Nestled in the center of the Central American isthmus, Nicaragua, for the past 35 years has seemingly been left behind by its neighbors to the north in the hydrocarbon exploration game-until recently. A Canadian independent partnered with a small Oklahoma-based company has cast a ray of light with not only the first exploration well drilled in the country in 35 years, but also the first hydrocarbon discovery.

Vancouver-based Norwood Resources Ltd. and Oklahoma-based Industrias Oklahoma-Nicaragua SA have drilled two new-field wildcats on the Oklanicsa Block in the Sandino Basin along the Pacific coast. With test results still uncertain-testing was still under way at press time-preliminary indications from the wells are promising to say the least.

The road to becoming possibly the newest hydrocarbon producer in Latin America has been interesting and far from easy for Nicaragua.







Sandino Basin

A total of 34 wells have been drilled in Nicaragua with San Caetano 1 being the first, in 1931. There has not been a commercial discovery made in the country. In the Sandino Basin, or Nicaraguan Pacific coastal zone, a total of 12 wells have been drilled with five reporting oil and/or gas shows. Six were reported dry, and one went unreported. Just the drilling of a first exploration well in Nicaragua in 35 years is significant, but a discovery is quite newsworthy, if not almost unbelievable.

On April 29, 2004, Industrias Oklahoma-Nicaragua (30%) and Consolidated Agarwal Resources Ltd. (70%) signed an E&P contract with the Instituto Nicaragüense de Energía (INE) for the 3,423-square-kilometer onshore Oklanicsa Block in the Sandino Basin. Unlike the other three offerings in this first round-each of these marine acreage-the Oklanicsa Block required less difficult negotiations to finalize a contract.



The contract period is for six years subdivided into three sub-periods of two years each. Minimum exploration obligations include an environmental impact study, landsat study, geophysical surveys and diamond drilling. Expenditures for the six-year contract period total approximately $16 million. (All figures in this report are U.S. dollars.)

On June 7, 2004, publicly held Norwood Resources acquired a 70% working interest in the Oklanicsa Block from Consolidated Agarwal. The block extends south and west of Managua from the Pacific shoreline to the Costa Rican border.

The Sandino Basin is on- and offshore the Pacific coast of Nicaragua. It is elongate and asymmetric with the basin axis located to the west and trending northwest/southeast. It is a forearc basin developed in the Cretaceous along the subduction zone where the oceanic Cocos plate is subducted beneath the Caribbean plate.

The basin encompasses approximately 30,000 square kilometers, 85% of which is offshore. The basin has experienced intense tectonic deformation involving multiple episodes of uplift, compression and extension. As much as 10,000 meters of sediment may have accumulated in the basin depocenter.

The stratigraphic section is generally comprised of deep marine/shelf carbonates overlain by Paleogene turbidites with minor shelf/shallow marine carbonates. This is followed by a transitional phase in the Neogene/Quaternary characterized by nearshore, deltaic terrigenous clastics and continental deposits. The sedimentary section thickens to the west and dips west-southwest.

The eastern portion of the basin has undergone extensive structural deformation characterized by folding possibly related to wrenching, and has also undergone extensive volcanism. The existence of numerous active petroleum seeps on- and offshore suggests an active petroleum system is present. Source rocks are present in the Cretaceous-Paleogene section and potential reservoirs exist in the clastic sequences distributed throughout the Upper Cretaceous-Neogene section. Structural and combination strat-structure traps should be present.

In February 2007, Norwood Resources completed drilling the San Bartolo Rodriguez Cano 1 new-field wildcat after encountering gas, condensate and light oil in eight zones above a total depth of 2,680 meters in various turbidite sands of the Paleocene Brito formation. After logging and independent petrophysical analysis combined with core (percussion and rotary) analysis, a combined 152 meters of pay, including 61 meters of conventional pay and another 91 meters of naturally fractured low permeability sands, in eight zones were determined.

