Brazil providing foothold as producers expand South America presence

Smaller countries trying to catch investor interest

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The last exploration boom in the offshore industry - the Atlantic Ocean off West Africa - is now beginning to pick up speed, just as a new one is developing, directly across the Atlantic. Countries along South America's coastline are trying to cash in on some of the attention brought on by operators picking up leases offshore Brazil.

Brazil's national oil company, Petrobras, the deepwater leader, holds two deepwater records: the world's deepest exploration well and deepest producing wells. The reserves discovered by Petrobras total about 9 billion BOE from only nine of the country's 28 basins.

However, Petrobras may lose some of its lead. With the opening of the oil industry to the world with the first licensing round, Petrobras faces competition for the first time in its history. Despite weak oil prices at the time the bid round was announced, 27 licenses (all offshore) were awarded to 11 companies (10 foreign) for a cash outlay of about $180 million.

Brazilian rush

Companies such as Esso, Texaco, and Agip are setting up shop in Brazil, but the first to rush into Brazil were the seismic vessel contractors. The drilling rigs will be next and could add some severe competition to the Gulf of Mexico in terms of day rates.

But Petrobras is not sitting around waiting for interested operators. The company also actively bid in the round. Petrobras bid on seven licenses and was awarded five, the most of any other operator.

In addition, the company has signed 20 joint venture agreements with foreign firms to operate Petrobras' acreage. Producers appear to be so keen on investing in Brazil, they cannot wait for the licensing round, and are signing on with Petrobras for about a 30% stake and operatorship of the company's blocks. Petrobras has received thus far upwards of $2 billion for these partnerships and several of the operators, such as Mobil, have made Brazil their top investment priority.

Brazil does have its problems. The economy took a major hit early this year when the local currency went through a major devaluation. The economy is still trying to get back on track. In addition, the country still must import about 40% of its domestic consumption of crude. But, these things will likely change as outside producers bring their own currency with them to find and produce the oil to meet this 40% deficit.

Venezuela, investment

Venezuela's importance as a member of OPEC and production from areas such as Lake Maracaibo keep them high on the interest ranking, not just in the area, but in the world. While activity has remained constant, the political situation has not.

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New activity offshore Guyana includes Esso's signing on for the deepwater Stabroek Block, while CGX has taken the Corentyne concession.
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With the establishment of a new president, Hugo Chavez, many changes have taken place within the Venezuelan oil industry. The industry was very nervous when Chavez took office. He had pledged to review privatization during the campaign, impose moratoriums on foreign-debt payment, and limit investment in the oil industry.

Later, he softened his stance on several positions, especially the oil industry and promised not to close the doors to the international oil companies. He went so far as to say he would do everything necessary to facilitate growth in the industry.

Upon taking office, Chavez remained strong in his support of the oil industry. He appointed the new Minister of Mines and Energy, A* Rodriguez Araque, who recently announced the new 2000-2009 business plan for Petroleos de Venezuela SA (PDVSA).

Under the new business plan, Venezuela announced an aggressive stance, especially in terms of natural gas. The country plans to increase natural gas production by slightly less than 2 Bcf/d by 2010 to 14.5 Bcf/d. In addition PDVSA has pledged to spend $6.4 billion by year-end as part of a plan to get the economy back on track. This investment will be primarily focused on exploration and maintenance.

While this sounds like things are stabilizing within the Latin America's third largest oil company, in actuality, PDVSA has been going through a major shakeup. Chavez has openly criticized the company as being run as a "state within a state." Since his election, the company has gone through two presidents: Luis Giusti (the main target of Chavez' attacks) and Roberto Mandini. Mandini held the position for just seven months and left reportedly due to a dispute over production policies. Chavez quickly filled the position with a political ally, Hector Ciavaldini. Mandini said recently that Ciavaldini created problems within the top management of the company, and since that time six top executives have resigned.

But, Minister Rodriguez has shown his strong support of the new PDVSA head. He said the recent personnel changes were part of a restructuring implemented by the new Chavez government. Rodriguez added, "I have a close friendship with Hector Ciavaldini. We completely coincide on our political vision of the country and we also coincide totally on what PDVSA's direction should be."

