OIL-VENEZUELA: Orimulsion R.I.P.

By Humberto Márquez Reprint | | Print |

Humberto Márquez

CARACAS, Jun 30 2004 (IPS) - Venezuela has stopped producing its orimulsion fuel, a coal substitute that has been successfully used to fire power plants in the industrialised North and which has strengthened trade ties with major emerging economies like China, India, Brazil and South Korea.

”It won’t be produced anymore. It was not a profitable business venture, and we have to put an end to these kinds of projects,” said Venezuelan Energy Minister Rafael Ramírez.

President Hugo Chávez promoted orimulsion on lengthy tours to Europe and Asia in 1999 and 2000, and signed an agreement with former Chinese President Jiang Zemin to produce 6.5 million tons a year of the fuel in Venezuela for China to use in thermal plants and steel mills.

In June 2003, representatives of the state oil monopoly Petróleos de Venezuela (PDVSA) touted orimulsion’s benefits at a meeting with 400 business representatives in Houston, Texas, the world’s oil capital.

And in August the company reached an agreement with a South Korean consortium to supply that country with another 6.5 million tons of orimulsion a year.

But the government has made an about-face since September. ”Orimulsion does not pay,” said PDVSA president Alí Rodríguez, while Ramírez stated that ”it’s a bad business deal for Venezuela, because it can be sold at just four dollars a barrel,” compared to 30 dollars a barrel for oil.

What brought about the apparently abrupt change of heart? A late 2003 study by Bernard Mommer, an expert on the politics and economics of oil and the head of PDVSA’s London office, said the state lost up to 600 million dollars a year by producing orimulsion with extra heavy crude, instead of mixing it with light crude to produce more profitable synthetic fuels.

Ramírez said that by selling orimulsion at 4.60 dollars a barrel last year, Venezuela lost 12.30 dollars a barrel compared to what it could have charged for extra heavy oil mixed with other crudes.

Orimulsion ”is not an extremely profitable operation, but it is a way of producing dollars with our devalued currency, because nearly all of the costs of manufacturing it require investment in Bolivars,” Humberto Calderón, a former energy minister and president of PDVSA, told IPS.

Further, said Calderón, orimulsion ”is manufactured from extra heavy hydrocarbons, of which we have abundant reserves, and for which windows of opportunity open up in the markets, through that route.”

Xavier Grisanti, president of the Venezuelan Association of Hydrocarbons, which represents transnational corporations, told IPS that this country’s ”deposits of extra heavy crude are so vast that only one of many business opportunities is developed through orimulsion. The best thing would be to take advantage of all of them.”

According to Mommer, the decision to extract extra heavy crude and sell it at the price of coal was part of a strategy promoted by the International Energy Agency (representing industrialised countries) to ensure that Venezuela would continue to produce large quantities of crude and thus contribute to inundating the market, to the detriment of the Organisation of Petroleum Exporting Countries’ (OPEC) attempts to keep production, and prices, down.

But Víctor Poleo, an oil economy professor at Venezuela’s Central University, said on the contrary that ”the decision to stop producing orimulsion was actually hatched in Washington and implemented by Caracas,” because the United States, like Germany and Britain, wanted to get rid of a competitor for their coal.

To boost revenues, ”Venezuela should have redesigned its tax scheme, rather than close off an option for the future, because global energy markets are stable and growing, and orimulsion has geopolitical significance, due to the possibility of providing subsidised electricity to countries of the developing South,” Poleo remarked to IPS.

Orimulsion, a product developed by Venezuelan experts in the late 1980s, is an emulsion of 70 percent extra heavy crude oil of less than 10 degrees API (American Petroleum Institute), water, and surfactants, that is similar to coal.

Orimulsion has been successfully employed in dozens of thermal electric plants in the Americas, Europe and Asia, and has turned out to be cheaper and cleaner, and have higher caloric value, than coal.

In the mid-1990s, environment authorities from the European Union and Canada gave the green light to orimulsion, while in the United States, protectionist objections were raised by groups defending other sources of energy, who criticised the use of a fuel that was produced by only one country.

Orimulsion can only be produced in Venezuela, not only because of the patent, but because it is the only country that can produce the fuel in commercially significant volumes, as it is based on heavy oil, and 90 percent of the planet’s reserves of heavy oil are found in the Orinoco Belt in southeastern Venezuela.

The Orinoco Belt, to the north of the lower stretch of the Orinoco River, covers an area of 65,000 sq km and contains 1.2 trillion barrels of oil, mainly extra heavy oil, as well as bitumen and conventional crude.

While Venezuela has some 270 billion barrels of probable reserves – a volume similar to Saudi Arabia’s reserves – the available infrastructure only allows around 37 billion barrels to be considered proven reserves, recoverable under existing economic and operating conditions.

PDVSA built an installation in the Orinoco Belt capable of producing five million tons of orimulsion – a term that combines ‘Orinoco’ and ’emulsion’ – a year.

But its local subsidiary in the area, Bitúmenes del Orinoco (BITOR) – a project that Mommer said cost one billion dollars – will now be closed down.

For the past 15 years, BITOR has sold between three and four million tons of orimulsion a year to clients in Canada, Europe (including Britain, Italy, Denmark and Lithuania), Japan, China and South Korea, while tests have been carried out in Brazil, the United States, India and other countries, which hoped to start using the new fuel.

The initial aim was to produce, by the middle of this decade, between 20 and 30 million tons a year of orimulsion, which was eventually to be increased to 60 million tons a year.

The price of orimulsion stands at around 45 dollars a ton, or between seven and eight dollars per barrel of crude used in producing the fuel. Poleo said BITOR reported earnings of 200 million dollars in 2002.

But according to Mommer, by taxing the production of orimulsion as a mining (coal) product instead of hydrocarbon, each barrel contributes 64 cents to the state coffers, compared to between 3.60 and 8.80 dollars a barrel of oil.

Because of fiscal reasons, ”a national technological achievement is being disregarded, and our options for the future are being reduced,” Poleo criticised.

One of the clients, New Brunswick Power in eastern Canada, is suing PDVSA in a New York court to force it to live up to an orimulsion fuel supply agreement or pay two billion dollars in damages.