LatAmOil Week 04

Issue 548 27•January•2015 Week 04

Major interest Despite the fall in prices, oil majors have flocked to Mexico’s data rooms to

study blocks as the historic Round One tender proceeds.

Production reduction Oil companies in Colombia have warned the oil price slump could cause

production in the country to fall by 220,000 barrels per day by 2018.

Crisis (mis)management Venezuela’s tweaking of its forex system highlights a government clutching at

straws as the economy unravels.

Wintershall is coming Germany’s Wintershall is to launch a shale exploration project with GyP in

Argentina’s Neuquen Province, home to the Vaca Muerta shale.

COMMENTARY 3

� Mexico managing price slump as tenders

proceed 3

� Currency controls confirm crisis for

Caracas 5

PIPELINES & TRANSPORT 6

� US-Mexico swap deal feasible in Q1 6

INVESTMENT 7

� Andes bolsters Colombian position with

IOX purchase 7

� Pemex outlines cost-cutting plans 7 PERFORMANCE 8

� Price crash creates downstream uplift for

Petrobras 8

� Colombian oil output forecast to fall 8

POLICY 9

� Argentina offers incentives to spur oil

production 9

� Maduro moots petrol price increase 10

� Qatar cited as potential downstream

investor in Venezuela 10

PROJECTS & COMPANIES 11

� YPF prepares Chaco-Parana Basin

exploration plan 11

� GyP, Wintershall to start Argentina shale

drilling in March 11

� Americas Petrogas brings four Neuquen

wells on line 12

� BPZ pushes ahead at Peru’s Block Z-1 13

NEWS IN BRIEF 13 SPECIAL BRIEFING 17

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LatAmOil 27 January 2015, Week 04 page 3

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The oil price crash has come at a sensitive time for Mexico with its oil sector liberalisation under way. With the country’s historic bid rounds progressing, investment is likely to be lower as companies cut their capital expenditure budgets. Government officials are also now saying some shale fields that were due to be auctioned this year will be held back until prices recover.

Undeterred, the National Hydrocarbons Commission (CNH), which is running the tender process, remains upbeat. It recently opened state-of-the-art data rooms, in which interested parties can study all the geological information. This includes seismic studies and data from 32 exploratory wells drilled near the first 14 fields that are being offered to investors.

Major names such as Royal Dutch Shell, Chevron, BG Group and ExxonMobil are among those that have

already been authorised access to the eight data rooms. Others include Colombia’s Ecopetrol, Australia’s BHP Billiton and US independent Hunt Oil. And the CNH said the number of companies expressing interest in the data was growing by the day.

“Interest is holding up … Round One is going well, even with this price scenario,” Juan Carlos Zepeda, head of the CNH, told reporters.

The first 14 fields are all in shallow waters, where production costs are around US$20 per barrel. Under the terms of the tender, companies will be restricted to bidding for a maximum of five fields and belonging to only one consortium.

Mexico’s state-run oil company Pemex is a shallow-water specialist and is unhappy at being restricted to just five fields. But the government is seeking to maximise investment and experience to

boost production that has been flagging for a decade, dropping to the current level of 2.4 million bpd from a peak of more of 3.4 million bpd in 2004.

Alma America Porres, a CNH commissioner, said foreign majors were interested in the first fields to be offered – even though they are in shallow waters. The core focus of the majors was expected to be the deep waters of the Gulf of Mexico, where striking oil is “virtually guaranteed”.

Companies accessing the data rooms will see not only an integrated geological atlas of the areas but also a wealth of seismic and other data in a format that can be viewed on any software, the CNH said. Mexico is expected to announce the second swathe of tenders at the end of this month – in productive fields in shallow waters – with the winners of the first batch of bids to be announced in July. Tenders will continue throughout the year. Shale rethink While deepwater fields still look attractive at current prices, with drilling years away and prices likely to have recovered by the time productions comes on stream, the 62 shale blocks included in this year’s Round One are now being re-evaluated. Shale’s relatively speedy transition from exploration to production makes current low prices more of a deterrent. Areas where shale development would occur also remain dangerous in security terms and lack infrastructure.�

COMMENTARY

Mexico managing price slump as tenders proceed Despite the fall in prices, oil majors have flocked to Mexico’s data rooms to study blocks as the historic Round One tender proceeds By Jude Webber � Shell, Chevron, BG and ExxonMobil have already been authorised access to the eight data rooms � Mexico is due to announce the second swathe of tend ers at the end of this month � Foreign investment in projects could halve while th e oil price remains low

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Source: NewsBase Research Global Oil Forecast

Mexican Deepwater Production Forecast





Zepeda said several shale blocks overlapped with other types of hydrocarbons prospects at different depths, meaning some may still be economic. But others – including unconventional prospects in the challenging Chicontepec formation – may now have to be dropped from Round One and included in subsequent tenders.

The impact of the lower price on other areas is less clear. For example, Chicontepec, which contains both light and heavy crude, comprises some prospects that would cost US$120 per barrel to produce and others below US$40. “Some areas, [which] we will be seeing as part of this tender, are viable and competitive even at low prices,” Zepeda said. Other tenders were being “reassessed,” he added.

Blocks in the south of Chicontepec, which are more productive, “have more chance of being viable”, while other

fields in the north are more likely to be reassessed. The CNH is advising the Mexican Energy Ministry on the technical aspects of which fields to keep in this round and which to drop, and by March-April the authorities should have a clearer idea, Zepeda said. “But what is not in Round One will be put in later rounds,” he went on.

He is confident that investment in Round One will not be wildly different from the US$12 billion the government has estimated. But Benito Berber, an analyst at Nomura, wrote in a research note this week that he expected annual investment in Mexico’s oil sector to fall into the US$4 billion to US$6 billion range, from the US$8 billion to US$12 billion estimated before the price collapse.

“However, the overall foreign direct investment outlook coming from electricity, natural gas pipelines, energy-

related infrastructure, petrochemicals and manufacturing could add another US$5 billion in a sustainable way,” he added.

In the coming few weeks Mexico also expects to award as many as five to ten permits for companies to conduct seismic studies, another potentially lucrative source of investment. Companies will have 12 years of exclusivity to be able to sell the data to interested parties, compared to ten in Brazil and Norway and 25 in the US.

