EXPLORATION AND DEVELOPMENT AT CROSSROADS IN ECUADOR

Ecuador's oil and gas sector has reached a pivotal point in its history.

After several years of fairly brisk activity, foreign operators recently began scaling back exploration in Ecuador. They cited results that haven't met expectations and persistent delays in obtaining approval by state owned Petroecuador for development of reserves that have been discovered.

Foreign oil companies had anticipated the pace of development would accelerate in Ecuador in early 1992, but major projects generally remained in limbo for most of this year (OGJ, Mar. 23, p. 23). At presstime, however, there were signs of an encouraging follow-through in promised reforms in the permitting process.

Petroecuador in April-May approved two of those projects and a third in June.

Of the 13 oil companies or groups that had signed exploration contracts with the state oil company since 1985, several companies have terminated their operations in the country, and only one company, Oryx Energy Co., Dallas, is producing a small volume of oil. Two other companies have been negotiating exploration rights for about 2 years, with contracts yet to be signed.

Discoveries by all foreign operators the past 7 years could total as much as 900 million bbl of mostly heavy crudes-about two thirds of that the last 3 years. For the most part, those discoveries are broadly scattered in several blocks throughout the southern portion of the Oriente basin, where no infrastructure is available.

In contrast, Petroecuador, which operates in the northern portion of the basin has discovered about 100 million bbl of oil/year. Some of its fields have been brought into production, and the state oil company plans to step up exploration and development in 1992. At the same time, Petroecuador has been busy completing its oil infrastructure and constructing product pipelines, shipping terminals, processing plants, storage tanks, and other facilities.

In addition, Petroecuador took over Texaco Inc.'s interests in the Oriente in June with the expiration of Texaco's 20 year contract in a concession that accounts for about two thirds of the country's oil production. At the same time, Petroecuador is faced with the unwanted prospect of becoming the sole operator in other blocks, following disappointing results by some foreign companies that have wrapped up operations in the country.

FOREIGN COMPANIES' RESULTS

Many of the foreign companies hunting elephant scale fields in the smallest crude oil producer and exporter in the Organization of Petroleum Exporting Countries have encountered relatively meager results.

Although collectively their strikes may approach 1 billion bbl, most of the discoveries are relatively small and feature gravities of 10-18, posing lifting and transportation problems. Coupled with the lack of infrastructure, many of these discoveries have proven noncommercial to date, prompting several companies to pull out.

Others, notably Ste. Nationale Elf Aquitaine in Block 14 and and Petroleos Brasileiro unit Braspetro in Block 17, continue to evaluate their discoveries. Commerciality hinges not only on technical feasibility but also contractual and economic provisions, such as taxes and payment for services. Current contract provisions covering these issues make it difficult to justify development.

MAXUS DEVELOPMENT APPROVED

Petroecuador has approved the planned development of heavy oil reserves in the Southeast Oriente by a group led by Maxus Energy Corp., Dallas, following 2 years of negotiation.

The project, originally proposed by Conoco Ecuador Ltd., entailed a $500 million project that would be Ecuador's first heavy oil development. Conoco subsequently pulled out of the project in 1991, citing better investment opportunities elsewhere.

Conoco also had been buffeted by heavy opposition from environmentalist and native groups-because Block 16 overlaps into biosphere reserve Yasuni National Park-despite developing a comprehensive environmental protection and mitigation plan some industry observers see as a model for rain forest oil development in Latin America (see related story, p. 46). Partner Maxus then assumed operatorship of the Block 16 group.

Petroecuador approved a development program covered under a 20 year exploration and production service contract with the Maxus group.

In all, the combined Block 16 development is expected to now cost about $625 million. That breaks out as $135 million in 1992, $175 million in 1993, $120 million in 1994, and $29 million/year during 1995-2002.

BLOCK 16 DEVELOPMENT DETAILS

The Maxus group Block 16 program entails a slightly expanded version of the $500 million development plan originally put forth by Conoco, which entailed development of Amo, Daimi, Ginta, Iro, and Bogui fields (see map, OGJ, July 23, 1990 p. 23).

