High and dry: not known for oilfields, Uruguay has become the darling of foreign energy companies.

Uruguayans can't be blamed for feeling they are in the center of the oil business these days, considering the battle among oil giants raging in the region. Some are retreating from the market and others are rushing in, briefcases full of investment cash in hand.

Dutch oil giant Shell is bowing out of Uruguay while heavyweights such as state-run behemoths Petrobras from Brazil and Venezuela's Petroleos de Venezuela (PDVSA) see profits in the small South American country, especially taking into account Shell's departure. "A study was made of the company's business portfolio, which led to Shell's leaving Peru, Venezuela, Paraguay, Colombia and Uruguay. At the same time, we kept businesses in Brazil, Argentina and Chile and in six Central American countries," says Gerardo Giordano, the head of Shell's Uruguayan operations.

Leaving Uruguay was not a question of competition but part of an international strategy that stretched beyond the region. "In Spain and in Portugal, Shell also decided to leave the market," Giordani says. In Uruguay, Shell accounted for 22% of fuels sold at the country's service stations and 17% sold at retail outlets. Petrobras bought Shell's Uruguayan assets, a figure industry analysts estimate at US$38 million.

Shell's exit strategy was a great opportunity for Petrobras, which has sought to boost its presence in the region. Petrobras also bought all of Shell's assets in Paraguay and a chunk of them in Colombia. Claudio Castejon, head of Petrobras' international division, says the company now runs 89 service stations once owned by Shell in Uruguay, as well as control of jet fuel sold at the international airport, an asphalt business and fuel sales to domestic and international shipping companies.

In Paraguay, Petrobras took over 134 service stations and runs businesses at airports in Asuncion and Ciudad del Este, according to Castejon. In Colombia, Petrobras runs 38 service stations and some additional assets. The Shell purchases are not the only means for Petrobras to plant its flag on Uruguayan soil. It also bought Conecta and Gaseba from Spain's Union Fenosa and from Gaz de France, respectively, giving it control of Uruguay's natural gas pipelines.

Potential. There may be more business, beyond filling stations and pipelines. The Brazilian giant wants to conduct studies on potential natural gas fields in the country. Petrobras might also build a refinery in Uruguay, which would make its trademark Lubrax line of lubricants, Petrobras President Jose Sergio Gabrielli told LATIN TRADE during a visit to Uruguay.

PDVSA is not likely to sit idly by. It also has Uruguay in its crosshairs. Venezuelan President Hugo Chavez has forged solid relations with his Uruguayan counterpart, Tabare Vazquez, and that includes stronger energy ties. "A feasibility study is under way for the construction of a refinery to produce 50,000 barrels of heavy crude a day, a project that would call for an investment of more than $600 million," says Daniel Martinez, president of Uruguay's state owned oil company Ancap.

PDVSA and Ancap are not just looking at blueprints. In March, PDVSA bought for $15 million a 49% stake in Petrolera del Cono Sur, a Southern Cone fuel distributor, from Ancap. Petrolera del Cono Sur controls 3% of neighboring Argentina's gasoline and diesel market, making it the fifth-largest fuel distributor in that country. The deal ends years of headaches for Ancap; the unit was losing an estimated $30 million a year. "Ancap sold cheap and bought high. It had to sell products at prices capped by the Kirchner government," says Martinez. "By not having its own refinery in Argentina, it had to buy oil from other companies at international market prices that haven't stopped rising since 2005. It's always dangerous to be just in the fuel-distribution segment."

The deal will allow Petrolera de Cono Sur's gasoline stations to sell fuels originating in Venezuelan oilfields in Argentina at domestic prices. Ancap has deals with other oil giants. The company recently created a consortium with Argentina's state-owned Enarsa and with Spain's Repsol-YPF and Petrobras to explore for oil in the Colorado Marina block off Argentina's Atlantic coast. The consortium hopes to begin drilling in 2008. With an initial investment of $15 million, the group is ready to hike that figure to $100 million if warranted.

Other possibilities are popping up in the same area. "We also have good relations with Chile's state-owned oil company Enap, and we are looking at some good alternatives," Martinez says. "Our strategy is to work together on projects tied to Uruguay's logistical advantages. Among other things, its geographic position puts us in the middle of the Santiago-Belo Horizonte belt, home to 60% of the region's gross domestic product. It has good highways and maritime transportation."

DIEGO STEWART * MONTEVIDEO