Issue 600 16•Fenruary•2016 Week 06

�� Colombian cutbacks Low international oil prices have led to a wave of spending cuts by

Colombia’s upstream players.

�� Difficult position State-owned Pemex’s new CEO, Jose Antonio Gonzalez Anaya, has been

tasked with cutting costs, finding new funding and raising production levels.

�� A plan for Petrobras Leading emerging markets investor Mark Mobius has said the Brazilian

major should seek bankruptcy protection in order to restructure its debt.

�� Second strike CGC has struck oil at the Santa Cruz I block in southern Argentina after

finding gas there in September 2015.

MexicoDeepwater Special Report

2016 £440

Buy today for exclsuive insight on the following and much more:

�� Deep impact Data on the blocks being offered in Mexico’s first deepwater

bid round have reportedly made the majors “drool”. We analyse the acreage that could attract capex of up to US$44bn.

�� Sweetened terms The bid rules for the ten deepwater blocks on offer will be less

stringent than previous auctions. The regulator provided us with essential details for bidders.

�� Pemex participation International oil companies may look to partner with Pemex,

which has said that it will participate in the deepwater bid round. We look at the risks and rewards of such a strategy.

�� Local knowledge Operators are positive about Mexico’s flexible local content

requirements. We find out why and how the country has learned lessons from Brazil’s mistakes.

To find buy the report, click here or visit: shop.newsbase.com

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LatAmOilLatin America Oil & Gas Monitor

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C O M M E N T A R Y

Have a question or comment? Contact the editor – Ryan Stevenson ryans@newsbase.com)Copyright © 2015 NewsBase Ltd. All rights reserved. No part of this publication may be reproduced, redistributed, or otherwise copied without the written permission of the authors. This includes internal distribution. All reasonable endeavours have been used to ensure the accuracy of the information contained in this publication. However, no warranty is given to the accuracy of its contents

C O N T E N T S

Colombia’s upstream struggles under weight of cheap oil 4New Pemex head shoulders mammoth task 6

I N V E S T M E N T

Mobius: Petrobras should seek bankruptcy protection 7Petrobras to exit power sector 7Pacific E&P takeover nears 8PDVSA, Rosneft may cut investments in Venezuela 8

P E R F O R M A N C E

Colombia: A view from the ground 9Venezuela’s oil output continues to fall 9

P O L I C Y

Argentina, Bolivia plan to expand gas co-operation 10

P R O J E C T S & C O M P A N I E S

CGC finds oil in southern Argentina 10Mexican regulator allows three new wells 11PDVSA aims to boost gas output 11

N E W S I N B R I E F 14

O U R C U S T O M E R S 20

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COLOMBIA’S oil reserves have fallen by nearly 600 million barrels as companies scale back on exploration and production owing to the oil price crash, a leading industry group has said, at the same time pointing to state-run Ecopetrol’s suspension of operations at many of its oil wells.

According to the Colombian chamber of oil goods and services Campetrol, overall explora-tion in Latin America’s fourth biggest oil pro-ducer has declined “dramatically” over the past year as the cost of production exceeds crude prices.

New estimates released by Campetrol earlier this month show that Colombia’s oil reserves stand at 1.7 billion barrels of oil based on crude at US$34.06. “Our oil reserve estimates are based on what is economically viable for companies to extract oil based on today’s oil prices,” Campetrol head Ruben Dario Lizarralde told NewsBase.

Upstream regulator National Hydrocarbons Agency (ANH), meanwhile, estimates the coun-try’s reserves at 2.3 billion barrels of oil based on US$50-60 per barrel. Oil is Colombia’s biggest export and source of revenue, and the country’s economy has been hit hard by the steep decline in oil prices over the past year.

Running outAccording to Campetrol’s latest estimates, Colombia’s oil reserves are now only antici-pated to last slightly less than five years if oil prices remain at around US$30 per barrel, and if government oil production forecasts remain at 944,000 barrels per day during 2016, Lizarralde said.

“At today’s current prices, with oil at US$30 a barrel, we have oil reserves left lasting between 4.6 and 4.7 years. This is because companies aren’t prepared to produce given the current high production costs,” Lizarralde said.

The ANH, meanwhile, has said the country’s oil reserves are anticipated to last for another 6-6.6 years.

Campetrol says its estimates take into account the natural decline in oilfields, the cost of pro-duction, the average sales costs and are based

on data from consultants Rystad Energy. Across Colombia, drilling activity has fallen sharply, as producers, both big and small, are short of funds.

A steep decline in investment on explora-tion has seen the number of wells drilled across Colombia fall by 74% between 2014 and 2015, according to a November 2015 report by the Colombian Petroleum Association (ACP). Only 19 exploration wells were drilled during the first nine months of 2015, ACP figures show, down from a record 131 in 2012.

“The trend in Colombia has been for com-panies to prioritise on maintaining cash flow to maintain production and to focus their investments and capital on production,” ACP’s vice-president of economic affairs, Alexandra Hernandez, told NewsBase. “This implies sac-rificing investments in exploration. To reduce production costs companies have reduced exploration, which started more than a year ago with the fall of oil prices.”

In response, the ANH announced in late Sep-tember 2015 that it would hold more frequent

W H AT:Campetrol has estimated that the country’s reserves stand at 1.7 billion barrels of oil, which would last less than five years at current production rates.

W H Y:Low oil prices and high production costs have left companies unwilling will to invest in exploration.

W H AT N E X T:Colombia may struggle to produce 944,000 bpd this year, down from 955,000 bpd in 2015.