Zepeda said the terms ought to spur onshore and offshore seismic surveying in Mexico and boost prospectivity. “This is an information business,” he said.

It is also a price-sensitive business. And although annual investment in the oil sector could halve whilst prices are low, as noted by Nomura’s Berber, the overall impact on Mexico’s auctions appears to be relatively contained thus far.�

COMMENTARY





Venezuelan President Nicolas Maduro last week ended months of dithering and announced changes to the country’s foreign exchange system. The move was designed to restore faith in his faltering government and reboot the economy, which contracted by 2.4% last year. Instead, critical questions remain unanswered and the government’s decision to opt for a stealth devaluation will make doing business in the country more expensive for oil companies, as it stokes inflation.

Maduro said in his annual address to the National Assembly that Venezuela would continue to have three official exchange rates, dashing hopes he would opt for one unified rate, perhaps at between 30 and 40 bolivars to the US dollar. Such a system “isn’t viable” at present, Maduro said. Hopes for an outright devaluation were also dashed.

“This is pure improvisation,” one

banker, who spoke on condition of anonymity, told NewsBase. “Maduro still couldn’t give any details about the new systems, even though he has had more than a year to work on them. I really don’t know what is going to happen next.”

The late president Hugo Chavez enacted forex controls in 2003 to arrest capital flight during a nationwide strike that sought to force him from power.

The country will maintain its official forex rate of 6.3 bolivars to the dollar, which is used for imports of basic foodstuffs and medicines, Maduro said. The official rate is also the one most open to abuse, however, as it is used to “reward” government officials and their families.

The existing SICAD forex rates – both of which are set in opaque auctions – are to be merged into one. The SICAD I rate – which is used for selected industries to

cover their operating needs – is currently 12 to the dollar. SICAD I is also the rate used to set airline fares, and selected transactions such as hard currency sales by tourists and currency purchases of Venezuelans going abroad.

The SICAD II rate, which is theoretically available to both companies and individuals, carries a rate of about 51 to the dollar.

Maduro did not say what the new SICAD rate would be, though there is speculation it could be around 30 to the dollar. Investors, companies and individuals will be able to buy and sell dollars under the third forex mechanism, a new auction of dollars that will be under the control of the country’s public and private brokerages. A similar system functioned until May 2010 when Chavez abruptly ended it, saying the auction was being manipulated by dishonest brokerages. The new system may absorb the country’s black market, where the rate is around 175 to the dollar, or nearly 30 times higher than the official rate.

Maduro provided few details, including whether PDVSA would be able to sell its dollars via the new system. Instead, he said the changes would be explained in detail in the coming days.

What seems certain is that many of the goods and services presently covered by the 6.3 and 12 rates will shift to the new rate; hence the notion of a stealth devaluation being executed.� (Left) Maduro addresses the National Assembly

COMMENTARY

Currency controls confirm crisis for Caracas Venezuela’s tweaking of its foreign exchange system is indicative of a government clutching at straws as the economy spirals out of control By Peter Wilson � Venezuelan President Nicolas Maduro said the countr y would retain its complex triple exchange rate sys tem � The system is an obstacle to doing business in the country and an ongoing risk to IOCs and PDVSA � The oil price slide has exacerbated the dollar crun ch, raising fears of a possible debt default





Obstacles Venezuela’s complex forex system is widely regarded as being one of the chief obstacles to doing business in the country. Corruption is rampant, delays are common and the paperwork is daunting.

The bolivar, at least in the official and SICAD I rates, is significantly overvalued. PDVSA has been selling its revenue from foreign oil sales to the government at the 6.3 rate, which has exacerbated the company’s financial crisis.

The government is looking for over-complicated solutions to a simple problem: it has not made enough dollars available to meet demand. This forces companies and individuals to turn to the black market, where the rate is soaring and which in turn stokes inflation. Venezuelan inflation closed 2014 at a rate of 64%, creating shortages of foodstuffs, medicines and spare parts.

The situation is unlikely to improve while oil prices remain depressed. Oil revenues account for 95% of the country’s hard currency income. But the price of Venezuela’s market basket of oil and petroleum products has fallen by more than 60% in the last year to US$38 per barrel on January 21. It was US$96 per barrel at the same time last year.

The slide in price has exacerbated the dollar crunch, raising fears of a possible debt default later this year and worse shortages, as the government will likely cut funds to importers. Maduro recently returned from his tour of China, Russia and OPEC countries without any new credits or loans, meaning Caracas will be hard pressed to raise dollars to meet existing obligations.

What next Oil companies operating in the country will adopt a wait-and-see approach until the government releases details of the new forex systems.

This view is supported by Fernando Sanchez, vice president of the Society of Venezuelan Petroleum Engineers, who told NewsBase: “The biggest challenge right now is that of credibility,” he said. “The president gave few details about the new system. Given the government’s past record, people just don’t believe it.”

PDVSA was formerly required to sell all its dollars to the Central Bank at the official exchange rate. Under previously announced changes, the national oil company (NOC) is permitted to sell its dollars using the SICAD mechanism as well. This means PDVSA will have more bolivars for the dollars it sells.

“That is fine for covering local

expenses such as salaries, etc,” said Sanchez. “But PDVSA’s biggest cost is that of the products it uses. And all of those are imported. The company has to import pipe; it has to import cement for extra deep wells; it has to import basic materials and instruments.”

This is a risk to PDVSA and international oil companies (IOCs) operating in the country because although labour costs may go down in dollar terms, the cost of everything else will rise.

NewsBase does not expect the new forex regime to solve the myriad problems facing PDVSA and its partners or indeed Venezuela’s wider economic issues. The rollout of the new system looks likely to take place over weeks rather than days, which will exacerbate shortages and lead to more opposition demonstrations. The government is also likely to tinker with its exchange policies again this year and a full-scale devaluation is likely if oil prices weaken further or remain at present levels. This is a considerable risk to PDVSA and its partners who are already struggling to raise production. It is also a notable risk to Maduro, whose forex tweaking highlights the desperation of a government in deep crisis.�

Mexican imports of light crude from the US under a swap programme have moved a step closer and could kick off before the end of the first quarter. The swap deal would mark a major policy change for Washington, which has kept oil exports off limits for four decades.

