July 2000 Vol. 221 No. 7  International

Kurt S. Abraham,  International Editor

Brazil dominates Latin American energy gathering

With multinational firms’ interest in Venezuela waning over the last year, the new Latin American "star" is definitely Brazil. This certainly was apparent at the Ninth Annual Latin American Energy Conference, hosted by The Institute of the Americas May 15 – 16 in La Jolla, California (San Diego area).

Companies remain wary of the Chavez administration’s intentions in Caracas, and they are turned off further by the regime’s deliberate cutback in large, oil development projects (as Venezuela adheres to its OPEC quota) in favor of less-lucrative natural gas schemes. In contrast, Brazil has offered the upstream industry an opening of its oil and gas sector – complete with two exploration tract auctions – that has generated great interest and participation. Add much higher crude prices and a burgeoning natural gas market to the mix, and you have a successful formula.

Results from the recent 2nd Round auction of exploration licenses (see also page 11 for further details) illustrate Brazil’s growing popularity among operators. Groups comprising 44 different companies submitted $260 million in winning bids for all but two of 23 blocks (13 offshore and 10 onshore) offered. This compares to last year’s historic 1st Round, which attracted $182 million in winning bids, but saw less than half of the 27 tracts offered (23 offshore and four onshore) actually sold. Perhaps the only sour note expressed was that state firm Petrobrás managed to win a third of all blocks.

Part of this year’s greater success is due to changes in bidding characteristics made by the supervising governmental entity, Agência Nacional do Petróleo (ANP). Some changes were suggested by operators, including several small modifications to the concession agreement, and the nomination of some areas by private companies. Round 2 was also broadened, to give small independents a chance to be part of the bidding. This took the form of offering onshore blocks in mature basins and reducing associated financial requirements.

On the other hand, the doubling of crude prices between Rounds 1 and 2 was a major factor. Higher prices filled the operators’ war chests and encouraged them to see whether Brazil’s underexplored and virgin provinces can meet geologists’ expectations. According to Rafael Schechtman, ANP’s general manager of strategic affairs, part of the story also involves Brazil’s fundamental energy numbers. Despite producing 1.1 million bopd, the country still imports 360,000 bopd. Yet, proved oil reserves total 8.2 billion bbl, and the potential exists to add significantly to that figure. Schechtman sees good upside potential for natural gas, too. Gas reserves total 8.12 Tcf, and output is 1.13 Bcfgd, although much of that is reinjected into oil reservoirs or used by Petrobrás for other operational purposes. Yet, another 39 MMcfgd is imported, with more on the way. Schechtman told the conference that gas filled only 3% of Brazil’s primary energy demand during 1999, but he projects gas demand to grow an average 4.7% through 2010. On the oil side, he said that consumption increased 44% during the 1990 – 1999 period, and that trend should continue.

Mexican agenda laid out. Not all the news was generated by Brazil. Mexico will see greater E&P activity during 2000, albeit all of it operated by state firm Pemex. As presented by Pemex’s deputy director of planning and strategy, Pedro Carlos Gomez, the Mexican industry’s 2000 budget totals $9.6 billion, or $4 billion higher than 1999’s figure. Of that, 69% will go to E&P. Another 25% will be spent on refining.

Much of the upstream portion is tied up in the giant Cantarell offshore oil field expansion, to increase production capacity to more than 1.9 million bpd. Another goal is to process and market the entire associated gas output volume. Spending on Cantarell will total $2.6 billion this year, and amount to $10.5 billion over the 15 years from 1997 to 2012. Meanwhile, the project to increase non-associated gas production in the northern region of Burgos will spend $650 million in 2000. Total spending in the 1997 – 2012 period is expected to tally $6 billion. Output will rise to 1.2 Bcfgd next year from the current 971 MMcfgd, and it should reach 1.4 Bcfgd in 2004.

IPAA buoyed by gas news. Association staff members were not sure whether the reason was the tourist-friendly San Francisco location or high oil prices, but attendance at IPAA’s Spring Meeting was up considerably from last year’s event in Charleston, South Carolina. Given current economics, morale was very high among independents, and they were excited further by some of the forecasts presented.

Richard Gross III, Lehman Brothers’ senior vice president for natural gas analysis, told members that the average U.S. gas price during second-half 2000 should be $3.53/Mcf. Gross said that gas supply levels remain low, and additions totaling 1 Bcfgd are needed to return supplies to a 2.8-Tcf level considered normal for the start of the heating season. So tight are supplies, said Gross, that the industry will not have the luxury of draining down inventory when temperatures drop below normal levels. If prices remain at $2.60/Mcf or higher, he believes that the industry can do well and drill considerably more wells to help meet growing gas demand. However, he cautioned that $4/Mcf or higher would cause electric utilities to switch power plants to coal as their fuel of choice.

In other sessions, IPAA Vice President for Government Relations Lee Fuller told the Tax Committee that chances are slim in Congress this year for passing tax reform measures or any energy policy legislation. Fuller said the IPAA-supported marginal well tax credit plan "faces a sizeable hurdle" among legislators. That credit and other oil and gas measures are part of Senate Bill 2665, initiated by Sen. Kay Bailey Hutchison (Republican-Texas). Another ambitious energy policy proposal, Senate Bill 2557, appears to have been introduced too late this year to gain enough momentum for passage. Fuller said that independents have a better chance of succeeding in their efforts to elect additional legislators that are friendly to the industry.