Oil politics: the future in their hands (part 1)

Politics and oil mix raucously almost everywhere, but the combination seems to resonate most loudly throughout Latin America, where it is variously seen as an exclusive birthright (as in Mexico), or a national champion (as in Brazil). Some, like Colombia, see it as an opportunity to enrich the nation, while others, like Argentina, install price caps to curry favour with the electorate.

Venezuela

Nowhere have the decisions made by the presidential palace had greater influence than Venezuela. The death of Hugo Chavez in March 2013 capped a decade of dictats that saw PdVSA, one of the world’s largest and most technologically-advanced oil companies, reduced to a shadow of its former self, and the country’s entire sector shackled by arbitrary measurements and outright confiscation.

The meddling began in 2002, when staff from state oil company PdVSA initiated a strike to protest the use of company revenues for social programmes. Chavez suppressed the strike and subsequently purged 18 000 professionals from the company, replacing them with loyalists. In 2007, his regime nationalised major projects in the Orinoco heavy oil belt region by awarding 60% ownership to PdVSA. Although several companies, including BP, Chevron and Total, accepted compensation offers, ExxonMobil and ConocoPhillips filed multi-billion dollar claims in the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID). Money that should have gone into maintenance and exploration was funnelled off to subsidise handouts and export Chavez socialism to impoverished neighbouring countries. The mismanagement resulted in a production decline from 3.5 million bpd in 1999, to an estimated 2.4 million bpd in 2012.

But the fact that Venezuela has over 1 trillion boip means that the country cannot be ignored. National oil companies (NOCs) and international oil companies (IOCs) continue to announce joint venture investments in order to stake out a presence in the massive heavy oil deposits in the Orinoco belt.

• Production at the PetroJunín joint venture between PdVSA (60%) and Italian producer Eni (40%) came onstream this year with the first well in the Junin-5 giant heavy oilfield. The field holds 35 billion boe, and the production development plan calls for 15 000 bpd by the end of 2013 and 75 000 bpd by early 2015. Phase 2 development will see production jump to 240 000 bpd by 2018. The output will be shipped to the proposed 350 000 bpd Jose Industrial Complex refinery.

• Eni is also co-operator in the Perla gas-condensate field (17 trillion ft³ gas in place), located in the shallow waters of the Gulf of Venezuela. The field will be developed in three phases to a total of 2.4 billion ft³/d. Production will be directed to the domestic market for power generation, petrochemicals and heavy oil upgrading. The companies are also in discussion to develop exports.

Chavez’s chosen successor, Nicolás Maduro, won a narrow election victory to serve out the remainder of his six year term as President. During the campaign, Maduro reiterated the anti-American rhetoric and subsidisation policies that generated popularity for Chavez, but the dire reality of the country’s finances and the continued reliance upon the US as a destination for the largest portion of its exports may, as reported in the New York Times, result in a regularisation of political relationships and greater respect for international law.

On the other hand, analysts like Sarah Ladislaw, Co-Director of the Center for Strategic and International Studies, noted that the country is marked by deep divisions, both within Chavez’s party, and between Chavistas and opposition members. “As we look ahead to another period of transition in Venezuela it is important to be mindful of the potential for disruption and to look for ways to mitigate the impacts of such disruption,” she noted in a recent commentary.

Brazil

In stark contrast, Brazil keeps moving from success to success. In February, the giant Sapinhoá Field officially came onstream with first production. In March, Petrobras and partners announced that total pre-salt oil production had surpassed 300 000 bpd. The level had been reached in just seven years (after first discovery in 2006). Associated natural gas production is 9.8 million m³/d.

Petrobras notes that the pre-salt production comes from just 17 production wells at eight different platforms. Between 2014 and 2016, another 11 new platforms will go onstream: ten in Santos Basin and one in Campos Basin. Oil production operated by Petrobras in the pre-salt is expected to exceed 1 million bpd of oil in 2017.

Drillers are also serving up new discoveries. The Sul de Tupi well located south of Lula field, at a water depth of 2188 m and 302 km off the coast of Rio de Janeiro state, confirmed the presence of reservoirs of excellent quality in carbonate rocks below the salt layer.

Hydrocarbons have also been discovered farther afield. In December 2012, Petrobras encountered 67 m of oil in the Sergipe Alagoas Basin, 900 km northeast of the prolific Santos Basin. The discovery is the fourth such made in the basin.

