Are Venezuela's "proven" oil reserves (and other valuable resources) drastically inflated?

"Everything the Circus thinks is gold is shi* made in Moscow" - Tinker, Tailor, Soldier, Spy

Back on 11/8/19 or so, the 2nd season of Jack Ryan came out on Amazon Prime.   In the opening monologue the main character blows students minds by telling  them how Venezuela actually has the largest oil deposits in the world.  My first thought was, with something viscous like oil, sitting underground for as long as it has, what are the odds that its somehow super concentrated in one single area of the globe, in volumes greater than any other area in the world.  Did God build a giant rubber lined vat underground to hold it all or something?  Something seemed fishy, so I started doing some research.

Around this time I knew some people who were in the business of knowing information.  They seemed incredibly giddy that we can find all the resources we need so close to home, thus allowing the USA to leave the middle east etc.

First stop was Wikipedia, which stated that in 2007 their proven oil reserves were 100 billion barrels, and by 2008 that number had jumped to 172 billion barrels.  In 2009 the number again jumped to 211.17 billion barrels.  By 2015 it was up to 300.9 billion barrels.

Years ago I used to expose penny stock pump and dumps, and I know that the world has a long history of bs/scams when it comes to things of value underground.  Even the head of the CIA at the time, George Bush Sr, got scammed by BRE-X, and I knew of numerous penny stock scams involving fake underground gold etc reserves.  BRE-X was pulled off basically by two dudes.  

In general, the word "proven" in regards to oil reserves seemed awful "salesy" to me and kinda rubbed me the wrong way.

Beginning actual research, I found a market watch article saying that it was a BP statistical revenue of world energy June 2016 that was the source of the proven numbers.

Next I started searching through BP's websites and found out that they say their sources are: primary official sources, third party data from OPEC Secretariat, World Oil, Oil & Gas Journal, and specifically that Venezuelan Orinoco Belt reserves are based on the OPEC Secretariat and government announcements. 

At this point I remembered the story of Christopher Columbus, and had a new hunch behind his overstated gold findings... "Hey rival country, blow lots of money and sail across the world wasting tons of resources for nothing!"

In short, the world has a long and constant history of bs when it comes to resource claims that are underground.

Further research showed that the Venezuela oil reserves chart went parabolic after Venezuela began nationalizing several key industries in 2006, but it wasn't a perfect fit for what I had previously seen.

Then I saw that Venezuela had also miraculously also discovered some of the worlds largest deposits of REE's...  "Luckiest country ever!"

Going back to Wikipeida further, I found that they cited the USGS as their source for proven oil reserves in Venezuela.   https://pubs.usgs.gov/fs/2009/3028/pdf/FS09-3028…  There is a nice chart in there showing how parabolic the chart of Venezuela's oil reserves over time went.

Then I dug into the USGS report and then I saw it... 
"f you take a look at the citations section of that usgs report, pay close attention to the years the studies were published and where they were published. Nearly all of the studies before the chart went parabolic were from the USA, and all except one when and while it was (still is) going parabolic are from China..." - my notes 11/14/19

This next point doesn't carry much weight, but I looked up who is responsible for those Venezuela reports at the USGS.  Its a very attractive female scientist with whos bio said she was half Chinese and Venezuelan.  Maybe I've watch too many Bond films when I was a teenager?

Hypothetical question: Wouldn't it be incredibly beneficial for the USA's rival China, if we were tricked into leaving all the real oil in the middle east for some lure they set up in our neck of the woods?  It wouldn't be the first time in history that something like that happened.

If two dudes could scam the head of the CIA in BRE-X, what could a country pull off?

 

KnowsNothing

Interesting hypothesis. Got a way to test it?

Thanks for asking that, it gave me something interesting to think about.

It's hard to prove a negative, and it's really up to the relevant international oil corporations to dig in and see what's what.  It does line up with the classic MMO logic. (Motive, means, opportunity)

If you read through news related to venezuelan oil for the last 5-10 years you will notice a pattern of consistent "oops" esque reasons why their oil output doesn't come close to matching it's potential.  I'm sure lots of it is legitimate, lack of reinvestment of oil revenues etc by the government etc... But it's a very long and consistent string of coincidences.

So many coincidences, all "facing the same direction" not neutral towards oil output or positive.  You could almost consider it a three sided coin.  One side is negative impact on oil output, one side is neutral, and the other is positive towards oil output.  Or it might be more accurate and simple to just go with a two sided coin toss.  Positive and negative effects on oil output.  The statistics are pretty simple to calculate once you do some homework. "Odds of flipping heads x times in a row, or x times out of y instances."