Colombia’s upstream struggles under weight of cheap oilThe country’s oil reserves are shrinking in the face of US$30 per barrel oil, with Anastasia Moloney finding that the government needs to do more if it wants to avoid running out of oil in the coming years

C O M M E N TA RY

COLOMBIA

Ecopetrol has suspended drilling at some of its wells to cut costs.

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auctions of smaller oil blocks, consider introduc-ing tax cuts for oil companies, reduce the time it takes to secure environmental permits, offer more flexible contracts and provide better geo-logical and seismic data.

But both Campetrol and the ACP have said the government needs to do much more to boost foreign investment in exploration and make Colombia more competitive.

Government efforts “There is much more to be done and much work to be done. It’s not in the interests of Colombia to stop exploration. We believe that the govern-ment has to address the issue of tax and be a little bit more aggressive in offering tax incentives to oil companies, which the government did not wish to introduce last year,” Hernandez said. “If companies don’t explore, you take away the pos-sibility of increasing oil reserves.”

In recent decades, Colombia’s oil sector has been stifled by permit delays, rebel attacks on pipelines and infrastructure and commu-nity protests against exploration and drilling projects.

Lizarralde said he was hopeful a much antic-ipated peace deal between rebel group the Rev-olutionary Armed Forces of Colombia (FARC) and the Colombian government would encour-age foreign investment. The two sides have been engaged in peace talks since November 2012. In September 2015, Colombian President Juan Manuel Santos and FARC leader “Timochenko” set a deadline of March 23, 2016 for a final agree-ment to be signed, although FARC negotiators have since cast doubts on the chances of meeting that deadline.

“We trust that with the signing of the peace deal, it will be easier to work in a calmer environ-ment and boost activity,” Lizarralde said.

But both the ACP and Campetrol note that regardless of a peace deal, production costs will remain high owing to Colombia’s poor infrastruc-ture and because crude is transported by oil trucks often through difficult mountainous terrain.

OutlookEcopetrol, which produces most of the crude in Colombia, is struggling under the pressure as the oil price crash takes its toll. In January, Ecopetrol was downgraded to a notch above junk status by Moody’s, from Baa2 to Baa3.

“While Ecopetrol has no material debt coming due in the next two years, weaker cash generation and higher leverage, coupled with limited funding availability overall for the oil industry, will hurt the company’s ability to continue with its capital spending program to sustain reserves and production,” Moody’s said in January.

Ecopetrol has slashed spending in drilling activity and has shut down an unknown number of oilfields, including heavy-oil wells in Colom-bia’s central Meta Province, as it struggles to cope with low oil prices. As such, Colombia may not meet the government’s reduced production tar-get of 944,000 bpd this year, down from 955,000 bpd in 2015.

“We can say that there are many wells across the whole of the country where Ecopetrol has suspended operations, where there is no activ-ity,” Lizarralde said. “Some wells are generating losses and because Ecopetrol wants to reduce costs, it started to suspended activity, little by little, since the start of this year. In the past two weeks, the situation has got worse with more … wells suspended.”

Ecopetrol has not yet officially confirmed either the well shutdowns, the exact number of suspensions or for how long they will last, according to Lizarralde. He added that the gov-ernment needed to do more to help Ecopetrol ensure it had enough cash flow and “give a line of credit to Ecopetrol focused on seismic explo-ration to ensure future reserves.”

The government hopes drilling in offshore blocks in the Caribbean will help boost reserves. But it will likely take up to a decade for offshore drilling to yield any results. “Offshore exploration is a long-term bet and you won’t see the results for at least another 7-8 years,” Hernandez said.�

C O M M E N TA RY

Bogota has high hopes for the country’s offshore prospects, but it may take up to a decade before exploration here yields any results.

It’s not in the interests of

Colombia to stop exploration. We believe that the government has to address the

issue of tax and be a little bit

more aggressive in offering tax

incentives to oil companies.

Alexandra HernandezVice-president of eco-

nomic affairsColombian Petroleum

Association (ACP)

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THE new CEO of Mexico’s ailing state-owned Pemex, Jose Antonio Gonzalez Anaya, must slash spending, and find new ways to bring in money and pump more oil – fast.

Hailing from the oil town Coatacoalcos in the southestern Gulf state of Veracruz, Gonzalez Anaya is a hard-nosed economist well used to scrutinising Pemex’s finances in one of his previ-ous posts, as income undersecretary at the finance ministry. Though he has no direct experience at an oil company, he has family ties to the industry – his grandfather was an early Pemex employee and his father is a contractor to the state company.

But it was Gonzalez Anaya’s track record in his most recent job, as head of the state social security institute (IMSS), coupled with his closeness to the finance ministry and central bank – both of which have called for more progress in reining in costs at Pemex – that landed him his new challenge.

He is also an expert on pensions: Pemex’s pen-sions bill comes to around US$90 billion, around 9% of Mexico’s GDP. While the company reached a historic pensions deal with its union in 2015, that accord has yet to be implemented fully.

Grim realismGonzalez Anaya has a reputation for decisiveness and, in his few public comments since taking up his new job, has been realistic but determined.

“It won’t be easy at all,” he told Radio Formula in an interview, in which he said cost-control would “not necessarily” equate to job cuts. But he denied suggestions that Pemex’s situation was “disastrous”, saying instead that it was particu-larly difficult because of the tough international oil price environment. Pemex lost US$10 billion in the third quarter and with output not grow-ing, its problems are multiplying. Former Pemex CEO Adrian Lajous wrote in Nexos magazine that Pemex had lost money last year in all of its divisions, including exploration and production, while the refinery business “very probably lost 120 billion pesos (US$6.3 billion) in a year of high margins in the rest of the world”.

