Oil and gas in the capitals

According to a June report by Barclays, Latin American E&P spending is projected to rise 5% in 2014, down from December’s expectation of a 13% increase. However, this low growth in regional spending is transitory, and many continue to view the region as an important driver.

PDVSA is driving the pullback in spending. Barclays expects the Venezuelan NOC to increase spending $1 billion in 2014 (to $11 billion), down from a $5-billion increase previously announced. Brazil’s Petrobras is increasing its CAPEX capture rate, which could bode well for spending moving forward. And Mexico’s Pemex, discussed in more detail in the North American drilling update, is in the early stages of a substantial capital investment ramp, in an effort to prove and develop vast unconventional resources, including deep water and shale, as well as investment in enhanced recovery projects. According to Barclays, Pemex is expected to increase spending 6% in 2014 to $23.4 billion, tempered from prior expectations of a 14% boost.

Venezuela. Despite the lack of political stability during the last few months, Venezuela continues to be a good destination for investors. PDVSA recently reported, in its financial statements, that it made a profit of $15.835 billion last year, despite the average crude oil price level dropping to $99.49/bbl from the $103.42/bbl average in 2012. Total sales for the company increased 5.3 %, to $134.316 billion.

Among the new investments, the moves made by Repsol and Eni—which will finance production from a gas field in Venezuela at a cost of $1 billion—in the creation of a JV company stand out. This JV will exploit an enormous gas field off the Venezuelan coast. PDVSA will hold a controlling interest of 60%, and Eni and Repsol will each have a 20% share. The project will produce 150 MMcfgd at its maximum output level.

Last May, PDVSA signed an agreement with Halliburton, Schlumberger and Weatherford for a line of credit worth $2 billion, to expand production to 4 MMbopd in 2014. PDVSA also signed a $420-million financial agreement with Perenco for a JV company, which will expand production from Lake Maracaibo and Faja de Orinoco to 25,000 bopd from 5,000 bopd. The agreement also includes the drilling of 27 new wells in Ambrosio field, again located in Lake Maracaibo.

Since last year, financial agreements have been signed for more than $10.3 billion to form JV companies with foreign oil companies, such as CNPC, Chevron, Rosneft and Repsol. These deals should increase production.

Argentina. Despite postponing construction of the $910-million GNEA gas pipeline project for several years, Argentina’s Ministry of Industry has budgeted $37 billion, between now and the end of 2017, for investment in the hydrocarbon industry. This capital investment consists of $28 billion for E&P and $9 billion for refining capacity. These investments may be compromised, if negotiations fail with the “holdouts,” which are key investors for the development of the Vaca Muerta mega field.

Repsol’s exit from the investment package, and its replacement by investment funds will alleviate, in the near term, the shortfall for 2014. This may become a good letter of recommendation when it comes time to look for further financing.

The inability to reach an agreement with Repsol damaged the possibility of securing investment partners in Europe, which would be necessary to generate contributions from investors in Asia and the Middle East. To date, YPF has been able to secure investors in the U.S., including such firms as Chevron (shale oil) and Dow (shale gas), and probably Eni or Statoil, as well as closing a deal by the end of this year with Petronas for the development of Vaca Muerta. Even without the purchase of Apache’s assets in Argentina, YPF’s investment during the third quarter was $1.2 billion, with a net income of $350 million.

Colombia. The JV between Chevron and Ecopetrol will invest $249 million to optimize production of Ballenas, Chuchupa and Riohacha gas fields in La Guajira, which will increase Colombia’s output by 50 MMcf. In April, the Colombian oil company launched a $2-billion, 30-year bond offering in the international capital markets. This bond offering doubles Ecopetrol’s debt requirement, which is regulated by the state at around $1 billion.

Even though the development side of the oil industry is the main destination for foreign investment in the country, interest in exploration is still strong, although industry experts worry about sustainability over the medium and long term, considering the circumstances that exist for the upstream hydrocarbon market. Currently, a perception of increased difficulty in the execution of operations can be observed.

Brazil. Petrobras will invest $102 billion through 2018 to exploit ultra-deep oil wells. Despite the fact that Petrobras is highly indebted—taking into account the difference between the price it sells fuels for in the domestic Brazilian market and the current international price of oil—the company in mid-March offered for an $8.5-billion sale of 3-, 6-, 10- and 30-year bonds. This was the second bond sale for the Brazilian company in 2014, after raising $5.271 billion in January.

The decision, at the end of March, by Standard and Poor’s to downgrade the credit rating of Brazil’s state debt from “BBB” to “BBB-“ will, probably, affect the company’s debt in the short term, but it could also force the government in Brasilia to increase the sale price of fuels. The downgrading of Brazil’s credit rating will probably reduce access to new capital for Petrobras.