APLA: Private money required

09 November 2012 11:34  [Source: ICB]

Private sector involvement is needed to fulfil frontier oil and gas potential in Latin America, to support predicted faster-than-average economic growth in the region

With Latin America expected to be one of regions that leads global economic activity through 2013, the pressure is on its oil and gas companies to support this growth through increased output.


Government investment on its own may not be enough in Latin America

Copyright: RexFeatures

International oil cartel OPEC expects Latin American oil and gas demand to grow by an average of around 130,000 bbl/day, or 2.3%, across 2013, more than any other region except China. Recent exploration successes have demonstrated Latin America's great hydrocarbons potential both on and offshore; however the extent to which governments are willing to open domestic sectors up to the private investment necessary to realise this potential remains unclear.

Argentina became the centre of global attention in April when President Cristina Fernandez Kirchner announced the seizure of a 51% stake in the country's largest oil company, YPF, previously owned by Spanish energy group Repsol, in an effort to reinvigorate a domestic industry marred by a decade of production stagnation.

YPF's new management team has been busy since then, unveiling plans in August to invest $3bn (€2.32bn) through to the end of 2013 as part of a larger $37.2bn five-year investment plan. The company aims to boost production by 6%/year through to 2017, largely through the exploitation of the country's enormous shale gas reserves, estimated by the US-based Energy Information Agency (EIA) to be the third-biggest in the world, at 774 trillion cubic feet.

Steps have also been made to harness unconventional resources elsewhere in the region, with Mexico's state oil company Pemex aiming to replicate the shale revolution north of its border in an effort to turn around its own flagging production.

Pemex announced plans in September to spend $200m drilling wells into Mexican shale plays already producing in Texas, in order to prove Mexico's own resource potential, estimated in the region of 60.2bn bbl of oil equivalent (boe).

Pemex's exploration successes over the past year have not been confined to onshore activity. Recent offshore finds at the Trion-1 and Supremus-1 wells in the deepwater Gulf of Mexico could add up to 500m boe to the state oil company's reserve base.

The governments of both countries have been quick to point to 2012 as a year of change; however industry watchers warn that any excitement should be tempered by reality.

Experts point out that the cost of developing reserves in such hard to reach places could be too much of a burden for the respective companies alone. Economist Michael Economides recently estimated that for YPF to achieve its gas production goals, it would need to invest some $250bn in unconventional resources, a figure "impossible to envision" right now in Argentina.

YPF management recognises the need for private investment and cooperation with the international community, announcing in September a tacit agreement with US-based Chevron focused on development of the giant Vaca Muerta shale reservoir.

In the shorter term the companies will concentrate on improving recovery rates across mature fields, as YPF pursues further shale-focused alliances internationally.

Mexico's Pemex too has looked to harness the power of the private sector to improve its performance, awarding several incentive-based contracts by which companies operate mature fields in return for a fixed payment per bbl of oil equivalent produced. The national oil company hopes that these deals, targeting mature fields both on and offshore, can boost production by 150,000 boe/day through to 2015.

President-elect Enrique Pena Neito has promised to open the sector to more private investment, something analysts stress is necessary for the country to release the full potential of its unconventional and deepwater hydrocarbons wealth. However, the new president is likely to face stiff opposition in parliament given the intimate relationship between Pemex and the state; the company's revenues account for nearly one-third of all the Mexican government's income.

In Brazil, 2012 has not been a great year for the oil sector. State oil company Petrobras, once seen as a shining example of how a national oil company can flourish in alliance with the private sector, has been bogged down by bureaucratic and political issues, while environmental concerns threaten to derail the offshore oil boom which has seen the company increase it reserve base 10% since 2006.

In May this year Petrobras unveiled a $236.5bn five-year corporate capital expenditure programme, with much of this investment destined to further delineate and develop the pre-salt offshore reserves in the Santos and Campos basins. Progress in these areas has however been stymied by environmental concerns surrounding an oil spill on the Frade field operated by US major Chevron.

The 2,400bbl spill demonstrates the huge technological challenge involved in the exploration of pre-salt reserves, where hydrocarbons are contained below up to 6,000 metres of sea, rock and salt.

More than 90% of Brazil's oil production currently comes from offshore deep-water wells and this share is only likely to grow as exploitation of the pre-salt advances. Increased environmental regulations in the aftermath of the spill are now likely to lengthen the development process.

The Chevron case has also demonstrated the fractious relationship between the government and the private sector, with Chevron executives facing criminal charges over the spill and being prevented from leaving the country. International oil companies (IOCs) had previously complained about strict government legislation stipulating that much of the infrastructure used in offshore exploration be produced locally. Insufficient equipment is holding up pre-salt development, they claim.

National production, which had been expected to jump by at least 100,000 bbl/day to 2.8m bbl/day over the course of 2012, is now anticipated to grow by no more than 30,000 bbl/day, according to OPEC.

A recent injunction against the operator of the rig used on the Frade field, Transocean, suspending the company from using all its deep-water rigs, had threatened to reduce this production growth still further though Petrobras succeeded in getting the injunction overruled.

Analysts warn that the company must now lobby for better relations between the public and private sector and a relaxation of protectionist economic policies, if Brazil is to hit its target of producing 3.9m boe/day by 2015.

If progress in Brazil has stalled, Venezuela's oil sector is regressing. State oil company PDVSA, once one of the world's top oil producers, has seen its production levels decline from 3.5m bbl/day in 2002 to around 2.5m bbl/day in 2011, according to the EIA. This comes despite Venezuela holding the world's largest oil reserves, some 296.5bn bbl according to BP's latest Statistical Review of World Energy.

PDVSA's problem has been its increased incorporation into the political system of President Hugo Chavez. Effectively the oil company is now a branch of the state, using money from its budget to build houses, run power plants and operate agricultural subsidiaries.

Analysts argue that this extracurricular activity diverts valuable man hours and investment from the company's core business; producing oil revenues for the Venezuelan state. Accidents such as the 25 August Amuay refinery explosion, which left 48 people dead and halved capacity at the world's second-biggest oil refinery, show how far the underinvestment in the oil business has gone.

Opposition candidate Henrique Capriles had vowed to stop the politicisation of PDVSA in the lead up to the 7 October election, talking of the need to encourage private investment, in decline since a sweeping range of nationalisations launched by the government in 2007.

Chavez's re-election seems, however, to have quashed moves to reinvigorate the oil sector, with many IOCs increasingly reluctant to operate in the country while he remains in power. In January Chavez announced that the country will withdraw from the World Bank's International Centre for the Settlement of Investment Disputes (ICSID), limiting dispossessed companies recourse for compensation still further.

Brighter things are seen away from Latin America's big four producing economies, with resurgent activity levels in both the Colombian and Peruvian oil and gas industries.

Production in the former has doubled since 2006; however the security issues which previously deterred investment in both countries' hydrocarbon sectors also seem to be re-emerging. Here again political support is essential in dealing with the threat posed by the terrorist groups which over the last year have consistently bombed Colombia's pipelines and attacked the installations of the Camisea gas consortium in Peru.

Author: James Fowler

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