Latin American drilling activity swells in past year

Offshore rigs increased to 72 in April 2004, with activity off six countries. Mexico leads the group with 38 rigs offshore, followed by Brazil (15), Venezuela (13), Trinidad (4), Ecuador, and Peru (1 each). Overall Latin American offshore rig activity is up 41% since April 2003, when only 51 rigs were working off four countries (Table 1).

Land rigs increased by 3, to a total of 213 working in Latin America. Mexico is the busiest, with 74 rigs working on land, closely followed by Argentina with 70 rigs, and Venezuela a distant third with 36 rigs. Argentina added 4 land rigs, Mexico's count increased by 1, and Venezuela lost 3 since March. The land rig count in April 2004 was up 14% from a year earlier, when 187 land rigs were active in nine Latin American countries (Table 2).

According to the daily industry newsletter Rigzone.com, 145 marine rigs were working off Latin America as of June 8, 2004. This included 87 rigs drilling, 9 workovers, 1 in production, 3 waiting on location, and 2 en route. An additional 5 rigs were being modified, 24 were ready-stacked, and 14 were cold-stacked.

Dale Tremblay, CFO of Calgary-based Precision Drilling Corp., announced in early May that the company's first-quarter 2004 Latin American revenues were twice that of 2003. Precision operates in Mexico and Venezuela and generated $24.8 million in Mexico alone during the first quarter.

Global activity

The world rig count outside the US and Canada reached multiyear highs in May 2004, with a total of 839 rigs working, according to BHI. This is a 1% (7 rigs) monthly increase from 832 rigs in April 2004 and an 11% annual increase (84 rigs) from 755 rigs working in May 2003. The land rig count outside North America reached 590, a 12-year high. The offshore rig count dropped to 249, from 260 rigs in April 2004.

Prudential financial analysts Grant Borbridge and Cyrus Lowe expect to see strong upstream capex spending through 2004, with continued increases in land and shallow water activity worldwide. Borbridge forecasts the global land rig count to average 575 rigs in 2004 and 600 rigs in 2005. Offshore, he expects the average global rig count to rise 4% to 350 rigs in 2004, up from 338 in 2003, primarily from growth outside North America.

Worldwide offshore rig utilization was 89% in mid-May, based on rigs immediately available (not cold-stacked or under repair). Demand for deepwater rigs is tightest, with 95% utilization. Global jack up utilization was 89%, with the greatest number working in the Gulf of Mexico (80), Middle East (78), and Asia Pacific (63). Mid-water utilization was 85%, with the greatest number of rigs working in the North Sea (24), Latin America (21), and Asia Pacific (14).

GlobalSantaFe Corp.'s monthly worldwide Summary of Current Offshore Rig Economics (SCORE) for April 2004 was 42.2 overall, down 4% from March, but up 12% from a year earlier and up 44% from 5 years earlier. North Sea rates showed the only positive monthly change, up 1.4% from March, and up 6% from a year earlier.

The April SCORE for the Gulf of Mexico showed the largest annual increase, up 30% from last year, although down 2.8% from March. The SCORE reflects the current day rates, referenced to the estimated cost of a newbuild.

Rigzone tabulated the following average global day rates in early June:

• Independent cantilever jack ups, $47-59,000/day (average $49,097).
• Independent slot jack ups, $40-75,000/day (average $50,727).
• Drillships, average $135,000/day.

Semisubmersibles:

• Second generation, $67,000/day.
• Third generation, $64,000/day.
• Fourth generation, $115,000/day.
• Fifth generation, $154,000/day.

Mexico

Mexican drilling has fueled the rise of Latin American activity in the last 2 years. In a May 17 report, Simmons & Co. analysts Scott B. Gill and William A. Herbert note that Mexico's working rig count has increased to 112 rigs from 65 rigs in 2003 and 58 rigs in 2002. They anticipate this rate to slow, as Petroleos Mexicanos "has its hands full managing and financing the rapid growth in activity."

On May 17, Mexico's Energy Secretary Felipe Calderón Hinojosa told 250 industry principals at the Institute of the Americas' 13th annual Conference on Latin American Energy conference in La Jolla, Calif., that the government needs to invest $117 billion in exploration and production in 2004-12 in order to meet domestic demand and reduce dependence on imports.

Calderon said that the company's oil and gas reserves have declined from 57,741 MMboe in 1999 to 48,041 MMboe in 2004 and that more exploration was needed.

Pemex awarded Halliburton a 2-year turnkey contract worth $175 million to drill 27 wells in the Mexican state of Tabasco. Parker Drilling Co.'s Mexican subsidiary mobilized five land rigs (Rigs 121, 122, 165, 174, and 260) from Bolivia and Colombia to drill in the Samaria, Iride, and Cunduacan fields in southern Mexico. Operations were scheduled to begin in June.

