ExxonMobil�s Thompson: Latin oil potential appealing-if terms are right

In a world that should see continued robust growth in oil and gas demand for the next 20 years, Latin America offers some of the most appealing prospects for petroleum company investment, according to Jon L. Thompson, president of ExxonMobil Exploration Co., the chief upstream unit of supermajor ExxonMobil Corp.

Bob Williams
Executive Editor, Oil & Gas Journal

RIO DE JANEIRO�In a world that should see continued robust growth in oil and gas demand for the next 20 years, Latin America offers some of the most appealing prospects for petroleum company investment, according to Jon L. Thompson, president of ExxonMobil Exploration Co., the chief upstream unit of supermajor ExxonMobil Corp.

That is the case, providing, however, that the region can continue and even step up efforts to sustain economic and regulatory reforms and ensure a fair and transparent fiscal regime, Thompson said in a keynote address Tuesday evening at the Rio Oil & Gas Conference in Rio de Janeiro. The conference, which started Monday and runs through Thursday evening, is sponsored by the Instituto Brasileiro de Petroleo e Gas and is one of the largest exhibitions in Latin America.

ExxonMobil energy outlook
Before offering his assessment of Latin American petroleum investment prospects, Thompson offered a backdrop of the global oil and gas market outlook for the next 2 decades, gleaned from the company�s internal supply-demand forecast.

Noting that the company�s outlook �is not well-accepted in some circles� because it assumes that �the age of petroleum is far from over,� Thompson cited an ExxonMobil Corp. forecast that projects world gross domestic product growth of 3%/year to 2020, with the slowest GDP growth occurring in industrialized countries.

By contrast, economic growth will be stronger in Latin America and the emerging economies of Asia, while Russia and Eastern Europe will finally have their recovery back on track, he said.

Those solid economic gains will fuel a rise in worldwide energy demand that ExxonMobil puts at almost 2%/year to 2020. Of energy demand growth in that period, oil demand will expand at a pace of just under 2%/year-for almost a 50% gain in volume terms-and natural gas demand will rise nearly 3%/year-propelled mainly by gas-fired power generation consumption growth.

In short, the company�s energy outlook calls for oil to essentially maintain its share of the energy mix, while natural gas increases its share at the expense of coal. The category dubbed �Other,� which covers biomass, renewables, hydro, and the like, will see the slowest relative demand growth at only 1%/year.

While the prospect of 2%/year gains in oil demand growth might sound relatively modest, it represents, in fact, a jump in global oil demand of 36 million b/d in the next 2 decades. Of that incremental volume, the developing nations of the Asia-Pacific region will account for 17 million b/d, Latin America 7 million b/d, and the industrialized nations 6 million b/d, with the former Soviet Union-Eastern Europe and other regions accounting for the balance. Accompanying that demand growth will be a gradual change in the world�s product mix, according to the ExxonMobil forecast.

Given this outlook and the ever-growing thirst for transportation fuels in the developing world, Thompson contends that �[I]t will be 2015 before we begin to see any significant divergence from our base outlook.�

An even stronger growth outlook is forecast for natural gas worldwide. ExxonMobil predicts that gas demand will shoot up by 72 tcf in the forecast period, to 168 tcf/year by 2020 from 96 tcf in 1999.

Turning to the question of future oil supply, Thompson said his company expects that currently undeveloped or undiscovered reserves will have to account for about 40% of the projected oil supply that the world will need from countries outside the Organization of Petroleum Exporting Countries during 2000-2020.

Accordingly, said Thompson, the call on OPEC oil will demonstrate a modest increase in the near term but by 2020 will have grown by 20 million b/d in order to meet the world�s supply needs and still provide a healthy cushion in case of supply disruptions.

Latin American outlook
The ExxonMobil forecast pegs GDP growth in Latin America at an average 4%/year during the next 20 years, a level that trails only China and the other emerging economies of Asia, Thompson told the Rio conference delegates.

In that same period, gas demand growth in Latin America will average more than 4.3%/year during 2000-2020, rising to 12 tcf/year from 5 tcf/year.

Latin American demand for oil is forecast to grow by 3.3%/year during the next 20 years, a rate that will add 7 million b/d of incremental oil consumption in the region and 20% to world consumption levels. The bulk of this incremental demand, notes Thompson, will be in motor fuels, distillates, and LPG.

At the same time, Latin American liquids production growth is expected to post a stunning 80% gain during 1990-2010, rising from 6.8 million b/d in 1990 to 9.4 million b/d in 2000 and 12.4 million b/d in 2010. That growth will taper off in the second half of the forecast period, reaching 13.4 million b/d in 2020.

