Recently, there have been political and economic crises in Venezuela, Argentina, Brazil and Ecuador. But in the opinion of many oil and gas industry experts, South America shouldn't be off any U.S. independent's radar screen. "In an environment that's perceived to be tough-where the risks appear high-there's less competition for opportunities," says Bill Cline, Houston-based chief executive for Gaffney Cline & Associates, a worldwide management consulting firm specializing in the oil and gas sector. "Currently, our team of energy specialists believes there are some excellent oil and gas opportunities within South America for counter-cyclical investors, major oils and independent producers." This view is shared by other energy industry observers, including Jerry Kepes, managing director, upstream group, for PFC Energy, a Washington- and Paris-based energy consulting firm; and Michael Dyer, Houston-based director, Americas, global E&P services, for IHS Energy, a Denver-based international oil and gas information services company. Together, these three firms offer their takes on where the best risk/reward ratios are within South America. Venezuela This country has the largest oil resource in South America, with proven reserves of some 75 billion barrels-and this excludes more than 240 billion barrels of heavy-oil reserves in the Orinoco Belt, says Cline. With about 145 trillion cubic feet (Tcf) of proven natural gas reserves, the country ranks seventh. "On the heels of the recent strikes, the recovery of Venezuela's economy is going to rely very heavily on its oil and gas sector," says Cline. "And from what the government has been saying recently, it's clear it has its arms open for foreign investment in that sector." While the government is focusing on the major oils, there is a suite of opportunities for small-cap U.S. producers, he adds. The government has fired some 15,000 workers at PDVSA, the national oil company, including all its exploration managers, Dyer says. "So they're going to be more prone to inviting foreign oil and gas companies-particularly the major oils-to develop that country's huge discoveries." Argentina This mature hydrocarbon province has proved reserves of about 3 billion barrels of oil and more than 27 Tcf of gas, so it's resource-rich, says Rafael Quijano, a senior associate with Gaffney Cline. "Also, it has a fairly attractive fiscal regime, with relatively low royalties and federal income tax." Argentina is a very liquid market for acquiring oil and gas producing assets, he adds. Both the federal government and some of the Argentine provinces are now licensing oil and gas acreage. The peso has declined tremendously in value since its devaluation. "This has translated into much lower operating costs for producers." For small, 10,000-barrel-per-day U.S. oil producers that know the local terrain and how to conduct exploitation- and modest exploration-drilling programs, Argentina is a good place to grow, says Kepes. Brazil Although this country has had a lot of changes in its government and problems with its fiscal regime, it nonetheless has very large unexplored, billion-barrel-potential oil prospects, particularly in the ultradeep offshore, says Dyer. "The major oils and large independents like Devon Energy would have the main interest in such high-potential provinces as the offshore Campos Basin." Back in 1998, the only oil company operating in Brazil was state-owned Petrobras; today, there are more than 40 producers there, including such independents as Devon, Samson, Kerr-McGee and Newfield Exploration, says Ivan Simões, another senior associate with Gaffney Cline. "That's because there's a large variety of play types, from the rehabilitation of old onshore oil fields to high-potential exploration plays like the offshore Campos and onshore Santos basins." Royalties are set at 10% of gross revenues, but can be negotiated down to 5%, depending upon the economics of each discovery. Also, the value of Brazil's currency, the real, has declined in value since the country was opened to foreign producers; again, that reduces operating costs. "Brazilian concession agreements now allow operators to export their oil production; thus, operators can have their revenues in dollars and parts of their investments in reals." Colombia The challenges in two of Colombia's biggest oil fields-Cusiana and Caño Limón-are reflective of those currently facing the country's entire oil and gas sector, says Kepes. "The above-ground risk is very high, including security issues, difficult-to-access rain-forest areas and indigenous-group issues." Against this backdrop, foreign producers have to pick and choose opportunities, he says. "For example, they may want to use state-owned Ecopetrol-which is interested in having capable U.S. independents come in and propose ideas-to operate fields in joint-venture arrangements. Ecopetrol is more familiar with the country's above-ground risks." A few years ago, Colombia's fiscal regime included a high 20% royalty on every field plus strong participation by Ecopetrol, says Quijano. "Those terms have softened and Ecopetrol is now offering concessions on more attractive terms in the Llanos Basin and the upper and lower Magdalena Valley." Trinidad The government of Trinidad is stable and the resource potential offshore is attractive, says Dyer. "BHP made a billion-barrel, deepwater oil discovery in 2001, and a new bid round on nearby deepwater and ultradeepwater acreage may open up later this year, which should draw interest from the bigger oils. That said, there are still some interesting onshore and shelf opportunities for smaller U.S. independents." Trinidad is an old, mature oil province that during the past dozen years has become a dynamic natural gas province, with a rapidly growing LNG business dominated by BP. "However, BHP's offshore Angostura discovery may signal the start of a second life for that country's oil sector," says Cline. Oher independents like Aventura Energy, an affiliate of Canada's Vermilion Resources, are making interesting gas discoveries onshore through joint-venture farm-outs with the state-owned oil company, Petrotrin. Bolivia Large natural gas discoveries in Bolivia during the past five years led to a lot of excitement about the potential of exporting that country's gas to Brazil and Argentina, says Kepes. But the recent economic problems in Argentina have temporarily shut down that country as an export outlet for Bolivian gas. And although the Brazilian gas sector has expressed intentions to build a lot of gas-fired power capacity, that hasn't happened yet. Still, Bolivia has such large gas reserves that several companies, including Repsol, British Gas and BP, have proposed an export project that would pipe gas either through Chile or Peru to a planned LNG plant on the continent's west coast. "So far, that project has not materialized; thus, Bolivia remains a country with a lot of gas potential, but not enough indigenous demand for it or the means of exporting it. For U.S. independents, there may be some opportunities for liquids production, but it's limited to high-risk exploration plays." Peru The oil and gas fiscal regime in this country is becoming more attractive and there are some selective gas exploration plays; however, the most interesting exploration opportunities are in the jungle-on the eastern side of the Andes-so they're difficult to reach, says Dyer. "Still, some small independents like Dallas-based Maple Gas are making money from drilling programs there." While there are large blocks of exploration opportunities available for U.S. independents, the risk of commercialization is high, says Kepes. "There are above-ground risks, problems with getting to remote locations, lack of infrastructure and issues with indigenous groups. I would rank Peru as high-risk, in terms of investment." Ecuador More oil has been found in this country than can be exported at desired levels, says Kepes. However, a pipeline is now being built, and within another two years, oil production is going is increase significantly to take advantage of that additional export capacity. "This is fertile ground for U.S. independents. It's a place where a 20,000-barrel-per-day producer-or larger-could do well," he says. "The fiscal regime is decent, in that the government take is acceptable."