OREANDA-NEWS. June 08, 2018. Venezuelan state-owned PdV is reviving a plan to expand crude production through service contracts to reactivate more than 23,000 idle wells in its traditional eastern and western divisions.

The upstream plan, inherited from the company?s previous management, is technically sound, senior and mid-level PdV officials tell Argus. PdV needs to boost light and medium crude production of legacy grades such as Mesa and Santa Barbara from the two divisions to run its refineries and blend with extra-heavy Orinoco crude for export.

But the structure of the proposed service contracts, the integrity of PdV's potential counterparties, and a possibility that PdV could assign all of the crude offtake - rather than incremental flows - to pay oil-backed debt to China and Russia are raising alarm bells about the company?s future viability.

"We have identified several areas where output potential will be recovered in a structured manner with the effort, capacity and investment of PdV's workers under the supervision of new Venezuelan engineers, many of whom were trained in Russia and India," PdV chief executive and energy minister Manuel Quevedo said after a 5 June meeting with PdV workers.

He said the plan holds the potential to boost production by up to 1.4mn b/d, which would effectively double current output. Critics say the uptick would add no more than around 600,000 b/d, if the plan is properly implemented and the wells can all be effectively restarted.

Quevedo said yesterday PdV remains committed to developing about 2.4mn b/d of new extra-heavy crude production in the Orinoco oil belt, which has been the firm's anchor for ambitious growth plans since at least 2005. The vast Orinoco deposit spanning over 55,000 km2 holds up to 1.36 trillion bl of in situ extra-heavy crudes reserves of 8°-10°API. PdV has a series of Orinoco joint ventures with minority foreign partners, including Chevron, Repsol, Total, Equinor, Russia?s Rosneft and China?s CNPC that produce and upgrade or blend the crude for export, mainly offering 16°API Merey blend and diluted crude oil (DCO).

But PdV?s near-term upstream priorities are now pivoting toward reviving the conventional oil fields in western and eastern Venezuela that have been largely abandoned for more than a decade. Each division currently produces around 350,000 b/d, half of the level registered around 2015. The Orinoco division is currently running at around 800,000 b/d, compared with 1.3mn b/d three years ago.

PdV's revived upstream plan was developed under Quevedo's predecessor Eulogio Del Pino who was imprisoned on corruption charges late last year.

According to Quevedo, the plan would restart up to 13,435 inactive oil wells in the western division to add an estimated 655,000 b/d. Another 9,500 inactive wells with a combined potential of up to 700,000 b/d would be restarted in PdV's eastern and Orinoco divisions, including over 5,000 inactive wells within the Orinoco oil belt.

Some of the wells have been inactive for 30-60 days and require minimal investment to restart. Others have been idle for more than 90 days, and require significant work, a senior PdV official says.

Quevedo's announcement did not include details on projected investment and timelines.

Under the broad executive powers to restructure the oil industry that he was granted by Venezuelan president Nicolas Maduro earlier this year, Quevedo can award contracts without a bidding process.

Under a typical service contract model, the contractor receives a per-barrel fee for incremental production, paid in cash or in kind. In contrast, PdV?s revised plan would award separate contracts for up to 100pc of the offtake to its Chinese and Russian partners in the Orinoco oil belt, in order to service oil-backed loans on which it has fallen behind for at least a year.

One PdV official said the arrangement "doesn't make sense commercially unless the oil services contractors are associated in some way with the Orinoco partners."

A local Chinese oil executive confirmed its potential involvement in the plan, telling Argus that CNPC and Petrochina would likely form "integrated partnerships or contractual associations with Chinese oil services firms whose operations to restart inactive oil wells would be financed by Chinese lenders."

The Chinese lenders and oil services firms would be paid directly by CNPC with revenues generated by the sale of the crude to Chinese refiners and other third party clients, the Chinese executive added.