Watching Government: Central considerations

July 22, 2002
Better technology and a promising investment climate may translate into more industry interest in Nicaragua.

Better technology and a promising investment climate may translate into more industry interest in Nicaragua.

President Enrique Bolanos this month signed legislation allowing foreign investors to explore several regions of the Central American country. Those areas include the Caribbean offshore, near the Miskitos and Perlas islands; marshland near the Pacific coast; farmland near Managua; and rugged jungles in southern Rivas Province.

According to the US Energy Information Administration, Nicaragua as yet has no commercial oil production or proven reserves, but is still considered to be one of the few remaining areas in Central America worth exploring for oil and gas.

Nicaraguan energy officials predict that oil concessions now being considered by four US independents could yield 50,000 b/d and 2 MMcfd over the life of the proposed fields. Bolanos said investors have pledged at least $50 million to get oil flowing.

He told the Associated Press that having foreign investors drill for oil in his country was like "winning the lottery without buying a ticket." He estimated his government will collect about $300 million in annual tax revenues from the 50,000 sq miles now open for development.

Trade talks

Moving forward with legislation giving US companies drilling rights is a positive development if more petrodollars are to flow in that country. And on a broader scale, US government officials are hoping to encourage more regional investment. US and Central American officials met in early July to prepare for formal free trade negotiations later this year. Both sides hope negotiations may result in a powerful trading block even larger than the existing North American Free Trade Agreement among the US, Canada, and Mexico. Under a pending proposal by President George W. Bush, several Central Americans countries, including Nicaragua, would be part of a Free Trade Agreement of the Americas.

EIA notes that although the region collectively has limited energy resources, it is still a key transit center for oil (via the Panama Canal), and is a potential energy transit center between North and South America.

Central America is a net importer of oil (222,000 b/d), mainly from Mexico and Venezuela. Regional demand accounts for a scant 0.3% of world oil consumption.

Challenges ahead

But challenges remain for US businesses that want a foothold in the region.

Formal free trade talks are expected to center on new US farm legislation that Central American officials say could boost US agricultural subsidies by up to 70%, making it impossible to sell their own crops to lucrative US markets.

Festering trade tensions have the potential to shift political winds in Nicaragua and elsewhere, poisoning the energy investment well. History shows it doesn't take much to create major delays that drilling companies want to avoid.

Houston-based Harken Energy Corp., for example, wrote off a $8.8 million investment in Costa Rica this year because of a political and regulatory climate that quickly soured (OGJ Online, Feb. 20, 2001).