Scorecard for South American exploration:
The up-and-coming play you’ve heard about, the big plays you know about, a key company you might not be familiar with and a couple of play areas just evolving.
Ruaraidh Montgomery is senior analyst for the Latin America Upstream Research Team in the Houston office of the global research and consulting firm Wood Mackenzie.
He provided an overview of the current E&P picture in South America.
Argentina
The new play on everyone’s lips in Latin America right now is Vaca Muerta. That’s somewhat unfortunate, since Vaca Muerta is Spanish for “dead cow.”
The beef about this play isn’t geology or production potential, but politics.
“In terms of geology, so far so good with this particular play,” Montgomery noted. “The results have been positive.”
Vaca Muerta is an extensive, shale, unconventional resource play in the Neuquen Basin in west-central Argentina. State-owned oil company YPF SA said the total play could hold more than 21 billion barrels of oil equivalent.
Major players in addition to YPF are praising Vaca Muerta’s potential – a good sign, according to Montgomery.
Exxon, Shell, EOG Resources, Total and Apache are among the herd of companies who’ve been active in the area, he said.
“At this early stage, it looks like this is a world-class shale resource for Argentina,” Montgomery observed.
“The challenges are all above ground,” he added.
Economic problems led Argentina to default on most of its public debt at the end of 2001. The government decided to suppress oil and gas prices through price controls, hoping to use cheap energy to help fuel economic growth, Montgomery said.
Butchering returns caused industry to steer clear of energy investment.
“What they’ve imposed on the oil and gas industry is a constrained pricing environment,” he explained. “As you can imagine, that’s very good on the demand side. But on the supply side, it didn’t help.”
Now, through YPF, the government has direct exposure to its own pricing structure – and a tightened supply-demand picture has brought higher prices, Montgomery said.
But the future development of Vaca Muerta depends on companies having confidence that their investment will be respected, he noted.
The integrated Spanish oil and gas company Repsol SA acquired YPF in 1999. Argentina’s government voted to re-nationalize control of YPF in 2012, leaving Repsol to stew over compensation issues, not yet worked out.
“They’re not going to reverse things overnight.” Montgomery said, “It’s going to take time for those higher prices to feed back into investment.”
On a more positive note, the Neuquen Basin is a long-established producing area with good infrastructure and excess pipeline capacity. Proppant for hydrofracturing has had to be imported and technical support is limited, but as Montgomery said, “where there’s money to be made, the service companies will go there.”
Brazil
Subsalt discoveries offshore Brazil have dominated oil exploration news in South America.
“The hottest area (in Latin America) is offshore Brazil. In the offshore, it’s been the hot exploration play in the world for the past five or six years,” Montgomery said.
That multi-year record of success should take the country toward five million barrels a day of production by the end of this decade, moving Brazil from a major producer to a significant exporter of crude oil, he said.
Home-grown Petrobras has dominated the exploration activity, but a handful of other companies, including BG and Repsol, have been able to participate in the action.
“These people had the good sense to partner with Petobras when opportunities were available,” Montgomery noted.
Industry can’t expect any favorable terms in the pre-salt play, however. Production now is well established, and the Brazilian government has a habit of using energy policy to support domestic programs.
“As often happens in Latin America, a big resource is developed, it looks good, and then the government changes the rules,” Montgomery said.
“That reduces the size of the prize. They’re introducing a new set of fiscal terms, which inevitably weights the return in favor of the government,” he added.
Colombia
Montgomery called Colombia the “leading light of investment” for industry in Latin America, primarily because of the pragmatism of the country’s politicians.
“Companies investing in Colombia have a lot of confidence, when they sign that contract, that their investment has real good protection,” he said.
Also, Colombia has been able to dampen the threat from guerrilla rebels and other violence in recent years. Exploration opportunities in the country attract numerous “junior-type companies,” Montgomery noted.
“You’ve seen a lot of companies from Canada – a lot of these companies are headquartered in Calgary – moving into Colombia over the past decade and scoring good exploration success,” he said.
“The Llanos Basin is where they like to get involved. There’s a lot of targets for them, albeit on the small side,” he added.
Industry has found success in developing heavy oil resources with bustling work and some significant discoveries on the eastern side of the basin.
“Ecopetrol, the state oil company, has done good work there,” he said. “The main driver behind it is a company called Pacific Rubiales.”
Montgomery described Pacific Rubiales as a company created and operated by former PDVSA employees. Not well-known outside Latin America, it has become the largest independent in Colombia, with operations expanding into Peru and Guatemala.
Earlier this year, Pacific Rubiales announced that it expects to spend $1.7 billion on exploration and development in 2013, with plans to drill about 35 exploration wells and a target of 15-30 percent growth in average daily production.
An improved oil-production picture worldwide hasn’t hurt the demand for heavier crude. Montgomery observed that Pacific Rubiales has gotten a premium for its heavy oil from U.S. refiners.
“The heavy oil coming out of Colombia has found a ready market on the U.S. Gulf Coast,” he said, “so it has backfilled, especially as Mexico’s oil production has declined.”
Other Activity
A line of basins hugs the eastern flank of the Andes down the length of South America. The Middle Magdalena Valley Basin in northwest Colombia is a rare resource-play prospective basin on the west side of the Eastern Cordillera.
“It’s the basin where Colombia’s oil and gas industry started, so it’s a fairly mature basin,” Montgomery said.
Players see a very attractive above-ground picture and a promising prospect in the La Luna shale.
“Shell and Exxon have quietly been building up positions in this basin,” Montgomery noted.
“But very few wells targeting the shale have been drilled. Very few fracs, if any, have been done,” he said.
An emerging equatorial margin play runs along the entire northeast coast of South America, from the eastern Venezuela coast, along Guyana, Suriname and French Guiana, to the northern coastal area of Brazil.
“What they’re hoping to replicate there is the exploration success seen in West Africa. So this is your mirror-image theory. There are a lot of geological similarities,” Montgomery said.
He noted that Brazil will hold a licensing round for the northern offshore. Given the extreme frontier nature of the play, industry can expect a favorable shake.
“Hopefully, after quite a few years of delay, we’ll see them start to lease this area,” he said. “We expect bidding for that acreage to be pretty intense.”