Bonanza could fuel future

Large oil and gas reserves could ensure prosperity and South America’s place at the top table of global producers, writes Rob Langston

Venezuela lays claim to the largest proven oil reserves in the world.

President Hugo Chavez claimed his country has 297 billion barrels, surpassing the previous long-term world leader Saudi Arabia.

After Venezuela, Brazil has the second largest proven oil reserves in Latin America with just under 14 billion barrels. It also has the second largest proven gas reserves in the region, according to the Organisation of Petroleum Exporting Countries.

Offshore, there are further opportunities, says Angelos Damaskos, chief executive of Sector Investment Managers, adding that there are “potentially huge” reserves of oil and gas off the coast of Brazil. “These oil accumulations could position the country as one of the five largest producers of oil in the next two decades, from its current 11th place,” he says. “However, the economic viability of these finds remains questionable.

“At over 2,000 meters of water depth and some six to seven kilometres beneath the seabed, drilling, establishing the infrastructure and delivering oil and gas to the markets will come at high cost and with large risks.”

Accessing the oil would provide a boon to Brazil’s economy, but the costs could be too high. Oil prices may need to climb to justify the expenditure.

Venezuela claims 297 billion barrels of proven oil reserves, surpassing the previous long-term world leader Saudi Arabia

But the benefits would be immediate. Brazil was the largest consumer of oil in Latin America last year, which has increased year-on-year since 2007, to 2.8 million barrels a day in 2011. Furthermore, just 124,000 barrels per day were exported from Brazil in 2011; only Ecuador, and Trinidad and Tobago exported fewer. It also imported large amounts of oil and gas.

Luis Uriza, head of emerging markets investment house Bain’s Europe, Middle East and Africa oil and gas practice, says developments in Brazil will be “fundamental to the oil and gas industry, given their scale and complexity”, and could lead to new technologies being developed. 

“Accessing Brazil’s reserves will be one of the largest engineering construction projects in world history,” he says. “In total, the challenges will draw gigantic levels of investment, even for an industry that manages projects that cost more than $10 billion as a normal course of business. But optimism is high. Markets, the industry leaders and the consuming nations all assign a very high probability of success to Brazil’s oil and gas industry prospects.”

Sector Investment Managers’ Mr Damaskos says there will be “large goodwill and commitment to pursue the development of these difficult projects”.

However, he warns the government may try to control oil deposits via national interests and state-owned oil company Petrobas, which could deter other international oil companies from taking part.

“Brazil will need the super-cycle of oil prices to last for a good two to three decades in order that it may realise its dream of large oil exports to the world,” he concludes.

POWERING LATAM

Latin America has established itself as an important player in the oil and gas market, with production expected to grow substantially in the years ahead. The Organisation of Petroleum Exporting Countries (OPEC) expects non-members in the region to increase production of crude and natural gas liquids from 4.1 million barrels a day in 2010 to 4.9 million in 2015.

Venezuela, the largest producer of oil and gas in the region, has under President Hugo Chavez become a strong force in the international energy market. It has become increasingly tied to China, with the BRIC country investing huge sums in Venezuela’s infrastructure. However, it is likely that the nationalised oil company PDVSA (Petróleos de Venezuela S.A.) will need further investment and support to increase production.

Bolivia’s reserves should make it one of the big players in the regional energy market. Argentina’s state-owned energy company Enarsa (Energía Argentina S.A.) recently announced it would increase its consumption of Bolivian gas and it remains a key supplier to Brazil. However, it faces a number of challenges. Concerns that Bolivia’s oil reserves are running low could slow production, unless further investment in exploration is made. A further challenge for foreign investors is the country’s attitude towards nationalisation and foreign resources companies.