In the wider scene, there was rioting and protesting when the Chavez government began stripping the country's Congress of its powers and assumed control of legislative affairs. Chavez installed a constituent assembly and is in the process of re-writing the country's constitution to allow the government broader powers such as restructuring and abolishing corrupt and inefficient public institutions.

Until the fallout from this latest in the saga of Hugo Chavez passes through, the world will still have to wait to see what happens in Venezuela. Even so, many oil companies there will most likely continue with business as usual.

Separate from the political turmoil, some exploration and production activities have taken place in the country.

  • Conoco made a sizeable discovery in the Gulf of Paria West, which flowed at a cumulative rate of 4,195 b/d of oil from three zones and tested 10.6 MMcf/d of gas, and 287 b/d of condensate from a fourth zone.
  • Arco and Phillips exchanged interests. Arco assumed Phillips 18% interest in Block LL-652 in Lake Maracaibo. Phillips assumed interest in the onshore Hamaca heavy oil project in eastern Venezuela.
  • Chevron will increase production on its LL652 marginal field in Lake Maracaibo from 10,000 b/d of oil to 110,000-120,000 b/d of oil in three years through an additional $250 million investment.

Mexico, privatization, Silhil

Mexico's main thrust of offshore activity has been focused on the supergiant Cantarell Project. Cantarell is one of the largest oil fields in the world and state oil company Pemex is doing everything it can to reap the rewards of size. Production on the field has increased from one million b/d of oil in 1994 to over 1.4 million b/d in 1998. This volume was reduced to 1.3 million b/d (capacity is estimated to be 1.69 million b/d) capacity due to Mexico's self-imposed production constraints.

Pemex has also announced plans to increase production to 2 million b/d. For this and the associated cost, Pemex has received a great deal of heat from the press. Many want to know, with the production constraint, where the excess oil will be marketed. Pemex has defended its position and said that it could not reveal its plans, due to the marketing considerations and did not want to reveal its output goals to the competition.

However, with the opening of Brazil and the de-monopolization of Petrobras, the question remains, will Pemex be next? The globalization of the oil industry and the need for foreign investment may necessitate the need for privatization of the company.

A highly credited source within the oil industry in Mexico offered an opinion. "I see the Mexican drilling industry expanding and I don't see Pemex being a monopoly for a long time. It is a global process and the multinationals are getting into it, but it is going to take a long time and will be a slow process."

In the meantime, drilling and development is still underway offshore. Pemex has begun the fabrication and installation of over 20 production platforms for the expansion of the Cantarell complex.

Enron Offshore Services and Technology, through a partnership with Cigsa, has become heavily involved in the project. The company is refurbishing drilling modules and fabricating new jackets to be used in the development.

Also, a new drilling rig has entered the scene. Perforadora Central S.A. DE C.V. has sent its new jackup to work on Cantarell and the surrounding areas in the Bay of Campeche. The new rig, Tonala, was built at TDI-Halter's Pascagoula, Mississippi yard and is the first rig of the LeTourneau Super 116-C design as well as the first newbuild from TDI's yard. The rig can drill in up to 350 ft of water and has a 70 ft cantilever.

But Mexico may have more up its sleeve than just Cantarell. Pemex has reported the discovery of an estimated 1.4 billion bbl oilfield in the Bay of Campeche. Pemex has named the discovery Silhil and it was discovered 5,200 meters below the seabed (much deeper than Cantarell at 1,200-2,700 meters). More production tests on the field are underway and very little is known about it. But it is confirmed that it is not part of Cantarell.

Pemex has said that Silhil is one of undiscovered billion plus bbl fields in the Bay of Campeche. If more of these monsters do exist, Pemex may exponentially increase its standing in world oil industry.

Trinidad and Tobago

Trinidad and Tobago has long been the hidden jewel of Latin America. Several companies such as BP Amoco, BG, BHP, Texaco, and Elf have had success with the area's strong gas play and new deals are being struck to exploit its potential. One such deal involves expanding Trinidad's export of LNG.

