ANÁLISIS QUINCENAL: Transparency and Extractives Update from Latin America

By Carlos Monge, RWI Latin America Regional Coordinator
With Claudia Viale and George Bedoya

February 4 - 22, 2010

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Argentina argues British oil exploration off the Falkland Islands is illegal.

Production problems in Ecuador's and Mexico's state-owned oil companies.

Chile's Gas Atacama is interested in Bolivian gas industrialization.

Argentina argues British oil exploration off the Falkland Islands is illegal.

British company Desire Petroleum PLC has hired the platform Ocean Guardian, which is owned by the Scottish Diamond Drilling company, to develop exploration activities in the Atlantic waters north of the Falklands Islands. The offshore region has an estimated 3.5 billion barrels of oil and nine trillion cubic feet of natural gas. The Argentine government believes the British company's actions constitute a violation of their sovereignty over the Falkland Islands and their surrounding waters. Indeed, on February 16, the Argentine government signed on a decree establishing that any ships sailing to the islands through national waters must request permission.

In 1982 the British government won its war with Argentina over the control of the Falkland Islands, or Islas Malvinas, which form a South Atlantic archipelago, 480 kilometers from Patagonia. Since then, the islands have been under British occupation. The British government claims its sovereignty over the islands is beyond question. In fact, they have control over distributing oil concessions to private companies embarking on hydrocarbon exploration and eventual extraction projects, and Britain's development of the Falklands oil sector has the full support of the government.

In contrast, the Argentine government believes that exploration activities around the islands in areas near Argentina's continental shelf violate international law. Consequently, Argentina has protested to international organizations and through diplomatic channels, and also restricted ship traffic between the mainland and the islands. Despite these efforts, the Argentine government had little recourse in preventing the Ocean Guardian from reaching the islands, apart from obtaining symbolic support from Venezuela and Brazil.

In 1998, oil drilling in the Falkland Islands was made part of a hydrocarbon cooperation agreement between the British and Argentine governments, in an effort to overcome the dispute over the sovereignty over the islands. Argentina ended the agreement in 2007, but the test perforations made before then indicate that there are 60 billion barrels of high grade oil in the region, according to a report from the Official Journal of the Geological Society of London. At the time, low oil prices made offshore extraction commercially unviable. Now, of course, the situation is completely different, not only because the high demand for oil but also by the current fixed price of around US$ 80 per barrel.

In addition to Desire Petroleum PLC, which will start drilling eight wells in March, the other companies operating in the islands are also British, such as Rockhopper Exploration PLC and the Borders & Southern Petroleum PLC. Two additional British companies, British Falkland Oil & Gas and its partner BHP Billiton, have also shown interest in drilling in the Falklands.

To many experts, Argentina's complaints are a renewal of the traditional conflict that has faced the two countries. Argentina's protests against Britain's exclusive access to the disputed offshore resources come as its own oil and gas production is falling. With production rates of 36.15 million cubic meters of oil and 48.14 million cubic meters of gas estimated for 2010, Argentina faces respective falls of 4.3% and 3.7% from 2009. Consequently, it's unsurprising that Argentina is speculating about the royalty revenues it could receive, in the unlikely event that the islands' oil reserves come under their jurisdiction.

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Production problems in Ecuador's and Mexico's state-owned oil companies.

The national oil companies of Ecuador and Mexico, Petroecuador and PEMEX, are suffering declining production levels, largely due to the lack of new national investments in the oil sectors.

In Ecuador, 2009 oil production levels fell 19,000 barrels per day from the 2008 peak of 505,000 barrels per day, indicating that Ecuador's greater state involvement has not led to higher production.

The Ecuadorian government hopes this situation changes when Petroecuador signs new contracts with private oil companies based on a New Hydrocarbons Law, which could be approved by the National Assembly during last days of April. Pushing to resolve a protracted negotiation process, the government has threatened to reimburse private companies' investments to date, and effectively removing them from the project, if they do not resolve the contract process soon.