Mexico’s state-run oil company Pemex has already applied for permission to import up to 100,000 barrels per day of light crude from the US. The company’s CEO, Emilio Lozoya, said at the World Economic Forum in Davos that the

programme could start within months of US approval being granted.

“Swaps of crude with the US make perfect economic sense,” Lozoya told Reuters. As for the timing, he said: “Everything depends on their [the US] decision. We could start two to three months after the approval is given. And within a year or a year and a half ramp it up to the targeted levels of 100,000 [bpd]”.

Pemex sources have indicated that the swap could happen as early as the first

quarter of this year and Mexico could end up importing much more – perhaps with the US capping exports to the country at 300,000 bpd.

In December the US opened the door to ending its four-decade ban on oil exports, which would potentially allow Mexico to take advantage of cheap tight oil gas. The American market is currently awash with light oil extracted from shale, which is proving hard to refine.�

COMMENTARY

PIPELINES & TRANSPORT

US-Mexico swap deal feasible in Q1





Swapping light crudes for heavier Mexican oil therefore makes sense for Washington.

It is a scenario that would also make financial sense for Mexico, which already imports about half the gasoline it

consumes. The price of gasoline, which is set by the government, is an estimated 41% higher in Mexico than it is in the US.

Mexico has traditionally exported much of its oil and is betting on its

ongoing energy reform to draw in tens of billions of US dollars in investment as it looks to boost production levels that have been declining for a decade. Output is currently over 1 million bpd below its peak of about 3.4 million bpd in 2004.�

Andes Energia has increased its interest in Colombia with the acquisition of Interoil Exploration and Production (IOX). As the majority shareholder in IOX, Andes has taken on IOX’s production of 1,571 barrels of oil equivalent per day, and proven and probable (2P) reserves of 5.7 million barrels.

IOX’s portfolio is made up of two production and exploration licences and one service contract in Colombia. Andes now has nine producing fields in Colombia and Argentina. Its net production has risen to approximately 2,500 boepd and it has 2P reserves to 23 million boe.

"We are pleased to become the majority shareholder of IOX, which will allow Andes to increase and diversify its

production and reserve base,” said Alejandro Jotayan, chief executive of Andes Energia. “We are acquiring current production, which provides robust cash flow and additional self-funded exploration and development potential.”

Shareholders in IOX agreed the deal at an extraordinary general meeting in Oslo after Andes Energia bought a 51% stake in the Norwegian company. Andes will appoint four new positions on the IOX board. Jotayan has taken on the role of CEO.

Shares in Andes rose by 4% on the news in London. The junior is also listed in Buenos Aires.

The deal should end uncertainty over the LLA-74 exploration contract in Colombia’s Llanos Basin. IOX needs to

provide bank guarantees and to appeal against the National Agency of Hydrocarbons’ decision to terminate the licence. The Cor-6 block has also been halted.

Andes owns more than 100,000 acres (400 square km) of Argentina’s Vaca Muerta shale formation. Last month, the company tested the VG x-1 well in the Vega Grande oilfield in the Neuquen Basin in Mendoza Province.

“This production test in Vaca Muerta is a meaningful advance in the development of our shale acreage,” said Jotayan. “It de-risks 30% of Andes' net acreage in Vaca Muerta, more than doubling our already de-risked acreage, and is the first Andes-operated intervention and production test in Vaca Muerta.”�

The low oil price is the catalyst for a proposed round of cost cutting at Pemex’s Exploration and Production (E&P) unit.

Gustavo Hernandez, the head of state-run had ordered 60 billion pesos (US$4 Pemex E&P, said Mexico’s finance ministry billion) worth of budget cuts, or around 14% of the budget approved by the legislature in October.

The budget was set when oil prices were above US$79 per barrel for Pemex’s crude mix. On January 23

Pemex’s blend closed at US$38.03 per barrel, its lowest level since January 2009. A further US$0.08 drop would see it at the lowest price since September 2004.

Enrique Lozoya Austin, Pemex’s director general, recently revealed that the company’s average lifting price was US$23 per barrel, meaning that its core oil production and export business remains in profit.

This is an important point as Mexico looks to attract investment in oil E&P as

part of the country’s energy reform. Pemex is farming out its more challenging assets via joint ventures with private companies, including deepwater projects that have yet to produce any oil. The company is eager to reassure potential investors that there is still money to be made despite the bearish price environment.

In related news, Pemex has been cutting outsourcing contracts.�

PIPELINES & TRANSPORT

INVESTMENT

Andes bolsters Colombian position with IOX purchase

Pemex outlines cost-cutting plans





Oceanografia, which was taken into receivership by the government at the start of last year, lost 25 of the 27 contracts it had held with the state-run company. Oceanografia collapsed suddenly after fraud was discovered in its loan guarantees. The government stepped

in because a default on some of its contracts would have brought Pemex’s offshore operations – responsible for more than half its 2.35 million barrels per day of crude production – to a standstill.

Since then, Pemex has had the time to restructure its process so that it no longer

relies so heavily on the company. The company has also allowed contracts with oil well services company Protexa to expire ahead of the anticipated influx of private suppliers in the post-reform market.�

The oil price collapse has given Petrobras’ downstream operations a lift. Subsidised fuel prices are expensive for the state-run Brazilian company when oil prices are high. However, the fall in price has not been passed on to Brazilian motorists, meaning gasoline at the country’s pumps is now 69% more expensive than abroad, with diesel 53% higher. This is worth around US$1.12 billion extra per month to Petrobras, said a study carried out by CBIE, a local consultancy. Two thirds of the boost will come from diesel, with the rest deriving from gasoline sales.

Fuel prices in Brazil are set by the government, which must authorise any increase or decrease. Until the recent price drop the government held domestic prices below international rates in a bid to contain inflation. This meant Petrobras

lost money when selling imported petrol and diesel.

The dynamic has reversed now, with the government apparently happy for motorists to subsidise the rebuilding of Petrobras’ finances. The company has stepped up imports of refined products in order to take advantage of the price differential swinging in its favour. The company has raised imports of gasoline from 34,000 tonnes in May 2014, when oil cost US$105 per barrel, to 249,000 tonnes in December, when the cost of a barrel was just US$50.

