International Outlook: South America

Against all odds, the continent marches ahead

Despite political instability in many countries, energy sector investment remains strong

 Mayra Rodríguez Valladares, Contributing Editor, South America

 The past year has not been kind to most of the continent. However, aside from the shaky situation in Venezuela, oilfield activity has bucked the trend. In Brazil, investors are relieved that the new government has, thus far, not deviated significantly from its predecessor.

 Venezuela. Oil production remains a point of contention between President Chavez’s government and the opposition. Three months of striking workers caused oil production to decline from 2.9 million bopd in November 2002 to about 600,000 bopd in January 2003. While the government argues that its production is almost at pre-strike levels of 3 million bbl daily, the opposition disputes those figures and argues that the strike led to the damage to reservoirs and equipment, lack of funds for adequate investment levels, especially from foreign investors, and hiring of less-qualified staff. It is likely that Petroleos de Venezuela (PDVSA) will need much more time to restore production levels.

 In January 2003, the government restructured PDVSA into two regional operating units. One unit is responsible for all activities in eastern Venezuela, the other for the western part. The government said the company needed to be decentralized to increase efficiency. In fact, this reorganization has – at least temporarily – further increased tension and detracted from the focus of increasing production and encouraging investment in the sector.

 Reaching pre-strike production levels will require further exploration; that requires funds not readily available domestically. Moreover, PDVSA said that it would tighten its belt by $2.7 billion this year, nearly one-third of its budget. Further still, since the end of the strike, the new PDVSA management has been trying to turn the company into one that focuses on reducing poverty in Latin America. Chavez specifically went after managers who would agree to plow more oil profits into the country’s social programs. PDVSA President Ali Rodríguez agreed with the government plan to divert some revenue to federal coffers that would otherwise be reinvested in PDVSA.

 In addition to funds, the company needs qualified personnel. PDVSA has suffered tremendously since dismissing almost 17,000 workers, about half the workforce. Many of the fired workers were experienced senior managers, scientists and economists. New management has brought in people from private industry, not necessarily with oil experience and, in a worrisome move, from the ranks of the active-duty military. A telling indicator of the Venezuelan oil industry can be seen in the country’s oil rig count. About four years ago, PDVSA was operating 120 rigs; presently, that figure has declined to less than 40 rigs. 

 To raise funds, PDVSA management may find that it has no choice but to sell assets in Germany, Sweden and the Caribbean, as well as portions of company-owned Citgo, which operates almost 13,500 gas stations in the US. Moreover, Chávez may increasingly be under pressure to privatize PDVSA. However, a law dictating that Venezuela maintain at least a 51% stake in all joint ventures will continue to be a challenge for investors.

 PDVSA announced in early May 2003 that it made two significant oil discoveries, which could raise reserves by up to 2.4 billion bbl. The discoveries were in Chaguaramal and Furrial fields in the eastern state of Monagas.

 Despite political and economic uncertainties, foreigners continue to express interest in exploration and production. In April 2003, ConocoPhillips, along with PDVSA, AGIP and OPIC Karimun Corp. (owned by Taiwan’s CPC), received approval to develop Corocoro field in the Gulf of Paria in western Venezuela. The group plans to invest $480 million to boost production to 55,000 bopd by the second half of 2005. ConocoPhillips Co. owns a 50% stake of the Corocoro development consortium; Agip has 40% and CPC the remaining 10%.

 In June, the president of the Anzoategui chapter of Venezuela’s oil chamber, Jose Antonio Perez, announced that PDVSA should define a contract scheme for private participation in existing and new fields by year-end.

 PDVSA is seeking private investment in new exploration blocks, particularly on the offshore Deltana natural gas platform. PDVSA formed a commission, called Pospan-Gas, with the energy and mines ministry, the national oil chamber and private companies, to organize tenders for blocks on the Deltana platform. In February, PDVSA awarded two of the five blocks to Statoil and ChevronTexaco. Deputy Minister of Hydrocarbons Luis Vierma is expected to announce plans to award the remaining blocks soon.

 ChevronTexaco and ConocoPhillips recently announced plans to invest $2.1 billion to develop Block 2 of the Deltana platform. Chevron plans to spread the investment over six years (2004 – 2009). The partners expect to spend $1.2 billion on an LNG plant and $900 million on exploration, drilling, facilities and 320 km of pipelines.

 Brazil. There is concern about policies that the new left-leaning government of Luiz Ignacio Lula da Silva may enact in the energy sector. Early in the year, tenders of giant semi-submersible units P-51 and P-52 were suspended. This change was not revealed until a day before bids for gas compression modules were due. Although management said that the new contracting process allows international competition, a new bidding process has not been announced.

 Petrobras began 2003 positively by announcing an offshore Campos basin discovery with 150 million boe estimated reserves. The company said the new field, together with those at Marlim Leste, could produce 140,000 bopd by 2006.

 In May, Petrobras produced more than 2 MMbopd, due to acquisitions and new ventures in Argentina, Bolivia, Ecuador, Peru and Venezuela. The acquisitions, particularly in Argentina, have helped Petrobras consolidate its position as an international oil company with operations in Africa and the Western Hemisphere.

