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Seeking energy investment in southern Patagonia

In an effort to revitalise its flagging upstream oil sector, which now produces about a quarter of the output of 20 years ago, Chile’s state-owned oil company, Enap, has just introduced a programme to invite foreign oil companies into its tightly held Magallanes Basin fields. The region’s gas industry also appears poised for growth, writes Paul F Hueper, from Tierra del Fuego

Down that gloomy passage ... appearing to lead to another and worse world. When Charles Darwin described his journey through the Strait of Magellan in 1834, he hardly could have foreseen that this remote and harsh region of Patagonia would some day become a focal point for hydrocarbons production and processing in southern Latin America. In 1999, Chile celebrated its 50th year of oil production. And although the Magallanes Basin—encompassing southern Patagonia, the Strait of Magellan and Tierra del Fuego Island—has been extensively developed, a new upstream offering and a variety of downstream gas projects will probably ensure the region draws international attention.

Last December, Chile announced that it would open its Magallanes Basin fields to foreign investors. Although these fields are largely gas prone, they have been almost exclusively developed for their oil and gas liquids reserves. The field offering is primarily intended to bring in outside technology and capital to assist state-owned Empresa National del Petroleo (Enap) in maintaining, and possibly boosting, the region's oil production.

To date, Enap has been successful in exploiting Chile's relatively modest oil resources base in Patagonia. During the past 50 years, the company has drilled more than 3,000 wells—about 800 of which are from 46 offshore platforms—and built a sizeable gas prosessing industry, and 3,000 km of pipelines, some of which are supplied by producers in neighbouring Argentina. As a result of this extensive effort, all of the country's oilfields are in advanced stages of decline, with production now at around 6,000 barrels a day (b/d). This compares with peak output of about 40,000 b/d in 1982.

Rising domestic oil consumption is one concern that has driven Enap to seek foreign help in Chile's upstream sector. Refined product demand is now running at more than 210,000 b/d and rising annually at rates of up to 8%. With limited domestic oil production, Chile has relied extensively on imports from elsewhere in Latin America and West Africa. Argentina, Brazil and Ecuador are the main crude suppliers, accounting for about 85% of total imports. Since early 1994, the Oleoducto Transandino, which links Argentina's Neuquen Basin to central Chile's 100,000 b/d Talcahuano refinery, has proved an efficient and cost-effective way of importing oil from Argentina. This 426-km, 16-inch pipeline carries 115,000 b/d, the balance of which is exported from the terminal at nearby Concepcion to Asian markets.

Separated from domestic markets in the rest of Chile by impassable mountains and glaciers, development of Chilean Patagonia's oil and gas resources was a challenge. While natural gas utilisation in northern Chile has been spurred by the completion of trans-Andean import pipelines from Argentina, Chile's sizeable gas resources remain isolated from domestic markets. Enap, however, has built an extensive gas processing industry—which includes the world's largest methanol complex—in the Magallanes region that already benefits producers in Argentina's Patagonia and Tierra del Fuego regions. In the future, Enap hopes to attract foreign investment, not only for its upstream oil sector, but also for new downstream gas projects that would boost economic growth and development in both Chilean and Argentine Patagonia.

Long history of oil development

Oil exploration first began in Chile in the late 1800s, with a survey by French scientists in 1893 that indicated a potential for hydrocarbons existed in Chilean Patagonia. The discovery of oil seeps on the Brunswick Peninsula, located on the continental side of the Strait of Magellan, spurred exploration efforts. The region's first wildcat, near the Canelos River, however, was dry. By 1920, six more wells had been drilled, most to depths of 200-850 metres. Optimism concerning the region's petroleum potential continued to run high during the next decade, and Royal Dutch and Standard Oil pursued the acquisition of exploration concessions on the Brunswick Peninsula and Tierra del Fuego.

The exploration effort in Patagonia was subsequently stepped up through the 1930s and focused on the area surrounding Punta Arenas on the Brunswick Peninsula and on nearby Riesco Island. It was not until December 1945, though, that Chile made its first oil discovery with the Cerro Manantiales (Springhill) well on northern Tierra del Fuego Island. Within a period of four years, more than 20 wells were drilled at the Manantiales field, which came on stream in 1949.

The Manantiales find shifted the exploration focus in Chile from the continent to Tierra del Fuego. Beginning in 1951, with the Sombrero field, a flurry of activity led to the identification of more than 20 fields. By the late 1950s, eight major fields had been brought on stream, including Calafate, Catalina, Chillan, Chanarcillo, Cullen, Flamenco and Tres Lagos. In 1954, the Cullen field—Tierra del Fuego's largest oil and gas field—began production. When it reached its peak output of about 8,200 b/d in 1961, the Cullen field accounted for one-third of Chile's oil output.