While the bounty generated by new and existing production has been wisely invested under the administrations of Presidents Dilma Rousseff and President Luiz Inacio Lula da Silva (Lula), most of the country’s 2.35 million boe/d production is concentrated in a small number of states. Regional administrators would like to see redistribution of federal funds to compensate for the lack of natural resources in some areas, and efforts to make royalty changes and sharing agreements have delayed new lease auctions since 2008. In addition, the federal government has established a preference for Brazilian-sourced equipment. Douglas-Westwood recently reported that over US$ 91 billion will be invested worldwide in floating production systems during 2013 - 2017, a third of which will be spent in Brazil. The consultancy noted that the local-source policy is driving up capital expenditures and extending lead times as local and international firms struggle to meet demand.

But the government remains firmly committed to a fiscal and regulatory climate that allows both national and international firms to participate in the bonanza. Brazil finally scheduled a lease auction in May 2013. The 289 blocks are located in the equatorial margin, which could hold promising findings. Analysts predict the area will contain oil reserves similar to those found off Africa’s west coast, as well as discoveries in French Guyana. The auction attracted widespread interest and US$ 1.35 billion in bids, exceeding expectations.

Brazil will also be holding a bidding round for pre-salt exploration blocks in November 2013. The available blocks are located both onshore and offshore and total more than 57 000 square miles. Officials believe the auction will attract investments of up to US$ 1 billion.

Engineering firms are investing heavily in local vessel construction and well equipment services. Aker Solutions, based in Norway, is supplying the complete topside and subsea equipment (drilling riser and BOP) packages for six drillships, and an option for one further unit. Up to 50% of the deliveries will be sourced in Brazil, where the company is investing US$ 100 million to build a 335 000 m² drilling equipment site, its fourth located in Brazil.

Colombia

Colombia has also relied on sound fiscal, regulatory and royalty policies to bolster its oil and gas sector. A decade ago, the country was a wreck, with insurrection groups such as FARC committing destruction against pipelines and holding sway over significant portions of the country. In 2002, however, President Uribe began a campaign to eliminate the widespread destruction of infrastructure and kidnapping of personnel. In addition, the country opened up the oil and gas sector and established generous royalties to encourage outside investment. International expenditures now exceed several billion dollars annually, and kickstart a new generation of production:

• Petrominerales Ltd, Calgary, which operates the Rio Ariari, Chiguiro Oeste, and Chiguiro Este blocks, announced it is producing 556 bpd from its new Tatama horizontal well in the Llanos basin.
• ExxonMobil Exploration Co. Ltd is taking a farm-out from Patriot Energy (Toronto) to explore for unconventional oil and gas in Colombia’s Middle Magdalena basin. The supermajor will spend up to US$ 45 million to test the Cretaceous La Luna formation.
• Petroamerica reported that the Las Maracas field in Colombia’s Llanos basin is producing at more than 4600 bpd of 30° gravity light oil with minimal water. The Calgary based company has a 50% participating interest in the field.

• Amerisur Resources recently encountered 99 ft gross pay, 79 ft net, in the U sands of the Villeta formation in the Platanillo field in the Putumayo basin of Colombia. The oil tested 31.8° gravity. The well raised company output in Colombia to 3500 bpd, and the company expressed confidence of achieving a year end production rate of 5000 bpd.
• Pacific Rubiales, based in Toronto, produces 235 000 bpd of oil equivalent in Colombia. It recently purchased 11 500 bpd of light oil production from C&C Energy in order to use it as a diluent for pipeline transportation. The company has set a goal of 500 000 boe/d by 2016.

But the powerhouse in Columbia is Ecopetrol, the former NOC. The company reached 800 000 boe/d by the end of 2012, and is spending in excess of US$ 8 billion/yr in an effort to produce 1.5 million boe/d by 2020. “The main challenge will be to develop more unconventional resources,” said Juan Carlos Mesa, the company’s Mergers and Acquisitions Director. When the National Hydrocarbons Agency (Agencia Nacional de Hidrocarburos, ANH) held an unconventional hydrocarbon lease auction in late 2012, Ecopetrol was the main bidder, spending US$ 370 million to purchase 12 blocks (both in whole and in partnership), in the Llanos, Mid Magdalena Valley, Caguan-Putumayo, Catatumbo, Cordillera, and the Colombian Caribbean offshore.

Labour unrest and social concerns still linger, however. Isolated incidents of kidnappings, union violence, roadblocks and pipeline disruptions have shut in production and partially curtailed transportation in certain regions. Ecopetrol and others are looking at multiple transportation and storage options to help mitigate the risk of pipeline disruptions. These options include diverting through Ecuador, and more trucking. The government is working with industry to address community issues, and vows to remain vigilant against resurgent terrorism.

 Continued in part two....

Written by Gordon Cope.

This is the first part of an abridged article that appears in the September issue of World Pipelines magazine. Subscribers can read the full article by signing in here.

To read the second part of this article, please click here.

Read the article online at: https://www.worldpipelines.com/business-news/28082013/oil_politics_and_pipelines_in_south_america_part_one/