This surge in Latin American oil output will benefit US efforts to diversify its oil supplies, Thompson noted. With US petroleum imports projected to reach 15 million b/d by 2020-a gain of 5 million b/d from 1990 levels-US oil import dependence is expected to expand to about 63% by 2020 from about 50% in 1990.

�Latin America has the potential to add about 3 million b/d to US [oil] imports, maintaining its current one-third share,� Thompson said.

ExxonMobil portfolio
Thompson then assessed the global development projects portfolio for the giant company in order to place Latin America�s petroleum investment prospects in context.

Looking at the discovered and undiscovered oil and gas resources of the world�s regions-and excluding nonconventional hydrocarbons such as the oil sands and heavy oil regions of Canada and Venezuela as well as the mammoth but problematic potential of the Persian Gulf and former Soviet Union regions-the remaining regional opportunities �are pretty much in close competition,� Thompson said.

He then homed in on three key regions that ExxonMobil has high-graded in its portfolio: West Africa, the Caspian Sea region, and the Middle East, where there are world-class development opportunities.

Thompson noted that �the real test of a company�s commitment� to a region is the relative position of that region within its global development portfolio.

Overall, ExxonMobil counts in its development portfolio 30 �large� projects in the implementation stage that are expected to yield it a net 3.5 billion boe of hydrocarbon reserves at a combined cost of $10.5 billion, 20 large projects in the design stage expected to deliver a net 4.5 billion boe at a cost of $12.5 billion, and 50 such projects in the planning stage that could realize a net 6.5 billion boe at a price tag of $22 billion. Three of the latter projects are in Latin America.

As far as ExxonMobil�s aspirations for Latin America are concerned, much of the company�s upstream emphasis is on the deepwater sector. Exploration is under way on large blocks in the deep water off Guyana and Trinidad and Tobago, and the company has secured 8 blocks in five basins off Brazil covering 25 million acres in water depths of 250-10,000 ft. Off Brazil, the company has 20,000 sq km of 3D seismic surveys planned or under way, and it lays claim to being the largest nongovernmental holder of deepwater Brazilian acreage.

Under agreements with state oil company Petroleo Brasileiro SA (Petrobras) and other partners, ExxonMobil plans to drill 12 wells by August 2001. Plans call for the first two operated exploratory wells to spud in the Espirito Santo basin next year. The company has completed work on the BC-10 discovery well in the Campos basin, where early press reports suggesting a giant oil discovery were greatly exaggerated, Thompson said.

He expressed concerns about the evolving Brazilian petroleum fiscal regime, noting that the terms under which the company entered into agreements with Petrobras and Brazilian national petroleum agency ANP at the exploration stage-singling out the special petroleum tax and royalty and other such front-end taxes-�continue to make development [decisions] difficult.�

�Hopefully,� he added, �the contractual terms will continue to evolve.�

Regulatory, fiscal concerns
Thompson contends that Latin America�s highly prospective oil and gas potential can be fulfilled against a backdrop of sustained robust economic growth, provided that this growth is underpinned with sound macroeconomic policies, market reforms, privatization, and a fair and transparent legal and regulatory framework.

If Latin America�s oil and gas supply potential is to be realized, he said, the petroleum industry must continue its successful efforts in technology research, effective application of new technologies and technical expertise, and cooperation between host countries and international oil companies to agree on contractual terms and fiscal regimes that result in mutually beneficial partnerships.

In that last category, Thompson ticked off eight elements crucial for an international oil company to succeed in investing in exploration and production in a country:

� Exploration blocks large enough to maximize exploration opportunity.

� A completely transparent bidding regime.

� An initial period long enough for exploration and appraisal efforts to succeed.

� A sufficiently long production period to underpin return on investment.

� A regulatory regime that is transparent and not unduly burdensome.

� Requirements to use local resources to be leavened with the understanding that those local resources must be price-competitive.

� An international market price for production that is in a convertible currency.

� A stable, profit-based fiscal regime.

Thompson also tossed in two other requirements on his wish list, calling for the �sanctity of contracts� and for any �dispute between companies and government to be subject to international arbitration.�

He noted that a number of Latin American countries are enabling their fiscal regimes and contractual terms to evolve to the point where international oil companies could begin to commit the significant investments required to develop oil and gas projects-especially in difficult and challenging environments such as the deepwater theater.

With multinationals planning, designing, and implementing major oil and gas projects around the world-especially given the scope of E&P portfolios as big and wide-ranging as ExxonMobil�s-Thompson warned that Latin America could find itself disappointed in the worldwide competition for energy development capital.

�No matter how big and successful they are,� he concluded, �[international oil companies] have to be selective in the pursuit of new opportunities for growth.�

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