While resource nationalism initiatives have scared away investors in Argentina, Bolivia, Ecuador and Venezuela, Peru and Colombia are two Latin America venues that offer relatively hassle-free investment and have plenty of new acreage openings. In Peru, we think LNG is the hot track to follow, while in Colombia, it’s all about shale oil—if you can stomach the improving but lingering security threat.
PERU: All about LNG
Against the backdrop of increasing resource nationalism in Latin America, Peru stands out because of its untapped natural gas reserves, a new LNG plant, new investor-friendly policies and an independent licensing regime.
While Peru is a net importer of oil, it is a net exporter of natural gas and also home to South America’s first liquefied natural gas (LNG) plant.
In a nutshell, Peru has 18 sedimentary basins with high hydrocarbons potential, but only six are undergoing any significant exploration activity and only three are currently producing. Geologically, the potential is vast: Nine of the 18 basins are located in the Peruvian coastal regions and the continental shelf; those basins in the central and southern continental shelf are particularly underexplored. In 2011, 18 exploratory wells were spudded, with another 25 drilled by the end of 2012 and more than 30 hoped for by the end of 2014.
As of early last year, Peru had around 582 million barrels of proven oil reserves, adding about 50 million barrels to its reserves annually for the past two years. The onshore reserves are largely in the Amazon, while offshore reserves have been discovered most notably in the Talara basin (1.4 billion barrels of recoverable oil). Onshore, the most recent big discovery was in the Maranon Basin (970 million barrels of recoverable oil).
As of 2012, foreign oil companies had managed to get ahold of 41% of the exploration license area in the Amazon, but the country’s attempt to lure in more investors could see this nearly double in the coming 2-3 years. (Right now there are more than 50 foreign oil companies engaged in oil and gas exploration and drilling in Peru). Bidding rounds in late 2011 saw 11 new exploration licenses and production contracts awarded. In late 2012, another 22 exploration blocks were up for auction in the Amazon region.
Many of Peru’s oilfields are already reaching declining output, and while new exploration may boost reserves, we’d rather talk about the potential of natural gas liquids.
Almost all of Peru’s natural gas liquids production is from onshore fields. Right now, Peru has about 12.5 trillion cubic feet of proven natural gas reserves, with its largest field in Camisea, in the southeast. Production here began in 2004 and has grown by nearly 40% year-on-year. However, the rate of natural gas production began exceeding domestic consumption in 2010. By December 2010, Peru's natural gas production was in excess of 1 Bcf per day, mostly from the Camisea reserve. Perú LNG's revenue last year reached $1.33bn, up 3.94% from 2011. But it’s still not fully explored, and we could see another 318 billion cubic feet discovered as this progresses.
But there are other, newer fields that hold great potential for investors.
• Madre de Dios (onshore): Lot 76 of Madre de Dios, in southern Peru, is currently being explored by Hunt Oil, which believes the reserves could rival those of Camisea
• Ucayali Basin (onshore): This field, in central Peru, was discovered by Petrobras in 2010 and is said to contain around 1.7 trillion cubic feet of natural gas
• Devonian Shale: In 2009, Maple Energy discovered unconventional gas in this shale
(There is also a leaked document that shows that the government of Peru is intending to create a gas concession bordering or even including parts of the Manu national park in the Amazon to extend exploration activities there. This one will get tricky, though, as it is home to indigenous peoples and is a unique area of biodiversity that UNESCO is keen to protect.)
Natural Gas Infrastructure
This is why we like the natural gas potential of Peru—aside from the exploration potential: pipelines and South America’s first LNG plant. Right now, there are two pipelines carrying natural gas from the Camisea fields: 1) the 336-mile, 450-million-cubic-feet/day capacity Camisea pipeline, which ends at the Pisco port terminal which handles exports; 2) a 444-mile pipeline that runs from Malvinas along the coast to Lima and Callao for residential and industrial distribution. A third pipeline, the 620-mile Southern Andean, is being built from Camisea.
In 2010, Peru began exporting LNG from its Melchorita plant, and by early 2012 exports had reach 15 billion cubic feet, with the bulk of exports going to Spain, the US, Mexico, China and South Korea. This LNG plant is owned by the PeruLNG consortium: Hunt Oil (50%), SK Energy (20%), Repsol (20%) and Marubeni (10%). The plant has a yearly capacity of 215 billion cubic feet and expansion plans are also under way for two or three more LNG trains within the next 4-5 years.
Construction also began just over two years ago on a new liquefied petroleum gases (LPG) plant in the Cuzco area in the southeast for meeting local demand.
A note on governance is also appropriate here: While the state body of Perupetro manages and oversees the licensing process as well as exploration and exploitation, it does not participate as a partner or shareholder with private companies.
Colombia: Shale Oil Exploration Gains Momentum
Colombia’s oil production has risen by about 40% from 2009 to 2011—making it the fastest-growing oil producer in Latin America. Right now, the focus is on expanding unconventional exploration, but this means treading on territory that until very recently was dominated by rebel groups.
Is it too early? Perhaps. The government is still in talks with the Revolutionary Armed Forces of Colombia (FARC). The security situation remains extremely complex, and will continue to dominate the potential investment climate.
The first auctions of shale acreage in Colombia were held late last year, with ExxonMobil Corp. and Colombia’s state-owned Ecopetrol SA making the highest bids for three onshore blocks—two of which are believed to contain shale oil. There really wasn’t enough data on these blocks in time for the auction: only five bids were placed for 49 blocks up for grabs.
In late February, Canadian company Canacol Energy Ltd (CAAEF) and ConocoPhillips joined forces to explore for shale oil in Colombia’s Middle Magdalena Basin. ConocoPhillips will pay $13.5 million in cash and be responsible for the cost of drilling, completing and testing some 13 wells. ConocoPhillips will get 70% of shale oil discovered in the deeper areas of the play, while Canacol will retain 30% in the deeper areas but 100% in the shallower reservoirs. This is for Canacol’s Santa Isabel contract (334,000 acres), which is only one of five contracts it has in Colombia. For other contracts, Canacol has agreements with ExxonMobil Corp. and Royal Dutch Shell PLC.
We like Canacol in Colombia because we believe it is the best positioned to take advantage of the country’s unconventional shale oil play.
Right now, this is really a play for the juniors—small and medium-sized businesses. Discoveries haven’t been on a massive scale, but we like the trend that has emerged with Canacol—junior exploration lures in the majors.
Let’s look at the key basins:
The Middle Magdalena Basin: This is where the big attention is now. This basin is located in the Eastern Cordilleras of the Colombian Andes and exploration to date has led to discoveries of some 1.9 billion barrels of oil and 2.5 trillion cubic feet of gas. Explorers are already calling this the next Eagle Ford, and comparing it also to western Argentina’s Vaca Muerta shale. Some have put recoverable shale gas reserve estimates at 31.7 trillion cubic feet.
The Llanos Basin: This east-central Colombia is one of the most prospective areas for E&P, with more than 1.5 billion barrels of recoverable oil recorded so far. Around 70% of current production comes from this basin. This is the sight of a heavy oil belt (particularly in the Rubiales Field—4.38 billion barrels of oil in place).
Caguan-Putumayo Basin: This basin is in the country’s southwest, bordering Ecuador and Peru and covering around 104,000 square kilometers. So far, more than 365 million barrels have been discovered in 19 different fields.
Catatumbo Basin: A southwest extension of the Maracaibo Basin in Venezuela, the Catatumbo basin accounts for about 2% of the world’s hydrocarbon reserves. It is one of the most prolific basins, but only moderately explored.