South America

The continent keeps plodding forward

Despite political troubles in the north and Argentina’s financial woes, the oil sector struggles on; Brazil forges ahead unimpeded

Mayra Rodríguez Valladares, President, MRV Associates, New York

Political and economic turmoil in South America, plus an uncertain U.S. economy, continues to adversely affect the energy sector throughout the region. Significant production declines are evident in all countries except Brazil.

Venezuela. Oil revenues account for over 70% of government coffers, and yet various strikes, the failed coup earlier this year and ongoing political uncertainties have had dire economic consequences. All of which will likely keep exploration, production and infrastructure spending stagnant at best. Domestic oil analysts estimate that PDVSA needs about $4 billion annually to maintain the country’s current capacity; this year, the government only budgeted half that amount and has yet to disburse it.

Former OPEC General Secretary Alí Rodríguez – now PDVSA´s head – has the difficult task of turning the $58-billion company around. One distraction is a revitalized debate between petroleum and government officials concerning partial privatization (at least 20%) of the company. Given that the nation’s constitution would have to be changed, any privatization in the near future is unlikely.

Key for exploration and production will be if the new management repeals the recently instituted Hydrocarbon Law, which has significantly reduced foreign interest in Venezuela’s oil sector. As is well known, the country’s main oil fields are aging, and significant investment is needed to ameliorate production declines.

Venezuelan oil production has become increasingly obscured by politics in recent years. A key OPEC nation, its current oil production quota is 2.5 MMbpd, but there are allegations that the country has sometimes exceeded this amount by 100,000 to 200,000 bpd. Assuming OPEC compliance, the country now produces 26% less than it did in 1998.

Earlier this year, PDVSA initiated the Deltana project to explore and develop natural gas resources, an investment estimated at $4 billion. Production could begin in 2007, with a gas-production target of 1 Bcfd.

Two heavy oil facilities went onstream in 2001. ExxonMobil’s and Veba’s joint venture at Cerro Negro began producing. A new $790-million, 120,000-bpd upgrading facility at José converts the extra-heavy crude to 16°API oil while expanding the project’s capacity. Phillips’ and Texaco’s extra-heavy crude Hamaca project began limited production in November 2001. In 2004, after an upgrading facility (to 26°API) at José is completed, 190,000 bopd are expected. In February 2002, the Sincor project, led by partners TotalFinaElf and Statoil, began production. It is slated to reach 180,000 bopd by year-end, then plateau at 200,000 bopd. Sincor’s crude also will be upgraded at a facility in José to about 30°API. All of these heavy oil fields are expected to pump for at least 30 years.

Phillips and partners, ChevronTexaco and PDVSA, initiated output last November at the Hamaca extra-heavy oil project in Venezuela's Orinoco Oil Belt. Nineteen wells were drilled, and a pipeline was completed. (Photo courtesy of Phillips Petroleum)

Brazil. The year began with further oil sector deregulation, allowing energy entities to compete against state firm Petrobrás. This new environment could encourage private investment by domestic and international E&P companies, provided the perception is that competition with Petrobrás is fair and protected by the new deregulation.

Petrobrás’ production now stands at 1.5 MMbopd. This represents a 14% rise compared to the first half of 2001. Development drilling at Marim Sul and new production from Albacora field were the major causes for the increase.

In April, Petrobrás began to extract heavy crude at deepwater Block BC-60, 48 mi offshore Espirito Santo state. Management intends to invest about $100 million to evaluate production of this 17°API oil, which is heavier than Campos basin crude. Tests are scheduled to begin in August 2002 and take one year. Petrobrás estimates that these reserves could be between 300 and 500 MMboe. Shell announced in July that it would drill an appraisal on Campos basin Block BC-10, where it had four discoveries of 17°-API oil. With positive results, Shell could start production in three years.

Petrobrás’ gas sector also did well. In April, it discovered a 212 Bcf (reserves) gas field 124 mi from the state capital of Manaus in the Amazonian jungle, which is rapidly becoming a major gas-producing region. At the end of 2001, off the coast of Valenca in Bahia state, Petrobrás and Brazilian partners Queiroz Galvao and Petroserv discovered new gas reserves totaling 700 Bcf. The field is expected to produce some 100 MMcfd beginning in 2003.

Results of Brazil’s fourth licensing round were down from previous rounds. Less than half of the 54 blocks offered were taken, and only $33.3 million was raised, $23.5 million of which was for five offshore leases. These were acquired by (or consortia led by) BHP Billiton; Petrobrás; Maersk Olie og Gas AS; Shell Brazil Ltda.; and Newfield Exploration Co. Potential investors cited the quality of the acreage and high taxes as their primary objections. Petrobrás was, as usual, a prominent winner. Despite the mediocre results, Brazil’s National Petroleum Agency remains committed to encouraging foreign investment for E&P. The agency also budgeted about $430 million for geologic and seismic gathering through 2002.

