Spotlight on Latin America

April 1, 2015

Heather Saucier examines the effect of regional energy policies on Latin America’s rich untapped resources, estimated to be some 126 billion bo and 679 Tcf of natural gas, a large majority of which is offshore.


In its latest assessment of undiscovered, conventional oil and gas resources in South America and the Caribbean, the US Geological Survey (USGS) released attractive numbers. Of an estimated means of 126 billion bo and 679 Tcf of natural gas in 31 geologic provinces, a large majority is offshore.

“I think those numbers are rather substantial,” said Christopher Schenk, a Denver-based geologist who has overseen the USGS’ South American and Caribbean assessments for nearly 20 years, including its most recent 2012 assessment. “The big resources there are offshore.”

But are they worth anything?

“All those resources are of no value unless the countries in which they are located have energy policies and investment models that allow international oil companies to come in and monetize those resources,” said Jorge Piñon, director of the Latin America and Caribbean Energy Program of the Jackson School of Geosciences at the University of Texas at Austin. “The geologist finds the oil, but the petroleum engineers have to come and get it out. The only way to be successful is to work within an investment model that allows them to do their work.”

Some operators – such as BG Group, Statoil, BP, Chevron and Royal Dutch Shell – are managing to make offshore plays economically viable despite the moving targets of some countries’ energy policies, which can change agreements mid-game regarding royalties, taxes, repatriation of dividends and local content requirements.

Piñon – who runs a program that encourages consistent fiscal policies in countries that ironically need their resources exploited the most – is working to pave a smoother path for both host countries and operators. If dealt a fair deck, third party investors could bring millions of people long-term security and improved quality of life, he said.

Resources galore

Next to offshore areas in the Arctic and East Africa, offshore South America and the Caribbean could be the most hydrocarbon rich, yet underexplored areas on the globe.

For the past several years, Brazil’s Campos and Santos basins have been the hottest subsalt plays for offshore development on the continent. Yet, according to USGS estimates, they are far from being tapped out – containing a means of 14.7 and 59.7 billion bo undiscovered, respectively.

Locations of 10 priority geologic provinces of Mexico, Guatemala, and Belize assessed in 2012 by the US Geological Survey for undiscovered, conventional oil and gas resources.
Courtesy of the US Geological Survey.


Hiding in the shadows is the underexplored Guyana-Suriname Basin off the north coast of South America and estimated to contain a healthy mean of 13.6 billion bo. It is trailed by another underexplored basin, the Falklands, with an estimated mean of 5.3 billion bo.

“All along we’ve been saying there is potential in the Falklands,” Schenk said, likening the basin to offshore French Guiana, which went underexplored for years until 2011 when Tullow Oil announced a discovery of 236ft of net oil pay from its Zaedyus exploration well.

The virtually untouched Salado-Punta del Este Basin, which is farther south down the Brazilian coast and does not contain salt structures, is estimated to contain a mean of 2 billion bo undiscovered. “It has potential,” Schenk said. “Very little drilling has been done there.”

The North Cuba Basin of the Greater Antilles Deformed Belt also holds promise with an estimated mean of 4.7 billion bo undiscovered.

Although Colombia is most known for its onshore resources, an estimated mean of 2.4 Tcf of undiscovered natural gas lies in the Guajira Basin, Schenk added. “A lot of companies feel that oil is more economical than gas, but gas is becoming more economical around the world.”

Venezuela, in partnership with Eni and Repsol, is currently developing its offshore Perla gas field, which has been reported to contain reserves of up to 16 Tcf of natural gas in the Cardon IV block in the Gulf of Venezuela.

The Santos Basin is estimated to contain a mean of 62.3 Tcf of undiscovered gas, and the Falklands Basin is estimated to contain a mean of 39 Tcf, Schenk said.

“The resources in these areas are strictly related to the geological history of these areas,” Schenk said, referring to the rifting period when South America broke apart from Africa during the Mesozoic era and created rift basins, salt deposits and the deposition of other sediments, soil and rocks. “It’s all geology, really, when you come down to it.”

The right shovel

Although the geology may be present for lucrative discoveries, politics can sometimes trump science, leaving valuable resources in the ground, Piñon said.

“Those resources have zero value underground,” he said. “You need a shovel – the right shovel – to get them out.”

For Piñon, that shovel contains four important parts:

  1. Oil prices of a minimum of $70/bbl for conventional oil
  2. A vast amount of capital to invest in costly offshore drilling
  3. The right technology to explore and develop the area’s unique basin make-up
  4. A sound and consistent investment model of the host county

“The model has to be open, transparent and fair. It has to give companies an acceptable rate of return for them to take a risk, either geologically or politically,” he said. “Companies are going to invest where the geology is proven, but they will also look at where they have a high probability of being able to get an acceptable rate of return over a long period of time – 10 to 25 years. They need to invest in a country with a proven track record – not one that changes its policies every five years, or when the price of oil goes up says, ‘We don’t need you anymore. Go home.’”