So far, neither the new CEO nor the foreign ministry has spelled out what specific measures Pemex could or should take, saying only that all options must be on the table and that Pemex must make full use of all the instruments at its

disposal under the 2014 energy reform.That means, above all, achieving partnerships

and bringing in new capital: Pemex has already said it is also looking at possibly selling majority stakes in three of its six refineries. The company is suspected by some analysts of having held up planned farm-outs of some of its fields with an insistence on remaining the operator.

Daunting scaleMoody’s put the sheer scale of Pemex’s problems into perspective. “We estimate that Pemex would need to raise about US$23 billion during the remainder of 2016 to cover all spending, includ-ing maturing debt, if it reduces operating costs by 10% but does not adjust its roughly US$15 bil-lion planned capital budget for the year,” it said in a note. It is currently reviewing Pemex’s ratings.

The agency noted that Pemex had been slower to cut costs and raise output than Latin American peers and faced a debt crunch. “Pemex had only US$6.5 billion cash on hand as of 30 September 2015 to face its debt maturities,” Moody’s noted. But it highlighted the value of government support, since Pemex successfully tapped the financial markets for US$5 billion in January after Finance Minister Luis Videgaray said it would stand by the company.

“We think support could operate through different mechanisms, the most likely being a reduction (temporary or permanent) of Pemex’s tax burden which would decrease government revenues,” Moody’s said. “Should further finan-cial support be required, it could come via trans-fers funded by extra-budgetary revenues. Other, less likely, forms of support could involve the provision of government guarantees and, ulti-mately, direct capitalisation.”

With Pemex on course to release the worst results in its history on February 26, Gonzalez Anaya has no time to lose. The finance ministry – which still relies on taxes from Pemex to fund about a fifth of the national budget – has made it clear that it is willing to support the state oil giant, which President Enrique Pena Nieto has called the “pride of Mexico”.

But it is equally emphatic that it will not throw good money after bad: if Pemex wants help, it must first help itself, is the crystal clear message.�

W H AT:Pemex needs to slash spending this year while also finding new funding if it is to keep to its US$15 billion planned budget.

W H Y:Between low oil prices and stagnant production the company has very little cash on hand.

W H AT N E X T:While the government has said it will help the company it has been clear that Pemex must first show it is capable of helping itself.

New Pemex head shoulders mammoth taskPemex’s new CEO, Jose Antonio Gonzalez Anaya, has been tasked with cutting costs at the company after it lost US$10 billion in the third quarter, writes Jude Webber

C O M M E N TA RY

While Jose Antonio Gonzalez Anaya has said righting Pemex’s finances will be difficult he has denied the company is in a disastrous position.

MEXICO

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PETROBRAS should seek bankruptcy protec-tion in order to restructure its crushing debt burden, emerging market investment authority Mark Mobius has said.

The head of Franklin Templeton Emerging Markets has argued that the company’s debt is unsustainable. At around US$135 billion Petro-bras’ debt is the largest in the corporate world. An additional burden has been placed on the company by the collapse in the Brazilian real in which the company receives most of its revenues, while the majority of its debt is denominated in dollars.

Mobius said any restructuring would be com-plicated by Petrobras’ status as a state company and even after seeking protection both in Brazil and abroad the driller would still be left requiring a cash injection from the Brazilian government.

He said he believed Petrobras needed oil at around US$80 per barrel in order to be profit-able. The investor said he sold out all his posi-tions in Petrobras six months ago because of the impact of the Car Wash corruption investigation

which has already led to dozens of former Petro-bras executives and leading contractors to being convicted of siphoning billions of reals out of the company.

With its main market in the worst recession since the Great Depression, its supply chain par-alysed by the Car Wash investigation, having being downgraded to junk status and an asset fire sale failing to ignite, (See next story) market concerns about how Petrobras will manage to meet its obligations have been on the increase.

Historically the Brazilian state has always implicitly stood behind the country’s biggest company and officials have signalled they could step in and help the company if needs be. But with Brazil’s debt to GDP ratio climbing and with no plan in sight to plug a deficit of more than 10%, the government’s ability to ride to the res-cue without further undermining confidence in the country’s finances is in doubt.

Politicians linked to Brazil’s ruling coalition accused Mobius of seeking to talk down the value of Petrobras shares in order to buy them later.�

Mobius: Petrobras should seek bankruptcy protection

I N V E S T M E N T

AS part of its bid to restore the company to finan-cial health, Petrobras’ management has decided to exit Brazil’s power sector, according to a report in Brazilian daily O Estado de S.Paulo.

Citing executive sources in the power gener-ation sector, the report said Petrobras was look-ing to sell 21 power plants, gas pipelines and gas terminals. Any sale will be complicated by the heavy regulation of Brazil’s power generation sector, which in recent years has been in financial turmoil following the heavy-handed state poli-cies of the government of Dilma Rousseff, which matches that of its interference in Petrobras which has left the company in financial turmoil.

The plan to exit the power sector would com-plement efforts to sell off foreign assets, a share in its BR Distribuidora fuel distribution business and its stake in petrochemical business Braskem.

