Patience pays in Central America

Russell McCulley
Tuesday, December 15, 2009

Border disputes, political upheaval and environmental concerns have helped keep offshore E&P in Central America mostly at bay. But activities offshore Nicaragua could signal a change in direction for some countries in the region. Russell McCulley reports.

Kansas-based independent Infinity Resources looks to be pushing ahead with exploration and production in an area covering 1.4 million acres offshore the Caribbean coast of Nicaragua. The company announced in July 2009 that it had formed a technical team to help guide the company in its exploration efforts in Nicaragua, which currently produces no oil. Infinity has concessions for two blocks about 40 miles off Nicaragua’s east coast; Noble Energy has rights to two more contiguous blocks, which were acquired from MKJ Xploration. Both companies are conducting environmental impact studies, according to the global information provider IHS, which will be followed by seismic gathering.

An agreement signed in March between Infinity and the Nicaraguan government granting exploration rights came years after the Central American nation began courting E&P operators. The deals were held up after Nicaragua’s highest court ruled that they had been negotiated without proper consultation with the regional councils from the nation’s two autonomous zones, which are largely populated by Nicaraguans of African descent and Miskito Indians.

‘Nicaragua is still, from an outsider’s view, developing concepts of federalism.’ Andrew Melsheimer, Thompson & Knight

Infinity, which did not respond to requests for an interview, also announced that the company had entered into a licensing agreement with Fugro Data Services for the acquisition of 2D seismic data covering the two blocks, Perlas and Tyra, which range in water depth from 100ft to 300ft. Initial processing was scheduled to be completed by the end of 2009, after which, Infinity CEO Stanton Ross said in a release, the company would ‘be able to more fully engage in discussions with potential partners in the Nicaraguan exploration and development project’.

‘The cogs in the energy wheels in these countries move slowly.’ Ron Harper, IHS

Andrew Melsheimer, an associate with the law firm Thompson & Knight which helped Infinity renegotiate the challenged contracts, says: ‘It was a long process, primarily because it was new for the Nicaraguans. They had never really done something like this before.’

The Falcon Explorer gathered seismic data offshore Honduras in spring 2009. The country planned offshore bid rounds in 2012, but political turmoil could pose complications.

Like all but two Central American countries – Guatemala and Belize – Nicaragua has scant history of hydrocarbon production, and relies on imports, mostly from Venezuela. Infinity’s interest in the country began long before Nicaraguan president and former Sandinista leader Daniel Ortega resumed power. ‘We’ve gone through three presidents, and each time there was a change in administration there were additional issues that needed to be addressed, because personnel would change and policy would change,’ he says. ‘But that’s typical of every nation in the region.’

Nicaragua’s case is somewhat different because of the political power wielded by the Caribbean coast inhabitants. ‘Nicaragua is still, from an outsider’s view, developing concepts of federalism,’ Melsheimer says. Power resides with the central government, but the constitutionally protected North Atlantic and South Atlantic autonomous regions have influence over many activities that occur within their borders or that, like offshore oil and gas exploration, could impact the region. ‘The relationship between these autonomous regions and the power that they share, and the central government and the power that it has – sometimes you fall into some gray areas,’ he says. ‘And because of that, I believe there has been a lot of learning on both ends – on the government side as well as the investors – on how to navigate these waters.’

‘Our position is that sustainable development doesn’t mean nondevelopment, and doesn’t mean not using resources.’ Javier Chamorro, PRONicaragua

About two years passed between the supreme court ruling and final approval of the concessions, he says. The process involved community meetings in some of the country’s most remote areas, direct talks with regional leaders and approval by the councils. Negotiations included a greater emphasis on projects that would benefit local residents. ‘The Nicaraguan government placed an emphasis on that issue during the renegotiations,’ Melsheimer says. ‘It wasn’t an issue for the company. Infinity considers itself a partner with the government and the people of Nicaragua in this project.’

The company had to overcome some mistrust among the affected communities, according to Javier Chamorro, executive director of the Nicaraguan governmentsponsored economic development agency PRONicaragua. ‘It was complicated, because the way that the problem developed created, in a sense, some type of feeling that due process hadn’t been established in the first round,’ he says. ‘But in reality, and in all honesty, [Infinity] was not at fault. They were inappropriately advised by the previous administration, who told them this part of the process was not required.’