It is not all positive news for Petrobras, however. The price crash has forced a wave of retrenchment at the company, with some of its projects poised to become loss-making if prices remain low. The company is expected to announce investment cuts as it seeks to

restore confidence in its financial health. Up to 30% of spending could be gutted from its rolling US$221 billion five-year investment plan. The company is also preparing to write down the value of a string of refineries at the centre of the multi-billion dollar corruption scandal that has engulfed it in recent months. The write-down could amount to as much as US$4 billion, which as well as the refineries would include two gas pipelines. Details are anticipated when Petrobras finally releases its third-quarter results. These are due to be signed off this week after a delay of several months caused by the company’s auditor PricewaterhouseCoopers refusing to certify results in light of the corruption allegations.�

Oil companies in Colombia have warned that production will fall this year in response to oil price crash. The decline should become apparent next year and continue until the oil price recovers or the government provides support to producers.

"Starting in 2016, a steady slowdown in the country's crude production is expected. By 2018, this could end up meaning a reduction of 220,000 barrels

per day," said the president of the Oil Producers Association (ACP), Francisco Lloreda.

The country produced 1.007 million barrels per day in December, according to Energy Ministry data. The ACP anticipates this year’s production will be 1.02 million bpd before falling to 900,000 bpd in 2016.

The ACP has placed caveats to its predicted increase in 2015 output. For

this to occur, it would require "no attacks on oil operations, no community blockades, no delays in environmental permitting, and no major fall in the oil price in the second quarter”.

The government and ACP are discussing measures, such as faster tax rebates, to ease the impact of the oil price collapse on producers.�

INVESTMENT

PERFORMANCE

Price crash creates downstream uplift for Petrobras

Colombian oil output forecast to fall





Colombia’s producers also expect to draw in their seismic exploration to 14,000 square km in 2015 from 32,000 square km last year. State-run Ecopetrol has shaved a third off this year’s exploration budget in comparison to 2014. Exploration spending this year has been slated at US$503 million.

"To the extent you explore less, unfortunately this is going to adversely affect the incorporation of oil reserves, which is essential for the country," said Lloreda. Colombia had estimated

reserves of 2.377 billion barrels at the end of 2014, according to US Energy Information Administration (EIA) data, which would be sufficient for approximately seven years’ production at current drilling rates.

The ACP’s approximately 80 members plan to step up drilling of exploratory wells from 113 in 2014 to 126 this year. This improvement remains below the 230 wells the ACP believes are required to maintain reserves at their current level. Furthermore, drilling plans could be

revised if the oil price remains subdued. The oil industry plays an important

role in Colombia’s economy. A US$1 drop in the price of oil equates to a 300 billion peso (US$123 million) fall in income for the country’s budget.

"If the price of crude stays at US$50 per barrel, that would mean a 15 trillion peso (US$6.2 billion) decline in revenue for Colombia," Lloreda was quoted as saying by Latino Fox News.�

Argentina launched an incentives programme last week to encourage companies to sustain oil production in the face of dwindling prices.

“We must all do our bit to continue on the path to energy self-sufficiency,” Economy Minister Axel Kicillof said at a meeting with producers, union bosses and governors of oil-producing

provinces. He said that if companies maintained or increased production compared with their output statistics from the fourth quarter of 2014, they would be awarded a subsidy of US$3 per barrel in addition to what they receive on their sales.

For oil shipped abroad, the subsidy would be US$2 per barrel if the producer

sustained exports at 2014 levels and US$3 per barrel if they achieved an increase, Kicillof said.

The incentives are designed to encourage companies to continue investing in rebuilding oil production that has slumped by 37% to 530,000 barrels per day from a record 847,000 barrels per day in 1998 on weak exploration, limited finds and maturing reserves.

Many companies reined in investment after the government started controlling prices at low levels to spur consumption and make industrial production more competitive. Yet after energy shortages started to hit in 2004, Buenos Aires amended its price controls, allowing them to rise with the aim of recovering the energy independence it lost from the late 1990s and early 2000s. This has spurred a recovery, with some companies like YPF boosting output. The state-run company raised its oil production by 8.7% year on year in 2014. Yet with oil prices down by more than 50% since June 2014, the governors of oil-producing provinces have expressed concerns about sagging tax revenue and job losses in the sector as companies slow exploration and production.�

PERFORMANCE

POLICY

Argentina offers incentives to spur oil production





Announcing the new incentives, Kicillof said the state was doing what must be done so “the oil industry doesn’t shrink”.

The government already has set prices

at between US$63 and US$77 per barrel for the domestic market in a bid to sustain drilling activity, and it has cut to 1% from 33% the tax on oil exports to keep exporters active. “We don’t want

any drilling rig to come out of activity,” Kicillof said. “Our main goal for this year is to sustain the activity and production of the sector.”�

Venezuelan President Nicolas Maduro said he was considering raising the price of gasoline as Caracas looks to close a growing fiscal deficit exacerbated by the oil price crash.

Vice President Jorge Arreaza is to present the government’s proposal to the National Assembly at a later unspecified date, whilst government officials will also meet with representatives from the transport sector, Maduro said.

He gave no indication what the new price might be. At US$0.01 per litre, Venezuela’s heavily subsidised gasoline is the cheapest in the world. Maduro said that any new price should cover the cost of production.

PDVSA’s former president Rafael Ramirez repeatedly said the subsidy cost the state-run oil company about US$12 billion per year.

Maduro has been toying with a possible price hike since early 2014. He withdrew the proposal after the country’s

opposition criticised any increase, demanding a full accounting of the government’s budget and calling for an end to oil giveaways to Cuba and other allies before raising petrol prices. Venezuela has not raised domestic gasoline prices in nearly 18 years, which means they could rise by up to 30 times if the government is serious about addressing the worsening deficit. The low cost of gasoline has come under greater scrutiny, especially as consumption of the fuel soars and Venezuela’s refining capacity is squeezed after a series of accidents at its four main domestic refineries. An August 2012 fire and explosion at the Amuay refinery left more than 40 dead. Production at the plant still has not recovered to pre-accident levels, leading Venezuela to increase imports of gasoline and gasoline components from the US and other overseas suppliers. PDVSA has to pay international prices

for such imports and then effectively gives the fuel away at the pump. Maduro’s remark that prices could rise looks like a political gambit designed to see how the public react to the proposal. Fuel price rises are controversial in Venezuela and can lead to rioting, as was the case in 1989, when hundreds of people died.

