Venezuela's 2006 Budget Puts Oil Output Target at 2.9M B/D.

The state-owned Petroleos de Venezuela (PDVSA) has calculated its 2006 budget on an oil production average of 2.9m b/d, lower than recent estimates of 3.3m b/d, according to budget figures. A PDVSA spokesman recently said the budget numbers did not necessarily reflect current output because they were calculated last year in order to make revenue and spending estimates. Independent analysts say PDVSA over-estimates its production figures by including products other than crude oil.

PDVSA used a conservative 2006 crude oil price target of $26/b to calculate its budget. The average price of Venezuelan export crude oils by mid-May was $55.67/b.

Total production, including condensate and NGLs, was calculated at 3.18m b/d for this year, according to a copy of the budget published recently in the Official Gazette. The budget did not specify if Orimulsion, a trademark boiler fuel indexed against coal prices, was included in the estimates.

Venezuela produces around 160,000 b/d of Orimulsion, derived from extra-heavy oil in the Orinoco river basin. Independent analysts say PDVSA, which claims production in line with its OPEC quota of 3.2m b/d, is including Orimulsion, NGLs and condensate in its oil production figures to argue that output has not declined.

"It's like saying they used to produce 4m b/d", said Miguel Octavio, an analyst with BBO Servicios Financieros. By most industry estimates, Venezuelan oil output peaked at 3.4m b/d in 1998 before OPEC began curtailing production to shore up prices. Venezuelan output fell to a trickle during an extended strike in late 2002 and early 2003.

Venezuelan production has not fully recovered from the strike and subsequent management purge at PDVSA. The IEA has calculated average Venezuelan crude oil production at 2.7m b/d in 2005, lower than 2.8m b/d in 2001, the year before the strike.

The budget figures put average 2006 exports at 2.55m b/d, 1.97m b/d in crude oil and 574,000 b/d in products. The remaining production is sold in the domestic market.

Focus On Orinoco Tar Belt: Beneath the plains and winding tributaries of the Orinoco River lie what Venezuela believes is the planet's largest oil deposit - a tar-soaked basin which could help meet spiralling global energy needs. It is known as the "Faja" (belt): a strip of land three times the area of Kuwait potentially holding 1.2 trillion barrels of extra-heavy oil.

Jet-black, sticky and oozing like molasses, Orinoco oil was long written off as too difficult and costly to produce - an alternative source of energy. Now rising prices make it attractive. President Hugo Chavez, who on June 1-2 hosted OPEC's ministerial meeting, says these unconventional reserves mean Venezuela will become the world's leading oil source for decades to come.

"Venezuela has the largest oil reserves in the world", Chavez declared recently, referring to the more than 300 bn barrels he believes are recoverable, mostly from Orinoco. Saudi Arabia claims 260 bn barrels of so-called proven oil reserves, or roughly 25% of the world's conventional oil, and its key officials recently said they would eventually prove up another 200 bn barrels of recoverable oil in the kingdom.

Chavez has squeezed a greater share of profits from the industry. A new tax on Orinoco operations took effect on June 1 and the government plans to take majority control in all oil producing ventures eventually. But private companies have not been scared away.

As light, easy-to-produce energy sources dry up, the global energy industry is turning to unconventional oils. Ali Moshiri, head of Chevron's Latin American operations, on May 31 was quoted by The Associated Press as saying: "There's a sense of urgency" about developing unconventional oils due to high prices for conventional crude oil now.

The Cambridge Energy Research Associates says unconventional oils will account for a third of world supplies by 2010, up from 22% in 2005. Venezuela's Orinoco and Canada's tar sands account for the bulk of unconventional, heavy oil production at present.

The asphalt-tinged smell of Orinoco oil hangs in the air at the Jose refinery's Sincor upgrader plant on Venezuela's Caribbean coast. There, Total of France, the PDVSA and Statoil of Norway take heavy crude which has been diluted with a solvent to an opaque, runny fluid so it can be piped in from an Orinoco well 201 km away, cook it at more than 900 degrees, inject it with steam and process it with hydrogen to strip it of impurities. It emerges as a clear, amber crude which is among the world's most marketable. Shipped to the US and Europe, it is refined into gasoline, diesel and jet fuel. The Jose refinery centre, called central upgrading zone, houses three other such ventures in which PDVSA works with BP, ExxonMobil, ConocoPhillips and Chevron to upgrade synthetic crude oils. All told, they produce 600,000 b/d of synthetic crude, about a fifth of Venezuela's official output figure.

"Of all the unconventional sources of oil, the one that gets the least attention...but in my opinion is the most economic is the Orinoco", said Robert Skinner of the Oxford Institute for Energy Studies, according to AP, adding: "They've demonstrated that they can produce this stuff at very low cost". Skinner, a former Shell executive, said producing a barrel of Venezuelan synthetic crude can cost $16/b, compared to Canadian tar sands which can go as high as $30/b. Orinoco crude can be produced economically as long as the oil price stays above $22/b, he said.