Cashing In on South America’s Unconventional Oil Boom

Matt is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

What could be the world’s largest unconventional shale oil discovery -- Argentina’s Vaca Muerta, or “Dead Cow” -- has captured the interest of big oil and spurred a rash of unconventional oil exploration across South America. It is believed that this discovery alone holds up to 23 billion barrels of oil, and there could be further sizable discoveries to be made on the continent. This makes South America the next big opportunity for local oil companies looking to grow their reserves, and big oil players seeking new unconventional opportunities.

These types of resources are technically difficult to recover, and typically local players need the expertise and technological assistance of Big Oil to recover those resources. Chevron (NYSE: CVX) has already inked a 50-50 joint venture with Argentina’s government-controlled oil company YPF (NYSE: YPF), to exploit the Vaca Muerta.

This is an important step for YPF, because it will give the company access to the expertise and technology needed to access these reserves. It will allow YPF to continue its ambitious investment and business development program, aimed at boosting its poor proved reserves of 2.7 billion barrels of oil to credible levels. It will also boost production for company that, prior to nationalization, had been in run-off mode under the control of its former owner, Spain’s Repsol. It is also a crucial development for Argentina, with the country dependent on the development of the Vaca Muerta to retain its place as a net energy exporter.

First-stage development will involve drilling 100 wells that will provide 50,000 barrels of oil and 3 million cubic meters of gas in daily production by 2017. It is anticipated that the second stage will see a further 1,500 wells drilled with an overall investment or more than $15 billion before 2020.

This not only boosts Chevron’s production and reserves, but also gives it a distinct advantage over its big oil peers when it comes to accessing unconventional oil in South America. These are important developments for Chevron, given the disappointing growth in its proved reserves and production over the last two years.

Unconventional oil exploration has also taken off in Colombia. Already, Colombian Energy Minister Federico Renjifo has stated that at the current rate of production, Colombia’s proven reserves will only last another seven years. This has spurred the Colombian government to attract fresh investment to uncap a spectacular "world class" unconventional oil discovery.

As a result, the Colombian petroleum industry regulator -- the National Hydrocarbons Agency, or ANH -- has offered a number of unconventional exploration blocks at its recent exploration auctions. Furthermore, between estimates that only 30% of Colombia has been explored for petroleum, and the country's now-improved security situation, it should only be a matter of time before a significant discovery is made.

Ecopetrol (NYSE: EC), the Colombian-government-controlled integrated oil major, has commenced unconventional oil exploration in central Colombia. It is hoped that this will boost the company’s waning proved reserves, which at 1.8 billion barrels of oil are far lower than any of the other oil majors', including Argentina’s YPF. The big fear: Should Ecopetrol not locate any credible oil discoveries, it will become dependent upon its low-margin upstream operations and gas production partnerships with Chevron to generate sales. This will effectively cripple the company.

Canadian oil junior Canacol Energy (NASDAQOTH: CAAEF.PK), has entered into three partnerships with Conoco Philips, Exxon Mobil, and Royal Dutch Shell to explore for and exploit unconventional oil reserves in central Colombia. At this time, it is essentially a play for oil juniors, with no major discoveries made -- but the geological potential indicates that it should only be a matter of time. 

All of these agreements offer Canacol -- which is already the fifth-largest oil producer in Colombia -- considerable opportunity to boost its production and proved reserves. It also gives Canacol the lead in unconventional oil exploration in Colombia, and gives the company's big oil partners the opportunity to test the waters in Colombia’s as-yet-unproven unconventional oil sector, while mitigating the risks and costs involved.

Foolish Bottom Line

It is clear that an unconventional oil boom is in full swing in South America, with big oil clearly attracted by the opportunities that exist. But Chevron, through its partnership with YPF – which at the time was derided by investors – certainly has the lead at this time.

Colombia is also shaping up as the next opportunity. With an improving internal security environment and growing unconventional exploration it is only a matter of time before a major discovery is made. As such, it would make sense for investors to consider those companies that have already invested in the ground floor in Colombia’s unconventional oil industry.

Matt Smith has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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