When Maduro made a similar proposal last year, the country’s military warned him not to, citing the threat of violent protests that an increase might spark.

Although such a move makes economic sense and would help Venezuela to balance its books, NewsBase remains wary that price rises will occur soon. Maduro’s approval rating is now around 25%, and with congressional elections looming later this year, the president and his party may be reluctant to take a controversial step that would cost them votes.�

Qatar could help finance the construction new refineries for state-run PDVSA, Venezuelan President Nicolas Maduro said last week.

The president, who visited Qatar earlier this month, said that several unidentified Qatari Banks had tentatively offered funding. He did not give details about possible project financing.

PDVSA’s shaky finances have delayed the construction of three new domestic refineries, plus upgraders for the

company’s extra heavy oil joint ventures. The three new domestic refineries –

Cabruta (400,000 barrels per day processing capacity), Batalla de Santa Ines (50,000 bpd) and Caripito (50,000 bpd) – have been under consideration for the last decade but their construction has been delayed repeatedly.

PDVSA wants to complete them to increase the value of its petroleum exports. The company has six domestic refineries but many have been in use for

more than 50 years and require considerable maintenance in order to function.

Accidents and shutdowns are common. In August 2012, PDVSA’s Amuay refinery was hit by a fire and explosion which killed more than 40 people and shut down large parts of the plant. The fire occurred because of poor maintenance and insufficient spending on safety procedures.�

POLICY

Maduro moots petrol price increase

Qatar cited as potential downstream investor in Venezuela





Both the El Palito and Puerto La Cruz plants are often shut down as well, especially during the rainy season when thunderstorms can result in lightning strikes.

PDVSA also needs upgraders to strip coke and minerals out of its extra heavy crude. These units are necessary for the company to boost output from heavy oil belt, or Faja. The upgraders prepare the oil, which has the viscosity of tar, for traditional refining.

Each upgrader carries a price tag of several billion US dollars, depending on

its size and specifications. Although PDVSA has pledged to boost output from the Faja, the lack of upgraders is undermining its plans.

The lack of upgraders has also forced PDVSA to import light crude from Algeria, Russia and others to mix with its extra heavy crude as a diluent.

NewsBase expects Qatari banks to be reluctant to advance PDVSA funds to invest in its refineries without concrete promises that the government will not hijack the money to finance its social programmes or cover current account

expenditures. PDVSA would also struggle to pay back the banks, unless they accepted oil in lieu of cash.

Qatar has a negligible presence in the South American country. Companies from the emirate previously considered investing in Venezuela’s offshore natural gas fields, but such plans never came to fruition. NewsBase believes the proposed refinery funding could suffer the same fate. Maduro’s announcement appears to be political window-dressing rather than a pre-cursor to meaningful foreign direct investment.�

Argentina’s state-run YPF is gearing up to launch new exploration work in the Chaco-Parana Basin in the province of Chaco.

YPF’s director of new exploration, Ricardo Caligari, met with representatives from the Chaco provincial government to present his company’s plans last week. The meeting followed the signing of an agreement by YPF and the province on December 10 that paves the way for the exploration of a 670,000-square km area in the basin. The plan will now be sent to the provincial legislature for a vote.

Though few specifics have been made public, Marcos Verbeek, Chaco’s

minister for infrastructure and public services, said: “Exploration work in the province will take place, to begin with, in areas of Las Brenas and Charata. It should be noted that it is possible that YPF may request permission from the province to conduct research in other areas of Chaco’s territory.”

The YPF-Chaco agreement will begin with the processing of a significant amount of pre-existing 2-D seismic data from the Chaco-Parana Basin, as well as the acquisition of new gravimetric data. YPF also said it would “apply surface gas analysis techniques and study in detail the columns from the seven boreholes drilled in the province”.

The Chaco-Parana Basin spans northeastern Argentina, as well as sections of Paraguay, southern Brazil and eastern Bolivia.

The initiative falls under YPF’s Argentina Exploration Plan, which is being spearheaded by the company’s CEO Miguel Galuccio. The plan is designed to reverse the country’s declining oil and gas output through the aggressive exploration and development of new resources, including the Vaca Muerta shale play.

The Chaco plan falls under the category of Frontier Explorations.�

Gas y Petroleo del Neuquen (GyP) is to launch a shale exploration project with Germany’s Wintershall in March.

GyP, the state oil company of the province of Neuquen, said the companies

would drill six wells – two vertically and four horizontally. The wells are to be sunk to establish the commercial potential for tight oil and shale gas production at the Aguada Federal block

in the province, which is home to the Vaca Muerta shale play.

GyP said the drilling programme required “intensive investment,” without specifying how much would be spent.�

POLICY

PROJECTS & COMPANIES

YPF prepares Chaco-Parana Basin exploration plan

GyP, Wintershall to start Argentina shale drilling in March





Initial reports suggested investment of US$100 million would be necessary to sink the six wells. A subsequent 30-well production pilot would start in 2016 with spending of US$150 million. If successful, the next phase would be to move the project to mass production, which would involve drilling 320 wells over ten years and investment of around US$3.3 billion.

GyP, which has rights to the block, farmed in Wintershall as the operator in a 50-50 partnership. The companies are to target a 97-square metre area of the Vaca Muerta, which has already attracted major investors such as US super-major Chevron. It is working with state-run YPF to produce oil and gas from the shale play. Together they produced 35,000 barrels per day in the fourth quarter of 2014, most of which was light crude.

Such progress has enticed others to follow, such as Malaysia’s Petronas and now Wintershall.

GyP says that since signing the deal with the German operator it has been laying the groundwork for financing the

project. A key component, it said, has been a deal it signed with YPF to swap its shares in two blocks with shale potential for six blocks with conventional production that were previously owned by the state-run firm. As of January 1, GyP said it had been generating revenues of US$116,000 per day from the sale of about 500,000 cubic metres per day of gas. This has provided a positive cash flow for the company. GyP also secured US$41 million in cash and US$41 million in bonds from the YPF swap.

