South America is witnessing challenges to its oil and gas industry growth due to resource nationalisation policies in its most resource-rich countries. Stringent yet uncertain fiscal regulations and over-protection of hydrocarbon resources have made countries such as Venezuela and Bolivia unattractive investment destinations.

However, big oil and gas reserves in offshore discoveries still make the region desirable for global oil and gas companies.

Prominent investment destination

South America has abundant natural resources and accounts for almost a tenth of global crude oil reserves and about 4% of total natural gas reserves worldwide. Venezuela has the sixth-biggest crude oil reserves in the world, with close to 99 billion barrels, and tops the chart in oil and gas reserves in South America, producing more than 932 million barrels of crude oil and more than 1,100bcf of natural gas in 2008.

Brazil recorded more than 12,700 million barrels of crude oil reserves and 11,500bcf of natural gas reserves. Other hydrocarbon-rich nations include Argentina, Bolivia and Ecuador.

Venezuela, through its latest bidding round in August 2008, invited investments in its extra-heavy oil reserves in the Orinoco Belt. This included seven blocks in the Carabobo area, which together has a potential of more than 800,000 barrels per day of crude oil.

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“South America counts for about 4% of total natural gas reserves worldwide.”

Elsewhere, recent offshore discoveries have transformed Brazil into a country with one of the highest potential investment acreages globally, while Colombia plans to invite foreign oil and gas companies when it auctions off 96 blocks of oil and gas reserves as it plans to check its falling crude oil production. The blocks on offer will be in areas where government-backed exploration has taken place and in underexplored areas, including the Pacific Coast and the Caribbean Sea.

Yacimientos Petroliferos Fiscales Bolivianos (YPFB), Bolivia’s state-run oil and gas company, plans to spend about $3m a day in 2009 to increase its oil production. In 2008, Bolivia had natural gas reserves close to 25,000bcf.

Abundant oil and gas reserves in South America such as the estimated recoverable reserves of 200 billion barrels of extra-heavy crude oil in Venezuela make it one of the most prospective investment destinations worldwide.

Brazil leads the way

The discovery of large, deepwater hydrocarbon reserves in offshore Brazil in the past two years could potentially transform it into a significant oil exporter. It started with the discovery of the giant Tupi oilfield in November 2007, which was followed by other large reserves including Sugar Loaf, in late 2007 and the Jupiter natural gas field in early 2008.

Meanwhile, reserve estimation for the country’s Carioca field stands at 33 billion barrels with recoverable oil at 10 billion barrels. Once proven, the Carioca Block BM-S-9 would be one of the largest oilfields in the world.

“Venezuela has the sixth-biggest crude oil reserves in the world.”

It is operated by Brazilian oil producer Petrobras, which is in talks with energy companies in countries including the US, Canada, Denmark, Singapore and South Korea over possible loans to develop Brazil’s offshore oil industry.

The company plans to invest $174bn by 2013 to enhance its oil production by more than 50% to 3.66 million barrels per day. In the next eight to nine years, more than 55 new refineries and drilling rigs are planned in Brazil.

China has sanctioned a loan of $10bn to Petrobras to finance the company’s offshore exploration in the pre-salt oil fields in exchange for a regular supply of about 200,000 barrels of oil per day.

However, big oil and gas reserves always come with a fear of transfer in ownership rights to foreign energy companies, leading to encroachment of hydrocarbon wealth. Brazil traditionally had a liberalised policy towards foreign participation into its oil and gas resources.

But, after the major offshore discoveries, it has withdrawn exploration rights to deepwater blocks in the sub-salt region from the ninth and 10th bidding rounds. Brazil is also considering certain changes in policies, such as increasing taxes and royalties on foreign companies or transforming concession agreements to production-sharing agreements with the national oil company.

Brazil’s plans are being viewed as initial steps towards nationalisation of oil and gas resources, which have already hurt foreign investments in the oil and gas industry of its neighbours Venezuela and Bolivia.

Venezuela and Bolivia

“Venezuela has close to 99 billion barrels of proved oil reserves.”