Between 1958 and 1961, a handful of sizeable oilfields on the Strait of Magellan's continental side were brought on stream, including the Posesion-Canadon, Daniel and Daniel Este-Dungeness fields. These fields posed a unique challenge to Enap's engineers because a large part of the reservoirs extended into the Strait. Consequently, deviated wells extending beyond the shoreline were widely used, as platform developments were not possible at the time. Many of these slant wells were drilled at up to 76O angles and had total lengths of 3,800 metres.

Rising output from these continental fields, which now contain about 570 wells, pushed Chile to its first oil production peak of 37,500 b/d in 1964. Other capacity additions from Tierra del Fuego, most notably from the Tres Lagos field, helped to keep Chile's oil sector in a rough production plateau through the late 1960s.

Sharp production declines

Beginning in 1968, Chile's aggregate oil production began to decline sharply. In certain years, such as 1977, annual decline rates reached almost 18%. Total output fell from 37,500 b/d in 1968 to 14,500 b/d in 1978.

Changes to promote foreign investment in the flagging oil sector and exploration initiatives offshore and elsewhere in the country were undertaken. Following geophysical and seismic surveys of both Chile's continental shelf and the Strait of Magellan in the 1960s and early 1970s, Enap spudded the first wells in the Strait of Magellan with a jack-up rig.

Subsequent results offshore were beyond expectations. Drilling success rates of up to 85% were experienced in offshore extensions of continental fields in the northern Strait. The country's estimated oil reserves more than doubled to 450m barrels, with about 300m barrels located offshore in the Strait. 

Typical conditions in the Strait of Magellan can be harsh and not unlike the North Sea. Strong currents of up to 9 knots, winds of 50-70 km an hour, tides of more than 10 metres and winter temperatures of below -15OC all posed challenges to offshore field developments. Maximum water depths in the Strait are 76 metres. Encouraged by the exploration results, however, Enap set up its own platform fabrication yard at Bahia Laredo, north of Punta Arenas.

In 1979, the first entirely offshore oil and gas field, Ostion, was brought on stream under a two-platform development and, within a year, reached its 5,000 b/d peak production. In the following year, jackets were installed at the nearby Spiteful field. Just two years after start-up, the Spiteful field reached peak output of 22,500 b/d. It was the main contributor to the resurgence of oil production in Chile, which peaked a second time at 40,150 b/d in 1982. The Posesion-Canadon and Daniel fields also were among the first fields to receive platforms, many of which had up to 12 slots each. Production at these onshore-offshore fields was subsequently boosted through more efficient offshore drilling and enabled it to reach a second peak. Between 1981 and 1991, a number of strictly offshore fields— Spiteful Norte, Pejerrey, Skua, Catalina Norte, Anguila and Terramar—were developed with offshore platforms.

The boost to Chile's oil production brought about by the Spiteful and other offshore fields, however, was short-lived, despite new field additions. Production declines resumed at rates reaching 10-20% for all but one year between 1987 and 1996, and total output fell from 27,500 b/d to 7,500 b/d during that period. Drilling in Chile continued to decline in the late 1990s. In 1998, 14 wells were drilled, of which half were exploratory and 12 onshore. In 1999, five wells—three development and two exploratory—were drilled. Just two more wells are planned in 2000. These figures compare starkly with activity in years such as 1983, when 76 development wells and 23 exploratory wells were drilled. In 1999, Chile produced about 6,300 b/d, according to Enap data.

All oil production in the Magallanes region is sent to the 15,000 b/d topping plant at Gregorio. On Tierra del Fuego, a crude line from Cullen runs to the Clarencia terminal on the island's west coast. Crude is then shipped across the Strait to Gregorio. Another crude pipeline connects Gregorio with Posesion. Due to a gradual lightening of Chilean crude production, Enap has recently experienced slight difficulties in optimising the Gregorio's product slate. It has also begun to purchase Argentine crude for use as feedstock. The plant produces jet fuel, kerosene and diesel exclusively for the Punta Arenas market.

Maintaining a mature oil sector 

In the 1980s, rapid field production declines partly resulted from Enap's interest in producing as much oil as rapidly as possible during this period of high oil prices, according to Victor Silva (Medina), head of Enap's production operations. Strong natural-water drives and good sweep-efficiency rate in the offshore fields aided the goal of maximising output. Many older fields still exhibit relatively low water-cuts of 50%, although some key fields have rates of up to 70%.

For offshore fields, an oil-water mix is piped to Posesion for processing with free-water knockout tanks and treated. In the past, this treated water was dumped in the Strait of Magellan. Although this practice did not harm the environment, Enap is now initiating a programme to send water treated at the Posesion facilities to onshore fields on the continent for reinjection. This new programme affects the offshore Posesion, Spiteful Norte and Spiteful fields.