The five fields contain reserves estimated at 200 million bbl and feature crudes with gravities of 15.3-20.7. The new program calls for including development of a unitized Bogui-Capiron area owned 70-30 by Petroecuador and Maxus. Under a separate contract, Maxus will operate Petroecuador's Tivacuno field, east of Bogui-Capiron on a per barrel of production arrangement. Tivacuno reserves are pegged at 8-16 million bbl with gravities of 19-22.5.

Project spending breaks out to about $580 million for the Maxus group fields and about $45 million for Tivacuno.

Major outlays will go for constructing a 150 km road from the Shushufindi producing area south to Amo, Diami, Ginta, and Iro; laying a 14-16 in. pipeline to Shushufindi and Lago Agrio; drilling 112 wells in Maxus' fields and 8 in Tivacuno; installing gathering lines and production facilities; and providing environmental protection measures.

In a first, 12 month phase, Maxus will construct a road and pipeline from Shushufinai to Bogui-Capiron and drill 16 wells in Bogui-Capiron and 8 in Tivacuno. Maxus will bring in a helirig to handle drilling while the road is being constructed. Bids have been tendered, and field work was expected to begin soon at presstime. Bogui-Capiron could be on stream as early as July 1993.

In the second phase, during mid-1993 through 1994-95, the road and pipeline would be extended from Bogui-Capiron to the Amo-Iro complex, where another 96 wells are planned.

Of the total 112 wells planned for both phases, 56 will be horizontal, 35 directional, and 21 injection in Amo, Daimi, Ginta, and Iro fields. Plans call for using a limited number of drillsites to slant or horizontally drill the wells.

Production will be through submersible pumps, taking advantage of the fields' existing high oil-water contact despite the low crude gravity. Maxus plans to augment the natural water drive with reinjection of produced formation water. Maxus has dropped tentative plans to inject diesel as a diluent into the crude mix. Conoco had proposed building a second pipeline to move Shushufindi crude south as a diluent, but that was scrapped.

Crude will move via a 14-16 in. pipeline from Bogui-Capiron to Shushufindi, where about 40,000 b/d of 17 gravity crude will be blended with 29.5 gravity Shushufindi crude. Further transport will be through batching the blend with the typical 28.5 gravity Oriente crude via the Lago Agrio-Balao trunk line. There will be dedicated tankage at Balao to receive the 22 gravity blend.

To handle added production, capacity of the Lago-Agrio-Balao trunk line will be expanded to 350,000 b/d from the current 325,000 b/d. Plans are under tentative consideration for further expansion of the trunk line to 400,000 b/d, once proposed development projects by other foreign operators come on stream. But Petroecuador still is looking at the decline in other fields the next 4-5 years before committing to further expansion.

TIVACUNO DEVELOPMENT

Tivacuno is a small field east of Bogui-Capiron owned by Petroecuador on a block operated by Ste. Elf Nationale Aquitaine.

It was discovered in 1971 by Minas y Petroleos, which drilled two wells.

Further drilling by Petroecuador predecessor CEPE in 1976-77 showed encouraging results, but the field has remained undeveloped for lack of infrastructure until the Block 16 development became feasible.

Maxus has a 12 year contract to develop Tivacuno. It plans a 23 km road and 12 in. pipeline from Bogui-Capiron to Tivacuno.

Plans call for drilling eight wells to develop the initially estimated 8 million bbl of reserves. Additional drilling would double that recoverable volume. Crude averages 19-25 gravities.

Maxus will be compensated on a per barrel basis for Tivacuno development costs.

ENVIRONMENTAL PROGRAM

Petroecuador also approved Maxus' continuation of strong environmental protection measures called for in the Conoco development proposal.

Without that, the controversial plan probably would not have gone ahead.

Strict environmental mitigation measures will apply to construction of roads and pipelines and call for drilling and spill containment at production facilities and stringent water discharge controls. All formation water produced will be reinjected.