In total the company could raise US$57.7 bil-lion with the inclusion of the power generation assets according to the report. But the company’s fire sale has been a notable damp squib so far. Despite targeting more than US$15 billion in sales between this year and last the only signifi-cant piece of business concluded so far has been the sale of a stake in its Gaspetro gas distribution business for around US$500 million to Mitsui.

Any exit from the power sector would see Petrobras cease to be an integrated power company.

Power sector executives interviewed by the newspaper said there was healthy interest in Petrobras’ power generation assets but that bids would not materialise until the government clearly signalled that the country’s energy regu-lator would green light potential purchasers to operate gas pipelines. One unnamed executive said no buyer would want to buy the plants but leave Petrobras in command of the pipelines.

Petrobras has 6.14 MW of installed capac-ity, around half of it in Rio de Janeiro State with plants in another eight states including Sao Paulo, Brazil’s industrial heartland. These are served by a gas pipeline network of 9,000 km which are also connected to two LNG terminals in Baía de Guanabara, in Rio de Janeiro, and Pecem, in Ceara in Brazil’s northeast.�

Petrobras to exit power sector

Franklin Templeton Emerging Markets’ Mark Mobius argues that the company’s US$135 billion debt pile is unsustainable.

BRAZIL

BRAZIL

Petrobras is reportedly looking to sell 21 power plants, gas pipelines and gas terminals.

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IN the clearest sign yet that a takeover of strug-gling Pacific E&P may be imminent, the com-pany said in a February 11 release that it was in active contact with interested parties as part of a restructuring process.

Harbour subsidiary EIG has extended an offer to buy struggling Canadian developer Pacific’s debt until March 24 and reduced its price per share, saying the company’s financial situation has deteriorated further since it made its initial bid in mid-January.

Harbour initially launched a takeover bid for Pacific in May 2015 but it fell through when a group of shareholders opposed it. Since then, Pacific has struggled with the imminent loss of its highest producing field and low oil prices.

Investors began to express concern about the company’s future when Pacific waived its January credit payments and subsequently announced an extension to the waiver on Feb-ruary 4. The company’s latest press release says it is “working with lenders and noteholders” to

“ensure the long-term viability of the business”.EIG has given Pacific shareholders until

March 24 to vote on its offer. EIG CEO R Blair Thomas told Reuters that “it seems apparent that Pacific is insolvent and that a bankruptcy filing is imminent”.

The company theoretically has until February 26 to sort out its cash flow problems but, with ratings agencies lowering Pacific to default level and the company itself addressing rumours of a takeover bid, such a bid now seems inevitable.

The O’Hara Group – a group of shareholders headed by Orlando Alvarado which torpedoed the last takeover bid for the company – has so far kept quiet about the EIG offer. It is not clear whether they may be one of the interested parties mentioned by Pacific or how the group would vote on the EIG offer. Pacific itself is not provid-ing any insight, saying in the press release that it “will continue to interact with these [interested] parties directly and refrain from commenting on mischaracterisations made in the media”.�

Pacific E&P takeover nears

I N V E S T M E N T

STATE-OWNED PDVSA and Russia’s Rosneft have said they may have no choice but to scale back investments in the South American coun-try owing to weak oil prices.

The warnings came after a meeting between officials from the two companies, which coin-cided with a trip to Russia by Venezuelan Oil Minister and PDVSA President Eulogio del Pino, who asked Russia to cut output to boost flagging prices. Officials from the two com-panies gave no indication where investments could be cut.

Rosneft has a broad portfolio of oil and nat-ural gas projects in Venezuela. They include development of the Mejillones, Patao and Rio Caribe offshore natural gas fields, which pre-viously comprised the Mariscal Sucre Project. The latter field also contains large reserves of condensates.

A preliminary agreement was signed in late 2015, committing the two countries to a joint ven-ture. Rosneft also is PDVSA’s partner in the Petro-miranda and Petrovictoria extra-heavy oil joint ventures, holding a minority stake in the pair.

The companies agreed in 2015 to make a final decision this quarter whether to go ahead with the construction of a new upgrader for the Petromiranda project. That upgrader would

refine extra-heavy crude of 8 degrees API into a 42 degree API feedstock prior to traditional refining. The companies gave no indication for the cost of the upgrader.

Rosneft has repeatedly pledged to expand its presence in Venezuela but has stopped short of stumping up the significant massive invest-ment needed. Besides Petrovictoria and Petro-miranda, Rosenft is also a minority partner in the Petromonagas joint venture.

Last year, Rosneft said it could expand its share participation in Petromonagas to 40%, up from its 16.67% stake. Petromonagas, which was formerly managed and controlled by ExxonMobil, is currently producing about 130,000 barrels per day. Petrovictoria could reportedly produce up to 120,000 bpd by the end of the year, while Petromiranda is just starting.

The problem is that Rosneft needs to build upgraders for its joint ventures if production is to increase significantly. Without them, the only way that the extra-heavy crude can be readied for refining is by diluting it with light and medium crude oils, or naphtha. NewsBase believes that Rosneft will maintain a holding pattern on its Venezuelan projects, while waiting for interna-tional oil prices to recover.�

PDVSA, Rosneft may cut investments in Venezuela

SOUTH AMERICA

VENEZUELA

Harbour initially launched a takeover bid for Pacific in May 2015 but it fell through when a group

of shareholders opposed it

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COLOMBIA’S estimated crude oil reserves have fallen to around 1.7 billion barrels because of the oil price crash, according to the Colom-bian chamber of oil goods and services Campet-rol. (See: Colombia’s upstream struggles under weight of cheap oil, page 4)

But Perenco petrophysicist Javier Rincon told NewsBase that this new figure might not be low enough. “This revision is very optimistic. The [fall] could be bigger because none of the companies in Colombia are making investments or even explor-ing, even Ecopetrol. So the reserves will be substan-tially impacted because of that,” he said.