GyP said its next step would be to push forward on separate

shale production pilots with Royal Dutch Shell and Total, which required a combined US$500 million in spending. GyP has also found tight oil and shale gas at another project in the Vaca Muerta play in conjunction with ExxonMobil.�

Toronto-listed independent Americas Petrogas has provided a production update on the four appraisal wells it drilled last year in its Medanito Sur Block in Argentina’s Neuquen Basin.

Average oil production at the Medanito Sur block, which is fully operated by Americas Petrogas, reached close to 1,440 net barrels per day after the four appraisal wells came on line, the company said. This represents nearly double the average volume produced from the block in the third quarter of last year.

Three of the wells were drilled to assess an extension of the El Calden Este site on the Cuyo formation. During initial testing, the first well drilled at this location “produced, by natural free flow, an estimated rate of 232 bpd of 33 degree

API light crude on a two-inch [50.8-mm] open choke with no wellhead pressure”, the company said. El Calden Este is a conventional block located on the Neuquen Basin’s eastern flank. The fourth well, drilled over the northern section of the El Jabali conventional field in the Tordillo formation, was for the same assessment purposes.

Argentine regulators have set a price of US$77 per barrel for Medanito light crude, the type of oil produced in Americas Petrogas’ areas, for the first quarter of 2015. Companies working in Argentina are insulated from global markets, as the federal government artificially dictates the price of oil in the country. The policy was put in place to keep prices at the pump low for consumers.

Following the announcement Americas Petrogas shares were up 8.1% on the Toronto Venture Exchange after losing 90% of their value over the past 12 months. The company owns both conventional and shale and tight sands oil and gas in the Neuquen Basin in Argentina, and works with joint venture partners that include US super-major ExxonMobil and Argentina’s state-owned YPF.

In December the company said Neuquen Province had granted it a four-year evaluation period, which is due to end in the second quarter of 2018, for the Los Toldos I, II, III and IV blocks in the Vaca Muerta shale formation. The company will drill two wells in Blocks I and II and acquire 200 square km of 3-D seismic for Blocks III and IV.�


Americas Petrogas brings four Neuquen wells on line





BPZ Energy announced last week that initial output from its Albacora A-27D development well in Peru averaged approximately 1,135 barrels per day of oil.

Associated gas is being re-injected into the well, which is located at the offshore Block Z-1, given the lack of a local market for the fuel, Houston-based BPZ said.

The well is “producing better than previous recent wells” owing to additional pay opened in the Lower Zorritos sands, the firm added.

Given the promising results at A-27D, BPZ said the new Albacora A-22D development well was spudded in mid-January. The targeted measured depth of the A-22D well is 14,445 feet (4,400 metres) and results are due in April.

In addition, the nearby Corvina CX15-

8D development well is currently being completed, with results expected next month, BPZ said.

The firm has a 51% working interest in Block Z-1 with its joint venture partner Pacific Rubiales Energy, which holds the remaining 49%.

In June, BPZ indicated it intended to increase its exploratory drilling campaign at the Albacara field. In November, it said the company’s current development plan was to work on three Albacora wells and three Corvina wells.

Crude production at offshore Block Z-1 has doubled to about 6,000 bpd since Pacific Rubiales bought a stake in 2012, the Canadian firm said last year. BPZ has licence contracts covering 1.9 million net acres (7,689 square km) in four blocks located in northwest Peru. Operations at these blocks are at various

stages, from early exploration to production. The Corvina and Albacora fields are the firm’s core producing assets. Along with Block Z-1, it has 100% working interests in onshore Blocks XIX, XXII and XXIII in Peru, which cover a total area of 1.6 million acres (6,475 square km). In November BPZ awarded a contract to T-Rex Engineering and Construction to build two drilling platforms for the Delfin and Piedra Redonda prospects in Block Z-1. The platforms are due to be installed by the middle of 2015. Peruvian oil production last November climbed by 9.2% year on year to 69,900 bpd, according to the latest monthly data from Peru’s national oil and mining society.�

POLICY

Price risk for T&T There are no guarantees major projects in the energy sector will continue given fluctuating oil prices, chairman of the Energy Chamber and president of BHP Billiton T&T Vincent Pereira said. He said major global oil and gas companies were cutting their capital investment budgets and cancelling major projects. “So far, the major projects in T&T have not been impacted but with expenditure constantly under review there is no guarantee that this will remain the case,” Pereira said. “Only sustained investment in upstream gas delivery every year, will allow us to deliver the 4 bcf of gas per day that is required,” he said.

GUARDIAN T&T, January 27, 2015

New Venezuela forex platform to free float A new foreign exchange platform for Venezuela to be created as part of the three-tiered currency control system will have a free-floating exchange rate, local media reported, citing the country’s planning minister. President Nicolas Maduro this week announced plans to change 12-year-old currency controls by turning the government-run auction system known as Sicad II, which provides the weakest of the three rates, into a new platform operated by brokerages. “It will be an open market and the vision is ... that there will be a free floating (exchange rate) through public and private brokerages,” said Planning Minister Ricardo Menendez.

REUTERS, January 23, 2015

COMPANIES

Gran Tierra reports output of 25,000 boepd Gran Tierra Energy, a company focused on oil exploration and production in South America, provided an operations update. Oil and natural gas production from continuing operations averaged approximately 25,200 boepd gross working interest in 2014, or approximately 19,300 boepd net after royalties before adjustment for inventory changes and losses, or approximately 18,500 boepd net after royalties adjusted for inventory changes and losses. Approximately 99% of the 2014 production is oil, with the balance consisting of natural gas.

INSIDE TRADE, January 26, 2015


BPZ pushes ahead at Peru’s Block Z-1

NEWS IN BRIEF





YPFB head dies amid corruption scandal The CEO of Bolivian state oil company YPFB has died from cardio-respiratory arrest at a clinic in Santiago, President Evo Morales said. Carlos Villegas died nearly three weeks after undergoing surgery for cancer of the oesophagus. “It’s a huge loss. An honest man, hard to replace,” Morales said. Villegas was in an induced coma for several days after the operation in Chile, where he travelled on January 1 amid allegations of corruption involving him and former official Selva Camacho. Camacho, who is under arrest, worked as Villegas’s top communications and public affairs assistant.