Porosities in the 17% to 21% range with permeability from 3 to 30 milliDarcies have also been determined. Well pressure is rumored to be exceedingly high and the API gravity of superior quality. The size of the San Bartolo structure is believed to be about 5,000 acres.

Before testing the San Bartolo, Norwood moved to the location of the Las Mesas Gutierrez Mendez 1 new-field wildcat, 11 kilometers and updip southeast of the San Bartolo well. The Las Mesas reached a total depth of 3,011 meters in April and was logged and, combined with independent petrophysical analysis, assigned a combined potential of 83 meters of conventional pay in 10 zones.

The zones of interest are within the various turbidite sands of the Paleocene Brito. Core analysis also indicated porosities in the 16% to 24% range with permeability from 2 to 75 milliDarcies. The well did not take a good cement job, making fracing difficult; thus attempts to test the well were unsuccessful. The well was plugged and abandoned as non-commercial.

According to a Nicaragua-Oklahoma SA spokesperson, the partners are confident that the disappointing results from the La Mesas tests are not due to poor geology but technical issues. Had a proper cement and fracturing job been possible, subsequent testing would have achieved much more favorable results. Operations have since shifted back to the San Bartolo 1 where, at press time, testing was under way.



Other basins



The Pacific coast is not the only area for potential hydrocarbon discoveries in Nicaraguan territory. In Caribbean waters, two small U.S. independents are anxiously waiting for legal issues to be resolved on their license areas. New Orleans-based MKJ Xploration signed for the Banco Isabel and Banco Tyra concession contracts in April 2006, covering 4,000 and 4,024 square kilometers, respectively. Both contracts call for seismic and drilling commitments over a six-year period.

MKJ reports that combined concessions may develop potential reserves in excess of 10 billion barrels of oil, with economical production facilities in shallow water and in proximity to Gulf of Mexico markets.

Meanwhile, Denver-based Infinity Energy Resources signed for the A. Perlas and B. Tyra concessions, also in the Caribbean, covering 4,000 square kilometers each. Commitments on the blocks call for seismic reprocessing, new seismic acquisition and drilling during an eight-year period. However, two indigenous groups from the north and south, the Region Autonoma Atlantico Norte (RAAN) and the Region Autonoma Atlantico Sur (RAAS), have filed protests claiming they were not adequately consulted in the bid-award process.

This claim is predicated on a premise that they were each granted autonomous rights when the country was granted independence, and they therefore should be a part of the contract-award process. Discussions with the government have been productive. The new government under President Daniel Ortega appears dedicated to resolving any and all outstanding issues so progress can be made in moving forward with exploration. MKJ reported that it may come to a resolution within weeks.

A total of 25 wells have been drilled in Caribbean waters off Nicaragua, with only two resulting in non-commercial amounts of oil. INE conducted a study of geochemical facies in the Nicaragua Rise area with special emphasis on hydrocarbon source-rock potential in the Caribbean Margin of Nicaragua. The study was based on selected data of geology, geophysics, geochemistry, geothermic and biostratigraphy. Results indicate that source rock is good mainly in the northern part of the study area. The mature zone has a top of about 3,000 to 3,500 meters, and the expelled oil and gas began to migrate in Late Eocene.

The analyzed geological sequence consists stratigraphically of three parts pre-Tertiary basement, Eocene volcanic rocks and overlying sedimentary cover of Eocene and younger ages. The geological time sequence allowed for some tectonic uplift and erosional phases, with the amount of the latter being estimated by existing geological and geophysical data.

Generally, there are two missing horizons on the section. The first hiatus is observed between 500 and 1,200 meters, corresponding to the top of Eocene and Oligocene unconformity. The second is between 300 and 800 meters, corresponding to the top Middle Miocene unconformity. The type II and III coal- and carbonate-shale source rocks are mainly from upper and Middle Eocene sections in the Diriangen Trough of the Quita Sueno Deep and Verolania basins. The top mature window is from 3,000 to 3,500 meters.

