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ARTICLE ~ November 10, 2009 ANÁLISIS QUINCENAL: Latin America Update, November 10, 2009By Carlos Monge, RWI Latin America Regional CoordinatorWith Claudia Viale and George Bedoya
The final weeks of October saw a surge in prices for commodities such as oil and minerals. This recovery—with oil prices reaching nearly US $80 per barrel—was due mostly to a weak dollar, speculation in the commodities market and an increase in the demand for crude oil. Faced with this upturn in prices, main state-owned oil companies in Latin American are seeking to increase their investments, production and revenues, to take advantage of the trend. In Bolivia, YPFB subsidiaries YPFB Transporte, YPFB Refinarción and YPFB Logística have issued shares totaling approximately US $117.93 million, to be purchased by the parent company to increase capital. State-owned YPFB hopes to reverse the decline in investment and production, worsened by the partial loss of main markets such as Brazil and Argentina. The other Bolivian oil companies plan to invest US $3.6 billion by 2015. The main objectives of the sector are to speed up natural gas production to meet the demand of the Argentine market, to increase domestic supply, and to further industrialize gas production. Venezuela's state-owned oil company PDVSA—facing a severe drop in oil revenues—has been establishing partnerships with China and Russia to raise oil production by 900,000 barrels per day in the Orinoco Belt. It has also issued bonds for approximately US $3.2 billion to meet obligations and repay outstanding debts, in order to resume their production levels. Despite the variety of benefits included in this bond offer, such as income tax exemptions, demand from investors has been less than expected. The amounts owed by PDVSA are quite high, but revenues from this transaction are still expected to alleviate the imbalances caused by falling international oil prices. Recent changes and uncertainty over oil contract terms in Ecuador have put investment projects there at risk, and reduced production levels. Indeed, 2009 production has averaged 416 thousand barrels of oil per day, down from 503 thousand barrels per day in 2008. In response, the Ecuadorian government says it will seek investment from state oil companies from Russia, China and Latin America, with the goal of forming joint ventures with Petroecuador to reverse the production decline. The Board of Directors at Colombia's state-owned oil company Ecopetrol, said their investment levels in 2010 will be similar to those in 2009, which reached US $6.2 billion. However, they also said that amount will probably increase over the coming year as a result of investments made in the purchase of companies such as Petro-Tech and the Cartagena Refinery. Budget funds will be mainly allocated for exploration and production to raise oil output up to one million barrels per day. New natural gas reserves found in the Camisea area of Cusco, Peru. Peruvian president Alan García announced on November 5th the discovery of a significant natural gas reserve in the Cusco region. The discovery was reportedly made by Brazilian company Petrobras and is said to contain 1.5 trillion cubic feet (TCF) of natural gas, found in the Urubamba 1X well within block 58 and adjacent to blocks 56 and 88, which make up the Camisea project in Cusco. President García says this finding could reach 4 or 5 TCF once Petrobras finishes drilling the other nearby wells. García demonstrated his optimism about the project with a large celebration outside the Presidential Palace and the statement that, with these new findings, "we will be able to more than cover the country's energy demand at least until 2050." If the figures prove accurate, gas reserves would increase by 10%, making the total amount of reserves 15 TCF. This statement was made despite the fact that Petrobras itself had not certified the actual volume of reserves discovered. The discovery comes amid criticisms of the government's failure to secure gas supplies for the domestic market, according to several experts. Peru could suffer a shortage when the consortium which manages Camisea begins to export gas to Mexico in 2011. Currently, the proven reserves of Camisea—in blocks 88 and 56—amount to 8.8 TCF, all of which is spoken for in supply contracts that expire between 2014 and 2026,. Meanwhile, Petrobras representatives avoid giving exact figures and have simply said that, "The samples are under analysis to be able to confirm the commerciality of the block and calculate an estimate of the volume of natural gas." Even the Minister of Energy and Mines Pedro Sánchez took a more moderate tone, saying that if the estimated volume was confirmed—these gas findings could cover domestic demand for approximately 20 years, at a rate of 250 million cubic feet a day (mcfd). However, we should point out that in 2008 domestic demand for natural gas actually reached 320 mcfd. Looking at the numbers, combining the extra 2 TCF in block 57, discovered by Repsol in early 2009, and the 5 TCF from block 58, if Petrobras confirms that discovery, the total amount of gas reserves in the country would reach 15.7 TCF. However, total domestic demand is estimated to be 21 TCF between now and 2050, so even with these new findings, the reserves