Latin America Leads in 2008 Crude Oil, Gas Discoveries

HOUSTON (Dow Jones Newswires), Dec. 15, 2008

Seven of the ten largest oil-and-gas discoveries worldwide this year occurred in Latin America, reaffirming the region's promising potential for hydrocarbon exploration.

But despite its considerable oil and gas deposits, Latin America still faces some of the same challenges that have repelled investors before.

This year's discoveries -- five in Brazil, one in Peru and one in Bolivia -- and other major finds in recent years, are bringing about a rebirth for the region in the eyes of international oil companies that had curbed investment due to political instability and aging fields.

The new discoveries are especially important for Brazil because if they are developed, they could turn the country into the largest producer in Latin America, displacing Venezuela and Mexico, and join the ranks of the top ten producers in the world.

The finds are also key for Brazil's state-run oil company Petroleos Brasileiro SA, or Petrobras, which owns a large stakes in most of the large fields.

"When it comes to oil exploration, Latin America has been forgotten and pushed into the background by other regions like West Africa and the Middle East," said Francisco Bello, director of the Americas at global energy consultancy IHS. "But these new discoveries are making companies realize the region, and especially Brazil, have enormous potential."

Among the largest discoveries are three gigantic fields in the Santos basin off the Brazilian coast that are believed to hold billions of barrels of oil reserves, although official estimates haven't yet been made. The finds in Peru and Bolivia - which contain solely natural gas - are bigger than the seventh, eighth and ninth largest oil finds this year in Iran, Australia and Egypt respectively, according to IHS.

'A Mixed Bag'

Countries like Mexico, Venezuela, Ecuador and Colombia have been major exporters of oil to the U.S. for decades.

Exxon Mobil Corp., ConocoPhillips and many other major oil companies had major projects in Venezuela until a couple of years ago, when the government of Hugo Chavez changed the terms of contracts and gave more control to the country's national oil companies. Similar moves occurred in recent years in Ecuador and Bolivia, discouraging investment of international oil companies. And although countries like Colombia and Argentina offer more stable political outlook, reserves in both countries have been declining at a fast pace. Mexico's large reserves are also declining and the country remains close to foreign investment.

All these factors pushed international oil companies toward countries like Angola in West Africa that were seen as more promising exploration and production destinations. Angola still offers more fiscal certainty and more inexpensive production costs than most countries in Latin America, said Patrick Patrick Esteruelas, an analyst with the New York-based political risk consultancy Eurasia Group.

But the increasing violence in other oil-rich African countries like Nigeria, where attacks on infrastructure, kidnappings of workers and strikes have complicated operations of companies like Royal Dutch Shell or Chevron Corp., made countries like Brazil, Colombia and Peru safer places for investments, Esteruelas added.

These countries offer a business environment more conducive to attracting foreign investment than Ecuador, Bolivia and Venezuela, evidence that the region isn't one unique block.

"Latin America is still a mixed bag," Esteruelas said.


For years Brazil was of medium-interest for major oil companies as the country was a heavy importer oil. But two years ago Brazil started a stunning string of oil and gas discoveries. In 2007, the Brazilian government announced, for example, the discovery of Tupi, the world's biggest oil find in seven years. Besides Petrobras, companies like Chevron, Shell, Exxon, Devon Energy Corp. are among the international companies that would benefit from these finds as they have interest in several of the blocks.

"If these discoveries come to reality in ten years or so Brazil could double its oil and gas production," said Luis Giusti, senior advisor at the Center for Strategic and International Studies.

But the massive discoveries are making Brazil reconsider ways to increase royalty payments on oil and gas production. A government panel is studying possible changes to Brazil's oil laws that would give more control to the state.

Operators in Brazil also face technological challenges. The country's major discoveries are in the pre-salt area, where oil is usually found below 2,000 meters of ocean water and thousands of meters below layers of salt, rocks and sand.

Officials from Petrobras have said about $400 billion will be needed to develop the pre-salt area and that production would be economically feasible at $50 a barrel of oil. The drastic drop in oil prices, which hover around $44 Monday, paired with the uncertainty about Brazil's new oil legislation, could reduce the viability to exploit these fields, analysts said.  

Copyright (c) 2008 Dow Jones & Company, Inc.

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