A proposed gas pipeline and LNG export network for Venezuela will provide a cash-flow alternative to traditional crude exports and an opportunity to capture the value of gas reserves in the Gulf of Paria and deposits off the north central coastline.
Latin America's promising oil and gas reserves continue to be a major attraction for international producers, and the move toward privatization of state holdings or domestic oil companies adds considerable upside. However, many Latin countries are handicapped with unbalanced general economies, leading to fluctuation in regulation and taxation, making participation risky at the same time.
With high oil prices prevailing, Latin American countries are either reaping substantial income, if they are exporters, or weathering a deep economic hit, if they are importers. The solution that many have opted for is to push for the development of natural gas reserves and infrastructural pipeline and LNG development, not only to reduce domestic energy costs, but to back out domestic oil usage for power generation, and substitute with gas. The latter would help boost oil exports and take advantage of high oil prices. Other major trends on the continent are:
- Even though it is no longer the only game in town, Petrobras' stakes in undeveloped projects and future exploration leaves no doubt of their dominance in the Brazilian market. At the same time, outside investors continue to pursue exploration opportunities there.
- Mexico will likely continue privatization under new president, Vicente Fox, working from downstream to the upstream sector, but it may be some time before Pemex is strongly impacted.
- Some field development and renewed exploration are finally getting underway in the Gulf of Paria off both Trinidad and Tobago and Venezuela. The region has always held some interest, but primarily for gas.
- High angle drilling along the Argentinian coastline continues, but the drill bits have yet to hit the big reserves indicated on seismic. Many geologists are convinced the Falklands plateau, Argentina eastward to the Falkland Islands (Malvinas) contains good prospects, if they could only figure out the seismic data.
Privatization
Privatization is moving slowly across the Latin American landscape, generally modeling the pace of change from authoritarian to more democratic political structures. Elections in Mexico are among the more high profile shifts as businessman and now president-to-be, Vicente Fox, promotes the privatization of some state enterprises, stronger state and city governments to manage local change, and the attraction of new international business.
Re-elected Venezuelan President Hugo Chávez also is looking to broaden the petroleum industry, including some privatization measures, as well as methods of managing sizeable poverty and financial problems. Aware of cautiousness on the part of outside investors, Chávez is making modest overtures to international business. With higher oil prices to fend off deep economic cuts, Chávez had an easier time winning re-election than expected.
Under Brazilian president, Fernando Henrique Cardoso, the country's economy has improved and the nation's energy industry is booming. Results of the Brazil Round 2 bidding left Petrobras, Brazil's national oil company, still far ahead of the game. After the round, Petrobras showed signs that it will dominate hydrocarbon and exploration activities offshore, beginning with the five blocks it will continue to operate in the Santos Basin, southeast of the Brazilian continental margin.
The shift to gas
Driven on by high fuel import costs, Cuban officials anticipate an expansion of a still-limited exploration program in areas bordering US territorial waters.
Natural gas has played a role secondary to oil for years in Latin America, but that may be changing. Venezuela passed a new law late last year to restructure its gas production. The basic purpose of the law, "Orgánica de Hidrocarburous Gaseosos," is to decree a greater separation of the production, storage, transportation, and distribution functions in the national oil companies; calculate final prices for the consumer; regulate data, transportation, and distribution, and allow open access in the transportation and distribution sectors.
Venezuela's domestic natural gas market is growing at a rate of 7% a year, and national oil company Petroven expects it to more than double by 2009.
Venezuela wants to incorporate a sophisticated gas infrastructure into the economy for a number of reasons: (a) to add to the country's petroleum life span; (b) to back crude oil consumption out of the domestic economy; and (c) to boost exports of crude, which at US$30/bbl are more attractive as revenue producers for the country's other needs.
The gas development program includes 14 natural gas accumulations not associated with oil production, where production can be pushed up to 6.1 bcf/d by 2009. Venezuela plans to spend US$37 billion to maintain the country's gas reserves at 150 tcf, and oil reserves at 77 billion bbl by 2009. However, the government is looking for outside financial help to develop some of its reserves.
Eventually, Venezuela may dispute the location and flow of gas under the Gulf of Paria with Trinidad and Tobago, especially as the latter is moving to triple LNG (liquified natural gas) production, using as sources the fields surrounding the island state to the south and west, but largely around the Gulf of Paria. Venezuela's 10-year business plan calls for LNG plants at Paria (on the Gulf of Paria) and Jose. Finbar Ganger, Trinidad's energy minister, has suggested to Venezuelan officials that they could partner with Trinidad in the siting of LNG facilities in Trinidad.