Population settlement along the road from the fields to the Napo River-especialLy feared by environmentalist and native groups-will be strictly controlled. River crossings by barge will be monitored and bridge construction forbidden.

Plans call for extensive reforestation along roads, pipeline routes, and at drilling locations.

Special measures will be carried out to monitor and research effects of development on flora and fauna in Yasuni, which the block overlaps.

OTHER DEVELOPMENT PLANS

Petroecuador in June approved the program submitted by Occidental Petroleum Corp. to develop its Block 15 discoveries.

The company has drilled eight wells, of which six are exploratory and two step-outs. Total exploration costs to date are about $70 million.

Reserves are estimated at 225 million bbl. Project investment will be about $267 million to eventually produce 30,000 b/d with start-up by early 1993.

Petroecuador in April approved development by Tripetrol, a private Ecuadorian company, of its Pacoa structure on Block 1 on the Santa Elena peninsula. Reserves are pegged at 40 million bbl of 31-34 gravity crude. Project cost will be about $66 million, and production is slated to climb to 7,500 b/d. There is no timetable yet for field work.

ORYX PROGRAM

Oryx continues to press exploration and development in its 100% owned Block 7 in the Oriente.

Work currently focuses on Coca-Payamino, a unitized field owned 35% by Oryx and 65% by operator Petroproduccion. It currently produces about 5,100 b/d from 10 wells. Plans call for drilling additional wells, two in 1992, to double output.

Oryx recently drilled two horizontal wells in Coca-Payamino. Coca 8 flowed 5,400 b/d from Cretaceous Hollin (OGJ, Jan. 13, p. 25).

Overall, plans call for drilling about 40 more wells on Block 7. Petroproduccion is considering artificial lift for the field.

Oryx's latest discovery on Block 7 is Gacela field, a few kilometers southwest of Payamino. Its 1 Gacela, drilled to 10,559 ft MD, 9,445 ft TVD, flowed 1,000 b/d of 25 gravity crude from a 783 ft horizontal lateral in Hollin. Testing through a downhole jet pump increased production to more than 2,500 b/d (OGJ, Oct. 28, 1991, p. 40).

Oryx 2 Gacela, a horizontal stepout, drilled to 11,729 MD, 9,501 TVD, flowed 1,374 b/d of 25 gravity crude from a 2,079 ft horizontal lateral in upper Hollin.

Oryx's four Block 7 horizontal wells are the first successful horizontal wells drilled in Ecuador. After initial problems with 1 Gacela, Oryx has modified drilling plans and reduced well costs to about $3 million/well.

Oryx is reimbursed for exploration and development costs and receives a contractor service fee.

ARCO STRIKE

A unit of ARCO has opened a new play in the Oriente.

ARCO Oriente Inc. 2 Villano on Block 10 in Pastaza province flowed 2,500 b/d of 21 gravity crude from Hollin. The well was drilled to 11,800 ft, and plans called for testing other horizons.

The preliminary estimate of potential reserves is 164 million bbl.

ARCO earlier tapped Hollin pay in the Pastaza region with its 1 Meretecocha, which flowed 500 b/d.

Any development plans are likely to be controversial. ARCO's discoveries have stirred up local residents. Following the Villano discovery announcement, about 4,000 residents of the Pastaza region marched on Quito with a list of demands including self-government and protection of habitat and native lifestyles in light of increased oil exploration in the region.

PETROECUADOR'S ROLE

Despite the slowdown for private companies, Petroecuador continued to expand its profile in Ecuador's oil and gas sector.

In 1991, Petroecuador:

Confirmed or discovered about 90 million bbl of oil reserves. Four successful wildcats-Anaconda, Palanda, Punino, and Singue-yielded good quality oil at 26-28 gravity and are near existing infrastructure.
Acquired 2,000 line km of seismic and processed and interpreted about 2,300 line km.
Completed evaluation of its sub-Andean basin as part of a multinational project including basins in Colombia, Ecuador, Peru, Bolivia, Paraguay, and Argentina. The project was sponsored by the World Bank, Latin American state oil company association Arpel, and Petro-Canada.
Drilled 25 step-out and development wells, mainly in Secoya, Shuara, Cantagallo and Tiguino fields. All these fields have been on stream for some years.