If Colombia does not change its upstream approach, reserves will only cover output for the next three to five years, he said, adding that “everyone has to change their way of thinking”.

Rincon said Perenco was different from many other upstream players in Colombia, in that his company was debt free and had sufficient liquid-ity to pursue distressed companies.

“Perenco doesn’t have debts, it has money in the bank and it is looking to [take over] other companies, probably broken companies. This is the business for Perenco, looking for new opportunities. Now, for example, we are looking at two companies and we are evaluat-ing their assets,” he said.

But the outlook for Colombia’s oil sector in general is far from promising, owing to falling reserves and the unlikeliness of making any major new oil discovery.

“Really, I don’t think there will be another major find, because basically the big reserves have already been discovered. To look for big reserves you have to make big investments and only the major com-panies are able to make these.”

He also pointed to the fact that Colombia was not a petro economy and that, despite the widespread belief that oil and gas could support economic growth, it needed to diversify.

“Colombia doesn’t have a petroleum econ-omy like, for example, Venezuela or the Middle East. I think this was one of the main problems here … we respect oil more than [other indus-tries] and now that [the price] has gone down the country and the economy is going down, too.”

Rincon said Colombia needed to start thinking seriously about how it would grow and added that a return to agriculture and an end to depending solely on oil could be the way forward.

“Look at Chile. Colombia exports more oil and gas than Chile, but the Chilean economy is healthier than Colombia. Why? Because Chile doesn’t depend solely on oil. Colombia depends on commodities, oil, minerals and that’s it.”�

Colombia: A view from the ground

P E R F O R M A N C E

VENEZUELA, which has the world’s largest oil reserves but has struggled to develop them, con-tinues to face flagging oil production in the face of capital expenditure and investment cutbacks.

According to OPEC, Venezuela’s production in January dropped 32,000 barrels per day to around 2.32 million bpd. Venezuela claims that its current output is 2.84 million bpd. Officials from state oil company PDVSA were not avail-able to explain the discrepancy. In the past, they have said that OPEC does not include the coun-try’s extra-heavy oil output.

But the drop in Venezuela’s output coincides with falling capital spending.

PDVSA’s capital expenditure dropped 15% in 2015, or by more than US$2.5 billion, in the face of weak oil prices.

PDVSA’s strategy director, Sergio Antonio Tovar, gave the figure during a conference in London. Tovar said additional cuts could be made this year if oil prices remain weak, but did not elaborate.

Tovar pledged that PDVSA would honour all of its debt payments this year. Including interest, they total US$5.7 billion, including US$3 billion of bonds maturing in October and November.

Venezuela’s oil output is a closely guarded secret. Oil production has fallen more than a quarter since 1999 when the late Hugo Chavez was sworn in as president and began his socialist revolution.

Production has steadily inched downward, especially after thousands of PDVSA employees were fired during a 2002-03 strike that aimed to force Chavez from office.

The company is slated to report 2015 produc-tion figures within weeks as part of its annual report. Former Oil Minister Asdrubal Chavez claimed in 2015 that the company produced 2.9 million barrels per day in 2014 with exports totalling 2.33 million bpd.

Those figures have been discounted by most observers and NewsBase Research (NBR) anticipates further declines in oil production, especially as PDVSA’s cash flow worsens. The company has no choice but to cut capex if it wants to avoid a debt default.

NBR also expects PDVSA to reopen possible asset sales, or approach its partners for short-term loans repayable in oil. But as the country’s political crisis mounts, few companies will be open to such loans, especially as the govern-ment’s long-term survival seems uncertain.�

Venezuela’s oil output continues to fall

COLOMBIA

VENEZUELA

I don’t think there will be another

major find, because basically the big reserves

have already been discovered

Javier RinconPetrophysicist

Perenco

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ARGENTINA and Bolivia launched talks last week to widen natural gas ties in a deal that could see Argentina’s state-run YPF stepping up explo-ration across the border.

Argentine Energy Minister Juan Jose Aranguren travelled to Santa Cruz for talks with his Bolivian counterpart, Luis Sanchez.

Aranguren said he wanted to ramp up gas imports from Bolivia to meet a surge in demand in Argentina during the May to September win-ter season, during which shortages have been common since 2004. Argentina has been stead-ily increasing Bolivian gas imports since 2004, reaching an average of 15 million cubic metres per day in 2015. The target is to take that to 27.7 mcm per day in 2017.

“At the meeting, we developed a very impor-tant link, and we want to strengthen it further,” Aranguren said in a statement issued by the Boliv-ian Ministry of Hydrocarbons and Energy. “In Argentina, we are dependent on Bolivian gas and so the more gas we can buy from Bolivia the better.”

Sanchez said the talks were to continue on February 26, adding that also under discussion was YPF’s exploration of Bolivia.

Bolivia has the second largest conventional gas reserves in South America after Vene-zuela, and it needs more investment to increase production.

The country also is looking to export more gas to Brazil – its only other buyer – and pos-sibly begin selling to Uruguay and Paraguay. This would make it possible for companies to extend their exploration plans, helping to increase production from a current 70 mcm per day.

Of that, 31 mcm per day is exported to Brazil and 15 mcm per day to Argentina, while the rest is consumed domestically.