Argentina posted a gain in oil production last year, albeit small, thanks to a high level of drilling activity. However, this year’s economic crisis is bound to have a negative effect on the country’s output rate. (Photo courtesy of Repsol-YPF)

Argentina. The country’s financial crisis plagues all sectors, including energy. During the first half of 2002, Argentine production averaged 782,359 bopd, about a 1% gain from 2001 but down 14% from 1998, the peak year in the last decade. If international oil prices were to fall significantly, Argentine E&P would likely fall disproportionately further, since revenues do not suffice for expansion.

The E&P sector could receive some help from the government’s June announcement to ease oil export limits on producers in return for their guarantees to supply domestic markets. However, a government decision worsened energy prospects by imposing a 20% oil export duty. This eliminated any possible benefit that producers could gain from lower costs resulting from devaluation of the peso, which now stands at US$0.28, down from an even par that was previously set by law. Due to foreign exchange losses, some international oil companies have questioned expansion plans or whether to have any exploration and drilling projects in Argentina.

In contrast, neighboring Brazil has not been dissuaded by the crisis. It remains committed to investing about $140 million in the Argentine oil sector between 2002 and 2005, of which about $86 million is earmarked for 2002. Most of these funds, however, are for refinery upgrades and infrastructure construction, not E&P.

Colombia. Continued political and economic instability and Colombia’s 38-year civil war continue to negatively impact E&P operations. The terrorist group, National Liberation Army, declared any oil company or its infrastructure as potential military targets. Oil companies such as Repsol, Occidental and state-owned Ecopetrol were specifically named by the group. While newly elected President Alvaro Uribe has made fighting terrorism a top priority, it’s too early to determine any effect.

Ecopetrol has yet to meet its E&P targets. Colombia continues to focus on stemming production declines by signing joint venture contracts with foreign companies. Over several years, Ecopetrol has signed about 60 E&P contracts with private companies.

Colombian production currently averages about 600,000 bopd, about the same as last year. This represents a 13% decline from 2000 and a 26% decline from 1999. Colombian oil reserves are about 1.85 billion bbl; the country could be forced to import oil within six years unless it finds new fields.

In February, Ecopetrol’s joint-venture partners found two new oil fields in eastern and southern Colombia with reserves of about 100 MMbbl, each. The new fields, located in the Casanare-Arauca area and near the upper Magdalena River, are expected onstream by about 2005. The discoveries are the biggest in Colombia since Brazil’s Petrobrás found the 130-MMbbl Guando field south of Bogota in 2000.

Ecuador. National oil company Petroecuador expects oil production to decline about 11% during 2002, due to aging fields and exploration project failures. Ecuador produced about 400,000 bopd during most of 2001. Oil production has also been significantly affected this year by protestors who are perennially unhappy with government policy. Also, the government remains mired in disputes with environmentalists who continue protesting the country’s building of the OCP oil pipeline. The impact of these protests was seen in May when exports declined by 31.2% to 93,600 bopd compared with April. Hopes of improving the sector lie with the newly appointed president of Petroecuador, Gustavo Gutierrez, a 48-year-old lawyer who has been part of Petroecuador’s administrative council for two and a half years.

The $1.1-billion OCP pipeline will double Ecuador’s crude-production capacity and allow export of lighter, more valuable crude. Presently, heavy and light crudes must be mixed and transported through the nation’s only pipeline, SOTE, which has been at capacity for years. Despite protests and delays caused by heavy rainfall, the government is confident that the pipeline will start flowing within a year.

Ecuador is also having difficulty with potential international oil investors. The government is arguing whether oil companies are entitled to "drawback," a process by which a 12% VAT is returned to exporters in an effort to promote their sales overseas. While Ecuador’s tax authority claims this tax break is already included in the firms’ contracts to extract crude, private companies say they have been unfairly denied this cash, estimated at $150 million since 2000. Consequently, firms are wary of investing fresh cash in exploration and production.

If the government is able to quell the various disputes by November, it will offer six blocks to private investment. Two blocks are offshore, two blocks are in the coastal transition zone and two blocks are in the Amazon Oriente.

Trinidad and Tobago. T&T is by far the Caribbean’s largest oil producer at about 140,000 bopd. Production, however, is declining slowly. While crude reserves may only last another decade, gas supplies continue to swell.

In late 2001 and this year, BHP Billiton, together with partners TotalFinaElf and Talisman Energy, announced three discoveries in Block 2C, offshore the northeastern coast. BHP Billiton estimates that this may be Trinidad’s largest-ever offshore discovery, with up to 1 billion bbl of oil and 2.5 Tcf of natural gas. In May, EOG Resources announced a discovery in the SECC block, off Trinidad’s eastern shore. It is expected to add 250 to 350 Bcfg to the field’s existing reserves. British Gas is also increasing development activity on its Hibiscus platform and exploration in Blocks 5A and 6 (ECMA).