Ecuador's total production in 1991 reached 109.5 million bbl, about 300,000 b/d, almost all of it produced by Petroecuador through its affiliates Petroamazonas and Petroproduccion. Output increased about 15,000 b/d over 1991 by putting on stream two new fields and drilling more wells in existing producing fields.

Most of current output is produced under artificial lift, mainly in the former Texaco concession area.

Some artificial lift is also under way now in some of Petroproduccion's fields. The largest of these, the Libertador complex, underwent gas lift this year.

INFRASTRUCTURE EXPANSION

Petroecuador continued its program to complete a major expansion of its petroleum infrastructure in 1991.

Projects completed last year include:

Expansion of the Tepre maritime terminal, near Balao, to allow export of fuel oil and more economic offloading of imported products. Work included extending pipelines 300 m into the sea to accommodate 36,000 dwt tankers vs. the previous 20,000 dwt capacity.
Construction of two product pipelines in the coastal region, starting from La Libertad, to transport gasoline from the two refineries operating there. The first line, 170 km long, will serve Manabi province. The second line, 128 km long, will serve the Guayaquil area.
Expansion of the Shushufindi-Quito LPG line to allow transport of additional output from the Shushufindi gas plant.
Expansion of the Lago Agrio-Balao crude pipeline capacity to 325,000 b/d capacity, to handle additional Oriente production. Work included installation of an additional pumping unit in each of the five stations and a new 300,000 bbl storage tank at Balao. Total project cost was $10 million.

Petroecuador in late April commissioned a 275 km, 10 in. products pipeline along the northern coast, the region's third, to link Santo Domingo with Guayaquil to supply the latter with gasoline from the Esmeraldas refinery.

The Esmeraldas-Santo Domingo pipeline is being replaced because the existing one is badly corroded. That makes a total of 573 km of product pipelines built in the coastal region the past 2 years.

In addition, Petroecuador affiliate Petroindustrial completed expansion to 25 MMcfd throughput capacity of the Shushufindi gas processing plant, enabling it to boost LPG yield to 500 tons/day from 230 tons/day. Basic engineering for the plant expansion was prepared by Bufete Industrial of Mexico, and construction was carried out by Colombia's Distral.

LIBERTADOR PROJECT

Petroproduccion's introduction of gas lift in the Libertador complex north of Shushufindi completes a program to optimize gas use in the area.

Libertador encompassing the Secoya, Shuara. Shushuqui, Pichincha, and Carabobo structures, has been producing since 1984 and now has about 50 wells. It produces about 41,000 b/d of crude and 13.5 MMcfd of gas that had been flared for lack of processing facilities and conflicts over its utilization.

Expansion of the gas recessing plant at Shushufindi to a yield of 500 metric tons/day of LPG justified moving Libertador gas 42 km south to the plant.

Libertador gas lift will come in two stages. The first, which recently got under way and involves about 25 wells, will boost crude production by about 4,000 b/d. Expansion would add another 4,000 b/d.

Plans call for moving gas from Shuara, Shushuqui, and Pichincha reservoirs at 120 psi to Secoya, in the center of the complex, where it will be compressed to 1,500 psi. High pressure pipelines of 2, 4, and 6 in. will return compressed gas for reinjection into the wells.

Produced gas will moved via pipeline across the Aguarico River to the Shushufindi gas plant. Liquids stripped from the gas will move via pipeline to the 10,000 b/d Amazonas refinery near the gas processing plant.

Total project cost to date is pegged at about $15 million, paid partly in dollars and partly in local currency for goods and services obtained locally.

Cooper Industries provided gas gathering and compression facilities, Panama's Harbert Distral assembled and installed the facilities, and Argentina's Techint laid the pipelines.

Gas lift is expected to sustain Libertador production for at least 15 years. There is no timetable for the program's second phase, which will hinge on results of the first phase.

