Regional Report: Latin America

Left, Platform P-61 and the floating-unit P-63, Papa-Terra field, in the far south area of the Campos basin. Photo courtesy of Petrobras. Right, the Ecole Hole Hunter technology (ILLI ) allows Ecopetrol to reduce the cost of operations. Photo courtesy of Ecopetrol.

Following the rapid drop in world crude oil prices, starting in second-half 2014, Latin America’s main producing countries have reacted in different ways. Some have continued to follow exploration investment plans, as scheduled. Others, seeing their national budgets suffer considerable losses, have scaled back E&P. Still other countries are offering incentives on transnational production, to keep pace with extraction and exploration. (All financial amounts cited in this article are in U.S. dollars.)

ARGENTINA

Oil production operated by YPF during 2014 grew 5.9% to 243,835 bpd, and natural gas production increased 26.3% to 470 Bcf, compared with the previous year. YPF and China’s Sinopec have agreed to extend their current joint operating agreement until 2027, aiming to re-launch exploration and development activity in Mendoza province, and at the same time give impetus to new projects, including 3D seismic, and the drilling of exploratory and development wells.

The national and provincial governments, and oil companies, expect that the international price slump will have minimal impact on local oil and gas activity levels. The national government has pledged to provide a subsidy of $3/bbl to companies that maintain the same production level as in 2014, and an additional $2/bbl to those who keep the same level of export dollars coming in.

Then there is the issue of what to do about the country’s shale oil resources. Argentina has planned to develop shale oil deposits in Vaca Muerta, Neuquen province. “However, the technology needed for this is relatively high-cost,” said Dr. Alberto Cisneros Lavaller, CEO/president of Caracas-based Global Business Consultants (GBC) and a former senior advisor on oil geopolitics in Planning Coordination at Venezuelan state firm PDVSA. “According to studies and forecasts by YPF and others in Argentina, unconventional production would require at least $75/bbl, on average, to become profitable,” added Cisneros. “Due to the current oil price crisis, these projects have been put on hold, to re-assess costs and profitability.”

BRAZIL

Brazil is the world’s eighth largest energy consumer and 10th largest producer in the world. Overshadowed by a corruption scandal, state-owned operator Petrobras produced 2.7 MMboed in March 2015, down 1.3% from January 2015. Among the international operators in Brazil is Statoil.

According to Statoil, Brazil is a core area for the company, and Phase 2 is an important and strategic element in Statoil’s ambition to continue to build a strong position in the country. The Peregrino field has a good track record, with more than 90 MMbbl produced since first oil, in April 2011. With platform C, the company will increase well potential and be able to continue producing in Peregrino for a longer period of time.

Based on the current plan, Peregrino Phase II is expected to start production towards the end of the decade, but Statoil says it will make adjustments to the schedule, should that be necessary. The current solution consists of a wellhead platform with a drilling unit (WHP-C) tied back to the existing FPSO Peregrino. The facilities contains standalone power generation, and will export power to WHP-A.

Fig. 1. Perupetro tendered 19 crude oil blocks offshore, part of the package of 26 that the company’s board approved in 2014.

Phase II will enhance production by increasing the number of production wells from a new area (Peregrino Southwest), which today is not reachable by the existing platforms A and B.

PERU

Exploration activities in Peru have certainly not stopped. State firm Perupetro tendered 19 crude oil blocks, part of the package of 26 lots that the company’s board approved last year, Fig. 1. At the beginning of 2014, Peruvian natural gas production reached 1.183 Bcfd, a 6.9% increase from the same period in 2013. Progressing from this result, cumulative production of natural gas for 2014 was 456.4 Bcf, an increase of 6.0% from 430.6 Bcf in 2013. Hydrocarbon liquids production, including NGLs, rose 3.1% to 172,731 bpd, compared to 2013’s level. At present, there are 68 contracts in effect in Peru, of which 24 are in the production phase and 44 are in the exploration phase. Reported investment in the sector last year totaled $1.19 billion, of which $688 million was designated for development and production, and $502 million was
set for exploration.

BOLIVIA

In its 2014 annual report, YPFB reported that more resources would be allocated for production than for exploration. Investment in the petroleum sector amounted to $2 billion last year, an amount that may increase this year, despite lower oil prices.

The resources designated for exploration in 2014 were $312 million, while the budget for field development was increased more than 100%, to $873 million.

To deal with falling oil prices in the international market, the national government is applying three measures: 1) investing more in the productive sector; 2) diversifying production; and 3) diverting resources from regional governments to the production sector.