“Bolivian is becoming more and more the energy heart of South America,” Sanchez said. “The countries of the region are interested in Bolivia providing them with energy, gas and derivatives.”�

Argentina, Bolivia plan to expand gas co-operation

P O L I C Y

COMPANIA General de Combustibles (CGC) said last week that it had found oil resources in a block where it had also recently discovered natural gas.

The find was made on Santa Cruz I, a block it operates in the southern province of Santa Cruz.

The company drilled to a depth of 2,300 metres to find the 28 degree API resources on the Fraction C of the block, with the Laguna Maria x-1 well testing at initial production flows of 270 barrels per day, CGC said. It said total potential reserves were 50 million barrels and added that it planned to put the discovery into production “in the next few days”.

This was its second find on the same block following a 40-50 billion cubic foot (1.13-1.42 billion cubic metre) gas discovery in September 2015 there that was producing an initial 100,000 cubic metres per day.

Santa Cruz 1-Fraction C is already in produc-tion, averaging 630 barrels per day of crude and 265,000 cubic metres of gas.

But CGC has been widening exploration to look for more resources in the maturing block, which has been in production for years.

CGC acquired Santa Cruz I-Fraction C and another 25 blocks from Brazil’s state-run Petrobras in April 2015 for US$101 million, an expansion push that started after the company was bought in 2013 by Argentine businessman Eduardo Eurnekian.

CGC is now producing 1.3% of the country’s 532,000 bpd of oil and 2.3% of its 120 million cubic metres per day of gas, according to indus-try group Argentine Oil and Gas Institute. That ranks it twelfth for oil and eighth for gas.�

CGC finds oil in southern ArgentinaP R O J E C T S & C O M PA N I E S

SOUTH AMERICA

ARGENTINA

The discovery was the second on the block after gas was found in September 2015.

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MEXICAN energy regulator the National Hydrocarbons Commission (CNH) authorised three new onshore wells last week.

The first was Terra 2 DL, which is the sec-ond well designed to check the limit of oil deposits and add 80 million barrels of proven reserves to Pemex’s onshore Comalcalco asset. It is also the ninth well at the location and is around 22km from Tabasco state capital of Villahermosa.

Pemex had previously produced gas from the Terra 123 oil well, triggering a fire that burned for weeks during the production start-up in Sep-tember 2013. Pemex said it would avoid volatile gas deposits to avoid a repeat of the incident.

It aims to begin drilling in February and fin-ish in September, drilling up to 6,800 metres underground and checking for pay at 4,262 metres and 5,212-5,900 metres.

The second well is Valeriana, an exploratory well in the same area, through which Pemex

aims to add 87 million barrels of proven crude reserves, targeting pay at 4,900-5,500 metres and 5,600-6,200 metres. Drilling is scheduled to start in February and run until December.

The third is Chocol-1, which is targeting pay at 6,400 metres and which Pemex hopes will add another 87 million barrels of crude. Drilling is to run from February to October with the well located 10 km from the other two.

All three are superlight reserves measuring at least 40 degrees API and are all in an area Pemex hopes to farm out to private firms under the terms of the reform passed in August 2014. It is part of the broader Macuspana Basin, which was approved by the CNH in July 2011.

Pemex had signed production-sharing deals for mature fiends in 2011-13, the so-called “incentive contracts” which will be farmed out first, ahead of wells still in the exploration or development phase which do not have a foreign partner in place.�

Mexican regulator allows three new wells

P R O J E C T S & C O M PA N I E S

PDVSA is hoping to boost natural gas output in the western part of the country to fuel power plants in the face of the El Nino weather condi-tions that have forced the country to reintroduce power rationing. PDVSA said it was target-ing the western state of Zulia for increased gas production. The company said the San Ramon – SRA-1 – well is already producing upwards of 8.6 million cubic feet (244,000 cubic metres) per day of unassociated gas.

By June 30, PDVSA’s gas unit plans to drill at least three additional wells, two in the San Ramon field, and the other in the Javilla field. The wells are expected to add about 23 mmcf (651,000 cubic metres) per day when they are fully operational in 2017. PDVSA is invest-ing US$175 million in the two fields this year alone.

Increased natural gas production is neces-sary if Venezuela hopes to avoid a collapse of its power grid. El Nino has reduced rainfall in the country, cutting into water levels at its hydro-power plants (HPPs), which provide more than 60% of the country’s power needs. But less rain has cut into the HPPs’ generation.

Last week, the government announced that it would ration energy until the country’s dry sea-son ends in May. A similar drought in 2009 led the government to earmark billions of dollars to build new thermal power plants (TPPs) to avoid future cutbacks. But many plants have not been started or completed amid widespread charges of corruption and diversion of funds.

The question of feedstock for the plants is also important: Venezuela does not want to burn fuel oil in the plants as that would affect its oil exports and government revenue. The emphasis has been on natural gas, but the country has a deficit of the fuel. PDVSA has delayed develop-ment of Venezuela’s gas reserves, which are the eighth largest in the world, to concentrate on oil. The gas reserves, currently listed at nearly 200 trillion cubic feet (5.66 trillion cubic metres), are 80% associated with oil.

Venezuela is producing about 7.5 billion cubic feet (212.4 million cubic metres) per day of gas. The country’s deficit of the fuel is estimated at up to 1 bcf (28.3 mcm) per day. PDVSA has tried to encourage foreign companies to invest in its gas industry but with limited success.