LATINO FOX NEWS, January 25, 2015

Shell set to offload Brazil fields after price rout Shell, the second-largest oil operator in Brazil, is selling a stake in one of its crude-producing projects in the country to HRT, according to a regulatory filing. HRT, based in Rio de Janeiro, agreed to buy Shell’s 80% stake in the Bijupira and Salema fields, an offshore venture that started production in 2003, according to a Brazil filing. HRT will boost output to more than 30,000 bpd, and also is buying the FPSO Fluminese ship. The acquisition will be financed by HRT’s first bond sale and a loan led by a Glencore unit. HRT did not provide a purchase price. Oil companies are retreating from high-cost projects and selling assets across the globe as crude’s seven-month slump of more than 50% erodes profit. This month, producers including Statoil, Tullow Oil and Premier Oil have delayed projects or cut exploration spending. For Shell, declining output in Brazil as reservoirs fade has increased the cost of extracting the remaining crude. The deal is the second Brazilian asset sale in a year for the Hague-based company after agreeing to sell 23% of

the Parque das Conchas project to Qatar Petroleum International for about US$1 billion. Shell completed US$11.6 billion in divestments in the first nine months of 2014 as it seeks to rein in costs, the company said October 30.

BLOOMBERG, January 20, 2015

PetroRio buys Bijupira and Salema field stakes PetroRio, the new brand of HRT Participacoes em Petroleo has purchased 80% of the rights and obligations of the concession contracts for the Bijupira and Salema Fields with Shell Brasil Petroleo and Petrobras holding the remaining 20%. The transaction also involved the acquisition of, among other assets, the ship FPSO Fluminense, used in the production process of both fields, with storage capacity for 1.3 million barrels of oil. Only upon approval from the regulatory agencies, the company will become the operator of the fields. With this transaction, PetroRio will become one of the largest independent producers in the country, operating an average of more than 30,000 bpd of oil. This represents a three-fold increase in current production and positions PetroRio as one of the most important emerging companies in Brazil’s oil industry.

PETRORIO, January 21, 2015

Former party leader targeted by Petrobras investigators Former president Luiz Inacio Lula da Silva’s ex-chief of staff has come under scrutiny from prosecutors investigating a massive kickback scandal at Brazil’s state oil giant Petrobras, local media reported. Jose Dirceu, Lula’s onetime right-hand man, was convicted in 2012 and sentenced to more than seven years in prison for a corruption scandal involving payoffs to Brazilian lawmakers. Globo television network reported that investigators determined three

construction companies implicated in the separate US$4-billion Petrobras scandal made US$1.3 million in payments to a consulting firm Dirceu owned with his brother. The construction companies, Galvao Engenharia, OAS and UTC Engenharia, are suspected of being part of a cartel that made under-the-table payments to Petrobras directors in return for lucrative contracts. President Dilma Rousseff chaired Petrobras from 2003 to 2010, coinciding with a period the kickbacks were being taken. She denies any knowledge of the scheme.

AFP, January 24, 2015

Rex completes drilling in Colombia Rex International has announced its 98.4%-owned licence-holding company Caribbean Rex has completed the drilling of three wells in the South Erin Block in Trinidad & Tobago. The wells were drilled as part of a three-well drilling programme that Caribbean Rex started in the South Erin licence in May 2014. Oil-bearing sands were encountered in all wells, two of which are deemed to be commercial with substantial net pay sands. Caribbean Rex will consider putting the wells on production as soon as testing has been completed and approvals have been granted.

RIGZONE, January 20, 2015

Ivanhoe trims Ecuador activities as partnership stalls Canada’s Ivanhoe Energy is to scale back its activities in Ecuador. Lower oil prices and a delay in discussions with its partner on moving ahead with plans at the Block 20 heavy-oil project are behind the company’s decision. Block 20, located 201 km southeast of Quito, contains the Pungarayacu oilfield, which holds an estimated 4.5-7 billion barrels of oil in place. Ecuador’s state-run oil company Petroproduccion drilled 26 wells in the field during the 1980s.�

NEWS IN BRIEF





Since 2008 Ivanhoe has operated the field, however it has experienced technical difficulties caused by the heavy nature of the oil. Ivanhoe previously enlisted an unnamed national oil company to review Ivanhoe’s investment in Block 20, the Canadian firm said. This resulted in an agreement in principle, which was still subject to the approval of the Ecuadorian government, for the national oil company to farm in to the project as the majority partner and operator of Block 20. Ivanhoe and the national company presented a joint proposal to the Ecuadorian government in March of last year. In mid-May, the Ecuadorian government said it was ready to move forward with final project negotiations. However the NOC, which had initially expected to complete its internal review by the end of the third quarter of last year, has since told Ivanhoe that “the sharp decline in oil prices and other factors have delayed its review, making a final decision to proceed with Block 20 not possible at this time,” Ivanhoe said.

IVANHOE, January 26, 2015

Moody’s assigns A3 rating to Pemex’s US$6-billion notes Moody’s Investors Service has assigned an A3 global local currency rating to Mexico’s Pemex upcoming issuances US$1.5 billion 3.5% senior unsecured notes due 2020, US$1.5 billion 4.5% senior unsecured notes due 2026, and US$3 billion 5.625% senior unsecured notes due 2046. Proceeds will be used to finance capital investments. The rating outlook is stable. The ratings are based on Moody’s view that despite the significant changes arising from the new energy law, Pemex will remain closely linked to the government of Mexico, which will continue to provide strong support, given the company’s importance to the government’s budget, to the oil sector and to the country’s exports. In the short to medium term, Moody’s does not expect any material reduction in Pemex’s tax burden and its debt amount is likely

to rise to fund higher capital expenditures. However, its managerial and budgetary autonomy will increase, improving its efficiency. Pemex’s underlying baseline credit assessment (BCA) at ba1 is based on prospects of stable production and reserves over the medium-term, as well as Moody’s outlook that continued high government taxation in conjunction with the company’s higher capital spending will lead to higher debt levels and financial leverage. For these conditions to materially improve, the government will have to increase other sources of revenues and reduce the call on Pemex’s earnings, and the company will have to increase production and earnings from new investments and joint ventures with new industry entrants; this process will be a gradual one.