Under the current contract, recovered oil is split between private companies and the Ecuadorian state. The government's proposed new model establishes that the state will pay private companies for extraction services and retain ownership of all the extracted resources. Faced with these demands, the president of the Hydrocarbon Industry Association (AIH), José Luis Zirit, has requested that the Ecuadorian government present the parameters for negotiating the new contract model.

Similarly, in Mexico, despite the fact that energy reform formally ended in 2008, debate continues about whether private companies should participate in state strategic activities like exploration and exploitation of hydrocarbons. Indeed, some experts argue that the new energy policy remains obsolete and a second round of reforms are necessary to allow private companies to participate in activities currently reserved for PEMEX.

There are several aspects to this debate. On one hand, the Mexican government warns there could be a coming oil deficit, as official reports between 1999 and 2009 demonstrate a 42.6% reduction in proven hydrocarbon reserves, from 24.9 to 14.3 million barrels of oil. However, PEMEX explorations since 2001 have identified 231 new oilfields, most of which are still untapped. In fact, some Mexican experts state that today the country's oil industry is characterized by inertia and the absence of value creation.

Both Petroecuador and PEMEX are facing defining questions about the role of private oil companies and their investments in this industry. Despite the differences in the companies' legal frameworks and political contexts, the current status of both state enterprises has compromised the productivity of the energy sector in their countries and demands a solution.

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Chile’s Gas Atacama is interested in Bolivian gas industrialization.

Chilean media reported that local gas and electricity distribution company Gas Atacama will soon begin negotiations with the government of Bolivia about developing gas industrialization projects there.

Bolivia has one of the most important hydrocarbon reserves in the Latin America region, with 465.2 millions barrels of oil and 26.7 trillion cubic feet of gas, according to the Bolivian Minister of Hydrocarbons and Energy. However, the country lacks the infrastructure needed to export it. Consequently, Gas Atacama general manager Rudolf Araneda suggested that Bolivia and Chile could reach a mutually beneficial agreement to give higher value to Bolivian gas production through industrialization. Since Chile is dependent on gas, particularly in its northern mining communities, a joint project would ensure sufficient energy supply.

There are other indications that Gas Atacama is very interested in Bolivian gas. Chairman of the Potosi Civic Committee (COMCIPO) Celestino Condori says the committee received a copy of Gas Atacama’s proposal to Bolivia, including its expressed interest in paying for the entire use of the waters of the Rio Silala. The proposal also offered to assume the cost of Chile’s historical debt for the use of this waterway—a dispute that has traditionally faced both countries—in exchange for access to Bolivia's gas and a Bolivian-built pipeline to northern Chile.

Gas Atacama earlier expressed its interest in Bolivian gas in 2002, when it attempted to negotiate an export deal that would utilize a connection to the trans-Andean pipeline in order to supply a petrochemical project and other mining ventures in the north of Chile.

Bolivian President Evo Morales said there are currently no conversations underway at the national level concerning a pipeline to Chile or the purchase of water rights for the River Silala. And, making reference to the proposal sent by GasAtacama to the Potosi Civic Committee, Bolivian Foreign Minister David Choquehuanca stressed that these negotiations must take place between states and not between companies and social organizations.  

Morales added, however, that a possible agreement between Bolivia and Chile over the use of River Silala waters will be negotiated later, and that the Bolivian technical oil team expects to discuss the natural gas proposals in the coming weeks. President Morales also noted that Bolivia  has received numerous significant international offers concerning the industrialization of Bolivia's iron and lithium reserves, and that all proposals must be reviewed and discussed before any decisions are made.

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Sources: BBC, Clarin.com, El Mercurio, The Guardian, The New York Times, Pagina 12, La Razón, El Comercio (Peru), La República (Peru), Perú 21, Eldeberdigital.com, El Universal, El Universo, La Jornada

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