 Also in May, Petrobras announced first oil from a remarkable well in Coral field, Santos basin. Well 7-CRL-4D began flowing 41°-API oil at 10,000 bpd, significantly exceeding initial forecasts. The well is part of the Coral and Estrela do Mar fields development, which lie 180 km off the Paraná state coast, in water depths of 150 m. Production there is expected to reach 20,000 bopd.

Brazilian oil production took a giant leap forward last year, gaining more than 25% . Much of the country’s output comes from floating production units like Petrobrás 18, stationed at Marlim field. (Photo courtesy of GVA Consultants.)

 Argentina. Uncertain economic and political conditions continue to adversely impact Argentina’s oil sector. High oil prices in 2001 and 2002 could not offset the damage caused by weak political and economic conditions, and a 20% tax imposed on oil exports, as well as a briefly imposed oil export cap. However, there are recent signs that the country is on the mend.

 A few foreign companies have continued activity despite this situation. During the summer of 2002, Pecom Energia and Devon Energy Corp. sold their assets to new foreign investors including Petrobras, TotalFinaElf and Wintershall. After having suspended work for almost a year and a half, Pioneer Natural Resources resumed drilling for oil in Argentina that summer. Also, Petrobras announced a hydrocarbon discovery in the Rio Negro province in August 2002. 

 At the end of June, El Paso increased its stake in the Argentina-Chile Gasoducto del Pacifico pipeline through an asset swap with Argentine natural gas producer and power generator Capex. Capex International Business Co. (Cibco) gave El Paso its 38.4% stake in Cayman Islands-based Triunion Energy Co., which has a 21.8% share in Gasoducto del Pacifico. El Paso already has a stake in Triunion. Potentially, Servicios El Paso is a more attractive asset for Cibco in the short term because its gas processing plant in Neuquen is already operating; Gasoducto del Pacifico is a long-term investment.

 Colombia. As a result of decreasing crude production, state firm Ecopetrol plans to reduce costs by laying off 1,200 employees and selling its shares in electrical companies Transelca and Empresa de Energia Electrica de Bogota for about 389 million.

 Early estimates are that Ecopetrol discovered what might be its largest find ever, the Gibraltar I well. While further analysis is needed, the company’s president, Isaac Yanovich, believes that the structure – located near the Venezuelan border – could contain as much as 200 million bbl of reserves of very light crude. The announcement came almost a year after Occidental Petroleum abandoned the well as noncommercial in May 2002.

 ChevronTexaco’s Colombia subsidiary won a deal with Ecopetrol this May that includes incremental gas production in Colombia’s northeastern Guajira coastal region. This agreement will enable both companies to develop and produce 1 Tcf of gas reserves that are in the area. ChevronTexaco and Ecopetrol already produce more than 80% of the natural gas consumed in Colombia. The gas comes from Ballena, an onshore field located in Guajira State and Chuchupa, the country’s only offshore field. Jointly, these fields produce an average of 500 MMcfgd.

 In continued signs that Russia wants to be a significant international oil player, Rosneft will begin selling oil from its Suroriente field in southern Colombia. In 2001, Rosneft (45%), along with Petrotesting Colombia (27.5%) and Holsan Chemicals (27.5%), won a tender to develop the field.

 In 2002, explorers found 114 million bbl of new proven oil reserves in Colombia, replacing only 52% of oil produced during 2001. Discoveries were made at Guando field, operated by Brazilian Petrobras, and at Cusiana Cupiagua, operated by BP. Oil companies plan to drill 25 exploratory wells in 2003; the government hopes that this will help it add 1 billion bbl in reserves during President Uribe’s four-year term. Colombian oil production should average 536,000 bpd this year, a 9% decline from last year.

 Ecuador. Ecuador remains a significant Latin American oil exporter, producing about 400,000 bopd. State oil company Petroecuador accounts for about 55% of production, with private companies producing the rest. Oil exports account for 30% of Ecuador’s $6 billion budget. In 2002, Petroecuador’s oil production reached a 10-year low, primarily due to aging fields and insufficient investment. While the company had hoped to increase production in 2003, that is unlikely since there was a 2002 E&P budget cut of more than 40% and oil-worker strikes in June 2003.

 The oil strike was triggered by anger over the government’s decision in the spring to increase gas, food and other commodity prices in hopes of meeting IMF’s requests; this, in exchange for $205 million dollars in loans. During the strike, oil production was halved. The only oil pipeline in the country was also hurt.

 Despite these challenges, the government had hoped to decide by this summer on a new type of E&P contract to offer private companies for its five main oil producing fields: Sacha, Libertador, Auca, Lago Agrio and Shushufindi; thus far, the decision has not been announced. The energy ministry has proposed an association contract structure, which would give private companies 20-year contracts and a 60% stake in field production, while the state would receive 40%. According to Petroecuador’s board, the high return on investment in the fields means that private companies could earn significant profits while potentially depleting the country’s oil reserves.