At present, Enap has only about 300 wells in production, with one-third of these offshore, according to Silva. About half of production comes from offshore, 32% from Tierra del Fuego and 20% from the continent. With increased gas utilisation at the Cabo Negro complex, fewer than six wells are now used for gas reinjection.

All of Enap's main offshore and onshore fields are in an advanced stage of depletion. The offshore Spiteful field, once Chile's largest producer, now has an output of 400 b/d of oil and 420,000 cubic metres a day (cm/d) of gas.

The field has a total of 82 wells, but only 12 of these are still producing. Eight platforms are situated at the field, all but two of which are automated. To date, the Spiteful field has produced 47m barrels of oil, or close to a 48% estimated ultimate recovery (EUR) rate, according to Silva. Similarly, the onshore Cullen field has about 200 wells in the field, of which only a small number are on stream, and produces less than 350 b/d. Since 1954, the field has produced 43m barrels of oil.

In December 1999, Enap introduced a field reactivation programme to attract foreign expertise and capital to assess and possibly develop programmes to maximise oil recovery rates at fields in the Magallanes Basin. This investment opportunity covers 21 oil and gas fields—nine on Tierra del Fuego, eight offshore in the Strait of Magellan and four on the continent. These fields have comprised the bulk of Chile's oil production over the past 50 years. The offering includes all zones of single or multiple fields, any exploration or development opportunities that might be identified and fully negotiable contract terms that could include surrounding areas.

The programme is intended to attract companies that can apply advanced technology, such as 3-D seismic acquisition, horizontal and infill drilling, and enhanced oil recovery (EOR) programmes.

So far, about 20 companies have asked for more information regarding the reactivation programme. All are either small- or medium-sized independent companies or service firms.

As of mid-February, five companies had visited Enap's data room in Houston. Companies with further interest have the chance to see additional information in the company's Punta Arenas office. In payment for their services, Enap has proposed that the foreign partners receive a share of the incremental increase in revenues from oil production from the fields.

During a recent interview in Santiago, Salvador Harambour (Giner)—general manager of exploration and production for Enap and also chief executive of Sipetrol, Enap's foreign subsidiary—described how the field reactivation programme would benefit Chile's upstream oil sector. Our fields are in a very late stage of production, and we do not expect much additional recovery in the future, unless secondary and tertiary recovery methods are applied. Enap has done a lot of studies on CO2 reinjection, but at this stage, we believe that the best way is to invite experienced oil and gas companies to look at and study our information and to propose possible increases in recovery.

Indeed, the potential for the use of advanced technology to boost recovery factors at Enap's fields is good. While gas reinjection and gas lift have been conducted extensively for years, they have not been part of an advanced recovery programme. Only limited waterflooding programmes have been used on two fields on Tierra del Fuego. Under primary production, Enap estimates that EUR at its oilfields has been a good 30-35%, partly due to the high quality of the reservoirs.

Rapid production rates at many fields have resulted in the creation of bypassed oil pockets, particularly in those located offshore. So far, part of Enap's challenge has been that many remaining hydrocarbons pockets are below the resolution of 2-D seismic, as Carlos Herrero (Pisani), Enap's head of exploration, recently explained in Punta Arenas. Several limited 3-D seismic programmes were undertaken in the 1990s, including a 300 square km survey on the offshore Daniel Este, Dungeness Este and Spiteful Sur fields, as well as another that covered a 750 square km tract over the Calafate area on Tierra del Fuego.

Structures more complex

More 3-D surveys will be instrumental in ascertaining the extent to which recovery factors at existing fields might be improved. As Herrero explained: Structures in the Magallanes Basin are more complex than originally thought and not possible to understand fully with 2-D seismic. 

The Spiteful field is an example of how 3-D seismic has led to a better understanding of the field's reservoir. A recent survey has indicated that three new areas— potentially holding hydrocarbons—were previously overlooked. But these new areas could be saturated with water because of the field's strong water drive—it's impossible to tell on seismic, cautions Herrero.

Still, Herrero and others at Enap are optimistic about the potential for advanced technology. The potential for new drilling technology, such as infill and horizontal drilling, also exists if bypassed oil pockets in fields can be identified on 3-D seismic.

Typical well spacing at fields such as Posesion is 500 metres for oil and 800 metres for gas. For heavier oilfields, such as Dungeness, well spacing is every 300 metres.

With a successful field reactivation programme, Harambour hopes that a 1-2% increase in EUR will occur. Enap estimates that $27m in investment will be required to implement EOR programmes on oilfields in the Magallanes Basin. The foreign companies will have to invest with Enap—share both investment and the risk—to partake in the rewards of this programme. We plan to make the programme as transparent as possible, added Harambour.