 

OPEC countries have historically inflated their proven oil reserves since it was a major factor in establishing production quotas. However, I believe global demand had started to outpace production capacity in the years leading up to the 2008 financial crisis. This meant supply no longer required quota-based restrictions to support prices.

Not sure how it evolved afterwards. Assuming reserves still drove in part allocated production quotas, I would take a look at whether OPEC started enforcing stricter quotas again in the years where proven reserves jumped up. That could be a significant motive for misrepresentation by the Venezuelan government.

 

LeveredLad

OPEC countries have historically inflated their proven oil reserves since it was a major factor in establishing production quotas. However, I believe global demand had started to outpace production capacity in the years leading up to the 2008 financial crisis. This meant supply no longer required quota-based restrictions to support prices.

Not sure how it evolved afterwards. Assuming reserves still drove in part allocated production quotas, I would take a look at whether OPEC started enforcing stricter quotas again in the years where proven reserves jumped up. That could be a significant motive for misrepresentation by the Venezuelan government.

Ah, interesting.  I don't doubt that there can be multiple motives at play.  Still, don't underestimate the importance that those figures may have come more from China than Venezuela when it went parabolic.  

 

Fair, although the study would be getting its information from somewhere and I assume the Venezuelan national oil company would be involved in the process. I’m only speaking to motives from the Venezuelan standpoint.

 
chris8sirhc

Going back to Wikipeida further, I found that they cited the USGS as their source for proven oil reserves in Venezuela.   https://pubs.usgs.gov/fs/2009/3028/pdf/FS09-3028…  There is a nice chart in there showing how parabolic the chart of Venezuela's oil reserves over time went.

Um... I don't see any chart like that in the cited study.

This study claims that in 1987, PDVSA estimated 1,180 billion barrels of oil (BBO), which was revised in 2006 to 1,300.  That isn't "parabolic" and frankly makes a lot of sense; I find it reasonable that the technology to assess in place reserves has gotten more accurate or allows for more accurate subsurface penetration, so we can identify more reserves.  A 10% increase is pretty modest if the point is to defraud investors.

First stop was Wikipedia, which stated that in 2007 their proven oil reserves were 100 billion barrels, and by 2008 that number had jumped to 172 billion barrels.  In 2009 the number again jumped to 211.17 billion barrels.  By 2015 it was up to 300.9 billion barrels.

Somehow I skipped over this.

You just don't understand what "proven oil reserves" means.  I suggest you look up the definition, compare it to a chart of global oil price movements, and draw your own conclusions about what might drive those changes to proven oil reserves.  Especially consider that Venezuela's oil reserves in general are well-known to be heavier crude than Middle Eastern oil.  On a related note, if you're interested in this, I recommend reading The Prize by Daniel Yergin.

 
Ozymandia
chris8sirhc

Going back to Wikipeida further, I found that they cited the USGS as their source for proven oil reserves in Venezuela.   https://pubs.usgs.gov/fs/2009/3028/pdf/FS09-3028…  There is a nice chart in there showing how parabolic the chart of Venezuela's oil reserves over time went.

Um... I don't see any chart like that in the cited study.

This study claims that in 1987, PDVSA estimated 1,180 billion barrels of oil (BBO), which was revised in 2006 to 1,300.  That isn't "parabolic" and frankly makes a lot of sense; I find it reasonable that the technology to assess in place reserves has gotten more accurate or allows for more accurate subsurface penetration, so we can identify more reserves.  A 10% increase is pretty modest if the point is to defraud investors.

First stop was Wikipedia, which stated that in 2007 their proven oil reserves were 100 billion barrels, and by 2008 that number had jumped to 172 billion barrels.  In 2009 the number again jumped to 211.17 billion barrels.  By 2015 it was up to 300.9 billion barrels.

Somehow I skipped over this.

You just don't understand what "proven oil reserves" means.  I suggest you look up the definition, compare it to a chart of global oil price movements, and draw your own conclusions about what might drive those changes to proven oil reserves.  Especially consider that Venezuela's oil reserves in general are well-known to be heavier crude than Middle Eastern oil.  On a related note, if you're interested in this, I recommend reading The Prize by Daniel Yergin.

Good catch, the chart is from the Wikipedia page.  Fwiw, all of my notes that I'm writing from are based on the state of things on roughly 11/14/19.

 
chris8sirhc

Good catch, the chart is from the Wikipedia page.  Fwiw, all of my notes that I'm writing from are based on the state of things on roughly 11/14/19.

