No. 2, 2009

Alexander Trushin


Russian companies are becoming prominent players in South Americas oil and gas business

In recent years, Russian leading energy companies have successfully expanded their ties with business partners in South America. Today, domestic oil and gas majors are focusing their attention on Venezuela, Colombia, Argentina, Bolivia, and Brazil.

A new era of partnership

The final years of the 20th century were characterized by declining cooperation between Russia and the countries of South America in the oil and gas sector, due to economic and political crises in the partner nations. Russian companies are now clearly stepping up their operations in these promising markets. Increasingly often, the largest of these companies - LUKOIL, Rosneft and Gazprom - are participating in tenders for oil and gas exploration and production in the nations of the region.

A number of Russian companies are hard at work in Colombia. The most prominent of these is LUKOIL Overseas Holding, which is carrying out the Condor Project for oil exploration and production. The Company is expanding its Latin American operations in general. In Moscow at the end of 2008, LUKOIL First Vice-President Vladimir Nekrasov, Energia Argentina S.A. (Enarsa) President Exequiel Omar Espinosa, and Pobater S.A. President Horacio Gabriel Sambucetti signed a memorandum of understanding. It is valid for a period of three years and can be extended. The document covers the possibility of delivering petroleum products (fuel oil and diesel fuel) to Energia Argentina S.A. and using the Pobater S.A. infrastructure to store fuel.

"Our company is already doing a lot of work in two countries of Latin America: Colombia and Venezuela," Mr. Nekrasov noted at the document's signing ceremony. "We hope that the memorandum of understanding with Argentine companies will help in the development of mutually beneficial cooperation between the Russian Federation and the Latin American nations."

Enarsa works in the areas of oil and gas exploration and production; the transporting, storage, and refining of oil and gas; trading in hydrocarbons; and in other related spheres in Argentina and other nations of Latin America. Pobater S.A. has its own oil tank farms and refineries, all located in the Argentinean province of Buenos Aires.

In Venezuela, LUKOIL Overseas is working on the quantitative assessment and international certification of reserves on the Junin-3 block of the world's largest heavy crude oil field, in the Orinoco River basin, which, according to preliminary data, contains 235 billion barrels of hydrocarbons. Upon completion of this work, the Russian company will be able to start producing oil there, now that it has formed a joint venture with PdVSA, as required by local law.

President of Venezuela Hugo Chavez has repeatedly given high marks to his country's political and economic relations with Russia, considering them to be a strategic union. He has frequently mentioned the prospects for enlarging the presence of Russian fuel-and-energy companies in Venezuela. Chavez has paid special note to cooperation with Gazprom, which, with the full support of Venezuela, is already taking part in the Urdaneta Project for gas exploration and production on the country's continental shelf. The President emphasizes that the Russian gas concern is the largest in the world and has a great deal of experience in, among other things, the construction of long-distance gas pipelines. "The Russian presence in the oil and gas sphere, as in other areas, is of strategic importance to Venezuela," says Mr. Chavez.

Bolivian prospects

Gazprom is in turn securing a place in the Bolivian market. In February 2007, the gas concern and the Bolivian state oil and gas company Yacimientos Petroliferos Fiscales Bolivianos (YPFB) signed a memorandum of understanding. The document calls for cooperation in the areas of hydrocarbon exploration and production in Bolivia; for studying the possibilities of taking part in infrastructure projects, including the production of liquefied natural gas; and for training and raising the qualifications of oil and gas sector personnel.

The Bolivians have also declared their interest in Gazprom's proposal to develop a comprehensive scheme for the development of the gas industry that would allow them to plan further steps in expanding their production and transportation capacities in the medium term.

In August 2007, Gazprom and YPFB entered into negotiations for the creation of a joint venture to work in the fields of hydrocarbon exploration and production. The Russian gas concern is expressing interest in developing the promising Aguragve, Inau Tiasa, and Inigavi lots, located in the departments of Chuquisaca, Tarija, and Santa Cruz.