BP Amoco and Repsol-YPF signed two agreements as part of a strategic alliance established back when both companies were known simply as Amoco and Repsol, to supply Trinidad natural gas markets in Latin America and Spain.

The first agreement calls for the companies to sell Spain up to 5 Bcm per year from the Atlantic LNG project on Trinidad, while the second agreement involves developing a new natural gas-fired power project in Spain that will be supplied with a portion of the regasified Trinidad LNG.

BP Amoco also loaded out the new Amherstia natural gas production platform from Unifab's New Iberia, Louisiana yard. The platform will be installed on the Amherstia Field off the north coast of the country. The platform should be in place and onstream the end of the year, and will be capable of handling 850 MMcf/d of gas.

BG is also working on its North Coast Marine Area gas development. The company is in the process of evaluating pre-qualification bids for the engineering, fabrication, and installation contracts for the project. The project will entail a platform and pipeline to deliver gas from the Hibiscus Field to Trinidad. Anticipated startup is 2002 and the company plans to award the contracts early next year.

On the discovery side, Trinidad mounted three big finds in the past year. BG and Texaco drilled the Starfish-1X discovery on Blocks E and 5A in the East Coast Marine Area late last year. The well was drilled in 427-ft water depths and encountered 501 ft of net gas pay in four zones. The well tested at an intentionally constrained rate of 16.2 MMcf/d of gas. Starfish is located near the companies Dolphin gas field which has been producing since 1996.

Earlier the companies also made the Dolphin Deep-1 discovery in Block 5a of the same lease. The well encountered 546 ft of net gas pay in three zones and tested at a rate of 36 MMcf/d a of gas and 430 b/d of condensate.

BHP and Elf also made a gas discovery on Block 2C. The companies drilled the Angostura-1 well in 40 meters of water depth and flowed 30 MMcf/d of gas. Appraisal studies are underway to evaluate the size of the discovery.

Other players

Major players in Latin America have garnered most of the attention, but as in West Africa, smaller countries are beginning to reach for their share of the action. Countries such

as Guyana, Suriname, Costa Rica, Peru, Nicaragua, and even Cuba are making their play for activity. Other, such as Argentina and Costa Rica, have had a few notable discoveries.

Guyana

Small Guyana has been attracting the most fanfare from the international oil industry. The small country has signed contracts with two foreign firms for exploration CGX Energy and Esso. CGX has been granted the 3,800,000-acre Corentyne concession in the Guyana Basin by the Guyana Geology and Mines Commission.

The concession comprises 172 blocks. The company has identified four targets in the concession, Horseshoe East, Horseshoe West, Eagle, and Wishbone, the last two of which are giant deepsea fans.

The company plans to begin their drilling program on the Horseshoe West and Eagle prospects following successful AVO (amplitude vs offset) analysis of the structure. The government has granted the company approval on its 1999-2000 work program. This includes the processing and interpretation of the 1,800 km seismic program shot in May and the drilling of two exploratory wells. A bid for jackup for the work has been tendered. CGX is currently in discussions with a group called the Guyana Offshore Exploration Syndicate in order to provide funding through earned interest and possible farm-ins.

While CGX's acreage lies near-shore, giant Esso is targeting the country's deepwater. Esso signed a production sharing contract with the government for the Stabroek Block. The block was awarded 100% to the company in mid-1998 and covers about 15 million acres in water depths ranging from 650 to 10,000 ft.

Suriname

Neighboring Suriname has made progress in attracting foreign capital to its economy by signing on with Burlington Resources to explore its deepwater territory. The company signed a production sharing agreement with the state oil company, Staatsolie Maatschappij Suriname, for an 18,500 sq mile deepwater block.

Burlington has already begun acquiring seismic in the block soon in accordance with the contract. Burlington has partnered with Shell, TotalFina, and Korea National Oil in the project.

Costa Rica

Costa Rica is hot in pursuit of foreign oil investment. The country placed eight offshore and 14 onshore blocks on offer in its Second Hydrocarbon Bidding Round earlier this year. The country is offering concession contracts with a three-year exploration program with up to three possible one-year extensions, and an production period of 20 years.