"Proven oil reserves" does not mean the amount of oil that is in the ground.  It means the oil that can be extracted in an economically viable manner.  When oil prices go up, so do proven reserves.  As technology makes extraction cheaper, proven reserves go up.  In other words, it makes sense that even in the absence of new reserves being discovered, proven reserves will increase over time.

Though you are correct that Venezuela's estimates may be fudged, since it is unlikely that they have the infrastructure or distribution network to access all of their in-ground reserves; they're probably painting a very rosy picture about the state of their drilling and refining capability (which has suffered from awful underinvestment the last few decades) rather than the actual liquid in the ground.

 

Ozymandia

chris8sirhc

Good catch, the chart is from the Wikipedia page.  Fwiw, all of my notes that I'm writing from are based on the state of things on roughly 11/14/19.

"Proven oil reserves" does not mean the amount of oil that is in the ground.  It means the oil that can be extracted in an economically viable manner.  When oil prices go up, so do proven reserves.  As technology makes extraction cheaper, proven reserves go up.  In other words, it makes sense that even in the absence of new reserves being discovered, proven reserves will increase over time.

Though you are correct that Venezuela's estimates may be fudged, since it is unlikely that they have the infrastructure or distribution network to access all of their in-ground reserves; they're probably painting a very rosy picture about the state of their drilling and refining capability (which has suffered from awful underinvestment the last few decades) rather than the actual liquid in the ground.

Yeah, I touched on alot of that in one of the initial responses.  Ever since the chart (attached to the original post) went parabolic there is a steady string of news about things that cause them not to be able to extract anywhere near their potential.  I guess the wide gap between what they say is economically viable, vs the reality of how much they pump is a huge red flag in and of itself.

An interesting chart would be to show barrels pumped per year vs proven oil reserves for various countries over time.

 
chris8sirhc

Yeah, I touched on alot of that in one of the initial responses.  Ever since the chart (attached to the original post) went parabolic there is a steady string of news about things that cause them not to be able to extract anywhere near their potential.  I guess the wide gap between what they say is economically viable, vs the reality of how much they pump is a huge red flag in and of itself.

An interesting chart would be to show barrels pumped per year vs proven oil reserves for various countries over time.

You really didn't touch on this at all.  And there is no chart attached to the original post, just the link to the USGS report

Your post and the follow on responses all pretty much have to do with the idea that there is some kind of conspiracy going on to lure the USA into expending resources to develop the Orinoco oil fields at the expense of using Gulf oil, which would presumably leave it all to China?  Not really sure how that all came together in your head but good for you.

And again, the gap between what PDVSA can pump and what is viable is not the same as the the gap between "proven oil reserves" and "gross volume of oil" in Venezuela.  PDVSA probably cannot pump the majority of the oil it nominally owns, because lack of investment in the company has made it uneconomic to get to reserves that would be more easily accessible for a major Western extractor.  And again, while there is a given amount of oil in the ground (even if we can't pinpoint exactly how much that is), the concept of "proven reserves" means that having wildly differing estimates isn't some nefarious conspiracy but rather the usual give and take of the market.

As for the news cycle - of course that's true.  Major flashy headline of "Venezuela has hundreds of billions of reserves!" followed by the inevitable, less heralded smattering of reasons why that shocking statement isn't entirely accurate.  Anyone who has grown up in the era of clickbait internet articles should understand that process.  Especially when considering that often these pieces are written by people with vested interests in driving crude prices in a given direction.

 
Most Helpful

Agree, I don't think that there is some vast conspiracy here. The oil reserves of the country, albeit likely inflated, are generally well understood by international oil companies (including Exxon and Chevron which have or had operations in the country). Production has plummeted due to poor management and under-investment over the last 15-17 years. It is in the interest of Venezuela to inflate the reserves to attract foreign oil company investment, but I don't think that they are going to have many takers, given they expropriated Chevron and Exxon's assets previously. I would also note that a lot of these reserves would be very heavy, expensive to extract and would require high upfront capital investment. This makes these reserves more marginal than other places that oil companies can deploy capital (with higher political risk). Overall, the disconnect between low production and high reserves is understandable. These reserves will likely only get developed in an environment where high prices were expected to be maintained for a long period of time.          