COLOMBIA

The devaluation of the Colombian peso, along with a corresponding increase in the U.S. dollar, has resulted in a rise of perceived risk in governmental debt. This is reflected in JP Morgan’s Emerging Market Bond Index (EMBI), where risk in Colombia increased to 227 points, an increase of 52 points in one year.

This year will be difficult for companies in the Colombian oil sector, producing a negative effect on their investment plans and new exploration projects. Given the current financial situation, Ecopetrol late last year announced a 25.8% reduction in its 2015 investment budget. Thus, while in 2014 the state oil company invested $10.595 billion, this year will see an investment of only $7.86 billion in its business areas. Ecopetrol has implemented a strict process of reducing operating costs, and prioritizing strategic investments. The plan to reduce operating costs and expenses amounted to $3.565 billion. The bulk of investment funds, $4.145 billion, will go to the production sector, from which Ecopetrol is seeking a production level of about 710,000 boed. Equion Energia, a partner of Ecopetrol, recently announced the shutdown of seven projects, due to low international crude oil prices.

ECUADOR

The fall in international oil prices has forced the government of Ecuador to reduce its expected revenue by $1.2 billion. Although there were also savings from lower fuel costs, the government had to adjust its budget for this year, since the drop in revenue represents 5% of the total resources budgeted for 2015. Ecuador experienced a loss of $365.9 million in the first 23 days of January 2015. The budget forecast had been based on a crude price of $79.70/bbl for fiscal year 2015.

MEXICO

According to the latest report from the National Hydrocarbons Commission (CNH), Mexico cut its oil production forecast for 2015, compared to what was recorded in 2014, from 2.43 MMbpd to 2.29 MMbpd. Meanwhile, gas production is projected to decrease 2.6%, to 6.36 Bcfd from 6.53 Bcfd in 2014.

Nevertheless, Pemex launched a $6-billion bond offering in three stages, with an investor demand around $15 billion. The government plans significant cuts in public spending in 2016 to address lower revenues from oil depreciation. In January, it announced a “preventive” reduction in 2015 of 0.7% of gross domestic product (GDP), thus underlining the importance of strengthening the country’s financial position, to face a probable adverse scenario.

Although it is predicted that production of Mexican crude will fall this year, Pemex still expects to produce 2.4 MMbpd, while also anticipating the recovery of foreign investment. Awarding of contracts will begin in July. Among the 19 companies that have so far qualified to participate in the auction are BHP Billiton, Chevron, Royal Dutch Shell and Total.

Mexican officials continue to look at expansion of their exploration and exploitation of the country’s deepwater Gulf of Mexico tracts. “To reach these reservoirs will require drilling in water depths ranging from 1,500 ft to 7,500 ft,” said GBC’s Cisneros. “This relatively high-cost activity has been valued at a cost of about $40 billion to develop these reservoirs. Technically, these projects would not be affected by the current price range. However, it certainly would shrink the profitability. Thus, these projects could become the most expensive of the whole portfolio that Mexico has to offer on their current opening.”

VENEZUELA

Venezuela has cut in half its subsidized oil exports to Cuba and member countries of Petrocaribe. Today, these shipments represent only about 200,000 bopd, down from about 400,000 bopd in 2012.

Venezuela and China agreed on cooperation and financing of more than $20 billion in various projects, to ensure the continued functioning of the economy, despite low oil prices. Another financial alliance has been made with leading Qatari banks, which aim to provide enough capital to cover the fall in prices, and provide the national budget with some breathing room, and hopefully prevent a devaluation of the national currency. However, the International Monetary Fund predicted that in 2015, Venezuela will suffer a sharp economic contraction of 7%, due to low oil prices.

State firm PDVSA achieved record production in the Orinoco basin, and exceeded 1.3 MMbopd in that area during February. This will help it reach its production goal of 1.4 MMbopd in that region by the end of 2015. “Venezuela is basing its production recovery on development of extra-heavy oil in the Orinoco Oil Belt,” said GBC’s Cisneros. “There are several extraction technologies available to produce these heavy crudes. Fortunately, they are not as costly as the technologies need to develop unconventional oil in the rest of Latin America. According to our own estimates, production of extra-heavy oil from this basin could range from $15/bbl to $20/bbl. Although current low prices would not have a negative effect on these oil projects, they could discourage new investment, as large profits would not be generated if prices remain low in the mid-to-long-term future.”