Oil production has traditionally dominated Enap's upstream activities, but expanding methanol production capacity and increased ties with Argentine producers may be heralding a new gas era for the region. In 1999, Chile produced about 8.1m cm/d of gas, about 6.1m cm/d of which was reinjected at fields after it had been stripped of liquids. In 1998, gas output net of reinjection was slightly greater at 3m cm/d. Enap has developed a significant gas processing complex in the Magallanes region. First-phase gas processing at Posesion, on the continental side of the Strait, is handled separately, from that at Tierra del Fuego, but wet and dry streams from these locations, and from Argentina, are transported to the industrial complex at Cabo Negro for final processing.

The 9.6m cm/d capacity turbo-expansion plant at Posesion is located 240 km from Punta Arenas and near the entrance to the Strait.

Since it came on stream in 1971, it has served as a first-phase liquefied petroleum gas (LPG) recovery plant with output of a raw mix of dry gas, propane, butane and other natural gas liquids (NGLs). From Posesion, the liquid mix is carried via an 8-inch, 180-km pipeline to Cabo Negro. An 18-inch dry gas line parallels the same route to Cabo Negro.

On Tierra del Fuego, gas processing is handled by a 4m cm/d cold-absorption plant at the Cullen field. This plant was built in 1962, but received an extensive upgrade in the 1990s. It is used to produce commercial-grade propane and butane on-site, as well as other NGLs. Dry gas from the Cullen plant travels via subsea pipeline across the Strait to Posesion. LPG from Cullen is carried by pipeline to the Percy terminal on the island's west coast, from where it is shipped across the Strait to Cabo Negro.

Exports of LPG

Cabo Negro is the largest gas-processing complex in the southern Patagonia region. The site contains an LPG plant, which is fed by the liquids mix from Posesion. Until last year, the plant produced 900 cm/d of propane and 600 cm/d of butane, but with a recent $100m expansion, the plant now has a capacity of 3,000 cm/d. From Cabo Negro, LPG is exported to northern Chile and to Atlantic-coast markets in Latin America.

Cabo Negro is also the location of Methanex Chile, which runs the world's largest methanol complex that now has three trains requiring up to 6.5m cm/d of feedstock. Last year, a $300m, 2,700-tonnes capacity train was added to the facility, raising total methanol output to 8,500 t/d. Harambour points out that Enap has committed its remaining dry gas reserves to the methanex plant. The first train was supplied entirely by Enap's gas. Argentine gas supplies were then brought in to supplement our own for the second train, but Argentine gas will be used exclusively to supply feedstock for the third train. 

Harambour estimates that during the past 50 years, Chile's gas reserves have been produced, stripped of liquids and reinjected—in effect, recycled—about five times. Enap's LPG production is beginning to slide. But with new production from the Argentine side, Enap can optimise the way we are producing in our fields, he adds.

Increased shipments of Argentine gas to Chile are the main reason for recent capacity additions at the Cabo Negro LPG and methanol plants. Enap now receives about 3m cm/d of dry gas and at least 500,000 t/y of gas liquids from Argentina via three pipeline routes: from the Rio Gallegos area to Posesion; from the Anomalia Magallanes field development, off the entrance to the Strait, to Posesion; and from Argentina's fields onshore and offshore the Atlantic side of Tierra del Fuego. In addition, Totalfina ships up to 1,400 cm/d of LPG by pipeline across Tierra del Fuego and the Strait to a tie-in point on the Posesion-Cabo Negro liquids line located near the Gregorio topping plant.

Enap is interested in attracting foreign investment to the Bahia Laredo-Cabo Negro complex. Cabo Negro now serves as the only export terminal for LPG, products and methanol from southern Patagonia and Tierra del Fuego, and Enap would like to expand it further in order to make it a logistical and industrial base for all of southern Patagonia.

Draft limitations are a major problem offshore Patagonia because of the steep Atlantic coast combined with the smooth gradient of the continental shelf, explained Jorge Vera (Capkovic), Cabo Negro's plant manager.

Totalfina's mono-buoy for its Hidra field, for example, is located almost 14 km from the Tierra del Fuego coast. Bad sea conditions that can cause delays of several days compound the problem further, which is part of the reason why Cabo Negro is now used by Enap and Argentine producers. Vera sees a bright future for Cabo Negro: It is going to continue to be the main loading terminal for both Chile and southern Argentina. It is protected from winds and can service vessels of up to 90,000 dwt for 350 days of the year.

At Cabo Negro, Enap is seeking partners for ambitious plans to increasing its gas processing capabilities. The company would like to build new plants to produce ammonia-urea, polyethylene and normal paraffin, as well as a 300,000 t/y methyl tertiary butyl ether (MTBE) facility. These projects are estimated to range in cost from $30m-400m.

Enap is also interested in marketing its upstream-related services and downstream facilities to Argentine producers.

It is offering a broad range of services, including exploration and onshore and offshore project engineering, drilling and construction. The Laredo fabrication yard, has built platforms of up to 1,000 tonnes. Enap also has three onshore rigs and one modular offshore rig.

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