In early June, the government announced that, together with 12 foreign firms, it would undertake a new seismic study of previously unexplored ultra-deep waters. Bidding for blocks in these waters may begin in about two years.

In July, Trinidad announced plans to run a gas pipeline to Martinique and Guadeloupe through the Eastern Caribbean, with branches extending to Antigua, St. Kitts and Barbados, ending in Puerto Rico. Feasibility studies are being conducted, with costs estimated at nearly $500 million. Officials also expressed an interest in supplying gas to the Dominican Republic and Cuba.

Trinidad and Tobago is now the largest LNG exporter to the U.S. The Atlantic LNG Co. plant, considered the largest single train ever built, is undergoing a $1 billion expansion to triple its capacity, to 10 million t/yr. BP is also building one of the world’s largest offshore gas processing units as part of a $600-million pipeline project. When finished, it will have a 2-Bcfgd capacity.

Bolivia. Bolivia continues gradual privatization of state-firm YPFB. Current contenders for the Bolivian presidency – regardless of who wins – are unlikely to significantly change current policies toward foreign investment in the energy sector. However, political and economic pundits say that both contenders are focused on policies that are opposite those of a market-based economy.

With proven oil reserves of only 475 MMbbl, Bolivian oil production – currently about 38,000 bpd – continues to be minimal and mostly for domestic use, with a small amount exported to Chile via pipeline. Gas, however, is the country’s key resource and economic lifeline. Proven gas reserves – as reported by the government – are 27.4 Tcf; probable (~50 Tcf) plus possible gas reserves are as high as 70 Tcf. Plans for further gas export remain unsettled, with both Chile and Peru vying for the exit route. The government may favor Peru due to an old border dispute with Chile, even though that route costs about $600 million more.

Market analysts believe that foreigners are ready to invest about $6 billion to drill and export Bolivian gas. Several operators have voiced interest in piping gas to yet-to-be-defined Pacific Coast LNG plants. California-based Sempra Energy has signed a memorandum of understanding with Bolivia for 20 years of gas supply. Sempra and other operators plan to build LNG plants somewhere on the Pacific Coast for supply to the U.S.

Bolivia currently exports gas through the Brazil-Bolivia pipeline, owned by Petrobrás, Enron, Shell and BGI. Presently, about 1 Bcfd of gas is transported via this pipeline. In December 2001, the Bolivian and Brazilian governments approved an expansion of the pipeline’s capacity to 1.4 Bcfd to meet Brazil’s growing needs for its power plants. It is scheduled for completion in 2003. In addition, in March, the Bolivian and Paraguayan governments signed an agreement to build a gas pipeline that would link points in Argentina and Brazil.

Peru. Peruvian oil exploration and production are under threat, given the intense pressure from environmentalists. The country currently produces about 95,000 bopd, a 4% decline from 2000.

Peru’s government signed two bills into law in January aimed at encouraging oil exploration. President Alejandro Toledo hopes to encourage foreign investment in the oil sector, in part by making investment terms more attractive and setting up a better legal framework for investors. Oil exploration investment in Peru fell to about $30 million in 2000, and only three oil wells were drilled during 2001. The government would like to increase drilling to at least 30 wells per year over the next three years.

At the beginning of the year, state firm Perupetro was negotiating with several companies, including Repsol-YPF, Perez Companc and Harken, on contracts for blocks in the Talara basin. Perupetro also signed technical-evaluation contracts on several oil exploration blocks with Hunt Oil, Occidental, Harken and Russia’s YUKOS. The government, however, has had strong challenges from environmentalists and laborer organizations. The groups oppose further mining, oil and gas exploration in a 30-million-hectare region.

Peru had significant setbacks in efforts to attract investors to the giant Camisea gas fields. State oil company Perupetro cancelled a tender on three blocks adjacent to Camisea after only one bidder showed up. Potential bidders stated that exploration costs are very high and cast doubt on the market potential for Peruvian gas, particularly with present attention focused on Bolivian gas markets. Earlier in the year, Peru looked as if it had begun to make progress. In May, the government awarded Belgian-based Tractabel a 30-year concession to build and operate a gas distribution network in the Camisea fields. Progress, however, has been difficult, made worse by allegations that Tractabel paid bribes to former President Alberto Fujimori.

Further bad news came to investors from the World Bank in a negative report on the Camisea fields and associated pipeline project. The report said that the development would have negative, irreversible environmental impact, regardless of strict mitigation measures.

Chile. Chilean oil production only amounts to about 6,700 bopd and continues to decline. State oil company ENAP has had disappointing exploration results. Consequently, the government focus has been on courting international oil investors to improve production. Chile made important strides in aligning itself with free trade markets in May, when it signed cooperation agreements with the European Community. It will now court potential European investors for its energy sector more aggressively.