 According to a report by the Board, “The ministry’s proposals mean that Sacha, Libertador and Auca offer a return on investment of 180%, 109% and 73% respectively, while the company’s Lago Agrio and Shushufindi fields yield returns of 28% and 22%.” The association contract gives private companies a higher percentage of profits because of potential risk in exploring the block, but according to the Board, “There is no risk on these fields because they are already producing and there is infrastructure in place.” The challenge for Petroecuador is to find operating alliance contracts that would still manage to attract private investment, without the company giving away the majority of potential upside.

 Trinidad and Tobago. Crude oil reserves remain a problem for the island, which, at 990 million bbl, will last only another decade unless new reserves are found. BP is the largest oil and gas producer in the country, followed by state oil company Petrotrin.

 BHP Billiton, which has been active in Trinidad since 1996, has committed up to $327 million for the first phase of its Greater Angostura oil and gas field off the northeast coast. The government has approved the project. BHP is operating the field and holds 45%, with partners Total and Talisman Energy owning 30% and 25%, respectively. The partners anticipate first oil by year-end 2004.

 Unlike at BHP, enthusiasm has waned at Shell after drilling three deepwater dusters on Block 25a in the past three years. BP and ExxonMobil have also had similar failures.

 Partially because of these problems, the government launched a nine-block licensing round from May 23 to September 30 last year. This bidding round includes deepwater Blocks 23a and 23b. Other blocks on offer are in shallow waters that in recent years have yielded rich gas discoveries. Interest in T&T’s gas exploration has increased significantly due to demand for gas through Trinidad’s Atlantic LNG plan. Natural gas is used extensively within the country, where gas-intensive industries, such as fertilizer, steel and petrochemicals, are important to the economy. Trinidad remains the only significant gas exporter in the Caribbean. 

EOG Resources has established a high-growth rate operation in Trinidad, thanks to recent successes like last year’s Parula natural gas discovery. (Photo courtesy of EOG Resources.)

 Peru. Consumption is significantly more than production, making Peru an oil importer from Colombia, Ecuador and Venezuela. While the Toledo government has tried to increase foreign investment in the oil sector, state oil company Perupetro, which is responsible for promoting E&P investment, signed only two exploration and production contracts in 2002: Burlington Resources and Petrotech. Burlington signed a $600 million exploration deal in Block 70, a region covering the eastern jungle provinces of Loreto, Amazonas and San Martin. The project is for seven years, but the contract has a 10-year extension option. Since the late 1990s, Burlington has spent $25 million, but its participation in five blocks has not yielded commercial results.

 Because only two contracts were signed, the Peruvian government reduced royalties on crude and natural gas E&P contracts up to 30% in hope of attracting investment to increase oil production. Also, Perupetro hired Robertson Research to help review its promotion strategy and to create initiatives to attract investment in the energy sector. A further reduction in royalties is being considered.

 Several companies are now exploring in Peru. In December 2002, Burlington Resources received permission to explore in Block 70 in Maranon basin. Burlington is also exploring Blocks 34 and 35 with Spanish Repsol-YPF, as well as Block 64 with Occidental Petroleum.

 Perupetro is in the process of finalizing five seven-year E&P contracts with Occidental, Hunt Oil and BPZ Energy, Spain’s Repsol-YPF and two Canadian companies. Both Perez Companc and Repsol-YPF are considering blocks in Peru’s jungle region. Andean Energy won a two-year technical evaluation agreement for Area X. In 2003, BPZ & Associates signed a two-year technical evaluation with Perupetro for Area XIX. Another American company, Maple, completed drilling its first exploration well on Block 31E and was awarded two Technical Evaluation Agreements for Blocks 31F and 31G.

 Some Argentine companies are exhibiting strong interest in the Peruvian energy sector. Pecom Energia’s first exploration on Block XVI in the northwest of the country has not yielded commercial results; the company must still drill a total of five wells on that block to be in compliance with its contract with Perupetro.

 Independent company Pluspetrol secured a $75 million loan this spring from Credit Suisse First Boston to finance drilling and well maintenance on Blocks 1AB and 8. Pluspetrol is also leading a consortium seeking financing from the Inter-American Development Bank and the Andean Development Corp. for the controversial Camisea Project. Various organizations have alleged that the project threatens the Amazon environment and its indigenous population. Pluspetrol has commissioned an environmental impact study to review these issues.

 In mid-June, Perupetro signed an amendment of the License Contract with Sapet for Block VV/VI in the Northwest area of Peru. The contract includes the drilling of eight wells, 20 workovers and the execution of two pilot projects for water injection and well reworks of 60 temporarily abandoned wells. This work will require investment of about $11 million dollars during the next three years.

 Bolivia. The country is self-sufficient in oil, just barely, producing about 49,500 bpd, including condensate.

 Interest remains firm in the Bolivian gas sector. Last fall, the US gave Bolivia $386,000 to study the feasibility of exporting LNG to California and Mexico, focusing on financial and environmental impacts. The study was delayed due to political instability and governmental indecision. The government was supposed to have decided last year whether it would use a port in Chile or Peru to export its LNG. It still has not decided, and the delay has caused some companies to threaten to pull out of the estimated $6-billion project.  

 Note: Mayra Rodríguez Valladares is President of New York-based MRV Associates, a management and financial planning consultancy: www.mrvassociates.com.