Exploring for Oil in Nicaragua: Friends in High Places

 
on August 29 2013 1:10 PM

On 17 July, Nicaragua announced that US-based Noble Energy would invest $30 million in drilling two offshore wells in the Caribbean—launching Nicaragua's first-ever oil exploration. The wells will be drilled in the Tyra and Isabel blocks, which have undergone nearly 5,000 kilometers of seismic surveying since 2011. But Nicaragua's first exploration will not go off without a hitch—namely, the revival of a nasty territorial dispute with Colombia, and another with Costa Rica.

In all Nicaragua is planning to offer up nearly 68,500 square kilometers of offshore Caribbean territory to explorers, dividing the area up into over 150 blocks.

This brings us to Noble Energy, one of our favorites over the past couple of years, but a company whose exploration bravado could land it in hot water—so we keep a close eye on developments. But here it's all about who you know and who your friends are—and Noble's got big friends in high places.

Noble Energy has minimal presence in Latin America, although aside from the Nicaraguan Caribbean, they purchased large areas for potential hydrocarbon exploration off the (also disputed) Falkland Islands (or Islas Malvinas, depending on your audience). Noble has built its company, in part, by drilling in unconventional corners of the globe, and the disputed waters between Colombia and Nicaragua are just such a niche.

Although Noble Energy is forging ahead with plans to drill for oil in Nicaraguan water, for most companies the potential downside of raising Colombia's rankles outweighs the potential upside of a contract in Nicaragua.

Even before the International Court of Justice (ICJ) handed down a decision in late 2012 awarding the maritime territory to Nicaragua, Noble was preparing to get to work there. But Colombia is fighting to reverse the ICJ decision. This is a huge potential problem for outside investors with operations there and contracts with Nicaragua. Even if the bloc stays under Nicaraguan control, Colombia's energy sector dwarfs Nicaragua's, and drilling in the disputed area is almost certain to make Noble, and any other company working there, persona non grata in Bogotá.

Still, Noble is counting on projections that an investment of $335 million for at least five productive drills will yield 500 million barrels during the 20 to 30 year contract. They have the backing of one key man who has outlasted many and upset many predictions: Nicaraguan President Daniel Ortega, who will see revenues of up to $700 million a year if Noble's projections are accurate.

Last week, tensions picked up momentum when Nicaragua's promise became more than a threat—it became reality—when Noble's Ocean Saratoga began drilling its first offshore exploration well. The well is being drilled 168 kilometers offshore from the Nicaraguan Caribbean coastal town of Bluefields. The first well will be drilled to a depth of 3,358 meters and exploration will be conducted over the next three months.

This is where Costa Rica comes in. Costa Rica, like Colombia, has its own claims. Specifically, Costa Rica claims maritime territory consisting of 18 blocks in the Pacific and 55 blocks in the Caribbean being offered up to explorers by Nicaragua.

Colombia's Response

Noble's endeavor has prompted Colombia to warn that it will under no circumstances allow oil exploration in the disputed territory. The Colombian president has also noted that its discretion on the issue for now should not be interpreted as inaction.

From Colombia's perspective, this disputed area of the Caribbean sits in a UNESCO-sanctioned biosphere, Seaflower—home to a huge coral reef that should not be an oil-drilling target. A significant number of the blocks being offered up by Nicaragua for drilling are in this area. Also raising Colombia's ire are the blocks located near the Colombian island of Quitasueno.

It gets even trickier when you consider that Colombia has controlled this territory since it gained independence in 1819—thanks to a number of treaties. However, those treaties—most recently one from 1928—are irrelevant, says Nicaragua, which claims that it was only signed under the pressure of US occupation. The ICJ rocked the boat on this late last year, ruling that Colombia has the right to seven islands in the territory but that Nicaragua should have the right to 70,000 square kilometers more than it was granted under those old treaties. Colombia is now challenging this legal assumption to the best of its ability. But the legal battle will extend further now that Nicaragua is seeking even more than the 70,000 square kilometers the ICJ thinks it should have.

Conclusion

Noble's got its diplomatic work cut out for it, but its relying on full support from Ortega to deal with these territorial disputes. But there's additional risk on this one as well. Nicaragua is uncharted territory, and the company itself notes only a 25% chance of success with its first well. This is just the test-run, intended to gather information for Noble's Caribbean coast drilling ambitions, for which it plans to invest anywhere between $90 million and $335 million over the next six years, depending on how successful this first well is.

But Noble is opening up a Pandora's Box here—much like it has in the Levant Basin with its wild exploration discovery of natural gas for Israel and a simmering dispute with Lebanon. So far, the company has managed to avoid getting entangled, but Nicaragua could be a legal headache—or worse. Where Noble is concerned, Colombia is the biggest problem, while the battle with Costa Rica is simmering faster on other grievances the country has with Nicaragua (and the US)—namely, ambitions to build a $40 billion Nicaragua Canal to rival the Panama Canal. Right now the most important thing to watch is the ICJ, which could be the kink in this chain.

By. Oil & Energy Insider Analysts of Oilprice.com

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