Investor trust
In Latin America, foreign investors hesitate to trust governments with frequent political changes, and change is often a hallmark of politics in the region. Seven times in the past two years, Venezuela has experienced a national political campaign. Earlier, President Hugo Chávez scared off investors when he promised to limit foreign investment in the oil industry. While in office, Chávez , switched gears and signed a new $4 billion joint venture with Phillips Petroleum to explore oil in the Orinoco region. Venezuela wants to raise production in that area from 158,000 b/d to 622,000 b/d in 2010.
Venezuela produced 2.8 million b/d last year, and has a productive capacity of 3.5 million b/d. The cost of production dropped to US$4.50/bbl last year from US$5.80/bbl in 1997. PDVSA plans to bring costs down to US$4.20/bbl this year and US$3.60/bbl by 2005.
Through most of Venezuela, reserves are bound up in heavy grades of crude, which require high-cost techniques to produce, transport, and refine. Part of the plan to increase reserve levels is to boost investment by $500 million during the next two years to reach the lighter reserves of some 2 billion bbl of oil and 16 tcf of gas in the Barcelona area and 3 billion bbl of oil and 9 tcf of gas in the Macal area. Venezuela plans to produce 400,000 b/d of lighter-gravity crudes from those areas by 2009.
PDVSA would like to produce 3.9 million b/d through its own efforts and at least 1.9 million b/d through efforts of partners. Under the operating-agreement arrangement, the contractor pays a 34% income tax, but PDVSA, as owner of the oil, pays the royalty. Investments should total US$8.3 billion through 2009.
Venezuela estimates gas resources at 2,276 tcf. A total of 146 tcf of that volume is proven reserves. The volume makes Venezuela seventh in the world in terms of gas reserves, just behind the US.
Prospective northeast
While little drilling has taken place, prospectivity off the coast of northeast Latin America is fed by appearances of large structures on seismic and gravity maps. A dispute between Suriname and Guyana, which has remained quiet for many years, has now broken out as a result of claimed encroachment by a drilling vessel.
Suffering as a result is CGX Energy which had already begun drilling on the site. The company was granted the concession to begin work in the Eagle target, but a Suriname naval patrol drove out CGX's rig. CGX moved the rig to another location, but that target was dry. On July 20, the company reported demobilization of its drilling equipment and support services because the two countries could not settle the dispute.
Elsewhere in the area, Burlington Resources recently entered a production sharing agreement with Staatsolie Maatschappij Suriname, the state oil company of Suriname, for exploration in the country's deepwater area. The agreement is an initial exploration phase with Burlington partners (Shell - 35 %, TotalFina - 15%, Korea National Oil - 15%). The partners will acquire several thousand km of seismic. The concession covers approximately 18,500 sq. miles.
Elsewhere in Latin America, after breaking the world record in extended-reach drilling - at 10,585 meters horizontally from the point of separation on the beach at Tierra del Fuego - Argentina is reaching a new level of success in oil production.
Deminex, Total Austral SA, and Pan American, operating companies for Cullen Norte No. 1, actually saved US$3 million in initial project costs for the drilling.
Operators owe their success to new and inventive machinery that pulls tubes and replaces them with perforated ones of a smaller diameter and those with a combination of high torsion and cradled threads. Total complex depth configuration measured 11,184 meters.
These highlights are providing a new technical and economic platform for expansion of E & P operations in Latin America, assisted by a developing gas infrastructure. With a necessary level of competition for licenses and a reliable regulatory program, there is less fear now that outside producers will steal Latin America's energy patrimony.
Common access
Recently, Mexico's regulatory commission approved the transport of gas through national pipelines for Pemex Gas y Petroquímica Básica (PGPB), a subsidiary of Petróleos Mexicanos (Pemex). This is the first step in common access, allowing competitors to move gas through common lines.
Pemex has monopolized the gas transport for as many years as the PRI has been in office, from field production to consumer sales. Considering that PGPB remains a subsidiary of Pemex, however, chances are that neither oil prices, nor whatever is currently wrong in the industry, will change soon. The two companies are still too tightly knit to be considered different institutions, but the movement seems to be a step in the right direction.
Another objective for Fox is dealing with corruption problems that afflict Pemex from time to time, especially in upstream contracting and downstream export contracts. One irregularity last year resulted in the resignation of Pemex manager Adrián Lajous.