Parker's barge Rig 53 is also under a 2-year contract from Pemex and began work in the inland waters of Tabasco state (Macuspana basin) in May 2004.

Four inland wells in Tabasco state had been shut down by Mexico's federal ministry for environmental protection, Procuraduría Federal de Protección al Medio Ambiente (Profepa). In mid-May, Pemex agreed to repair the damage, estimated at $343,000-$515,000, as well as sponsor an environmental awareness campaign.

Five Burgos basin gas wells had been closed by Profepa in 2002 because of improper disposal (abandonment) of 20,000 tonnes of drilling waste near Reynosa, Tamaulipas. Four companies were closed by February 2003, according to Jesús Antonio Ibarra Carecer, who heads Profepa's activities in Tamaulipas.

In May, Pemex announced that it would cut 2% of its workforce, about 3,000 jobs, and consolidate its seven departments into four in a restructuring for greater efficiency. Raúl Múnoz Leos, general director of Pemex, said the restructuring would allow the company "to reach more important goals."

Pemex was operating 42 offshore rigs in late May, including 1 inland barge rig, 10 semisubmersibles, and 31 jack ups, according to Rigzone data. All rigs were drilling except 4 jack ups being used for workovers and 1 for production.

There were 74 land rigs drilling in Mexico in April, according to BHI, up from 64 a year earlier, and 38 rigs drilling offshore in April, up from 17 a year earlier.

Trinidad

There were four rigs drilling off Trinidad in April, according to BHI, up from three a year earlier.

BP PLC was drilling the Kapok well off Trinidad in late May using the Ensco 76 jack up (Fig. 1). Houston-based TODCO, the recent Transocean Inc. spinoff concentrating on shallow and inland waters, had two jack ups in Trinidad (THE110, THE208). Nabors Industries Ltd. had one semisubmersible off Trinidad, and GlobalSantaFe Corp. had the GSF Monitor jack up contracted off Trinidad through September 2004 (mid-$60,000's/day).

Venezuela

Statoil Executive Vice-President Ottar Rekdal announced last month that the company would spend $100 million on natural gas exploitation in the Delta platform. Statoil will drill three wells in their block off Venezuela's Orinoco River delta in second-half 2004.

ConocoPhillips subsidiary Conoco Venezuela CA and partners announced in May that they "will begin drilling 14 exploration wells" in Phase 1-A of the giant Corocoro field project off eastern Venezuela's Gulf of Paria, beginning in December 2004.

Petróleos de Venezuela SA (PDVSA) said that it would begin developing the Tomoporo field in late May, spudding two wells onshore in the northeastern Maracaibo basin. The Venezuelan state company will use the Cliffs 54 and 55 rigs to drill to about 5,624 m into the Eocene Misoa formation deltaic sandstones. Reuters reported in November 2003, that PDVSA officials called Tomoporo, with its lighter crudes, the "jewel of PDVSA."

PDVSA was operating 15 drilling barges in late May: 9 of which were drilling, 1 involved in a workover, 2 undergoing modifications, and 3 waiting on locations. TODCO's THE156 jack up was off Venezuela.

Precision Drilling spent $100 million (Can.) retrofitting eight rigs in Venezuela that did not work in 2003, with the possibility of moving them to Mexico or the Middle East.

In late May, Nabors had 2 land rigs available and GlobalSantaFe had 6 land rigs available in Venezuela. Tulsa-based Helmerich & Payne Inc. had 13 drill rigs in the country, 5 with top-drives.

Brazil

Petroleo Brasileiro SA (Petrobras) was operating 30 rigs off Brazil in late May, including 7 drillships, 18 semisubmersibles, and 5 jack ups, according to Rigzone.

Transocean Inc. had nine rigs working off Brazil at the end of May, including the Deepwater Frontier drillship. Petrobras recently extended the contract for the drillship for 700 days, beginning in March 2004; the agreement may generate up to $101 million for Transocean.

Shell spud the Shell-14-RJS wildcat in 2,900 m of water in Block BM-C-10 of the Campos basin on Apr. 25. Wintershall AG has a 35% interest and Shell has negotiated to transfer 25% to Statoil ASA, subject to approval by the Brazilian petroleum directorate (OGJ Online, May 15, 2004).

Wintershall AG was operating the Pride South Atlantic semisubmersible off Brazil in late May.

Canadian independent EnCana Corp. budgeted 1% of 2004 capital for international exploration activities, which will include one exploration well to test the Dragon prospect Block BM-C-7 in the Campos basin. EnCana has 66.6% in the interest in the 161,000-acre block with Oklahoma-based partner Kerr-McGee Corp. (33.3%). The drilling is in 400-ft waters.

