The World's Fast-Changing Oil Map: South America

In a previous article, I discussed the rapidly expanding realm of oil and gas exploration and production in North America. While it wasn't long ago that the meaningful fossil fuels production was essentially limited to our continent (including the Gulf of Mexico), the Middle East and North Africa region, Russia, and the North Sea, in recent years Sub-Saharan Africa and South America have increased their petroleum production presence. Beyond that, watch for Southeast Asia -- especially offshore -- and China to be added to the list of active venues almost before you know it.

With that in mind, let's look at South America's energy scene. As has been demonstrated amply by Venezuela and Brazil, the continent sits atop substantial oil and gas deposits. At the same time, however, recent history has demonstrated that development of the continent's reserves -- along with necessary foreign investment -- may well be hindered by a virulent resource nationalism that's thus far been demonstrated to varying degrees by the likes of Venezuela, Ecuador, Argentina, and Brazil.

Four venues to the south
But given the substantial deposits of oil and gas in those countries, let's take a look at each of them:

Venezuela: The land of its recently reelected president, Hugo Chavez, sits at the northern extremity of the South American continent. With proved oil reserves totaling an estimated 211 billion barrels -- a number that has been subject to steady upward revisions -- the OPEC member also resides atop all Western Hemisphere nations in that important category. Today, however, largely as a result of Chavez's nationalistic policies, Venezuela's crude production remains at slightly less than 2.5 million barrels a day, a significant slide from the 3.5 million barrels that it cranked out each day a dozen years ago.

As you likely recall, in 2007 the Chavez regime announced the nationalization of its production in the fertile Orinoco Oil Belt. While three of the effected companies, including Chevron (NYSE: CVX  ) , accepted the governments' nationalization terms, ExxonMobil (NYSE: XOM  ) and ConocoPhillips (NYSE: COP  ) together sought some $40 billion in compensation through international arbitration. A decision on that action is likely to be handed down in 2013.

Argentina: With a current crude reserve estimate of about 2.5 billion barrels and 2011 daily production of just below 750,000 barrels, Argentina is hardly in Venezuela's league. Nevertheless, it ranks as the continent's biggest natural gas producer and its elbows are no less sharp. In May, the Argentine government passed legislation confirming the expropriation of the state-controlled oil and gas firm, YPF. Prior to that, 51% of YPF had been owned by Spain's Repsol (NASDAQOTH: REPYY  ) .

YPF is the country's largest hydrocarbons producer, followed by Pan American Energy, which is jointly owned by BP (NYSE: BP  ) and Bridas Corporation. The latter company is itself half owned by China's CNOOC (NYSE: CEO  ) . Argentina's most promising venue is its Vaca Muerta field, which may contain more than 20 billion barrels of oil equivalent.

Ecuador: The country, which is located on South America's west coast is, like Venezuela, a member of OPEC, despite a production rate below that of Texas and estimated reserves of about 7.2 billion barrels of crude. These days, Ecuador's primary claim to fame involves a two-decades-long, environmentally related round of litigation with Chevron, which has resulted in a currently contested judgment of more than $18 billion against the big California company.

Brazil: It likely won't surprise you to learn that my pick for the nation most worth watching on the South American energy scene is Brazil. While the country's estimated proved oil reserves of about 14 billion barrels obviously are dwarfed by Venezuela's, since 2007 a host of discoveries in the Campos and Santos basins has attracted international attention.

Many of the more compelling discoveries are in the "pre-salt" zone of the Santos Basin, where the now famous Tupi field -- which may contain approximately 6.5 billion barrels of oil equivalent -- was discovered by state-controlled Petrobras (NYSE: PBR  ) , among others, five years ago. Unfortunately for production in a normal offshore time frame, the crude sits nearly 18,000 feet below the surface of the Atlantic Ocean and beneath a thick salt layer.

Tough environment
In addition to Mother Nature's impediments, operations in Brazil have also been hindered by the country's government, which has proven to be every bit as obstreperous as its South American neighbors. In addition to implementing rules that have Petrobras functioning as a required partner in all pre-salt operations, up to 80% of the costs associated with major projects must be filtered through Brazilian suppliers. The latter edict has been made more difficult by the relative "newbie" status of the country's companies, workforce, and infrastructure.

Brazil's powers that be have also come down hard on Chevron, following a spill that amounted to about 3,000 barrels at its Frade field. That compares to 4.9 million barrels unintentionally deposited in the Gulf of Mexico by BP in 2010.

Perhaps in a related vein, Ian Williams, an energy consultant based in Scotland, is less than ebullient about Brazil as a place for foreign operators, at least in the near term. As he says: "... [You] spend a lot of time trying to dissuade companies from going there. It is unbelievably complicated. You don't get your money out." Maybe for that reason, ExxonMobil and Anadarko Petroleum (NYSE: APC  ) have both whittled down their participation in some Brazilian projects.

If you're interested in the energy atmosphere in South America and are on the lookout for some currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." You can get free access to this special report by clicking here.


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