One year later, Gazprom and the French company Total signed an agreement with Bolivia on joint natural gas exploration and production on the Asero gas field. We are talking here of possible investments of $4.5 billion. YPFB's participation in the joint venture is 51%, while Gazprom and Total's shares are 24.5% each. The venture's initial volume of production should be 13 million m3 of gas daily.

Present at the document's signing ceremony was Bolivian President Evo Morales, who noted that the alliance of Bolivia's YPFB, Gazprom, and Total "is the great hope of the Bolivian people." Mr. Morales emphasized that, in Russia, Bolivia is acquiring a serious strategic partner in the energy sphere.

Sylvie D'Apote, an expert at the Cambridge Energy Research Associates in the United States, notes that the partnership between Gazprom and YPFB is entirely natural, given the current circumstances, since the latter prefers to deal with state, rather than private, corporations. In turn, the alliance is also of benefit to the Russian gas concern, since Bolivia holds third place in Latin America, after Venezuela and Trinidad and Tobago, in terms of natural gas reserves (2 trillion m3) and has a high potential gas presence.

Bolivia's main natural gas reserves are concentrated in four large gas fields: the Margarita, the San Alberto, the Sabalo, and the Itau, discovered in the southeastern part of the country, on the border with Argentina, in the Tarija oil and gas region. Bolivia is the main supplier of natural gas to Brazil and Argentina. In the oil and gas sector, the state's interests are represented by the aforementioned company YPFB, which performs fiscal functions and is by law also granted the exclusive right to take part in oil and gas projects and market hydrocarbons, both domestically and for export, in Bolivia's name.

At the same time, Bolivia is experiencing a shortage of capital investment in the drilling industry. The situation deteriorated further in 2006, since the government's decision to nationalize all energy resources frightened off a number of foreign companies. Nevertheless, such major corporations as BP, Total, and Petrobras continue working there.

In 2008, Bolivia stepped up the general implementation of joint oil and gas projects involving companies from Iran, Venezuela, Argentina, and Russia. In particular, it continued negotiations with Gazprom aimed at establishing the volume of investments.

At the end of last year, Saul Avalos, Bolivia's minister of oil, gas, and energy, attended a session of the Forum of Gas Exporting Countries' 7th Ministerial Meeting in Moscow. Upon returning to La Paz, he told journalists that Russian specialists would conduct studies of natural gas reserves in Bolivia, to the tune of $4 million. In his words, a technical delegation from Gazprom would arrive in the Andean nation to study its gas potential. The minister noted that the work would be 100 percent financed by the Russians, who will develop a comprehensive scheme for the development of Bolivia's gas industry. He also reported that Russia would help the South American nation create a natural gas scientific research institute. In addition, according to Avalos's information, a delegation is expected to visit from LUKOIL, which has expressed interest in Bolivia's gas sector.

Not by oil alone

Cooperation is growing between Russian companies and the largest country in Latin America - Brazil, which holds second place in South America so far as production volumes of oil are concerned. Prospects for energy cooperation between the Russian Federation and Brazil are not limited solely to oil production. While visiting Rio de Janeiro and Brasilia in November of last year, Sergey Kiriyenko, General Director of the Rosatom State Corporation, told journalists that Russia is ready to help Brazil in prospecting its uranium fields. "Russia," he noted, "has gained considerable experience in exploring for uranium, among other things, at depths, and our helping in prospecting works has become one of the main topics of discussion at talks with our Brazilian colleagues. Since Russia holds third place in the world today so far as reserves of uranium are concerned, we have no need to share production and pro rata take the uranium ore mined." The last point is especially important to the Brazilians.

Brazil holds sixth place in the world today so far as reserves of uranium are concerned, although only 25-30% of its territory has been surveyed, and only to a depth of 100 m. Experts believe that the country's resources can be built up considerably. "Russia is interested in Brazil as one of the key countries in Latin America with a great deal of experience in developing atomic energy," said Kiriyenko. "There are points where the interests of the two countries coincide: prospecting and the production of uranium ore, nuclear fuel cycle, the recycling of nuclear waste, research reactors, and machine building for the power industry."