There were 10 land rigs drilling in Brazil in April, according to BHI, steady through the past year.

Colombia

Occidental Petroleum Corp. is active in both Colombia and neighboring Ecuador. The company produced 36 million bbl in Colombia first-quarter 2004, slightly less than the 37 million bbl produced first-quarter 2003, according to results announced in late April.

At the same time, Occidental also announced that it had signed an agreement with Ecopetrol SA, Colombia's state oil company, to extend the term of Occidental's contract for operating Colombia's second largest oil field at Caño Limón to the life of the field, instead of expiring in 2008.

The new contract provides for a 2004-07 work program at Caño Limón to include 40 new development wells, a 3D seismic survey, and various expanded surface facilities. The Caño Limón field produces about 95,000 b/d (gross).

There were nine land rigs drilling in Colombia in April, according to BHI, down one from a year earlier. Nabors Industries Ltd. had eight land rigs in Colombia in late May (one workover, seven drilling; Fig. 2). Helmerich & Payne Inc. had five top-drive rigs in Colombia.

Ecuador

Luis Camacho Barrios, president of Petroecuador, said on May 21 that good results from drilling with a Sinopec rig had increased production to 198,200 bo/d. The company expected another rig to arrive at the Shushufindi field in eastern Ecuador in early June to drill 10 additional wells.

EnCana is Ecuador's largest foreign investor in oil and gas development. The company is the largest shareholder (36.3% indirect equity interest) in the new OCP heavy crude pipeline, connecting the inland Oriente basin with the marine terminal in Esmeraldas, a Pacific coast port. EnCana's Ecuador production averaged 51,000 b/d in 2003. After drilling of 32 wells in 2003, production increased to 73,000 b/d in 2004, according to a company statement.

Paul MacInness, general manager of Occidental Petroleum in Quito, told OGJ that the company would probably drill 25-30 wells in Ecuador in 2004, including 15 in Eden Yuturi field, in the southeast corner of Block 15. He said that Occidental leases three top-drive triple rigs from Helmerich & Payne, one of which is heli-transportable.

Bill Hill, Occidental's vice-president of operations in Quito, said there were 5 drilling pads at Eden-Yaturi, and the company was adding 2 pads this spring.

In first-quarter 2004, Occidental produced 43 million bbl in Ecuador, nearly tripling the 16 million bbl produced during first-quarter 2003.

There were 7 land rigs drilling in Ecuador in April, according to BHI, down from 10 a year ago. Nabors has 9 land rigs in Ecuador (4 drilling, 5 workovers). Helmerich & Payne has 7 rigs in Ecuador, including 5 with top-drive, and 2 heli-transportable (one with top-drive).

Peru

There was one land rig drilling in Peru in April, according to BHI, down from two a year earlier.

According to Perupetro SA, the state oil company signed a contract with Occidental Petroleum del Peru on Apr. 2 for exploration in Block 101, in Alto Amazonas and Loreto Provinces, Loreto Department. The work commitment includes drilling four exploratory wells or the equivalent in Exploration Work Units (UTE).

Donald Lipinski, general manager and president of Occidental's Peruvian subsidiary, said that the company plans to drill the first well in 2006 (OGJ Online, Apr. 5, 2004).

Occidental also plans to drill two wells in the Situche complex on Block 64, including one well in Situche Norte by the end of this year and another in Situche Sur by mid-2005.

Perupetro also announced a signed contract with Compañía Consultora de Petróleo SA on Mar. 24 for exploration in Block 100. The work program includes a 2D seismic program and four exploration wells.

Parker Drilling completed drilling the San Martín 3X-ST1 (2,340 m TD) from the San Martín 3 platform for the Camisea project on Feb. 16, 2004. The San Martín gas field was discovered by Shell during a drilling campaign in the Ucayali basin in 1984 and has proven reserves of 3.1 tcf and 224 million bbl. The Camisea gas fields are in the Bajo Urubamba rain forest, Echarate district, La Convención province, Cusco department, about 500 km east of Lima.

The ENSCO 76 jack up drills the Kapok well off Trinidad (Fig. 1, photo from Ensco).

Argentina

There were 70 land rigs drilling in Argentina in April, according to BHI, up from 64 a year earlier. Oil Drilling and Exploration Argentina SA (ODEA), part of Ensign Resource Service Group Inc., operates 4 land rigs in Argentina. Helmerich & Payne operates 3 top-drive rigs in Argentina.

Production in Argentina has increased since the 1993 privatization of Yacimientos Petrolíferos Fiscales (YPF), the state oil company.

Between 1997 and 2002, however, Argentina's GDP shrank nearly 2%/year, according to data from the International Monetary Fund and from Fitch Ratings Ltd., a global credit rating subsidiary of Paris-based Fimalac SA.1

There has been a series of buyouts and takeovers in Argentina in the last decade.