 

Yes it is.

if the counter hypothesis is true that it's just increased technology and the ability to extract the oil causing the chart to go parabolic, are there other countries with similar heavy oil who's oil reserves also went up like in Venezuela?  Also, again, we aren't just talking about oil numbers going parabolic here... it's other desirable resources as well.  

conspiracy or not, whatever it was it likely "worked".  Those guys in the business of knowing things were giddy that we could leave the middle east etc and find "all the riches we could ever need" so close to home.  At the end of the day those guys are just salesmen, fwiw.Screenshot

 
Bizkitgto

If you really want to go down a rabbit hole, try looking at Saudi Arabia's oil reserves (specifically the prolific Ghawar field). Matt Simmons wrote the famous book, "Twilight in the Desert", and there used to be a whole online community called 'The Oil Drum' that debated this kind of stuff on a daily basis.

I haven't read the book but I do see that it is nearly 20 years old (probably the research is 20 years old), which is enough time to judge the prognostications made. Was Mr Simmons accurate?

 

I wouldn’t read too deeply into it.  Oil data is terribly imprecise.  The US government can’t even measure our own production three months in arrears (see the Twitter thread this week where the EIA has to explain why their “unaccounted for” number is so large).  One can only imagine the imprecision that went into estimating Venezuela’s potential to produce 2 decades ago.  What matters now is how much Venezuela produces now (a shadow of its former self) and why this would ever change (US sanctions would have to end, foreign companies would have to be willing to invest, and skilled people have to stop fleeing the country).

 

Venezuela created OPEC they have very large reserves. Venezuela has “heavy oil” reserves just like most of Canadian oil reserves. I skimmed this thread, but maybe the first step for anyone wanting to read into this nonsense is to learn the different crude qualities that exist.

Having large proven reserves does not mean much alone, unless you have consistent investment and the infrastructure to develop them. 
Similar, the Suriname proven reserves in Africa recently are massive finds but have massive obstacles to grow from here. As they are offshore, and the initial ramp was one thing and its an issue from here.

Then further we have supply chain issues, this is why India cannot overnight replace all Russian oil exports to Europe, Indian supply chain is not created to take Russian oil. Same issue where a few EU nations had to fight Russian sanctions as they built only refineries that took Russian crude quality.

And so on…

 
marcellus_wallace

Venezuela created OPEC they have very large reserves. Venezuela has "heavy oil" reserves just like most of Canadian oil reserves. I skimmed this thread, but maybe the first step for anyone wanting to read into this nonsense is to learn the different crude qualities that exist.

Having large proven reserves does not mean much alone, unless you have consistent investment and the infrastructure to develop them. 
Similar, the Suriname proven reserves in Africa recently are massive finds but have massive obstacles to grow from here. As they are offshore, and the initial ramp was one thing and its an issue from here.

Then further we have supply chain issues, this is why India cannot overnight replace all Russian oil exports to Europe, Indian supply chain is not created to take Russian oil. Same issue where a few EU nations had to fight Russian sanctions as they built only refineries that took Russian crude quality.

And so on…

The Canadian oil field that is similar in nature to Venezuela's shot up nearly a decade before (2002 vs 2010) Venezuela's went parabolic.  top 5 countries oil reservesOil is a global commodity, so can pricing factors really have varied that much between Venezuela and Canada?  Was the relative technology level for extracting oil also vastly different in the two different locations?  If price made it possible to list more oil in Venezuela's total, after 2015 the price is significantly less than it was when their chart went parabolic.  

All of those points, as I mentioned earlier have plausible explanations, but that wasn't the main point of the original post....

Most importantly: did any other countries proven reserves go parabolic after the research with determines those figures stopped coming from the USA and began coming from China?  Did other countries also have other desirable resources go parabolic as well?  That is an awful lot of coincidences, and that was the main point of my post.

 

You would be surprised at how different countries are at producing and refining oil.  This is an area in which expertise, technology, and institutions really matter.  Venezuelan production has collapsed while the Canadian oil sands grow pretty much every year (would grow more if politicians allowed more pipelines).  American drillers are automating jobs away while Nigeria worries about oil piracy.  Western refineries run at 80-90% of design capacity while much of Latin America struggles to break 50%.  It is not a “global commodity” at all in the sense that everyone is equally capable of using their resources.

It also does not necessarily price globally.  The price of Venezuelan oil is not even widely known because only a few shady independent refineries in China buy it (outside of Chevron’s recent small license) and as a result command massive leverage.  There are a lot of wrinkles into what one might think is an efficient and competitive market.  And as I’ve said before, a lot of data is bad and in some cases just made up.  And oil reserves are one which are notoriously inaccurate.

 

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