Feature: Clouds over South America for Secure Gas Development
Feature: Latin America still a risky bet for extractive industries. Political upheaval and potential violence are the main risks to development of gas markets in South America, according to a regional expert.
James Lockhart-Smith, of Maplecroft risk consultants, is also co-author of a book on the instability of some countries in the north of the continent, The FARC Files. FARC is the acronym for Fuerzas, Armadas Revolucionarias de Colombia, in English, the Revolutionary Armed Forces of Colombia. In the book Lockhart-Smith and co-author Nigel Inkster use government raid in 2008 as the jumping-off point for an exposition of the tensions in the region between neighbours Colombia, Venezuela and Ecuador.
Lockhart-Smith, who previously was a scholar at the International Institute for Strategic Studies, addressed the Shale Gas Environmental Summit in London recently. He described the volatility in the north of South America which is the main headache for energy development projects.
“Corruption remains the main risk for hydrocarbon extraction [in South America],” he says. “Chile stands out as a good place for investment, but Venezuela is the worst.”
In Venezuela, a country of 29 million, head of state Hugo Chavez has increased both state and public roles in the energy industries since he came to power 13 years ago. And despite a bruising bout with cancer, larger-than-life personality Chavez has just won re-election and seems to be still very much in control.
In energy markets, Venezuela is identified as a big player in oil, a founding member of OPEC and the largest exporter of crude oil in the Western Hemisphere. The country nationalized its oil industry in the 1970s, creating Petroleos de Venezuela SA, the country's state-run oil and natural gas company. Venezuela has vast reserves of natural gas. The US Energy Information Administration says Venezuela had 195 trillion cubic feet (Tcf) of proven gas reserves in 2012, the second largest in the Western Hemisphere behind the US. In 2011, the country produced 1.1 trillion cubic feet (Tcf) of dry natural gas, while consuming nearly 1.2 tcf.
On July 31 this year, Venezuela formally joined the Common Southern Market (MERCOSUR), a trade bloc comprising Brazil, Argentina, Uruguay and until recently Paraguay.
As for Colombia, which Lockhart-Smith also identifies as a volatile location, there is plenty of potential. The Oil and Gas Journal, quoted by the US Energy Information Administration, says Colombia has reserves of around 4 billion tcf.
At the environmental conference, Lockhart-Smith addressed the role that concerns over shale gas mining play in the region. “Perception is as important as reality, including re issues such as water use in fracking.” He spoke of the role of the internet, and the freeflow of information and discussion which it allows. “New media can be negative for companies, but positive for communities,” Lockhart Smith said.
Elsewhere in South America, a richly-promising field in Argentina has created excitement. The Vaca Muerta (“Dead Cow”) was described by the Financial Times as “exciting as Eagle Ford, Haynesville, Barnett and Marcellus in the US and far more advanced than China’s vast prospects”. Lockhart-Smith noted that Argentina “leads the region in shale development”, but added that this was not a very difficult title to acquire.
“Shale development is embryonic in South America generally.”
Argentina has abundant natural gas, and produces both gas products and oil. But policies to regulate the industry, and cushion consumers at both federal and state level, mean that oil and gas production are on downswing, according to the US Energy Information Administration (EIA). “Political risks are the great problem, ” Lockhart-Smith reiterates of the entire continent. “Outright expropriation is still a risk in many countries.” Apart from Venezuela, a number of other countries are led by governments which are left-leaning or avowedly socialist, including that of Evo Morales in Bolivia and Rafael Correa in Ecuador.
Maplecroft, a Natural Gas Europe Knowledge Partner, is a consultancy based in Bath, England, advises companies on a range of risk scenarios. See James Lockhart-Smith’s blog here.