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Oil and gas dominate the South American energy picture. Venezuela is home to the world's largest oil reserves, and Brazil's pre-salt offshore fields are one of the more compelling plays in the world right now. With virtually no nuclear presence on the entire continent, expect oil and gas, along with coal, to dominate energy production in the near future.
Renewable energy has a presence in South America, but in light of giant oil discoveries in recent years, the future growth of the industry is anything but predictable. Brazil, once the world leader in biofuels production, gave up its crown to the U.S. in 2006 and has been trailing ever since. Though it remains a world leader, and tops South America by far, biofuels production dropped 15% from 2010 to 2011. Brazil also leads the continent in hydropower generation.
Chile may wind up being the renewables champion on the continent. The country's fossil fuel production isn't particularly impressive, and renewable energy is its only shot at generating power domestically. Though hydro power meets 40% of Chile's electricity needs, 75% of all energy demand is answered by imported fossil fuels. Right now, renewables only meet 4% of Chile's overall energy needs. The country hopes to increase that number to 20%, not including hydro power, by 2020.
South America's coal story overall isn't especially compelling.
Colombia, Brazil, and Venezuela have the only significant coal reserves on the continent. The 11.8 billion tons only comprise 1.4% of the world's total, however. Colombia leads the way in production with an output of 55.8 million tons in 2011. Venezuela and Brazil followed with 6.3 million and 2.4 million tons, respectively.
Venezuela has the largest proven oil reserves in the world, but by most accounts its national oil company, PDVSA, is a mess, and consistently underachieves from a production standpoint.
Overall, the continent holds its own in the world oil game. Here is a snapshot of the region's production from 2011:
Total Oil Production
The story here is Colombia. The country ratcheted up oil production from 529,000 barrels a day in 2006 to 914,000 bpd last year. In an effort to reach its goal of 1 million bpd, the country plans to auction off rights to 115 oil and natural gas blocks this year, presenting an intriguing opportunity for foreign investment.
While Venezuela has the largest natural gas reserves, Argentina is the South American country that produces the most natural gas. The country pumped out 1.4 trillion cubic feet of natural gas in 2010, placing it among the top 25 globally. The country also has what are believed to be the third-largest shale gas reserves in the world, after China and the United States, totaling 774 tcf.
Brazil, Venezuela, Bolivia, and Colombia round out the top five producers on the continent.
While most regions limit the fossil fuel to electricity generation, South America has incorporated it into its transportation infrastructure. There are currently more than 4 million vehicles in service on the continent that run on natural gas, compared to around 125,000 in the United States.
Significant reserves and compelling plays like Brazil's pre-salt fields make South America a tempting locale for energy investment. Doing business with National Oil Companies, however, leaves a lot to be desired.
Take Chevron's (NYSE: CVX ) recent experience in Brazil, for example. Last November, the company reported a small spill in the Frade field 230 miles off the coast of Rio de Janeiro. Chevron acted quickly to stop the leaking well and contain the oil on the surface. The situation was resolved within four days and, while estimates put the spill at around 3,000 barrels, no oil ever reached the shores of Brazil.
A month later, however, the situation blew up as a Brazilian federal prosecutor named Chevron in what would be the first of multiple billion dollar lawsuits. Employees of the company were not allowed to leave the country, and were facing criminal charges.
In April, a federal judge denied a request that Chevron suspend all of its operations in Brazil. Reason may ultimately prevail, but not before expensive litigation and the loss of production from the entire Frade field, which Chevron voluntarily shut down.
Meanwhile, Petrobrás (NYSE: PBR ) , Brazil's NOC that holds a 30% stake in the Frade, had eight small spills last year with little to no protest coming as a result. As one Brazilian attorney put it, "It is easier to complain about the foreigners rather than Petrobras."
Then there is the case of Harvest Natural Resources. The company's share price jumped recently on news that it would be divesting assets in Venezuela. The assets are valuable, but were never really reflected in HNR's share price prior to the announcement because the company could not secure regular payments from PDVSA, Venezuela's NOC.
South America exemplifies a high-risk, high-reward situation, though for some companies, it does not pay to play.
The Brazilian government owns a 55.6% controlling stake in Petroleo Brasileiro. The company has not had a great year, and new CEO Maria das Gracas Silva Foster acknowledged Petrobras' shortcomings when she announced its new five-year plan. Unrealistic production goals, overextended refineries, rising costs, and frequent delays have wreaked havoc on the company's balance sheet. Net income dropped 52% in the second half of 2011, and Petrobras has a long way to go to restore investor confidence.
Chevron just inked a deal to take a stake in some offshore blocks in Suriname in an effort to grow its South American footprint; it already has operations in Argentina, Brazil, and Venezuela. The company is the fourth-largest oil producer in Argentina, and last year, it produced an average of 35,000 barrels of oil and 6 million cubic feet of natural gas per day. In Brazil, Chevron's daily production averaged 71,000 barrels of crude and 28 mmcf of natural gas. Higher still was the company's output in Venezeula, where average rates per day yielded 259,000 barrels of crude and 119 mmcf of natural gas.
YPF (NYSE: YPF )
In April, the Argentine government expropriated Spanish Repsol's stake in YPF and nationalized the oil company. The government now controls 51% of the YPF. The company's oil output has been declining, forcing the country to double its fuel imports to $9.4 billion in 2011. YPF's ADRs trade on the New York Stock Exchange and were down 70% through the first half of the year. The company is Argentina's largest oil producer, and the country certainly has the assets for a turnaround. Shale deposits in the south are estimated to contain at least 23 billion barrels of oil. Whether the government is the right entity to enact a turnaround remains to be seen.
National Oilwell Varco (NYSE: NOV )
NOV has worked to significantly increase its presence in Brazil over the past year. In 2011, the company boosted assets in the country from $32 million to $92 million year over year. The local presence is important because of the rules that govern how an important customer, Petrobras, procures its equipment. The two companies have a nice history, the NOC awarding National Oilwell Varco with drilling packages for seven rigs last year.
Suggestions for further reading:
- Will Brazil's Oil Gambit Backfire?
- Chevron's South American Double Trouble
- Solar Looking Beyond Europe for Future Demand
- Big Change or Status Quo at Petroleo?
- Big Brother and the Oil Company
Get more region-specific analysis on energy investing using the Fool's world map.