In 1996, US-based Pride Petroleum Services purchased Argentina's largest drilling and workover rig company, Quitral-Co. SAIC, for $140 million.

In the same year, Spain's Repsol purchased a 38% share in the Argentine producer Astra, giving it a controlling share.

In late 2000, Wintershall purchased 35% interest in the Tauro-Sirius and Octans-Pegaso concessions in the Austral basin, offshore Tierra del Fuego from Total Austral SA, adding to its reserves in the area (OGJ, May 14, 2001, p. 46).

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Bolivia

According to the US Energy Information Administration, Bolivia has the second largest natural gas reserves (54.9 tcf) in South America, after Venezuela.1

Bolivian state oil and gas company, Yacimientos Petrolíferos Fiscales Bolivianos (YPFB) has a long-term agreement to sell gas to Brazil through 2019, but there have been widespread demonstrations against expanding petroleum exports.

The announcement on May 25 that Bolivia will sell gas to northern Argentina may spark additional drilling in Bolivia's San Alberto and San Antonio gas fields. The fields are operated by Petrobrás Bolivia SA (35%) and Spain's Repsol-YPF.

The Monteagudo concession in the south of Bolivia has produced gas and condensate since 1967 and is operated by Repsol-YPF (50%), with partners Petrolex SA, a wholly owned subsidiary of Pan Andean Resources PLC; and Petrobrás (20%).

There are two existing wells in the El Dorado field, operated by BP (90%), with partner Petrolex (10%).

El Dorado has significant natural gas and condensate reserves, but development plans for 2005 are on hold, according to Pan Andean Chairman John Teeling.

There were six land rigs drilling in Bolivia in April, according to BHI, up from only three a year earlier. Helmerich & Payne operates six drill rigs in Bolivia, including tour top-drive rigs.

Nabors has three rigs drilling in Bolivia.

Latin investment

Investment in Latin America is problematic due to investor discomfort with political instability and uncertain economic programs.

New York and London-based Fitch Ratings Ltd. has given investment-grade ratings to only three Latin American countries with stable currency outlooks: Chile (A-), Aruba (BBB), and Mexico (BBB-). Mexico in particular needs to attract foreign capital to accomplish its ambitious development plans.

On May 14, credit rating agency Standard & Poor's, a division of the McGraw-Hill Cos. Inc., affirmed its BBB- rating on Pemex and the Pemex Project Funding Master Trust, according to a company statement on May 12.

Fitch Ratings assigned five other Latin countries long-term BB ratings, characterized by modest financing needs, mixed record on politics, and less reliant on market finance than the first group: El Salvador (BB+), Panama (BB+), Costa Rica (BB), Colombia (BB), and Peru (BB-).

The final category of Latin American sovereign ratings includes countries with financial or political crises, heavy debt or fiscal imbalances, and low GDP or export growth prospects: Dominican Republic (B+), Brazil (B), Venezuela (B-), Uruguay (B-), Ecuador (CCC+), and Argentina (DDD).

Brazil is the only Latin country to be rated with a positive currency outlook, but it carries a heavy debt burden (82.5% of GDP) and has a history of slow economic growth.2

Future drilling

Simmons & Co. analysts believe that the international rig count will rise about 5%/year through 2007, not including Russia, Libya, or Iraq.

They expect to see a prolonged oil service expansion worldwide, similar to the steady growth of 1974-79 (when the US rig count rose 8%/year), based on the foundation laid by capital spending discipline and strong macro energy fundamentals.

They expect a continued focus on property and company acquisitions for the short term and also believe operators are capable of increasing E&P spending 50% over 2003 levels.

They expect spending to be concentrated in the Middle East, West Africa, and Asia Pacific, based on stable costs and specific project plans.

In a research report issued in early May, Standard & Poor's analysts said that return on capital employed has been poor for the eight largest offshore drilling companies in the past 10 years.3

S&P analyst John Kartsonas said "Despite these past resultsUwe believe the group should perform well from this point forwardUWe believe time will work in favor of the drillers...[The] demand for offshore drilling should continue to increase." He concluded, "We believe we are at the beginning of a major cycle, which is going to last for a longer period of time than previous cycles."

References

1. US Energy Information Administration, "Country Analysis Briefs—Bolivia," October 2003, http://www.eia. doe.gov/ emeu/cabs/bolivia.html

2. Scher, R., "Latin American Sovereigns," October 2003, http://www. fitchratings.com/corporate/reports/report.cfm?rpt_id=185662

3. Standard & Poor's Institutional Equity Research Report, "Offshore Drilling: What Happened to Returns?," May 3, 2004.