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Latin America’s Most Exciting Oil And Gas Play

Introduction

Latin America is a major player in the world of oil. Brazil and Venezuela dominate the continent’s position in oil production, and continue to attract interest from the largest oil and gas companies from around the world.

But there is burgeoning interest in one corner of South America that does not have Latin roots. Along the northern coast of South America are a few countries that are rarely discussed in the world of geopolitics, let alone in the world of energy. Guyana and Suriname, two small, lesser-known countries along South America’s Caribbean Coast, could one day become energy players. The two countries of Anglo and Dutch colonial origins are starting to garner attention from a growing number of oil executives, and for good reason.

The US Geological Survey concluded in 2000 that Guyana may have the second largest oil and gas potential out of all unexplored basins in the world, with a possible 15 billion barrels of oil and 30 trillion cubic feet of natural gas. Much of that is still unexplored.

But that could change soon.

New Discovery

On May 20, ExxonMobil (NYSE: XOM) announced a “significant” discovery just off the coast of Guyana. Located 120 miles from the coast in the Stabroek Block, ExxonMobil, through its subsidiary Esso Exploration and Production Guyana Ltd., “encountered more than 295 feet (90 meters) of high-quality oil-bearing sandstone reservoirs.” The Liza-1 well was drilled to a depth of more than 17,000 feet (more than 5,000) meters. “I am encouraged by the results of the first well on the Stabroek Block,” Stephen M. Greenlee, president of ExxonMobil Exploration Company, said in a statement. “Over the coming months we will work to determine the commercial viability of the discovered resource, as well as evaluate other resource potential on the block.” Esso owns a 45 percent interest, Hess Guyana Exploration – a subsidiary of Hess Corp. (NYSE: HES) – owns 30 percent, and a subsidiary of China’s CNOOC controls the remaining 25 percent.

The discovery will heighten interest in Guyana’s oil and gas sector, which is vastly underdeveloped at this point. In fact, Guyana and its neighbor Suriname are starting to attract global attention as a region that has high potential. And the fact that oil drillers have not combed the waters off the coast of Guyana and Suriname is a plus – there is the potential for a big pay day for the companies that get there first. The number of wells drilled in the Guyana-Suriname basin over the next five years will be triple the level of the previous five years.

The Guyana-Suriname Basin could demonstrate similar geological features to West Africa. The offshore discoveries in Senegal and Mauritania in particular could provide some clues to the oil-bearing structures off the northern coast of South America.

One smaller company that holds acreage near to ExxonMobil’s recent discovery is CGX Energy (CVE: OYL). A junior upstream oil exploration company based in Canada, CGX saw its share price temporarily jump by over 400 percent following ExxonMobil’s announcement. It has since fallen back, but still trades more than twice as high as it did in the weeks before. That is because ExxonMobil – the world’s most valuable private oil company – provides a very large degree of validation for the strategy of the tiny CGX Energy. CGX is majority owned (54 percent) by fellow Canadian oil company Pacific Rubiales (TSE: PRE), and it has sought to acquire promising acreage before finding larger partners help it drill.

ExxonMobil’s announcement derisks CGX’s holdings in Corentyne and Demerara, two blocks immediately adjacent to ExxonMobil’s Stabroek. Corentyne could hold 779 million barrels of oil equivalent.

CGX drilled two wells in previous years but had disappointing results. The Jaguar-1 and Eagle-1 wells were drilled in 2012, along with partners Repsol (BME: REP) and Tullow Oil (LON: TLW). They were plugged and had to be abandoned after disappointing results. CGX’s share price suffered as a result.

Near to the blocks owned by both CGX and ExxonMobil is another block owned by Repsol and Tullow. The Kanuku Block (70 percent Repsol, 30 percent Tullow) holds potential, but the two companies are reviewing seismic data to figure out next steps. After having been burned with the Jaguar and Eagle wells, the two companies are being cautious.

Despite the setbacks, CGX’s management team is still bullish, and they are more enthusiastic about the Corentyne and Demerara blocks, which offer shallow water with a lower risk profile. They hope to complete two wells in Corentyne by the end of 2016.

CGX is one of the few pure-play investments on Guyana oil. It even has Guyanese board members, a Guyanese Co-Chairman, and a Guyanese Country Manager. It controls three blocks – the aforementioned two offshore prospects, plus one onshore. Together, the company is sitting on an estimated 3 billion barrels of oil equivalent. Despite its tiny size, it is the third largest acreage holder in the Guyana-Suriname Basin – only Anadarko (NYSE: APC) and Tullow have more. CGX is seeking joint ventures to find the funds to expand its drilling.

ExecReportMap1June5th

ExecReportChart2June5th

Royal Dutch Shell (NYSE: RDS.A) also has a presence in Guyana. It scored a discovery in 2011 with the Zaedyus field, but after appraising the well in subsequent months, Shell’s interest soured.

If ExxonMobil and CGX successfully develop their acreage, it will have a transformational effect on the tiny country of Guyana. The Guyana government is planning on setting up a sovereign wealth fund in order to manage the expected revenues from oil and gas production for the benefit of its citizens. Millions of dollars in revenues could go a long way in such a poor, underdeveloped country.

Conclusion

Let’s keep things in perspective. Guyana has an enormous challenge in building up the necessary infrastructure to support an oil and gas industry. Building that from scratch is not a trivial issue. Until the ports, parts, roads, and governing structure are fully setup, investment could stay on the sidelines.

Moreover, Guyana has yet to produce a “gusher” that would truly catapult it into the top echelon of oil and gas producing regions. There may be a lot of potential, but until substantial volumes of oil start being extracted from the ground, a lot of this is just hype and hope.

Until recently, in light of CGX’s failed drilling campaign and the deflating results from Shell’s Zaedyus field, interest in the Guyana-Suriname Basin declined.

That is, until ExxonMobil made its latest discovery. Now hopes are high again that the region can finally develop a strong offshore oil and gas industry. According to Wood Mackenzie, ExxonMobil’s discovery off the coast of Guyana is the most exciting play in Latin America right now.

ExxonMobil could be pouring in billions of dollars that could span a decade, a potential game changing project for the tiny country of Guyana.




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