Review

The Latin American Oil Industry - Out With The Old, In With The News....

The potential of the Latin American oil industry is slowing but surely coming to fruition. Although all roads appear to lead to growth, for producers and explorers alike, a number of sizeable hurdles remain. And it is these hurdles which keep the region's growing importance in the oil market very much a medium-to-long term story.

In terms of which countries in Latin America will drive growth over the coming decade, the power appears to be shifting. It's a classic case of 'out with the old and in with the new'. So while production declines from the more established oil producers such as Argentina, Ecuador and Mexico, a two-tiered group of rising stars looks set to take up the reigns and lead the region forward.

In the top tier are Brazil and Venezuela. Although the two nations differ greatly in terms of politics at present, one characteristic they do share is that they are both set to experience a marked uptick in projects being brought on stream. In Brazil billions of barrels of offshore reserves are set to be extracted, while in Venezuela the oil-heavy Orinoco belt is set to provide the country with a lucrative flow of exports for the foreseeable future.

But Brazil and Venezuela are not the only two nations stepping up to the plate. They are set to be joined by two smaller-scale producers in the form of Peru and Colombia. Both nations have been successful at catching the eye of overseas investor of late and look set to enjoy a strong uptick in production output going forward.

More broadly speaking, the region stands in good stead to become an increasingly exporter of oil in international markets in the years to come. Why so? While much of the debt-laden developed world is struggling to record even minimal growth, the economic growth outlook for the Latin American region is altogether more positive. Furthermore, with production output set to outpace consumption, the region will have plenty of surplus to feed both its own oil-based energy needs and to export for profit across the globe.

But as we noted, there will be bumps along the way in the road map to growth – Especially in the near-term.

One of the major stopping points towards growth is state intervention. Heightened levels of government intervention in the oil in gas industry by a string of South American nations – in nation such as Venezuela, Bolivia and Ecuador – has been making the headlines on the business pages over recent quarters. In turn, this has sent a large proportion of foreign investors running for the hills. Worse still, with the increased threat of state intervention in their affairs, existing investors have been rethinking their options too. While some firms have already started to reduce their production levels, others have decided to pull the plug on their local operations altogether – the prime example of this is ExxonMobil's move to leave Venezuela as a result of the state's actions.

The trend is towards focusing and finishing off what they've started on existing projects, rather than new exploration – which it could well argued is the true provider of long-term growth.

And with it the shadow of doubt grows.

Dwindling foreign investment in these countries has seen production levels decline in recent years and cast a shadow of doubt over future production levels. Venezuela holds massive but technically challenging heavy oil reserves that will require significant foreign investment to produce. So far the country has secured foreign partners for most of the Orinoco heavy oil blocks, and we expect these projects to lift production substantially over the coming decade. However, there remains a constant threat that those partners could pull out of their projects if oil prices were to fall significantly or the operating environment were to deteriorate further.

In Mexico, although tentative reforms are being made, strict controls on foreign participation in the country's oil and gas sector continue to hold back investment needed to stem the country's declining production levels.

Argentina has been experiencing reduced investment levels and has relatively few options in terms of longer-term supply expansion, although growing unconventional potential and improved fiscal terms have brightened the outlook somewhat.

The supply outlook is much brighter in some of the regions emerging oil sectors. Billions of barrels of deepwater subsalt discoveries are drawing huge levels of exploration investment into Brazil and, although there are concerns that state-run Petrobras is stretching itself too thin, the country is set to see huge production growth. Meanwhile, Peru and Colombia, in spite of there more modest resource potential, have attracted IOC investment by putting in place attractive fiscal regimes.

The overall regional story remains one of medium-term growth in both supply and demand, with the region's relative importance as an oil exporter growing. Latin American oil supply in 2010 averaged 9.915mn b/d, with 10.24mn b/d expected in 2011 thanks largely to Brazil and Colombia. By 2015, we see the Latin America region pumping an average 12.41mn b/d - up 25% from 2010 thanks to Brazil, Colombia, Peru and Venezuela.

Venezuela is pumping above its agreed OPEC ceiling and heavy oil projects point to healthy long-term growth. We are forecasting output in the country recovering to 3.10mn b/d by 2015 and continuing to rise to 4mn b/d by 2020, assuming that the country is able to attract sufficient investment.

Brazil is doing its best to boost regional supply, minimising its import requirement and developing a growing export capability. Crude oil production should rise from 2.14mn b/d in 2010 to a forecast 2.18mn b/d in 2011, a smaller rise than previously expected, indicating that medium-term growth could be slower than predicted. We expect production to hit 3.65mn b/d in 2015 as new deepwater fields come on stream and sub-salt discoveries increase their contribution. Brazil's overall production benefits from the rising ethanol output derived from sugar.

Colombia has consistently surpassed expectation over the past several years as an improved fiscal regime and security situation have encouraged investment in new production and infrastructure. We forecast production rising from 792,630b/d in 2010 to 1.2mn b/d by 2015 as new pipeline infrastructure unlocks production bottlenecks and investment levels continue to rise.

Oil demand, which reached 8.43mn b/d in 2010, is forecast to rise about 12% to 9.45mn b/d by 2015. There will be no single driving force behind the rising consumption trend, with all countries expected to experience steady growth on the back of relatively strong economic growth across the region.

By Richard Etherington, OilEdge - February 02, 2012