Key View: Venezuela will slowly boost its natural gas output through a number of projects, particularly offshore. However, a history of insufficient investment and prolonged production delays, in addition to the ongoing US sanctions, inform our more cautious growth forecast. Overall gas production will remain substantially below the country's production potential throughout our forecast period.
With vast below-ground potential, Venezuela has made significant efforts to expand its production of natural gas since implementing the Gas Hydrocarbons Law in 1999. This law allows 100% private ownership of non-associated gas projects and offers more competitive royalty and income tax rates.
When the US became increasingly reliant on LNG imports in the mid-2000s, then-president Hugo Chávez formulated a plan to transform Venezuela from a small-scale gas importer to a major regional exporter by 2012. Even with substantial offshore gas resources, the plan was ambitious and required billions of dollars of investment and long-term cooperation with foreign operators. However, as US shale output picked up speed, this increased pressure on the Latin American country's gas sector. Since then Venezuela has experienced moderate but steady output increases, reaching 23.4bcm in 2016, up from 21.1bcm in 2013.
We expected this trend will falter over the next several years, with gas production expected to remain below its 2016 high until 2022. Over the second half of our forecast period, we expect the sector will stage a modest recovery as private investment returns to the space. By 2031, we estimate production will reach 26.7bcm. While this represents a positive trend for Venezuela's natural gas sector, we acknowledge this is still modest given the country's significant proven reserves. Continued regulatory delays and operational challenges will hamper overall production at several notable gas projects, encouraging our more cautious stance.
The majority of Venezuela's natural gas resources will remain ineffectively operated by PDVSA as associated gas plays. We therefore believe stronger growth will allude the country as private investors in non-associated offshore acreage experience continued production delays. Moreover, an estimated 30% of supplies are re-injected into oil fields to boost production rates at crude developments. Although several international oil companies - including Equinor, Chevron, Total and Eni - have enjoyed moderate exploration success, they have suffered repeated setbacks as a result of continued operational and macroeconomic instability.
Many of PDVSA's gas projects have been postponed or repeatedly delayed, most notably the Mariscal Sucre project. After a USD200mn exploration rig sunk in March 2010, the government struggled to bring the complex online, pushing back the date of first production several times. In the medium term, limited production growth in Venezuela will be driven by underperformance at a number of offshore projects, including the Deltana Platform (including the Lorán-Manatee), the Mariscal Sucre complex (including the Río Caribe, Mejillones, Patao and Dragón fields) and the Rafael Urdaneta project (including the Perla gas field in the Cardón IV block).
PDVSA's multi-billion dollar joint agreements with Rosneft to increase gas production in Venezuela - first in June 2015 then in October 2016 and finally December 2017 - include a number of these fields in the Mariscal Sucre gas project. Rosneft was awarded a 30-year licence to operate and develop the Patao and Mejillones offshore fields in 2017. The company will have the right to sell all of the fields' production for export, including in the form of LNG. However, given a lack of timelines and advancement related to this strategy, we have not accounted for these plans in our current forecasts.
In an effort to expedite gas development, in October 2019 the government under President Nicolás Maduro removed VAT charges and import taxes on equipment for Gazprom to help incentivise rapid development of the Patao and Mejillones shallow-water fields but progress on both fields has stopped, according to media reports.
PDVSA indicated high hopes for the country's offshore production capacity, anticipating that by the end of 2017 the Cardon IV block as well as the Dragón, Rio Caribe and Patao fields would produce 33.7mcm/d (12.3bcm). These estimates proved ambitious given rising political and economic instability that has thwarted the development of this sector.
The governments of Venezuela and Trinidad & Tobago restarted negotiations in September 2015 to exploit offshore deposits that lie between the two countries. After signing a joint memorandum of understanding in December 2016, the countries agreed to develop an offshore pipeline in March 2017 to increase Venezuela's access to Trinidad & Tobago. We cautioned that supplies are unlikely to reach Trinidad & Tobago given continued project delays and a lack of funding, particularly in the wake of US sanctions enacted in August 2017 and in January 2019.
US sanctions have effectively put a hold on the Venezuela and Trinidad & Tobago bilateral natural gas deal from August 2018, which was slated to transport piped gas from Venezuela's offshore Dragon field to the Hibiscus platform in Trinidad, starting with 4.25mcm/d in 2020 and eventually reaching 8.5mcm/d. Dragon forms part of Venezuela's 416bcm Mariscal Sucre complex that also includes the Patao, Mejillones and Rio Caribe fields. The Trinidad & Tobago government rescinded the Unitisation Agreement for the exploitation and development of joint Loran-Manatee field in February choosing to proceed alone without developing the Loran field on the Venezuelan side of the border, dealing a further blow to increased gas production ambitions.