Historically, common deal-breakers have included:

  • Changing royalty agreements
  • Upping concessions yet still requiring third party investors to act as operators
  • Raising taxes on produced oil, among other assets
  • Increasing local content requirements – often creating a bottleneck in countries that lack the technology to explore and exploit a play

It has been widely reported that assets of ExxonMobil and ConocoPhillips in Venezuela were expropriated in 2007 when the companies refused to restructure their holdings to give the country’s oil company, PDVSA, more control.

While international operators have had issues in countries such as Venezuela, Ecuador, Argentina and, at times, Brazil, both Colombia and Trinidad and Tobago serve as the “poster children” for fair business climates by using independent regulatory agencies, Piñon said.

Colombia will surpass 1 billion b/d in production this year, he said, pointing out that the country has a solid set of rules on the table.

“Colombia has seen a dramatic increase in oil, natural gas, and coal production in recent years after the implementation of a series of regulatory reforms,” reported the US Energy Information Administration. “Colombia’s oil production has increased since 2008 because of increased exploration and development. New exploration and development were spurred by regulatory reform.”

On the other hand, for the past 10 years, Venezuela “has been stuck” at 2.5 billion b/d, Piñon said.

“Deepwater, subsalt, shale – the industry has the technology to develop those resources. But you can’t invest in a country that doesn’t play consistently. It’s like going to Vegas and in the middle of a big hand, the dealer changes the rules of the game.”

Mexico moves in

As Mexico prepares to open its doors to international investors in its Round One of bidding expected 1Q 2015, its open and transparent policies could serve as a major impetus for countries south of its border to follow suit.

“Now, other South American countries might have to become more competitive in their investment models to attract international oil companies,” Piñon said. “Mexico is closer, has long-standing political and trade relationships with the US and Canada, and it has a common geology, particularly in the deepwater Gulf of Mexico and cross-border shale formations.”

Deepwater Mexico is thought to contain 27.8 billion bo, according to the National Hydrocarbons Commission.

Cuevas Leree.

Familiar to many operators are several offshore plays that could give South America’s resources a run for their money.

The Perdido Fold Belt in Mexican waters – in the offshore Burgos Basin – are believed to contain larger ridge and salt structures than in the US, said Juan Antonio Cuevas Leree, a Mexico City-based geological consultant and former exploration manager for Mexico’s North and South Region at Petróleos Mexicanos (Pemex). “There could be more production there than in the US. The area is huge and there has been very little exploration in the northern part,” he said.

The Mexican Ridges Fold Belt in the Tampico-Misantla Basin has remained essentially untouched, as it is exposed in the sea floor and does not contain ideal seals. However, a deep drilling operation into turbidite channels and fans could change the fate of this play, Cuevas Leree said.

The Catemaco Fold Belt, located in deep water just in front of the Veracruz Basin, is known to contain gas and light oil. Furthermore, the underexplored Campeche Salt Basin could also attract investors, Cuevas Leree said, as several million barrels of extra heavy oil have already been discovered there by Pemex.

Although the Campeche Basin has been active for years, the USGS estimates that a mean of 2.9 billion bo remain undiscovered. “The Campeche is not done,” Schenk said.

Short-term vs. Long-term

In the wake of Mexico’s welcoming of international investors, Piñon said he would not be surprised if Brazil stepped up to the plate in the face of greater competition.

“Brazil is important to all investors because of its large resource and reserve base. The government has decided that Petrobras can handle – in our opinion – more than they can chew. This has been a mistake proven in Petrobras’ recent performance,” said Piñon of the company’s ailing refining unit, languishing production rates, and plummeting stock prices.

“I would not be surprised if sometime in the near future Brazil changes current investment rules and makes them more attractive,” he added. “Capital from foreign investors is desperately needed for them to monetize their deepwater resources and make them commercially viable.”

Overhauling business models is essential for South American countries to extract their resources. Oil and gas from South America, Canada, the United States and Mexico comprise one-third of the world’s reserves, Piñon said.

It’s really a matter of being able to help certain governments see the benefits of rearranging the rules for the sake of long-term strategy rather than meeting immediate needs.

“I understand what their short-term challenges are. They need hospitals, schools, employment. People are rioting in the streets because of the price of food and high inflation. Those are short-term political problems to face, and the only bucket in which you can put your hand is the oil and gas sector,” Piñon said. “But by robbing Peter to pay Paul, you are limiting the long-term growth of industry for short-term political benefits.”

The work required to help change international energy policies can be likened to a revolving door – a continuous conversation with academics, opinion leaders, scientists, leaders in the private and public sectors, multi-lateral international organizations, and others, Piñon said.

“National leaders of host countries, political ideologies, and economic conditions are constantly in flux,” he said. “They all put pressure on changing the course of sound energy policies. So our work is an ongoing process of striving for improvement.”

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