With the Libertador project, almost all Petroproduccion fields are under artificial lift. Total Petroproduccion output the first 4 months of 1992 averaged 82,800 b/d and is expected to climb to 90,000 b/d by yearend.

TAKEOVER OF TEXACO OPERATIONS

On June 6 Petroecuador assumed full ownership of the joint venture concession it had held in the Oriente for 20 years with Texaco.

In all, Texaco has operated in Ecuador for 28 years, obtaining the Oriente concession together with Gulf Oil Corp. in 1964. The original concession was later reduced and its 40 year term halved.

Texaco-Gulf's Lago Agrio discovery paved the way for the exploration and development boom and infrastructure in the Oriente during the late 1960s and early 1970s, leading to the first export of crude in 1972. CEPE acquired a 25% stake in the concession in 1974, boosting that later to 62.5% after acquiring Gulf's interests. Texaco tried unsuccessfully to negotiate a 10 year extension to its contract in 1988.

CEPE took over operation of the Lago Agrio-Balao trunk line in 1989. In a final effort to maintain a presence in the concession, Texaco in 1990 submitted a proposal for an enhanced oil recovery project in Shushufindi field, but later withdrew it when the company and Quito could not agree to terms.

Texaco still will retain a presence in the country, continuing to support Petroecuador in acquisition of equipment for concession operations.

And Texaco must await a final settlement with authorities over taxes and royalties due it as well as the result of environmental audits still under way. After unsuccessfully pursuing some claims administratively, Texaco has resorted to litigation to settle the claims. A decision is pending.

SHUSHUFINDI EOR PROJECT

Texaco may return to Ecuador if it opts to bid again for the Shushufindi EOR project. Petroecuador may call a tender for the EOR project in 1993, once the new government taking office in August reviews Texaco's proposal.

During 1991 Petroamazonas carried out a reservoir engineering study to evaluate Shushufindi's reserves recoverable with primary, secondary, and tertiary methods.

This study, conducted by Scientific Software Corp., reached a preliminary conclusion that Shushufindi holds about 3.045 billion bbl of original oil in place, of which about 44%, or 1.354 billion bbl, could be recovered by primary and secondary methods.

Of those reserves, about 650 million bbl have been produced. The remaining reserves could sustain production of 100,000 b/d to 2003.

Recovery could be increased by 7% with a carbon dioxide augmented waterflood.

PETROECUADOR'S 1992 BUDGET

Petroecuador's budget for 1992 will reach about $660 million, a 46% jump in nominal dollars from last year's budget.

This increase will take into account internal inflation, now running at about 50%/year, as well is new responsibilities, among them operation of the former Texaco concession fields and new activities in other areas.

The 1992 budget assumes production of 116 million bbl, crude export price of $15/bbl, and residual fuel export price of $11/bbl.

Operational plans call for 2,100 line km of seismic, six wildcats, and 37 development wells.

Capital spending will be about $250 million, of which $150 million is earmarked for exploration, development, and production. The two operating units, Petroproduccion and Petroamazonas will be merged in a single unit at some point.

Production in the former Texaco concession area reached 222,700 b/d in 1991 and is expected to increase slightly this year. Petroecuador will continue also operating its own fields outside the concession area and is targeting a total combined output of about 310,000 b/d.

OUTLOOK

Although exploration results by foreign operators have not lived up to expectations, development of the discoveries they've made is seen as of paramount importance in a bid to increase the country's oil reserves.

Current production in the former Texaco concession area is expected to decline within a few years, even if Shushufindi's EOR project is carried out.

Outside the concession area, Petroecuador also faces production declines in the near term, with no other likely prospects for sizable reserve additions.

The state company then will have to carry out exploration in costly, high risk frontier areas. That's why industry officials contend it is critical for the government to expedite development of existing discoveries and keep terms attractive for future exploration activity by foreign companies.

Without that effort, officials say, Ecuador's rapidly rising domestic petroleum demand could cause it to be the first OPEC member to lose its export capacity.