In the area of relatively high geothermal gradient in the northern part of the study area, top over mature is about 3,300 to 3,425 meters. Source rocks have a varying thickness from point to point, ranging from 400 to 700 meters in the central basin. The kerogen type was divided into three geochemical facies based on the S2 value.

The oil window is at 3,300 meters at present, indicated by the expulsion stimulation and hydrocarbon migration based on geothermal history and geochemical facies. The Taupi 1 well, the deepest in the area, provides a typical pattern of oil/gas generation and expulsion.



Current infrastructure

Nicaragua has no hydrocarbon production nor established hydrocarbon reserves. The country possesses one refinery with a capacity of 20,000 barrels of oil per day. Venezuelan President Hugo Chavez has pledged aid to the country in building a new $2.5-billion refinery on the Pacific coast. Construction would begin in late 2007 or early 2008 on the proposed pipeline and take three to four years to complete. Venezuelan crude would supply the refinery.

Such a move makes sense from Venezuela's point of view, with state oil company PDVSA attempting to relieve itself of much of its liability in refiner Citgo, which operates in the U.S. It would be less expensive to refine Venezuelan crude in Central America to transport to Asian markets, such as China, than to upgrade and maintain U.S. refineries.

A "dry canal," or the mega-pipeline project, has been proposed for the region by SIT-Global, and involves a high-speed railway, oil-products pipeline and fiber-optics line and may cost $1.5- and $3 billion. The products and fiber-optics lines are independent of the rail, which is proving to be a good deal since plans for the rail are facing major financial and approvals obstacles.

Phenix Group Ventures Corp. of Florida has completed an environmental impact study for the pipeline, which would transverse the country from Monkey Point on the Caribbean to Corinto on the Pacific, covering 475 kilometers with a capacity of 480,000 barrels per day. The pipeline would extend five kilometers into the ocean at each end to accommodate oil tankers. On land, two lines will operate independently.

The undertaking is encouraged by Venezuela's efforts to sell crude to Asian markets. The Panama Canal cannot handle super-tankers.



Acreage, political regime

The government plans to promote the country's offshore acreage for oil and gas exploration, with some 84,000 square kilometers in the Caribbean and 34,000 in the Pacific targeted for licensing. This second round has been temporarily suspended following reorganization; however, pre-qualification for participation and sales of data packages remains under way. Some of the Caribbean acreage is in an area disputed by Colombia. Reportedly, early interest is high for the bid round, and several companies have already pre-qualified.

The political situation in Nicaragua cannot be categorized with any degree of certainty. Former Marxist guerilla leader Ortega prevailed in the presidential election last year with 38% of the vote. Coming in second was conservative Eduardo Montealegre. Nicaragua's constitution does not require a run-off, so Ortega won with a mere plurality.

Ortega's first year as president has been less than compelling when it comes to the country's economy-subpar growth, massive external debt, hyperinflation, a radical and sharp devaluation of the country's currency, and more problems. Signs suggest Ortega has changed and he is not nearly as radical as before-which would be a good thing.

It is worth noting, however, that U.S. officials have stated that Ortega's election could result in the withdrawal of $200 million in aid. Depending on what Ortega says or does, sanctions or other pressures by the U.S. government might constrain the operations or level of investment by U.S.-based companies.

The cogs of the investment wheel for oil and gas exploration and accompanying downstream projects appear to be turning in Nicaragua. The Ortega administration has the favorable rhetoric at least, exploration activity to date is looking promising and acreage on offer is geologically intriguing. Also, there are ready markets in the U.S. and Asia for production, and oil and gas prices remain stable.

It remains to be seen, however, if these factors are enough to put Nicaragua on the list of oil and gas exploration hot spots.



Ron Harper is the area coordinator, Caribbean/Central America, for IHS Inc. He can be reached at 713-369-0246.

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