Latin America is blessed with hydrocarbons but cursed in political risk
By Stephany Romanow
Latin America remains a frontier of opportunity for the upstream, according to Wood Mackenzies Latin America upstream team. This region is home to significant hydrocarbon resources. Highlights from a recemt webcast indicated that aboveground risk levels are significant hurdles for doing business in this region.
Foremost, the politics of the Latin America are extremely volatile and can change overnight. Likewise, contracts with governments and state-owned oil companies can change without notice, leaving E&P companies vulnerable to political will and denial of profits.
Aboveground risks include financing, contracts and government politics. According to Wood Mackenzie, Latin America has extremes for doing business. For example, Latin American countries that have favorable or low-risk business climates are Columbia, Peru, Chile and Uruguay. On the other extreme, nations that are considered very high risk countries for conducting business include Venezuela, Ecuador and Bolivia.
The remaining nations are in between-- neither favorable nor too high of risk. Mexico and Brazil fall into this category.
Another contributor to the risk factor of Latin America is that national oil companies (NOCs) own the majority of the commercial reserves and E&P activity. The regional NOCs (Petrobras, PDVSA, Ecopetrol, and Pemex) dominate reserves and production. The major international oil companies (IOCs) are present in Latin America. BP, Statoil, Chevron, Total, Eni, Shell and ExxonMobil (EM) have some assets in this region. However, these companies have less than 10% of their worldwide assets located in Latin America due to the political unrest of the region and being burned in past business ventures. In addition, Latin America must compete against other regions for investment such as Africa and North America.
While the major IOCs are more selective in their business opportunities, the independents dominate ownership of exploration acreage. These smaller companies are the ones taking on the risk and pushing into new frontier areas.
President Pena Nieto recently proposed an energy reform that would overhaul the sector. If passed, the reform would open the downstream and midstream segments to foreign investment, as well as allow private investment in upstream projects through profit-sharing agreements. The reform must pass through several approval levels of the nations Congress and Senate before opening the midstream and downstream to private investment.
Under the new rules, a possible issue is that all of the produced hydrocarbons must be directed to a government entity for sale and then the investors would be paid. If all requirements proceeds without too many problems, it is possible that licensing of the resources could occur in Q4 of 2014 or early 2015.
As part of the energy reform discussion, the Mexican government set aggressive production targets that Mexico, as a country, should achieve by 2018. Reaching the stated objective of 3 million bpd will prove difficult, although not impossible to achieve.
Short-term growth may come from a ramp-up in the Chicontepec field, the development of heavy oil fields in shallow water and the use of enhanced oil recovery (EOR) techniques in mature fields. The Chicontepec field is a more difficult group of fields to produce. Pemex is producing about 65,000 bpd from this field; there is an estimated 80 billion bbls of reserves present. Pemex is having difficulty as the field is a tight oil reserve and requires horizontal drilling along with multi-fracture wells. The shallow water unconventional fields are very heavy oils (8-10oAPI). Special methods are needed to develop these hydrocarbons.
Over the longer term, production growth will be driven by deepwater and unconventional developments, which could be excellent opportunities for IOCs such as Anadarko, BP, Chevron and EM to apply their know-how and technology.
Shale gas is of interest to Mexico as well. According to the Energy Information Administration (EIA), Mexico ranks fourth in shale gas reserves as the Eagle Ford field extends south across the US border. And Mexico is, in fact, in need of local natural gas supplies. This nation imports one-third of its demand for natural gas from the US by pipeline and some by LNG imports. Demand for natural gas has required it to purchase LNG on the spot market. Mexico is also in need of pipeline capacity servicing both the Pacific and Atlantic coastlines.
This nation is fortunate to have great reserves, but it struggles to execute the management of the major upstream and downstream projects to capitalize on these resources. The presalt (Santos basin and Libra fields) resources are the future. Petrobras will take an additional 10% stake in Libra, increasing its total interest to 40%.
Given the commitment with this asset, the company which is already financially strained, is putting itself in a challenging situation to develop its impressive pipeline of projects including upstream and downstream projects.
The performance of the Santos Basin relative to other prominent deepwater basins is a measure of how impressively Brazil has performed in terms of exploration. However, these large discoveries present major challenges when it comes to developing them. Petrobras is attempting to accomplish something that is never been done in the global deepwater market before. The company is divesting of its noncore assets to focus on upstream and downstream projects. Petrobras now dominates the E&P sector, and Wood Mackenzie expects the company to operate more than 90% of production into the next decade.