Saturday, October 27, 2007

Columbia: PetroSouth, Barco, Standard Oil, Texaco, Socony-Vacuum

This report came across the Canadian Newswire about a company acquiring exploration assets in the country of Columbia.

The news-release states:

"PetroSouth Energy Corp. (the "Company")(OTCBB:PSEG), an energy exploration and production company focused on high-impact energy prospects in Colombia, South America, is pleased to announce the acquisition of a 6% working interest in the 64,000-acre Carbonera Exploration and Exploitation Contract, and participation in three future exploration wells."

and further states:

"The 6% working interest was acquired for US $420,000 and other considerations from Omega Energy's exploration block located in Catatumbo Basin region of northeastern Colombia. The operator of the Carbonera Contract is Well Logging Ltda. Fulfillment of the first Phase contract commitments (Phase 1 re-entry of Cerro Gordo-1) was met prior to the Company acquiring the 6% working interest. Pursuant to the terms of the Contract the Company will participate with drilling one exploration well in each of Phase 2 (12 months -April 28, 2008), Phase 3 (12 months - April 29, 2009) and Phase 4 (12 months -April 28, 2010). The Cerro Gordo-1 well was originally drilled and abandoned by Texaco in1989. The well was re-initiated (re-entered) by Well Logging Ltda. in thesouthern part of the block in June 2007. It was proven productive after aone-week test. The Cerro Gordo-1 well flow tested a combination of gas andcondensate at Gas: 4.0 MMCF/Day and Condensate: 60 BBL/Day."

The region encompasses the Catatumbo River basin and it begins northern Columbia, in the department Norte de Santander. It flows northeast across the Venezuelan border, and crosses the rich oil-bearing regions in the Maracaibo Lowland, and empties into Lake Maracaibo after following a course of about 338 kilometres. It is navigable in its lower course and receives more inflow from the Zulia River 6 kilometres west of Encontrados, Venezuela in the Maracaibo Lowland.

The Catatumbo Basin is a subbasin, forming the southwest flank of Venezuela's prolific Maracaibo Basin. It is bounded to the west by the Santander Massif (hence the department name of Norte de Santander) and the Sierra de Perija and in the south and southeast by the Merida Andes. The eastern boundary is defined by the Venezuelan border with Colombia. In Venezuela, this basin has already produced several billion barrels of oil, and individual producing fields there range in size up to more than 800 million barrels of oil recovered to date.

Oil exploration in this area began in the thirties, with initial exploration activity taking place in TibĂș field. By 1941, the field was in production as part of the Barco Concession (see footnote below), operated by Colpet. In 1977, Ecopetrol assumed the operation of the field, and after the concession reverted in 1982, all the rights to income after royalties went to Ecopetrol.

As we can tell, there are prolific fields in Columbia. The news-release provides a good summary of the region and neighbouring fields:

"Immediately adjacent to the Carbonera Block lie fields such as Tibu,found in 1940 and with 260 million barrels produced to date, Petrolea,discovered in 1934 with 38 million barrels produced to date, and Rio Zulia,dating from 1962 and with 137 million barrels recovered to date."

There are many attractive reasons to do exploration in Columbia.

January, 2004, marked a change in the way Columbian Government decided to conduct business with regards to regulatory and fiscal policies intended to encourage oil industry investment in the country. Some main points, including security, are:

  • The hydrocarbon potential of the country is significant in terms of the overall economy and much of it remains untapped due to alack of investment in the last 20 years.
  • Fiscal terms were revised as of January 2003, making Colombia an attractive country in which to invest in the oil and gas industry. These fiscal incentives increased the share of revenue which an investor could obtain from 27% to up to 50%
  • Colombia has a stable economy, with low inflation and consistent economic growth and, due to the fact that it has never defaulted on a debt payment or breached a contract with foreign investors, is a favored location for direct foreign investment.
  • Colombian authorities provide essentially unlimited access to all technical information on oil and gas blocks.
  • The security situation in the country, which has long hampered exploration, has improved significantly and is expected tocontinue to improve.

With the work being done by PetroSouth, we are seeing how a junior is working in another country that we do not often associate oil and gas with. They are growing their business one step at a time, taking educated risks and looking for a well-planned return on investment - not an immediate one, but one down the road.

You can't track oil stocks based on their Quarterly Reports. In my mind (opinion), that is bad business and bad analysis. Look at long term. Consider the fact that finding the fields and the exploration involved can take many years. Then consider once the field is proved productive, setting up the production facilities, then the pipelines - we are looking at easily 10 year span to bring most fields in remote regions to fruition. The infrastructure takes time, and even pipeline companies and operators want to know there are consumers for the oil or gas, before investing in the country and making large commitments.

