Why oil majors are attracted to Uruguay

Although deepwater exploration has been among the hardest-hit segments during the current oil downturn, the Pelotas basin off the Uruguayan coast continues to attract the interest of majors.

So far this year, Norwegian state oil company Statoil has acquired stakes of 35% and 15% in exploration blocks in the basin operated by Tullow Oil (block No. 15) and Total (block No. 14), respectively.

ExxonMobil also acquired a 35% stake in block No. 14 in late 2015, providing further evidence of the basin's potential. Total plans to spud the first exploration well at the license during the first half of this year.

Although no company has made a hydrocarbons discovery yet in Uruguay, it was voted Latin America's second-most attractive oil and gas jurisdiction in the Fraser Institute's Global Petroleum Survey 2015.

Uruguay's state oil company Ancap awarded the Tullow and Total acreage in the country's second bid round, held in 2012. A third round originally scheduled for 2014, then 2015, is still pending.

BNamericas spoke to Ancap's head of E&P, Santiago Ferro, about the upcoming round and what a major offshore discovery would mean for the country.

BNamericas: When do you think Uruguay could begin producing oil?

Ferro: I think we could see production as early as 2023. If there's a discovery in 2016, we're talking about three or four years of appraisal, and afterwards maybe five years of development. In other words, once a discovery is made, it will probably take seven or eight years to reach first production.

BNamericas: Is there an estimated breakeven oil price for the Pelotas basin to be profitable?

Ferro: Yes, I think we're talking about US$60-70/b.

BNamericas: Can you give us an update on Uruguay's upcoming offshore bid round? I imagine the global oil scenario has complicated matters a bit.

Ferro: Yes, exactly. On the one hand, we didn't want to compete with the farm-ins, which is partly why we didn't launch the round in 2014 or 2015. Now obviously with the price of oil where it is, we've asked services firms and oil companies when would be the best time to continue with the round, considering company budgets, oil prices, etc.

Ancap has already defined the blocks, auction terms and contract model for the round. We're basically just waiting for approval from the energy ministry, which we expect soon, so that we can announce the official timeline for the round.

BNamericas: Can you say whether it will be this year?

Ferro: Yes, we hope the official launch will be in 2016, and for the round to close in 2017. Ancap's plan has always been to hold bid rounds at regular intervals. It doesn't depend, for example, on the results of Total's first exploration well.

The rounds need to run on parallel tracks, so to speak, in order to find oil. We need to drill lots of wells, not just one. We can't sit and wait for the results of this well. We have to continue to seek new investment in order to explore other parts of the basin.

BNamericas: Given the encouraging early exploratory results by Petrel subsidiary Schuepbach Energy, do you think we'll see onshore or offshore production first?

Ferro: From our point of view, the biggest potential is offshore. I'm not a geologist, but my perception from listening to geologists is that the big bet is offshore, due to the volumes. An offshore discovery could truly change the country.

The prospect that Total found is potentially gigantic. We're talking about close to 1Bb of oil, with promising direct hydrocarbon indicators (DHIs), including a very interesting flat spot. It's a play with similar characteristics to Exxon's Liza discovery off the coast of Guyana.

BNamericas: What are the advantages for oil companies of operating in Uruguay?

Ferro: For the hydrocarbons sector, all taxes minus the income tax are exempted under the country's hydrocarbons law. These include customs tax, import and export taxes, wealth tax.

During the exploration stage, drillers obviously don't have income, but the services providers do. Taxes on this income were also exempted for firms that participated in Round 2 to incentivize investment exclusively in exploratory work.   

Then there are the advantages for any type of investment, not just oil and gas. These include logistics, telecommunications, a relatively qualified workforce, tax-free zones and freedom to repatriate capital.