Nicaragua
Seismic results continue to show potential natural gas in the Nicaraguan offshore region, although most wells drilled there historically have come up with sub-commercial results. Licensing for a new round of exploration is set to begin later this year. The areas on bid are rectangular blocks up to 4,000 sq km. Fugro-Geoteam is selling the technical data on the areas.
Nicaragua's new hydrocarbon law, signed in 1998, gives international oil and gas producers more leeway to explore than in the past. The government will hold a promotional campaign through the General Hydrocarbons Directorate of the Nicaraguan Institute of Energy (INE) before the bid round.
As part of the promotion campaign, INE is working to establish a data show room in Managua to exhibit the technical information associated with hydrocarbon prospectivity. The INE and Fugro-Geoteam signed an agreement related to the commercialized 2D seismic survey that was conducted in the Carribean Sea off Nicaragua in May 1999.
Earlier this year, a field trip with an official of a Mexican firm was undertaken off the southwest Pacific Coast of Nicaragua to ascertain prospectivity for that region.
Nicaragua-Honduras
Nicaragua and Honduras are disputing offshore boundaries in the southwestern part of the Carribean Sea, an area believed to have hydrocarbon reserves. The disagreement began in late 1999 when Honduras and Colombia formally sanctioned a 1928 treaty. In the Honduran maritime limits treaty, Nicaragua and Honduras had earlier agreed that Colombia would own the area extending 82 degrees west longitude to the San Andres Islands.
Nicaraguan officials now say the treaty is invalid because the US forcefully pressured them into signing it, in order to compensate Colombia for losing Panama in the early 20th century. Nicaraguans also say boundaries between the two countries should be divided diagonally from the northeast land borders into the far northeast Carribean sea - about 17 degrees lateral north. Nicaragua says it will question every petroleum concession Honduras grants in the area.
Although neither country shows signs of going to war over the issue, Nicaragua's president has threatened to take military action if Honduras doesn't recognize the claims Nica-ragua has made on the territory. As a result of the dispute, Nicaragua filed a suit against Honduras in the International Justice Court in The Hague.
Cuban leasing
Cuba is expected to lease 59 blocks in the eastern Gulf of Mexico and western Straits of Florida. The blocks are about 2,000 sq km and are in 2,000-4,000 meters water depth. A production sharing contract is set to govern the exploration the blocks, located within the Rankin, Dry Tortugas, and Key West areas. Most domestic oil in Cuba is about 14 degree gravity and about 8% sulfur.
The national petroleum company, Cubapetroleo (Cupet), is responsible for all exploration, development, refining, marketing, and transportation, while its affiliate Comercial Cupet handles contracts with outside companies.
Although Cuba would like the US to take part in the bidding, US economic sanctions won't allow it. Even though the travel ban to Cuba has been lifted, American law prohibits the spending of money in Cuba, although other nations' oil and gas producing companies are not similarly encumbered.
MEXICO: changes coming, but not quickly
Newly elected president, Vicente Fox, is expected to save Mexico's economy through business community and outside investors, but his real success and capabilities will not be apparent for some time until after he is sworn in. Although Fox is realistic about the speed of change in Mexico, he has made it clear he wants a 7% increase in GDP, much of which will come from the small and medium size business sector.
How long will Pemex, the national oil company, remain untouched? Several measures are apparent in early planning and statements:
- The E & P sectors may be last to be affected, simply because so many contracts have already been let on reworking fields and pursuing new lighter crude reserves. But there could be a shift in how projects are managed and contracts are let within a year.
- Petrochemicals, power generation, and some areas of refining, gas processing, and pipelines are being considered for quick privatization, largely because the sectors are either more technically discrete or geographically limited.
- Fox is re-examining oversight and regulatory agencies to determine how to speed up privatization but ensure that social needs and economic goals are met.
Cuba leasing, dispute highlight Carribean action
The Carribean Basin countries benefited little from high oil prices over the recent year, although Cuba is seriously moving ahead with large-scale licensing in an effort to lower energy costs, and Nicaragua and Honduras are trying to work out a boundary dispute to speed up exploration.
Oil and gas producers have explored sporadically throughout the entire Carribean Basin, but most of the recent activity has focused on the Trinidad and Tobago-Gulf of Paria region and Venezuela's Lake Maracaibo. Geochemists remain attracted to the Carribean Sea region off Venezuela's north-central coastline and a fracture zone east of Trinidad, but exploration companies have yet to strike commercial oil.
A study done earlier this year showed hydrocarbons, originating from organic and inorganic sources, contribute to the constant renewal of reservoirs in the Carribean and southern Gulf of Mexico, affecting onshore and offshore reserves in countries such as Trinidad.