Part of the problem is that Venezuela sub-sidises the domestic market, meaning that investors fear that they will not be able to make a profit. The late Venezuelan President Hugo Chavez repeatedly touted his country’s gas potential, saying PDVSA could export gas to the rest of the continent via a pipeline. Those plans never came to fruition, as development of off-shore reserves has not happened.

NewsBase believes that PDVSA’s gas development will remain mired in delays owing to a lack of funding and PDVSA’s inability to attract meaningful investments from potential partners. That means that the country’s gas shortage will continue in the short- and medium-terms.�

PDVSA aims to boost gas output

MEXICO

VENEZUELA

PDVSA’s gas unit plans to drill at least three

additional wells by June 30

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C O M PA N I E S

Shell to boost reserves from Brazil Shell expects to make robust investments in Brazil’s offshore, hoping to quadruple oil and gas output there by the end of the decade, its chief executive officer said. CEO Ben Van Beurden spoke in Brazil shortly after Shell’s takeover of rival BG Group, approved in late January, took effect. He said Brazil will be a key area for the Anglo-Dutch company as it focuses its expanded operations in LNG and deepwater oil production.

“We believe in the strong fundamentals of Brazil and the fundamentals of its geology,” Van Beurden said in Rio de Janeiro. “We will be looking at a substantial part of our production from Brazil.” By adding BG’s large Brazilian offshore assets, Shell’s local output rose six-fold to about 240,000 barrels of oil and natural gas equivalent per day, or 13% of its total of 1.8 million boe per day.REUTERS, February 15, 2016

Ecopetrol: concerns over future of Tibu interconnector projectColombian national workers union the USO has voiced concerns over the future of the Ecopetrol Tibu pipeline project, set to connect the Cano-Limon Covenas pipeline to the Rio Zulia and Tibu municipalities. The project will reduce the use of oil tankers and cut transportation costs.

Embezzlement and corruption allegations due to third party involvement have seen USO voice concerns over the apparent lack of management by the state oil firm.LA OPINION (COLOMBIA), February 11 2016

Ecopetrol suspends Puerto Gaitan wellsJust days after oil union USO objected to the suspension of several Ecopetrol wells, the company has moved to close another well. Ecopetrol has asked permission from the National Hydrocarbons Agency (ANH) to temporarily suspend some wells at the Cano Sur development in Puerto Gaitan.

According to Ecopetrol executive Jose Luis Villota, these fields are only commercially viable with an oil price of over US$40 per barrel. Now that crude has fallen below US$30, the executive says the situation has

become “unmanageable”. Ecopetrol sources in Villavicencio confirmed the company is waiting for a response from the hydrocarbons agency. EL TIEMPO (COLOMBIA), February 15, 2016

Jamaica negotiating with oil major for licenceJamaica is in the final stages of negotiation with a major oil company to explore for oil and gas in the country, according to energy minister Phillip Paulwell. Paulwell told the first day of the Future of Energy in the Caribbean conference taking place in New Kingston that negotiations with the company will conclude in March, when a licence will be granted to explore the southeast section of the island. The conference is aimed at gaining energy independence in the Caribbean.

Tullow Oil is currently conducting exploratory work on Jamaica’s southern coast, which has been identified as having exploration potential. CARIBBEAN NEWS NOW (CARIBBEAN), February 10, 2016

Spanish bank offers support to struggling PemexBanco Sabadell, the fifth largest banking group in Spain, has offered to provide funds to Mexico’s state oil company Pemex to pay an estimated US$7 billion debt to suppliers, 24 Horas newspaper reported. The bank, which launched operations this year in Mexico, could lend the funds to Pemex for making the payment, said director of the energy and infrastructure division of the bank in Mexico Eduardo Barrera.

“Sabadell’s bet on the [oil] sector is long term,” he said. “We want to be close to Pemex and its major suppliers. The current market conditions are a cycle, and we have to be cautious and understand which transactions come from a point of view of risk.”24 HORAS (MEXICO), February 11, 2016

Mexico to announce budget cuts in daysMexican finance minister Luis Videgaray said that cuts to the government’s budget, including transfers to Pemex, could be published within days. Speaking to the media following a meeting with business owners group Coparmex, he said that long-term pressure on oil prices, the slowing global economy and worries about when US interest rates might move higher.

“We are seeing a depreciation in many currencies worldwide, collapses in stock prices and those of other assets,” he said. Mexico had to seek stability “so that external shocks do not become a threat to the Mexican economy”. EL FINANCIERO (MEXICO), February 15, 2016

Statoil gets share in Uruguay blockNorwegian company Statoil has acquired a 35% working interest in a block off the coast of Uruguay from Tullow Oil. The company, which made its entry into the country just weeks ago, already has a presence in Latin American countries including Colombia, Venezuela and Suriname.

Statoil will take a share in exploration block 15 in the Pelotas offshore basin. Statoil VP Nicholas Alan Maden said the transaction allows the increase to increase its “exposure to the upside potential of this untested geological setting”. MARKETWATCH (US), February 15, 2016

PDVSA pays bondholders interestVenezuelan state oil company PDVSA has announced that it will pay interest to holders of the 2022 bonds on February 17. The interest payments correspond to the semester ending in February of 2016, and bondholders must go to their bank or the institution where they bought the bonds to claim.

The interest announcement will be welcome news for bondholders. Venezuela is said to be bracing for a possible default, with analysts saying the government will struggle to pay the interest due on its bonds this year. The country has US$10 billion of debt servicing costs coming due this year.CORREO DEL ORINOCO (VENEZUELA), February 11, 2016

O I L

Bolivia estimates 50 million barrel findNueva Esperanza, an exploratory block in Bolivia, could hold 50 million barrels of oil reserves and 125 bcf of gas, AN news service reported. The block is located in the Madre de Dios Basin in the department of La Paz.