Venezuela has been the forerunner in the nationalisation of oil and gas resources, with president Hugo Chavez ordering nationalisation in 2007, claiming the majority share in multibillion-dollar oil projects. In response, ExxonMobil Corporation and ConocoPhillips scrapped their significant heavy oil projects, arguing over the newly formed contracts of nationalisation.

The contract gave more than 50% of ownership rights to the government and triggered legal disputes.

Venezuela stepped up its nationalisation policy this year by expropriating a range of oil and gas service companies, leaving many private firms that do not agree to the terms of contract of nationalisation vulnerable to being seized.

William Companies Inc, a gas injection project, was ordered to be taken into state control in May, while the government recently took over installations of foreign firms on the oil rich lake Marcaibo, increasing the total number of nationalised companies to 74.

Companies that have been seized will be compensated at book value. However, the state oil company PDVSA owes nearly $14bn to oil service companies for their compensation value after taking them over, and companies including Halliburton Co, Schlumberger Ltd, Helmerich and Payne Ensco claim to be still seeking compensation.

A number of international service companies have halted their services due to non-payment, and Ensco International Inc terminated a drilling contract with PDVSA as the latter took control of the rig in the course of nationalisation and failed to pay off its debts.

“Venezuela tops the chart in oil and gas reserves in South America.”

Ironically, the nation had invited a bidding round in early 2008 for domestic and foreign private companies for oil exploration in seven blocks of the Orinoco Belt in the east of the country, to revamp its falling crude oil production. Many large foreign companies participated in the bidding round, ranging from US oil giant Chevron to China’s CNPC.

The results are to be announced in August 2009. However, there has been an ambiguous scenario in Venezuela since 2008 after ExxonMobil Corporation and ConocoPhilips were excluded from the four multibillion-dollar Orinoco projects.

The development of the Orinoco Belt requires advanced technology and refining capacity for upgrading heavy crude oil and, in the absence of both, the development of the belt could prove challenging and could affect the plans to enhance total oil output from it.

Bolivia has held the reins of energy resources since its nationalisation drive started in mid-2006, when it gave foreign companies six months to accept new terms or leave. Installations owned by companies including BG Group, BP, Petrobras, Repsol, Total and ExxonMobil Corporation were seized by the Bolivian Government, while in early 2009 the likes of CLHB, Chaco Petroleum Company, Pipeline Company Transredes and Ashmore Energy International were forced to hand over their assets.

The country’s new law declares that the state will “assume control and direction over the exploration, exploitation, industrialisation, transport and commercialisation of natural resources”. It enables the Bolivian government to take full control of its oil and gas industry and names the state-run YPFB as the owner of total production.

“Recent offshore discoveries have transformed Brazil into a country with one of the

Foreign investors could participate in the hydrocarbon industry as partners of the Bolivian state but would earn 18% in royalties instead of full control over the resources extracted.

Greater state control of energy resources could prove detrimental to the economies of Venezuela and Bolivia in the long run if they miss out on the foreign cash required to check the decline of their oil and gas production. Concerns have already been expressed regarding the countries’ efficiency and technical capacity in managing the newly nationalised oil and gas companies.

Furthermore, increased state intervention will boost expenditure in the hydrocarbon sector, which might result in a lack of funds for social and infrastructure development. In a slowing economy, a high level of state involvement in the oil and gas industry might also make the country too dependent on the hydrocarbon sector to generate revenues and jobs.

Besides, there is a danger that nationalisation will also lead to a decline in domestic and foreign private investment, which will reduce the efficiencies of their oil and gas industry and affect the overall development of their economies.


South America has been emerging as the biggest prospective investment destination for oil and gas companies. The abundant reserves of Venezuela and Brazil’s offshore discoveries, serve as good examples of the region’s potential.

However, South America is witnessing challenges to industry growth due to nationalisation policies in resource-rich countries such as Venezuela and Bolivia.

Changes in fiscal regimes as well as taking into state control various private oil and gas firms in these countries are intended to limit foreign involvements as this might lead to loss of ownership rights on indigenous hydrocarbon resources. However, this policy might drain much-needed foreign investment and lead to inefficiency in the exploration and development of hydrocarbon reserves, which could be detrimental to South America’s oil and gas industry.