Unconventionals in the Americas

By Felicia Graham

LA JOLLA, Calif., May 26 – With the theory of peak oil now passé, countries are asking what can be used to replace conventional fuels in an economically pragmatic and environmentally friendly manner. The answer? Unconventional fuels.

Fueled by high international oil prices and continuing geopolitical uncertainty, the importance of unconventional fuels is now recognized by mainstream political and industry leaders as a valuable component of energy security.

Leading this shift in importance are enormous discoveries and large-scale infrastructure projects taking place in Canada, the U.S., Brazil, and Colombia.

Unconventional Advances

Technological developments in shale oil and gas, as well as in the production of liquefied natural gas (LNG), have steeply increased since 2008.

Horizontal drilling and hydraulic fracturing are now proven technologies, contributing to the shale boom in the U.S. and Canada. Meanwhile, the emergence of floating regasification units has made LNG more available to smaller emerging markets.

This is especially notable throughout Central and South America, where a distinct balance between supply and demand is beginning to take shape.

Just a few years ago, it was expected that North America would need to import LNG to compensate for a decline in the domestic production of gas.

But during 2008-10, shale gas production in the U.S. doubled to make up for the domestic decline. In 2011, shale gas accounted for nearly a quarter of total North American gas production.

Because of this, North America may witness a shale gas glut in 2012, resulting in low regional market prices – making the region’s shale gas more attractive against the higher prices for gas imported from Qatar and Australia.

Good News 

This is good news for Latin American countries, which are quickly moving to incorporate unconventional fuel sources into their energy mix.

By the end of 2011, LNG alone represented 10% of natural gas consumption in Latin America, which cumulatively imported roughly 15 million cubic meters (cu m) of LNG during that same year, up from 5 million cu m in 2009.

LNG imports in Latin America (mcm/d)

Source: Manuel Colcombet, Natural Gas: the Demand Side presentation

Much of the increase in power demand in Latin America is seen to be coming from the industrial sector, as the transportation sector is growing at a slightly slower pace, and unconventional fuels account for a sizable portion of that growth.

While most unconventional fuel continues to be imported from North America, an increasing amount is being produced domestically in Latin America.

Colombia’s Energy Boom

Colombia is emerging as the darling of the international energy market, hitting the production marker of 1 billion cubic feet per day (cu ft/d) of gas in 2010.

Not least, the government has taken a pro free-market stance, and has been pushing to implement a completely unregulated price structure.

The result is that foreign direct investment in the country has increased 250% since 2006, quickly approaching a record exceeding the $10.8 billion raised in 2008.

FDI in Colombia

Source: Sebastian Castañeda: Colombia’s Energy Boom presentation

This business-friendly environment, combined with discovery of substantial unconventional resources in Colombia, has attracted a number of major international and local oil companies, including Ecopetrol, Chevron, and Equion.

Colombia also has been developing its gas infrastructure within the framework of its Gas Development Plan.

Between 2003 -11 Colombia’s domestic demand increased at an average annual rate of 7.6%. Additionally, 78% of urban households are connected to the country’s natural gas grid, making it a convenient industry to develop. And in 2010 gas accounted for 24% of  Colombia’s domestic energy mix.

Still, domestic demand has yet to exceed production, positioning Colombia to become an exporter.

To date, Colombia’s existing gas infrastructure enables the export of 250 million standard cubic feet per day (mmscfd) of gas surplus to neighboring Venezuela  – and Colombia’s unconventional potential is estimated to be above 400 trillion cubic feet (tcf).

Colombia Demand v. Production

Source: María Victoria Riaño, Perspectives on Gas: the Colombian Experience presentation

With that, Colombia has made explicit its goal to become an international player – and it certainly has the resources to do so.

Western Energy Epicenter?

Colombia is, however, just one of many Latin American states that are rapidly developing their energy resources.

Brazil’s subsalt and conventional fuel development continues to offer compelling opportunities for oil and gas companies of all sizes, and despite Argentina’s nationalization of YPF from Spanish Repsol,  developing its resources may still be financially viable.

But the discoveries across the Western hemisphere have other implications. To strengthen economic and energy security, many Latin American countries are seeking regional integration with their neighbors.

In Central America, this is manifested in the Electricity Inter-connection System for Central America (SIEPAC ), which will connect the Central American countries through an electrical transmission line. As both the supply and demand continues to rise in the region, further plans for regional energy integration will likely emerge.

And with this, the possibility arises that the Western Hemisphere has developed the resource base to become the new energy capitol of the world.

Whether or not the Western Hemisphere will replace the Middle East as the primary energy producer is a different question. But a consensus sees the Americas as having enough potential to substantially alter the geopolitical energy balance.

Still, there are barriers that prevent the realization of that potential. Countries like Mexico, Venezuela, and Argentina – which have some of the largest undeveloped reserves – have yet to implement energy policies that support the rapid development of their resources.

Alternatively, Colombia has arisen as a model for the region, with an energy policy that supports the monetizing of its conventional and unconventional resources through international capital and technological integration.

It is clear that the Americas now have the potential resources to become an international energy game-changer. It may be a slow process, but it’s a process that is already set in motion.

The next step is to monitor the energy policy of states in the region to determine whether or not these resources can be developed enough to make the Western Hemisphere the new global energy epicenter.

Felicia Graham is Managing Editor at Oil Diplomacy

For more information visit Institue of the Americas at UCSD.