The first bidding round was held in 1997 and the first concession contract was signed in August. MKJ Xploration has signed on for four blocks, two inland and two on the marine zone, covering 5,634 sq km on Costa Rica's Caribbean zone.

Peru

Peru has also joined the game in trying to spur some activity. Earlier this year Perupetro announced a new bidding round with 14 offshore blocks averaging 1.2 million acres each.

Several of the areas are deemed very highly prospective and are believed to be some of the best the country has to offer. The round was set to open in mid-August, but has been postponed due to another ongoing bidding process with regard to the Camisea gas fields.

Nicaragua

Nicaragua has not had extensive exploration activity. About 30 wells have been drilled in its offshore waters. But the country is looking to change things by establishing new petroleum legislation and hold its first bidding round.

Nicaragua put Law No. 286, Special Law for Exploration and Exploitation of Hydrocarbons and its Regulation into effect in June of last year.

The new law establishes a separate legal regime for petroleum exploration and exploitation and confirms that all hydrocarbons are owned by the state. In addition it established a National Commission of Energy to create the policy for its hydrocarbon exploitation. First bidding under this new law is anticipated for next year. The government is currently assessing areas to be offered with regard to current environmental restirctions.

Cuba

Cuba, not wanting to be left out of the oil rush, has even cracked its door open a bit. The government is hoping to lure foreign companies into joint exploration contracts for its offshore in order to increase the country's oil production.

Cuba plans on offering 59 blocks in the Gulf of Mexico averaging about 2,000 sq km. The majority of the blocks lie in water depths up to 2,000 meters. The joint ventures will most likely call for the foreign company covering 100% of the total exploration cost and upon discovery the government will pay in oil.

Cuba has been experiencing a major shortage in oil supply since the fall of Russia. About 60% of the country's demand for oil is imported. However, earlier this year, the country signed an accord with Russia to exchange 1.5 million tons of Russian oil for 800,000 tons of Cuban sugar.

Argentina

Argentina has been one of the few areas in Latin America with a new offshore discovery, through which it hopes will entice more interest. A 50-50 joint venture of Repsol-YPF and Sipetrol made an oil and gas discovery this year off the country's coastline.

The companies drilled the CAM XE-1 well to a total depth of 1,725 meters on the CAM 2/A South Block near the Magellan Strait. The well flowed 15 MMcf/d of gas and 151 b/d of condensate. A second well was also drilled and tested 2,000 b/d of oil and 620.5 Mcf/d of gas.

Honduras

Even impoverished Honduras may have the potential for an oil play. A geological study by the Russian Institute for Oil Exploration and Research of the country's Caribbean Mosquito Coast has reported reserves equaling 29.2 billion bbl. However, the locals aren't convinced.

Oil companies have explored Honduras since the 1920s and only encountered one commercial discovery. Previous reports also indicated that the country's reserves equaled only around 500,000 bbl.

Regardless, if the country can find investors it could bring a turnaround for the poor people of Honduras. Estimates have indicated that investment of $150 million would be needed to be able to explore for the "alleged" oil.

Ecuador

As far as development, EDC Ecuador, a subsidiary of Noble Affiliates has commenced with development of the 345 Bcf Amistad gas field offshore Ecuador. The company plans to use a combined drilling and production platform equipped to handle 100 MMcf/d of gas. The platform will be tied into a 40-mile pipeline linked to the El Oro province in the southern region of the company. Installation is expected next year and the company is in the process of drilling four directional wells.

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BP Amoco's Amherstia natural gas production platform at the Unifab yard in New Iberia, Louisiana. The platform will be capable of producing 850 MMcf/d of gas and is the largest platform built in New Iberia.
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While drilling activity seems somewhat slow in Latin America, the pace will increase significantly in the coming years. The number of licenses scheduled to be offered in the next two years off eastern and northeastern South America is certain to attract heavy interest, particularly from those looking for an extension of the Brazilian play. When the operators finish setting up camp in Brazil, it would seem likely that many will begin looking for other opportunities nearby. And it does not appear they will have to search very long.

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