CHAPTER 1 Models of Oil and Gas Development: Latin America's Spectrum

• Jurisdiction: Derecho Internacional

Oil and Gas Development in Latin America
(Mar 1999)
CHAPTER 1
Models of Oil and Gas Development: Latin America's Spectrum
Anthony E. Reinsch
Executive Vice President
Tornado Resources Ltd.
And Roger Tissot
Director, Latin America
Canadian Energy Research Institute

For the Rocky Mountain Mineral Law Foundation

Special Institute: Oil and Gas Development in South America

Introduction

"The central conclusion ... is that Latin America appears poised for a period of sustained economic development. Political stability, regional economic and energy integration, debt reduction, fiscal stabilization, and the withdrawal of the government from the marketplace—as evidenced by the privatization of state-owned enterprises and deregulation of foreign investment—all favor strong economic growth. In this development paradigm, the energy sector has taken center stage.

The Latin America of the early 21^{st century promises to be a much different environment. Increased economic ties, through a growing number of regional trade agreements, and rapid energy integration will bind the countries together behind a common purposes and direction. While respectful of individual jurisdictions, the process of integration will make it increasingly difficult for indivieual countries to move out of step with economic and energy policy trends being pursued generally in the region."}

Anothny E. Reinsch and Roger R. Tissot

Petroleum Industry in Latin America: Volume I

CERI Study No. 64, August 1995.

From 1991 through 1997, the Canadian Energy Research Institute (CERI) engaged in a comprehensive examination of the hydrocarbon sector in Central and South America. this body of research culminated in a three-volume analysis of the petroleum sector in the region,¹ and a subsequent analysis of the development options for the natural gas sector in the Southern Cone region of South America.² The original study contained one of the first, comprehensive analyses of the legal and regulatory environment governing hydrocarbon exploitation in Latin America. This analysis was coordinated by one of your Institute chairpersons, Mr. Uisdean Vass; many of

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the contributing counsel are represented at this Institute. The second study provided an update to this body of work, focussing on the natural gas sector.

The remarks contained in this paper stem from this research program, and from the subsequent observations and investigations by the authors in this important energy region.

Background

The wave of privatization, deregulation and foreign investment opportunities that has swept the globe since 1988 has been a "defining moment" for the international energy sectory, reiniscent in some respects of the Texas oilfield discoveries in the early 1900s, the Middle East oil exploitation of the 1950s, and the oil price shocks of the 1970s and 1980s. Over the past decade, private oil companies have been presented with an unprecendented array of international investment, exploration, and exploitation opportunities.

Indeed, it can be argued that this global "aperture" process³ — more so than the downturn in petroleum product demand resulting from the "Asia flu", the prolonged economic recession in the former Soviet Union, or the chronic quota violations of the members of the Organization of Petroleum Exporting Countries (OPEC)—lines at the heart of the crude oil commodity price downturn that is plaguing the international petroleum sector.

Latin America has figured prominently in this aperture process. An important hydrocarbon region, Latin America accounts for 134 billion of the approximately one trillion barrels of established, conventional global crude oil reserves, making it the largest oil reserves region outside of the Middle East. The South American continent possesses some 84 billion barrels of established conventional reserves, with the balance found in Mexico.⁴ The region also possesses some 263 trillion cubic feet (Tcf) of established natural gas reserves, roughly equal to that of North America. The South American continent possesses some 200 Tcf, of which Venezuela accounts for almost 70 percent.

While it is convenient to speak of Latin America, or South America, as aregional hydrocarbon play, it is most appropriate that the focus of this Institute is on the differences existing within the region, in terms of the legal, regulatory, fiscal and operating environment in place in the countries of the region and the array of hydrocarbon exploitation opportunities available to the foreign investor. The remainder of this paper will deal with comparisons of Key variables across the countries.

