country will have significant trouble.

Now we have talked some about the current breakeven costs of heavy oil and how high they are. But the next significant thing we need to talk about its reserves.

Reserves

World Crude Reserves Map - Wikimedia

Looking above, we can see a general map of oil reserves by country. Keep in mind that this does not specify a difference between light or heavy oil. However, one important thing to pay attention to is that Venezuela has significant crude reserves - in fact, Venezuela's proven reserves are higher than that of Saudi Arabia.

However, when you hear about oil and countries that play a major role, you consistently hear about Saudi Arabia and the United States. When you hear about countries that have become lavish from wealth generated through the oil trade you here of different Middle Eastern countries.

Rarely, do you hear about Venezuela despite a production rate at roughly a third of Saudi Arabia and reserves that will last much longer. The reason for this is because the majority of Venezuela's reserves are heavy oil.

World Reserves by Type - Petroleum Equities

Here you can see a map of the world's heavy oil and bitumen reserves along with a map of the world's conventional crude oil reserves. There are two significant things to pay attention to here. The first thing to pay attention to is the world's heavy oil and bitumen reserves are significantly more than the world's conventional crude reserves.

Heavy v. Light Oil Reserves - Jone Soil

Above, you can see the light v. heavy oil reserves without paying attention to the country. Heavy oil is a significant portion of the world's oil.

However, the second and more important thing to pay attention to is the split up division of the reserves. Looking at the conventional crude oil reserves, we see that Middle East dominates. However, looking at the heavy oil and bitumen reserves, we see that Venezuela dominates.

There is one other thing to note here. Light oil represents a much more significant portion of the world's crude reserves than heavy oil. With proven oil reserves at roughly 1.324 trillion barrels, that means the world has thirty-six years of oil left.

With heavy oil representing the majority of this, that means that even if the world continues burning through light oil because it wants the lower cost, it will eventually have to turn to heavy oil. Heavy oil will result in a higher oil breakeven cost.

Future

Now we have talked about the current situation of Venezuela's reserves and production costs. The time has come to talk about the future situation of Venezuela's reserves and why despite the heavy production, costs will not hold it back.

Venezuela Oil Production and Consumption - Blogspot

Currently Venezuela produces roughly 2.3 million barrels of oil per day. That means the country produces 840 million barrels of oil per year. At its current production rate, Venezuela's reserves should last 354 years. Comparatively at current production rates, Saudi Arabia's reserves will last it just 71 years roughly 20% as long.

Venezuela Per Capita GDP Among Other Things - Venezuela Analysis

The first thing to pay attention to is that the country's oil GDP is tied pretty closely to the country's non-oil GDP. As a result, if we can expect the country's non-oil GDP to grow we can also expect the country's oil GDP to grow.

Venezuela GDP and Growth - BMI Research

As you can see here, with the exception of minor dips as a result of financial crashes, Venezuela's GDP has experienced noticeable growth every year. We can expect as crude production grows so should Venezuela's oil exports.

Venezuela Crude Oil Extraction - Roperld

In fact, looking at a long term prediction of Venezuela's crude oil production, its production is expected to grow. The graph above shows Venezuela's crude production to top out at almost ten million barrels per day slightly before 2080. I would venture to say we will see a quicker and higher top.

As we determined above, Saudi Arabia, which produces ten million barrels of oil per day should see its production die out in 71 years in the year 2086. Looking at the United States, we see a similar story.

The United States has proven reserves of 30.5 billion barrels and a production rate of roughly ten million barrels per day. At the U.S.'s current rate of production, its reserves should only last roughly 8.35 years.

That means even if the U.S. can magically find a few hundred billion barrels and world demand does not grow - which it is expected to do - the word will still have a twenty million barrel per day shortage by 2080.

More so, other Middle Eastern countries are burning through their reserves fast as well. With production expected to grow, people will turn to Venezuela as the largest source of oil reserves.

Invest

If you want to invest in growing heavy crude production, then Venezuela is the place to go. Venezuela has the largest oil reserves in the world and by far the largest heavy crude oil reserves.

Given Venezuela's status as one of the world's top oil producers, ETFs represent one of the best ways to invest in the country.

The iShares Emerging Markets High Yield Bond (BATS:EMHY) represents one of the best ways to invest in this market. The fund has significant bond holdings in Venezuela.

Oil Prices - LSE

As a result of the 2015 oil crash, Venezuela has seen its exports drop significantly. Oil represents the largest portion of Venezuela's exports which has significantly hurt its earnings.

The same can be seen in the iShares Emerging Market ETF price - the ETF saw its price drop a maximum of 15% since the start of the crash before recovering to a roughly 10% drop. Still, the ETF is slightly undervalued below its fair value and now represents a good time to get involved.

Venezuela Bolivar v. USD - Wordpress

Above, you can see the prices of the Venezuela Bolivar compared to the USD. As a result of the oil crash, the Venezuela Bolivar has seen its value decrease rapidly.

While the country has had to deal with inflation, those interested in investing can still try and invest in the currency. Investing in the currency should provide a nice long-term reward if the country's export value increases.

Conclusion

Venezuela, despite its significant oil reserves, has been producing oil at a relatively small rate. However, this should not hold things back.

Other countries are burning through their reserves at unsustainable rates. The way things are going, even if oil production does not grow, the world will experience chronic shortages based on proven reserves.

While current Venezuelan extraction costs are seen as being too high, that is not a long-term thing. In the future, as demand for oil occurs and reserves run out, Venezuelan heavy crude production should grow.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.