South American countries need positive steps to compete for international funds.

The world oil and gas market is highly competitive, and in recent years, South America has fallen behind in the race to attract investment money from international oil and gas companies.

In short, risks are high and rewards tend to be low, and that's not an attractive combination for companies with money to spend, according to Michael E. Humphries, director of oil & gas, with Taylor-DeJongh.
In 1997, for example, Colombia had the Cusiana-Cupiagua complex on stream and the nation saw a high level of exploration and development. Now, the political risk of operating there has discouraged some investors, even with improved contract terms.

In the same period, Bolivia moved from limited investments in domestic opportunities and new gas exports to Brazil to recent political problems that are impeding gas export plans and making investors cautious.

Argentina was extremely active in 1993 and was establishing itself as the gas supplier for the Southern Cone of South America. Today, the economic collapse makes investment returns uncertain, at least in the short term.

Venezuela was a land of opportunity in 1997, with the third bid round scoring a success with investors and government policies pointing to an open gas sector for foreign investors. Today, President Hugo Chavez has the upper hand, but he's still struggling with opponents after booting 18,900 of the 40,000 Petroleos de Venezuela SA (PdVSA) employees out the door. That struggle has severely restricted the flow of foreign capital into the country. Even the tracts on the 38-Tcf Deltana Platform offshore Venezuela found few bidders willing to put up the needed capital.

Brazil was just opening its deepwater acreage, and that area remains a favorite search target by foreign investors, but few discoveries, a slow bureaucracy and new taxes by Rio de Janeiro dampen investment enthusiasm.

Trinidad & Tobago has been a big success. In 1997, it had gotten US $600 million in financing for the Atlantic LNG plant. Now, it has installed a third train in the plant, it's getting ready for the fourth train and a fifth train is in the planning stages. Exploration activity is high, and the gas-hungry United States makes a great market for the country's LNG.

Latin American potential is high. With 98.6 billion bbl of oil reserves in Central and South America, only the Middle East has more oil, with 685.6 million bbl.

Central and South America fall behind the rest of the world in natural gas with 250 Tcf (7.08 Tcm), compared with 2,156 Tcf (61 Tcm) for Europe and Eurasia.

The location of that oil and gas can be a drawback. Of those totals, Venezuela controls 77.8 billion bbl of oil and 148 Tcf (4.1 Tcm) of the gas. That's 70.5% of the oil and 62.8% of the natural gas. Remove Mexico from the list and the percentage is even higher.

The point, however, is that South America has vast, unused supplies for both oil and gas in a period when most projections call for sustained higher oil prices and increasing demand for natural gas in the United States.

Other parts of the world also have large untapped stores of hydrocarbons, so the capacity to supply those hydrocarbons to international oil companies (IOCs) in return for their investments has become a key focus for worldwide competition.

IOCs look for reserve growth and return on capital employed. Large independents are following the same line, and those big players are involved in every market in the world they choose to work, Humphries said.
South America is a part of the $50 billion in annual spending plans for the upstream oil and gas industry, he said, but West Africa's giant fields will draw a lot of that money. Most of the money aimed at Latin America will go to Brazil, because deep water looks like the play that offers the best return on capital employed.

Russia's vast reserves will attract investors like BP, Shell and ExxonMobil. At the same time, spending appears to be faltering in the North Sea and North America, although those areas still control a dominant position.

Big oil companies capable of operating anywhere in the world are looking for:
• Significant proven and probable hydrocarbon reserves;
• Access to markets, particularly gas markets;
• Countries with legal, social, economic and political systems stable enough to provide secure returns;
• Stable fiscal and regulatory terms and conditions; and
• Economies of scale.

Companies worry about political unrest in Venezuela, Ecuador, Bolivia and Argentina, he said. They get uneasy about fiscal crises in Brazil, Argentina, Ecuador and Colombia. Labor unrest in Venezuela, Ecuador and Colombia make them nervous.

The large IOCs are sticking with offshore Brazil, Trinidad & Tobago and heavy oil projects in Venezuela.
New policies can change the situation, and they are coming, slowly, by necessity.

They include:

• Improved legal and fiscal regimes,
• Liberalized markets to improve movement of products to market,
• Gas policies integrated with electricity policies for commercial viability,
• Reform of state oil companies and restrictions on private sector investment, and
• Reduced resource nationalism.

South America has world-class resources. It can compete, he said, with a commitment to open markets and economic and political stability. It needs a transparent, efficient and stable legal, regulatory and institutional framework.

Individual governments also need to recognize that IOCs can be a major factor in developing resources for the benefit of the host countries and their people.

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