Energy Sector Characteristics

Table 1 provides a summary of energy sector characteristics across the seven key hydrocarbon countries that formed the focus of our research — Argentina, Bolivia, Colombia, Ecuador, Mexico, Peru and Venezuela. The notable absence of Brazil in this table reflects both the recent nature and the uncertainty of the "aperture" process in this country. Where possible, we provide

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Table 1

Country Comparisons: Petroleum

Argentina	Bolivia	Colombia	Ecuador	Mexico	Peru	Venezuela	Total
Established Reserves (1997)
Crude Oil (MMb)	2,600	132	4,900	3,300	50,700	800	71,700	134,132
Natural Gas (Tcf)	24.3	4.6	14.2	3.7	64	9	143	263
Production (1998)
Crude Oil (Mb/d)	759	35	662	376	3,050	123	3,300	8,296
Natural Gas (MMcf/d)	2,649	307	496	90	3,464	93	4,853	11,952
Consumption (1997)
Oil and Products (Mb/d)	485	35	264	140	1,900	152	475	3,451
Natural Gas (MMcf/d)	2,778	123	320	n/a	205	n/a	1,395	4,888
Reserves/Production Ratio
Crude Oil (years)	9	10	21	25	46	17	60	44
Natural Gas (years)	28	10	78	>100	51	>100	81	61
Electricity Sector
Installed Capacity (GW)	19.61	0.81	11.0	3.0	36.0	3.8	20.0	94.22
Generation (BkW.h)	64.67	2.95	54.1	8.5	154.0	16.2	77.1	377.32

SOURCES: (1) Energy Information Administration, US DOE, Country Briefings; (2) Consensus Economic Forecasts, Latin America, 1996/97; and (3) Canadian Energy Research Institute, 1999.

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observations on Brazil within this paper, and will leave it to a later panelist to provide the Institute with a more complete picture of developments in that country.

The two-tier distribution of reserves is clearly evident, with Mexico and Venezuela accounting for over 90 percent of the total established reserves. Venezuela also accounts for over 50 percent of the established gas reserves in the region. Considerable undiscovered reserves potential is believed to exist in Colombia, Brazil and Peru.

The "golden era" for the region's natural gas sector continues to await the development of pipeline infrastructure to link the considerable resource base to the region's demand centers. As discussed below, considerable progress has been made with the completion of the Argentina-Chile gas pipeline, the progress on the Bolivia-Brazil pipeline, and the Gas Massification program in Colombia. The future for the gas sector lies in the numerous projects currently under examination that, if acted upon, could usher in a regional gas market in South America not unlike that which exists between Canada and the U.S. We will return to this issue later in the paper.

Operating Conditions

Table 2 provides a summary of petroleum sector operating conditions in the seven countries. In Argentina, Colombia, Peru and Venezuela, foreign investment opportunities are available in virtually every aspect of the petroleum sector. Interestingly, these countries cover the spectrum of "aperture" models, from the cumbersome legislative and Congressional requirements in Venezuela and the more accommodating, but still state-dominated, association arrangements in Colombia, to the open market operations in Argentina and the radical privatization process in Peru.

In Bolivia and Ecuador, a decidedly mixed environment prevails. The situation in Bolivia has evolved rapidly, with the adoption of the capitalization program for privatization of state oil company YPFB and the electric utilities, movement on the Bolivia-Brazil natural gas pipeline and approval of the Hydrocarbon Law governing foreign investment in upstream oil and gas exploration and exploitation. In Ecuador, proposals for the privatization of pipeline, refinery, and other assets of PetroEcuador continue to encounter stiff resistance from politicians and unions, and from military advisors reluctant to transfer control over "strategic sector" assets to private interests.

In Mexico, restrictions on foreign investment in the development of the country's natural gas transmission and distribution infrastructure and power sector have been relaxed considerably. However, foreign participation in upstream oil and gas development continues to be tightly controlled.

Similarly, contractual vehicles for foreign upstream investment vary considerably across jurisdictions. Argentina and Peru have opted for a return to the concession system. In Bolivia and Colombia, both Association contracts and Risk/Service contracts are in operation. The flexibility of the Association contract system in Colombia has allowed for significant foreign involvement in the upstream petroleum sector without impacting the continued, strong government presence of state oil company Ecopetrol. Ecuador offers a variety of contractual options, including Associations, Service/Risk, and Participation contracts.

The opening of the Venezuela petroleum sector to foreign investment has been accomplished through a range of vehicles approved by Congress under Article V of the nationalization legislation. The large-scale heavy oil projects in the Orinoco region were approved under

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Table 2

Country Comparisons: Operating Conditions

Argentina	Bolivia	Colombia	Ecuador	Mexico	Peru	Venezuela
Foreign Investment Opportunities
Upstream Exploration	Yes	Yes	Yes	Yes	No	Yes	Yes
Refining	No	Yes	Yes	No	No	Yes	Yes

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