If the reserves are as large as estimated, Bolivian President Evo Morales said the state oil company YPFB could build an oil refinery in the region.AN (BOLIVIA), February 13, 2016

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Colombia oil discoveries down 39% in 2015Low oil prices have had a dramatic effect on Colombian oil exploration, with a 39% drop in new discoveries in 2015. Data from the National Hydrocarbons Agency (ANH) shows just 17 new discoveries last year, compared to 28 in the previous year.

Canadian company Pacific E&P made the most discoveries. The company is feared by analysts to be on the verge of default, after using a grace period to delay January bond payments and announcing it is in talks with “interested parties” with regard to “restructuring”. ACP data shows that 25 exploratory wells were drilled last year.EL TIEMPO (COLOMBIA), February 14, 2016

Colombian oil production drops by 1.1% in JanuaryColombian oil production dipped by 1.1% during January compared to same period year-previous, Colombia’s mining and energy ministry reported. Output was reported at 982,000 bpd compared to 993,800 bpd recorded during December 2015. The dip was attributed to “technical maintenance at the Quifa, Rubiales and Piedemonte fields in addition to reduced pumping carried out on the Caño Limón Coveñas pipeline,” the ministry said in a release.

It added that natural gas production averaged 1.05 bcf (29.8 mcm) per day in January, up 1.52% from December’s output of 1.04 bcf per day. Colombia produced an average of 1.005 million barrels of oil per day in 2015, which translates into “1 trillion pesos (some US$302.2 million) for the country,” officials saidLATIN AMERICAN HERALD TRIBUNE (VENEZUELA), February 15, 2016

Mexico forecasts lower price for heavy crudeMexico’s state oil company Pemex expects the price of its heavy crude, known as Maya, could fall as low as US$19 per barrel by the end of March, La Jornada newspaper reported. This would make it harder for the company to turn around flagging oil production.

Maya is the crude that the company exports the most. With a lower price, Pemex would have to step up its budget cuts, slowing efforts to rebuild production after more than a decade of decline to an average of 2.5 million bpd.LA JORNADA (MEXICO), February 12, 2016

Venezuela looks to freeze oil productionVenezuelan oil and energy minister Eulogio del Pino has proposed a freeze in production across the struggling Latin American country.

Following a meeting with the OPEC countries, Del Pino has proposed a freeze in production in the hope that this will reduce an excess of barrels on offer in the global oil market.ENTORNO INTELIGENTE (VENEZUELA), February 11 2016

G A S

Pemex flares natural gas in TabascoPemex, on February 15, began five days of controlled natural gas flaring in Paraiso, a coastal town that hosts the Dos Bocas export terminal, close to the separation valves belonging to the Tsimin-Xux complex, which is part of the firm’s Tabasco Littoral project.

The Dos Bocas terminal is the export terminal for the vast majority of Pemex’s crude. The flaring, which runs from 8.00 am to 8.00 pm daily is unlikely to affect exports. NOTIMEX (MEXICO), February 15, 2016

R E F I N I N G

Iran, Brazil in talks on investment in Brazil refineries Iran and Brazil are in talks about possible Iranian investment in troubled refinery projects controlled by Brazilian state-led oil company Petroleo Brasileiro SA (Petrobras), a Brazilian government source said. Iran, which is boosting oil output after the end of sanctions over its nuclear programme, is interested in exporting oil to Brazil, processing that crude at refineries in Brazil’s north-eastern region and then selling it in the Brazilian market, the source said, adding that talks are at an early stage.

Talks though are far from any result, the source added. “For this subject to be considered embryonic it will still need to evolve a lot,” said the source, who asked for anonymity because the inter-government talks are private. Iran has shown interest in

investing in the construction of the Premium I and Premium II refineries in Brazil’s north-eastern states of Maranhao and Ceara, the source said. The refineries are designed to produce low-sulphur fuels.

While plans for those projects were developed by Petrobras, as the state-owned oil company is known, they have been dropped from its investment plan. The source was not clear if any Iranian investment would include Petrobras. Battered by financial problems, a corruption scandal and falling oil prices, Petrobras suspended work on both projects. Each is expected to cost more than US$15 billion. REUTERS, February 12, 2016

Colombia’s Reficar blames budget overrun on ‘bad planning’As both the Colombian energy ministry and the state oil company come under the microscope for the Reficar budget overrun, a statement issued by the refinery blames the extra costs on bad planning. The refinery, operated by Ecopetrol, came in US$4 billion over budget. The government has since said that it is looking at several high profile executives, including previous Ecopetrol CEO Javier Gutierrez and Finance Minister Mauricio Cardenas.

The press release rejects accusations against the company made by the media and blames the budget over run on high labour costs, inefficiency in hiring and unexpected technological costs. RCN RADIO (COLOMBIA), February 14, 2016

F U E L

Bolivia seeks LNG, motor fuel co-operation with Russian firmsBolivia is interested in developing co-operation with Russian companies in the sphere of LNG and gas motor fuel projects, gas giant Gazprom’s unit Gazprom International said on February 15. “We want a lot to find partners in Russia for work on this direction, and I think that with Gazprom’s help we will certainly manage to do it,” a representative of the Bolivian delegation said, as cited by Gazprom International.PRIME (RUSSIA), February 15, 2016

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