Frontier land: South America’s emerging nation16 June 2016
After years of minimal activity and lacklustre investment, Uruguay’s offshore industry is finally gaining momentum following spudding of the country’s first offshore well by ExxonMobil and Total last year. With BG and Tullow Oil also holding interests in the region, Uruguay is being touted as South America’s newest offshore frontier. IHS analysts Michael Dyer and Claudia Pessagno share their expert insights on Uruguay’s fledgling offshore industry with Heidi Vella-Starr.
In November 2015, Uruguay's state-owned oil company ANCAP announced that ExxonMobil had acquired a 35% stake in an oil block off the country's coast. The US company had teamed with France's Total, which had been operating in the block and carrying out seismic surveys since 2012, to spud Uruguay's first offshore exploratory well 400km from the capital of Montevideo at a depth of 3,400m.
Previously, major players such as BP and Petrobras had pulled out of Uruguay offshore, with BP stating it was going to prioritise other 'low risk' projects amid falling oil prices. Marking a turnaround for the region, Total and ExxonMobil begun drilling in Block 14 in the first half of 2016 as part of a $200-million investment from both companies.
Will other companies with exploration rights offshore Uruguay follow suit or will the record low oil price continue to keep them away? Heidi Vella-Starr speaks to IHS analysts Michael Dyer and Claudia Pessagno to find out more.
Heidi Vella-Starr: Why have Uruguay's offshore oil andgas reserves not been developed before?
Michael Dyer: There are several reasons. The first is that there have been few successful wells in the South Atlantic basins south of the Walvis Ridge; this includes the African basins as well as the South American basins.
Until recently, there have been very few wells drilled in these southern South America basins. From the Santos Basin to the Falkland Islands, there were approximately 50 dry wells, all on the shelf, and only two in Uruguay. As a result, the area was perceived as being very high risk. From development in the Brazilian Campos and Santos basins it was known that the deep water held the larger potential prospects and a great source rock was known, the Lagoa Feia.
The Uruguayan basins essentially were very high risk because companies did not have any idea of the petroleum systems that may be active there in the deep water. The reason for this was the limited amount of very old 2D seismic data, plus the two dry wells drilled on the shelf. This changed in about 2007 when ANCAP [Uruguay's state-owned energy company] began contracting modern-spec 2D seismic data and now the basins are well covered with modern seismic data resulting in a much greater understanding of the prospective petroleum systems in the two offshore basins.
Claudia Pessagno: Also, in recent years, investors have been lured by more exciting and prolific exploration, and development opportunities in Latin America, notably the pre-salt play offshore Brazil, but also renewed interest in Argentina - specifically its unconventional potential - and also interest in Colombia, which boasts a very friendly investment climate.
What are Uruguay's estimated offshore reserves?
MD: The estimated reserves for Uruguay are very speculative at this point until Total drills its significant wildcat later in 2016 and actually obtains data regarding the petroleum systems in the deep water.
For now, I estimate, based on the US Geological Survey estimates of the Pelotas and Salado-Punta del Este Basin - the two basins offshore Uruguay - a range of one to two billion barrels of oil (bbo), and 3-5tcfg and 12-20tcfg of gas, and 300-500MMbc.
CP: I would take whatever oil and gas resource numbers you come across with a pinch of salt. They really don't mean much at this point since so little is really known about the country's potential. Until there is much more drilling and seismic efforts conducted, the potential can't be truly known.
What key challenges does Uruguay's offshore oil and gas industry currently face?
CP: Right now, low oil prices pose the biggest hurdle to investor interest in the region. Companies are further slashing capital spending by significant amounts this year and exploration/frontier activity will be
the first thing to go.
In addition, the exploration risk/scarcity of drilling and data is another challenge; not much is known. Competition with other offshore plays in the region will also be an issue. With the opening of Mexico's oil and gas industry, a lot of companies are going to be interested in the Gulf of Mexico on the Mexican side. That area could be more enticing since it's in a basin that has been proven to be productive and prolific on the US side versus, say, Uruguay.
MD: From the administrative aspect, Uruguay has shown that it has recognised the difficult situation granting the three operators with five blocks offshore from Uruguay Round II a one-and-a-half-year extension to their exploration periods. Also, ANCAP has indicated that for Round III, the contract terms will likely be improved with at least longer exploration periods.
An additional challenge is infrastructure in case the offshore basins are gas prone. This would require building significant gas pipeline infrastructure to the coast.
Why do you think BP pulled out, but Total and ExxonMobil stayed offshore Uruguay?
MD: BP had blocks that were on the shelf, and only a portion of Area 6 and Area 12 blocks were in deep water. It is possible that this area on the shelf and slope do not hold prospects large enough in a low-oil-price environment to justify drilling. The larger prospects are at the base of the slope in the ultra-deep water similar to what has been found offshore north-eastern Brazil, Guyana and West Africa. That is why Total and ExxonMobil are moving forward with their well.
CP: Total and ExxonMobil are more involved in the Latin America region overall, with assets in the Vaca Muerta, La Luna, Brazilian pre-salt. BP, however, has faced a lot of challenges in recent years and its
exit from Uruguay was part of a larger divestment and a shift in strategy, which included focusing on lower-risk projects.
Is corruption a potential risk for foreign oil companies and investors operating in Uruguay?
MD: Uruguay ranks 24th in the world on the corruption index, so corruption is not an issue presently. However, as is the case in many parts of the world where the easy money of oil and gas wealth is generated, corruption seems to creep back in. Brazil is an example.
CP: I think this is always a concern in Latin America - just look at Uruguay's neighbours.
Are you expecting more activity offshore Uruguay from other companies, such as BG Group?
MD: As far as BG Group goes, I think it is waiting for its merger with Royal Dutch Shell to go through and then, with the recent extensions, the company will have until May 2017 to make a decision on whether or not to enter the second exploration period whereby there will be a well commitment. I think it will depend a lot on the state of the world industry, the results of the Total well, and the combined BG-Shell company and its new objectives as to whether or not it enters the drilling stage.
Argentine energy group YPF and partner GALP Energia Group have commitments to drill up to two wells by October 2016 but there have been no reports of any plans, so I am not sure what will happen there. Perhaps they will also seek an extension. Tullow Oil just needs to wait for the results of the Total well and then decide by June 2017 whether it wants to proceed to its second exploration period and commit to an exploration well.
CP: In terms of interest from other companies, given the current price climate, we will probably see some companies enter, but most are focusing on what they have and exploration activity, overall, is being curtailed.