Mr. Kiriyenko doubts that the worldwide financial crisis can negatively affect Brazil's plans for increasing nuclear power's share of the country's energy balance, which now stands at around just 3%. "I admit that the crisis could affect how quickly the program is implemented. In general, the recession period will shift the timeline for carrying out projects to develop atomic energy around the world, but there is no way they'll be cancelled or revised," said Kiriyenko. He also noted that "the Brazilians are a bit envious because, in Russia, the program for the development of atomic energy gets major support by government orders, and the rate at which it's being implemented depends little on the financial crisis."

There is enormous room for cooperation between Brazil and Russia in the field of atomic energy, said Sergey Kiriyenko. In his words, the two countries resemble one another in their vast territories, their multiethnic makeup, their being located at crossroads of cultures, and their energy industries being traditionally based on a variety of different energy sources. Russia has huge reserves of oil and gas, while the world's largest hydropower resources are found in Brazil, where they provide up to 90% of the country's electricity. "We realize," noted Mr. Kiriyenko, "that sustainable energy cannot be developed in a rapidly developing nation solely by burning oil and gas." Brazil, in turn, recognizes that it cannot depend solely on hydropower resources.

At present, two nuclear power plants are operating in Brazil: the Angra-1 and -2. Several years ago, a uranium enrichment plant went on line in the city of Rezende, 160 km from Rio de Janeiro. According to Edison Lobao, Brazil's mining and energy minister, from 50 to 60 nuclear power plants, capable of producing 1,000 MW each, will be built in the country over the next 50 years.

On the eve of RF President Dmitry Medvedev's visit to Brazil in November 2008, his Brazilian counterpart, Luiz Inacio Lula da Silva, in an interview with Russian journalists, touched on the two countries' cooperation in the field of energy. He said that the technological partnership between Gazprom and the Brazilian government's oil giant Petrobras was one part of such cooperation. "Along with this, the report that Gazprom is opening an office in Brazil next year looks especially promising," said President da Silva.

During his visit, President Medvedev stated his conviction that the mutual trade turnover between the two countries ought to be based largely on high-tech goods and energy projects. "Energy has so far shown few results, but its potential is enormous. This is particularly true of the development of new fields in both Russia and Brazil," added President Medvedev.

Dmitry Medvedev visited Petrobras headquarters in Rio de Janeiro, where a presentation was given of Brazil's experience in exploring and developing oil and gas fields on the deepwater continental shelf. The Russian president was also introduced to Brazil's national program for the production of biofuels. Accompanied by Petrobras Holding President Sergio Gabrielli, he visited an exhibit with samples of such fuels - ethanol and biodiesel.

Deputy Chairman of the Gazprom Management Board Alexander Medvedev, who accompanied the Russian President on his trip, believes that joint efforts with Petrobras on new oil and gas fields are of the highest priority. In his words, "we are talking here not only of the offshore fields opened recently in Brazil, but of promising fields on dry land as well." In answering a question on Brazilian advancements in the production of biofuels, Gazprom Deputy Chairman called them "interesting." "We too are investing in new ways of deriving hydrocarbons from nontraditional sources and are therefore following our colleagues' experience closely," he explained. Alexander Medvedev also noted that Brazil was deliberately chosen as the place where the Gazprom representation would be opened in Latin America. Overall, RF President Dmitry Medvedev rated his visit to Latin America as very important for energy negotiations: "In this sense, the trip was very informative and interesting, despite the difficult situation on the oil markets; I'm referring here to the drop in prices. I'm satisfied with the energy part of our talks." We may therefore say that this visit laid the cornerstone for the foundation of Russia's further business relations with a number of South American countries in the energy field.

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Oil of Russia, No. 2, 2009
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