are adequate. Therefore, many analysts have questioned the figures provided by President García, which they claim have no technical underpinning. Though critics recognize that the new discovery is encouraging, they agreed that the government should be more cautious about creating a false expectation that domestic demand will be covered for the next 40 years. Lastly, another problem related to these new reserves is their price, since they will be sold in the country at the international Henry Hub price level, which is double the current price level for Camisea gas. The gas from Camisea costs less because, in both cases, Shell absorbed the exploration cost and then gave the blocks back to the State. The new gas would cost US$ 4.5 per million BTU, so the company can recover its full investment. If this hydrocarbon is destined to be transported though the Southern Pipeline, it would cost US$ 6 per million BTU and citizens of the south, where the gas is produced, would paradoxically have to pay higher prices. These events have therefore reignited a debate about the consequences of exporting natural gas from Camisea. Natural Gas in Latin America: shortages and new trade relations. Natural gas has become an important energy source for South American countries since it offers a cheap and clean alternative to oil and its derivatives, particularly as international prices soar and global warming accelerates. Indeed, countries like Colombia, Brazil and Peru have promoted the natural gas conversion of vehicles and industries, causing domestic demand to increase rapidly. Regional trade relationships have thus been shifting, as each country seeks to ensure domestic supply and export markets for natural gas. Colombia was forced to ration natural gas, leaving approximately 20,000 vehicles without fuel. November gas supplies to the industry were cut on November 4 and could only be restored on November 10th. Authorities stated there were two reasons for these rationing: First, the transport capacity of the pipeline from Ballenas to Barrancabermeja had fallen from 270 million cubic meters per day (mcmd) to 190 mcmd due to a loss of compressor capacity. Second, the recent shortage of water to produce hydroelectricity has led to the need to use the Atlantic Coast thermoelectric power plant which uses natural gas. This restriction in domestic supply prompted a debate in Colombia over possible alternatives. Representatives from the Mining and Energy Planning Unit (UPME) said that natural gas would only last until 2014 in a mid-level demand scenario, and recommended evaluating the possibility of building a liquefaction plant to process imported gas or to import natural gas directly from Venezuela. This last alternative generated controversy due to Venezuela's lack of political stability and the lack of clear investment and development plans from State-owned hydrocarbon company, PDVSA. It is worth highlighting that Colombia's development discussions touched on core issues such as the need for adequate energy sector planning, while Peru, also faced with a likely natural gas shortage, focused its discussions only on increasing exploration activities to discover new reserves. Bolivia continues to seek new export markets and strategies for natural gas, due to the uncertainty of its two main trading partners, Brazil and Argentina. As we discussed in the previous report, Argentina is about to begin importing liquefied natural gas from Chile, reducing its imports from Bolivia. And Brazilian demand has been volatile throughout 2009, with an overall declining trend. In October. demand registered at 22 million cubic meters per day, whereas in 2008, it reached levels around 31 MMCD. Furthermore, a new project to sell 30 MMCD in natural gas to Brazil's Cuiabá thermoelectric plant did not materialize because of price disagreements. The contract had already been signed in September 2009 and exports were to have begun by October of the same year. In light of these challenges, Bolivia's Minister of Oil and Energy, Oscar Coca, announced on October 30th that the government had begun negotiations to deliver natural gas to Paraguay and Uruguay though Argentine pipelines in 2010. This step came in parallel to continuing work on the Urpabol pipeline project, a four-year initiative which would take gas from Bolivia to Uruguay and Paraguay. In addition, Coca said: "Argentina is willing to allow Bolivian gas to go to Uruguay through its pipelines. The first information we have is that the country would only charge for the transit of Bolivian gas. In other words, Argentina would not charge anything other than the use of the pipeline." As we can see, regional natural gas supply has faced new attention due to shortages or to the need to assess new markets. These discussions have focused not only on the relations between countries—e.g., Colombia refuses to import gas from Venezuela, while Bolivia is laying the groundwork for a new trade relationship with Uruguay and Paraguay—but on the importance of adequate energy sector planning, domestic demand has been growing at high rates and does not seem to be reducing its pace. Sources: La Razón, Eldeberdigital.com, El Universal, La Republica.com.co (Columbia), El Comercio, La República (Peru), Perú 21 ADDITIONAL ISSUES
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