My advice, don't play oil stocks on the short term (i.e. quarterly), but on the long term prospects and continual growth of fields coming on line. This is how juniors operate and slowly they'll become the new majors.

A Footnote: A Little History from Time magazine about the Barco Concession

Quoting from a Time Magazine article about the Barco Concession, we see an interesting story of how oil exploration, Standard Oil, Gulf Oil and others played a part in building Columbia's oil history.

An very good read, enjoy the article below:

"Time Magazine, Monday, October 30, 1939

In A. D. 1907 General Virgilio Barco of the Republic of Colombia turned up in Manhattan. He had in his back pocket an oil lease to 1,200,000 acres of his native jungle—a gift to him from a grateful country. No fool, he went straight to No. 26 Broadway, office of the late John D. Rockefeller. Standard Oil's guards took one look at the general's Latin getup. He never got in, and until last week no oil ever came out of the Barco concession.

For 29 years the concession was juggled like a hot potato. Virgilio sold it to seasoned Promoter Carl Kendrick MacFadden's Carib Syndicate (25%) and Henry L. Doherty's Cities Service Co. (75%). Cities Service faced 250 miles of steaming, mountainous jungle between the Barco and the Caribbean, and gave up. In 1926 it finally sold the concession to the late Andrew W. Mellon's Gulf Oil Corp. Then the Colombian Government put its oar in, canceled the whole concession.

Out of Colombian courts and politics five years later came the Barco concession revamped: Gulf Oil received a 50-year contract calling for construction of a pipe line to tidewater and payment of a 3½% royalty to General Barco's successors, 6% to Colombia on all oil delivered there. Gulf sank twelve wells, and a lot of money. There was oil there, but the cost of getting it out was appalling. In 1936 not one barrel of Barco oil had yet reached the sea when testy, ribald, Norwegian-born Torkild ("Cap") Rieber, The Texas Corp. chairman, finally shelled out a cool $12,500,000 for Gulf's "white elephant." He took Socony-Vacuum Oil Co., Inc. into a 50-50 partnership and for $2,050,000 bought Carib's minority interest. That done, Cap Rieber settled down to one of the toughest engineering feats in the history of his industry: piping oil from the Barco to the sea.

Last week Barco oil oozed from the end of a 263-mile pipe line at the new-built Colombian port of Covenas. It was not black like much U. S. oil but bright green (it looked golden in the sun). Hove to in Covenas harbor, the Texaco tanker Nueza Granada and Socony-Vacuum tanker Altair began to fill their cargo tanks with the first Barco oil for transport to an unnamed foreign crude buyer.

To hardheaded, steel-willed Torkild Rieber (57), once a tanker captain himself, the tough job's end was a triumph. Construction began in February 1938. There were no roads, and the rainfall was terrific. With a fleet of six trimotored Fords, a Lockheed and two Stinsons, engineers flew in, piece by piece, tractors to cut jungle roads, suspension bridges to span the rivers, power plants, refrigeration plants, pumping stations, cement, concrete mixers, food, and 263 miles of twelve-inch steel pipe. In all, 11,000,000 lbs. of freight went into the jungle by air. One plane with its crew of two flew into the jungle and disappeared for good. Eight other men died on the job—transfixed by arrows of the Motilone Indians (a short, husky, irascible tribe who dress in rancid alligator grease to keep off mosquitoes and hang their dead from the ceiling to rot).

From the Petrolea pumping station at the Barco field the pipe line snaked up 5,400 feet over the Eastern Andes, then down through miles of rotting jungle to the sea, thrice crossed the Magdalena River or its branches. It cost Cap Rieber and Socony-Vacuum a cold $40,000,000 ($18,000,000 for the pipe line; $22,000,000 for development work). "Hell!" says Cap Rieber, "if they wanted to move the Chrysler Building to Colombia, we'd do it —if they'd pay us for it."
Today 25,000 barrels of Barco oil flow daily through the pipe line. Next year they expect to step that up to 50,000, with an eventual top of 70,000 barrels after all seven pumping stations are in. The oil yields 49% gasoline on straight run, double that under cracking processes (ordinary black oil yields no better than 24% gasoline on straight run). How much of it lies hidden in the upper Catatumbo basin nobody knows. The companies have until August 1941 to stake out their final claims. Then half of the Barco reverts to the Colombian Government.

To Texaco and Socony-Vacuum the Barco oil is welcome. Both sell overseas (there is a 21¢ tariff on oil imports to the U. S.) and neither has enough oil for its distribution system. In a warring world they will doubtless find buyers for their Colombian oil, but may bring it to the U. S. to be refined. Last week old Virgilio Barco was many years in his grave, but his son Jorge (pronounced Horkhay) Barco, in CĂșcuta, had himself a few drinks as the royalties began to accumulate."

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