MOODYS, January 25, 2015

Pemex sustains profits despite price plunge Despite a plunge in oil prices, Mexico’s Pemex is holding out as one of the world’s most profitable oil companies thanks to low production costs, Excelsior newspaper reported. The state oil company is continuing to pull a profit at mature, onshore and shallow water projects even though Mexican oil prices have dropped 63% to US$38 per barrel from US$102 in June 2014, Pemex data shows. This is largely because Pemex is producing at US$9.25 per barrel at its mature fields, leaving a healthy profit margin. Onshore costs are running at US$10.67 per barrel, and in shallow waters US$13.39. Pemex has not altered its investment plan for this year, even as many companies around the world make cuts. Pemex plans to invest US$27.3 billion this year.

EXCELSIOR, January 26, 2015

PDVSA set for cash injection Citgo Petroleum is planning to raise US$2.5 billion and transfer the funds to

its cash-strapped corporate parent, state-owned PDVSA, according to a person with knowledge of the matter. The US oil refining and marketing unit of PDVSA is seeking to sell US$1.5 billion of bonds and obtain a US$1-billion loan, according to the person, who asked not to be identified. While Citgo’s debt ratings were cut to six levels below investment grade by Moody’s Investors Service, it is three steps higher than the government’s. The government said in October that it had scrapped a plan to sell the Houston-based company.

BLOOMBERG, January 20, 2015

PDVSA debt grows adding pressure on servicing Venezuelan state oil company PDVSA’s consolidated financial debt rose 6.3% in 2014 compared with the previous year to reach US$46.2 billion, the company said, a figure that does not include debts to providers. PDVSA this year will have to pay some US$6 billion in debt service and around US$5.5 billion in 2016, according to analysts, boosting pressure on its finances amid a tumble in crude prices. The figures did not include new details on its debt to contractors. PDVSA’s trade accounts payable, an indicator of debts to service providers, in 2013 rose 28% to reach US$21.4 billion.


OIL

IMF says Bolivia can weather weak oil According to the International Monetary Fund, Bolivia can weather the impact of the fall in international oil prices although it will affect economic growth this year. According to the document, the decline in crude oil prices will also affect “the growth perspectives in Bolivia, Colombia and Ecuador,” La Razon reported, citing AFP.�

NEWS IN BRIEF





According to the IMF “the fiscal balances will suffer due the reduction in oil income ... But the initial positions are sufficiently solid to weather the impact.”

LA RAZON, January 22, 2015

Mexican oil production declines for tenth year Mexico’s state oil company Pemex said its oil production fell in 2014 compared with 2013, stretching the decline to a 10th consecutive year, El Universal newspaper reported. The company extracted an average of 2.43 million bpd in 2014, down 28% from a record 3.38 million in 2004. In 2014, output dropped 3.7% from 2.52 million in 2013, according to company data. The production last year was the lowest since 1986, when it averaged 2.41 million bpd.

EL UNIVERSAL, January 20, 2015

Optimism that Petrotrin will recover with oil price Petrotrin chairman Lindsay Gillette is optimistic the company will turn around within the next 12 months since global projections show oil prices will rally between US$65 to US$75 this year. Gillette said he hopes oil regains “its US$60 per barrel US$70 per barrel (price)” on international markets. “If that occurs then we could start coming back to some sort of normalcy,” he said. Gillette admitted that even if prices rally Petrotrin still faces other challenges, including the impact of shale oil and shale gas in the United States and other geo-political issues affecting energy.

T&T GUARDIAN, January 22, 2015

Latest LGO well keeps up success LGO has announced that its most

recently completed well, GY-669, at the Goudron Field in Trinidad was perforated on January 23 in the C-sands and is now flowing at a stabilised, but highly restricted, rate of 365 bpd of 41 degree API water-free oil through a 10/32-inch choke with an average well-head flowing pressure of 1,900 psi. Over the last 48 hours the well has flowed at an average rate of 445 bpd. The initial calculated open-hole flow rate of the well is approximately 1,000 bpd. LGO’s chief executive Neil Ritson said: “Preparations for the 2015 drilling campaign at Goudron are now well underway.”

OIL AND GAS TECHNOLOGY, January 26, 2015

Venezuela’s oil exports fall Venezuela’s oil exports fell to 2.33 million bpd in 2014, from 2.43 million the previous year, Oil Minister Asdrubal Chavez said. Production averaged 2.9 million bpd last year, he added. OPEC member Venezuela, which is reeling from the plunge in global crude prices since mid-2014, is counting on joint ventures in the heavy-crude Orinoco region to boost output in future years. Production from the Orinoco Belt should rise to 1.37 million bpd by the end of 2015 from an average of 1.25 million last year, Chavez said. “Right now we’re at 1.3 million a day.”


Low oil price to hit Venezuela hardest Venezuela’s economy will decline more than any other in the region as a result of the drop in oil prices, analysis from the International Monetary Fund found. The Central Bank of Venezuela in December said the collapse in oil prices was in part to blame for a 2.3% drop in third quarter gross domestic product. That marked three straight quarters of decline for the OPEC member and a

formal slip into recession. Oil prices have dropped more than half since June and are down 20% since the Central Bank’s announcement.

UPI, January 22, 2015

GAS

Petrobras TPO start up gas plants to prevent blackouts Despite denying that there is a lack of energy in the country, Minister of Mines and Energy Eduardo Braga has said that Petrobras will restart some of its thermal power plants by February 18 to complement energy supply for the southeast. The plants were closed for preventive maintenance and will return to the system earlier than planned. Energy from these plants is more expensive and their use is likely to add to electricity bills, which already account for a total of US$8.8 billion. Measures will also be taken to increase energy transfer from the Itaipu dam. In total, the southeast will receive another 1,500 MW. According to Braga, the aim is to guarantee supply until the problem in the North/South line, one of the causes of recent power cuts in 11 states as well as Brasilia, is completely resolved. Of Petrobras 22 power stations, 16 are reportedly suffering problems.

FOLHA, ESTADO, January 21, 2015

Work to expand Camisea pipeline to begin in early 2016 Work to expand the Camisea pipeline, which is operated by Transportador de Gas del Peru, will begin in the first quarter of 2016. The expansion will make it possible to increase the amount of natural gas sent to Lima from 314 mcfd to 450 mcfd, according to Energy and Mines Minister Eledoro Mayorga.

ANDINA, January 19, 2015

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