PRONicaragua helped bridge the gulf between the company and skeptical residents during the renegotiations. But offshore energy was a relatively new endeavor for the agency, Chamorro says. ‘We don’t really proactively go out to promote oil and gas investments, but we offer support to companies that are doing business here,’ he explains. ‘And we also support any type of promotional activity that our ministry of energy and mining tries to develop to attract investment.’

Getting involved in a ‘concessional project’ was a departure for the organization, and a lesson for future energy projects. ‘We normally work in what we would call open sectors, not concessional sectors,’ Chamorro says. ‘We normally attract investment into sectors that are not regulated. It’s quite more complicated to work on a concessional project. It takes much more time.’

The number of different parties involved in a concessional project is one complication; Central America has others, including border disputes – Costa Rica and Nicaragua have locked horns over where offshore lines should be drawn – and perhaps more of concern to investors, political inconsistency. ‘The cogs in the energy wheels in these countries move slowly,’ says Ron Harper, area coordinator for the Caribbean and Central America at IHS. ‘In Nicaragua and Honduras, the problem is, their presidents can only serve one term. It’s hard to get anything done. They have so much else to tackle that energy never gets put on the front burner.’

Completing even one term is never a given. Honduran president Jose Manuel Zelaya, elected in 2006 to a four-year term, was ousted in a coup in June, an act that drew international condemnation and threw the country into turmoil. At press time, Zelaya was encamped at the Brazilian embassy in Tegucigalpa, having been smuggled back into the country from exile in Costa Rica; a US-mediated powersharing agreement reached with de facto president Roberto Micheletti in October had fizzled by November, when Honduras was scheduled to hold a presidential election with neither man as a candidate.

The political upheaval came at an unfortunate time for the Honduras’ nascent oil and gas industry: the country hoped to launch a bid round in 2012, and last spring Norwegian marine geophysical contractor Petroleum Geo-Services completed the acquisition of 6180km2 of 2D seismic data offshore the nation’s Caribbean coast using the Falcon Explorer. Zelaya signed the vessel’s guest book and gave a speech about the nation’s need to develop offshore oil reserves.

Those plans will likely be pushed back, says Harper.

‘Honduras wants a bid round in 2012 for offshore – that’s the area they want to release first. But that’s going to take a second seat and a back burner until they get this political situation resolved. There will be nobody around to look at it, nobody available to make any decisions,’ he says. ‘And that’s a shame, because they worked hard to get their petroleum code in order, they worked hard to get a model production sharing contract that companies could look at. And it’s for naught right now. It’s been sitting in the congress for approval for months, and that’s where it’ll continue to sit until they get this political mess cleaned up.’

Some Central American nations may never become hydrocarbon producers by choice. Costa Rican president Oscar Arias Sánchez, after initially signaling that he would support exploration off the country’s Caribbean coast, instead has honored a moratorium on E&P. ‘El Salvador, possibly Costa Rica – they’ll probably never be hydrocarbon producers, so they’re going to be big attractions for alternative, renewable energies. And they already are,’ Harper says, noting geothermal and hydroelectric developments in the region. ‘Those will be welcomed, especially in Costa Rica, because they’re called clean energy.’ Costa Rica has pegged much of its economy to ecotourism and a ‘green’ image that make it tough for E&P advocates to gain traction. Nicaragua, which has been building up its own ecotourism network in recent years, could be a test of how well the two industries can coexist. ‘Our position is that sustainable development doesn’t mean non-development, and doesn’t mean not using resources, but using resources in an appropriate manner and making sure that you reduce any environmental impact that you create,’ says Chamorro.

Potential investors ‘need to have patience,’ Melsheimer says. ‘And that’s the hardest, because an investor may have certain time frames to report to their shareholders, and they may have certain commitments they’ve made. But they have to appreciate that they need to add some additional time.’

Given the challenges, will Central America ever develop a viable oil & gas industry? ‘I would hope so,’ says Melsheimer, who lived for a time in Managua in the 1990s. ‘Especially in Nicaragua; the people deserve it. I would hope, for any country, particularly in Central America – they have a resource that can be used, and if used wisely could help develop their standard of living, reduce poverty and increase health care, those kinds of things. I do hope that one day Nicaragua discovers vast riches offshore, because it would be a win for that country.’ OE

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