Oil politics: the future in their hands (part 2)

This is the second part of Gordon Cope’s article analysing South America’s oil and gas pipeline industry. Read part one here.

Argentina

The proverbial chickens are coming home to roost in Argentina. For the last decade, the federal government has placed price and export controls on oil and natural gas that limit profits. As a result, production has fallen from over 900 000 bpd in 1998 to current levels of 750 000 bpd, and gas from 4.5 billion ft³/d in 2007 to 3.8 billion ft³/d. At the same time, low prices have encouraged domestic consumption to rise, and the country is now a net importer of gas, experiencing severe winter shortages.

Faced with public outrage, Argentina reacted by nationalising the country’s largest hydrocarbon producer. Citing underinvestment, President Cristina Fernandez de Kirchner seized 51% of oil producer YPF SA from Spain’s Repsol (which had purchased the shares after YPF was privatised in the 1990s). Under government control, YPF then announced it was entering into a US$ 1.5 billion agreement with China-based Bridas to develop the unconventional shale reserves that YPF had discovered under Repsol’s guidance. Repsol has taken legal action against Bridas and filed a complaint against Argentina before the World Bank’s arbitration centre. The stakes for Argentina, Repsol and other producers caught up in the dispute are certainly high; in early 2011, the US Energy Information Administration (EIA) published a report that the country could contain up to 774 trillion ft³ of recoverable shale gas, mostly in the Neuquen Basin in western-central Argentina, and Golfo San Jorge, in the southeast.

In spite of the risks, several international oil and gas companies have established comprehensive land packages in the shale regions and are beginning to gain a stronger understanding of its potential. Gran Tierra announced an unconventional shale well in the Neuquen basin flowed 840 bpd of light oil after multi-stage hydraulic fracturing. Americas Petrogas drilled through 340 m of the target Vaca Muerta shale formation, encountering oil and gas shows the entire length. 

Studies have also shown that Argentina could have the same offshore potential as Brazil’s pre-salt play. Industry analysts reckon that an investment of US$ 25 billion/yr would double Argentina’s current production by the end of the decade. With the seizure of YPF, however, any substantial future investment would be highly risky, and the most likely scenario is that, without pervasive structural reform in the sector, the resource-rich country will have to increasingly rely on imports and expect more energy disruptions.

Mexico

After years of production declines, Mexico may finally be turning the corner. As recently as 2004, the country’s production stood at 3.8 million bpd, but now hovers in the 2.5 million bpd range thanks to declines in the giant offshore Cantarell field. Pemex, the national oil monopoly, is working to find substitute production in the Tsimin, Xux and Kab (TXK) and the Ku-Maloob-Zaap (KMZ) fields. Production in the highly complex KMZ field, which stood at 513 000 bpd in 2007, has since risen to over 840 000 bpd, and the company hopes to reach 1 million bpd by 2015.

Mexico also has a constitutional law that makes it illegal for anyone but the state to own and operate hydrocarbon fields in the country. Efforts to end-run the restriction began under the PAN administration of President Felipe Calderon, and continue under newly-elected PRI President Enrique Peña Nieto. As an example, a recent joint venture agreement between Pemex and Halliburton meets constitutional requirements and increases production from worn out fields. Wells in the Chicontepec basin have traditionally yielded an average of 40 bpd and a maximum cumulative production of 40 000 bbls. Using its most advanced technologies, Halliburton drilled an 822 m horizontal well that had an initial production of 4200 bpd, and a four month cumulative of 180 000 bbls. Halliburton and Pemex have since drilled two more wells, with similar results.

The offshore Gulf of Mexico offers the greatest potential benefits. Up to 15 billion bbls of undiscovered, recoverable oil may lie in Mexico’s deepwater portion of the Gulf. Pemex recently announced the discovery of 350 million bbls of reserves in the Trion discovery well, located 177 km off the coast and 39 km south of US waters, which is expected to yield up to 10 000 bpd production. Earlier this year, US Congress began hearings into the approval of the US-Mexico Trans-Boundary Hydrocarbons Treaty, which would allow opportunities for international companies to jointly operate trans-boundary fields. But without the legal ability for international companies such as seasoned Gulf veterans BP, Petrobras and Chevron to participate as partners in purely Mexican waters, it might take decades before discoveries sufficiently large enough to offset Cantarell’s decline are made.

Pipelines in Latin America

Latin America currently produces over 10 million bpd and 204 billion m³/yr of gas, and is expected to reach 12.4 million bpd and 237 billion m³/yr by 2015. Due to geographical barriers, national rivalries and large distances between population centres, however, Latin America does not possess a continent-wide, integrated energy pipeline network similar to North America, and most pipeline activity is confined to regional needs.

• Ecopetrol and partners are investing US$ 2 billion to add 600 000 bpd capacity to the network of pipelines that moves crude from the Llanos basin, including the Oledoducto Bicentenario.
•  NET Midstream is building a 124 miles, 42 in. gas pipeline from the Agua Dulce Hub in Nueces County in Texas to the Mexican border in order to supply Pemex with up to 4.2 billion ft³/d. The gas is sourced from the Eagle Ford Shale play, and will be used in Mexico for energy generation and industrial use. The pipeline is expected to enter service in late 2014.
•  In Mexico, TransCanada was awarded the contract to build the Mazatlan pipeline for the Comisión Federal de Electricidad (CFE), Mexico’s federal power company. The US$ 400 million, 24 in. line will run 413 km, from El Oro to Mazatlan. When completed in late 2016, it will have a capacity of 200 million ft³/d.
• CFE awarded contracts to Sempra International to build, own, and operate a 500 mile, US$ 1 billion pipeline network running in the northwestern states of Sonora and Sinaloa. The gas will be used to generate electricity in the industrial regions. The first segment is expected to come online in late 2014, and the second in 2016. In all, the system will transport almost 1.3 billion ft³/d.
• The CFE also contracted with TransCanada to build, own and operate the El Encino-to-Topolobampo Pipeline. The US$ 1 billion line will carry up to 670 million ft³/d from Chihuahua State to Sinaloa. The 530 km line is expected to be in service by 2016.
•  Brazil’s offshore Sapinhoa field is the latest to be hooked up to the Lula-Sapinhoá-Mexilhão pipeline, a 300 million ft³/d, 18 in. gas line running from the pre-salt region of the Santos basin. The 216 km line starts at 2145 m below sea level and ends at a production platform in shallow waters off Rio de Janiero.
• The Argentine government recently opened bidding on Gasoducto del Noreste Argentino (GNEA). GNEA is to connect Argentina’s remote northeastern provinces, which are currently reliant on more expensive liquid fuels, to the domestic natural gas grid.

Written by Gordon Cope.

This is the second 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 first part of this article, please click here.

Read the article online at: https://www.worldpipelines.com/business-news/29082013/oil_politics_and_pipelines_in_south_america_part_two/