After years of a brutal industry downturn, Latin American oil and gas is finally starting to get back its strength.
But just barely, according to Aditya Ravi, senior analyst for consulting firm Rystad Energy in Oslo.
Challenges for the Latin American oil industry include a financial hangover from the oil price collapse, political uncertainties and a struggle to replace declining production.
In Latin America, “Brazil and Guyana are the hotspots when it comes to exploration offshore. Until something big comes up in Argentina, it’s unlikely” those provinces will be overshadowed soon, Ravi said.
Brazil’s recent past illustrates the problems caused by years of depressed oil prices. Combined with a government corruption scandal, the downturn essentially halted exploration and discovery in the country’s offshore sector.
A licensing round in 2015 met with near disaster. The Brazilian national hydrocarbon agency, ANP, reportedly offered licenses on 84 blocks in six offshore basins and sold only two.
Ravi described Brazil’s upturn in activity as a bounce-back from the depressed years.
“Because of the record (number of) floater agreements signed before 2014, we see significant growth in supply in 2019-20 as the floaters are now commencing production,” he said.
“We see the growth flattening a bit in 2021-23 due to the long-cycle effect – the lack of floater awards in Brazil in the 2014-17 period with oil prices collapsing and the infamous Car Wash scandal,”
Investment interest from the majors and other large industry players is assisting the current comeback effort by Latin America’s national oil companies. ExxonMobil, with its hugely successful offshore Guyana operations, has been especially active.
“Activities did take a hit (during the downturn), but offshore is a long-term focus. The companies involved are big-name companies. These aren’t small names,” Ravi said.
Political forces and depressed economics also have affected the industry’s outlook in Mexico, which introduced investment and licensing reforms in 2013-14.
“In Mexico, they embarked on this ambitious plan before the oil price collapse,” Ravi noted.
License rounds and farmouts in Mexico ultimately affected about 110 blocks, he said, but the drive to continue inviting foreign participation has been in doubt since last year’s election of Mexican President Andrés Manuel Lopez Obrador.
Obrador questioned the effectiveness of the industry reforms, moved to strengthen national oil company Pemex and canceled planned licensing offers for three years.
“That’s been put on hold until all the rounds are investigated for any kind of corruption. We don’t see any additional bid rounds to 2020, but from 2021 forward we definitely see things happening,” Ravi said.
Mexico’s challenge is to turn around a serious decline in oil production. There’s been a lot of talk about addressing the situation but without meaningful progress, Ravi noted.
“Actions have fallen short of delivering results as production continues to decline,” he said.
“In terms of development, we do see these relatively shallow mid-sized offshore fields being fast-tracked for development,” Ravi added.
But the big potential lies in deepwater offshore exploration and drilling, he observed.
On Mexico’s Trion block, “the BHP appraisal is being drilled right now and that is very interesting. The Etzil well by Total is interesting,” Ravi said.
The ultra-deepwater Etzil prospect, offshore Mexico in Block 2 off the Perdido Fold Belt, had a 2.7 billion barrels-of-oil-equivalent pre-drill potential resource estimate.
Improving financial results after the oil industry’s down years are now boosting the outlook for many Latin American energy companies.
In June, Ecopetrol reported that Standard & Poor’s had upgraded its stand-alone credit rating to investment grade, a sign of fiscal recovery. Ecopetrol is Colombia’s primary oil company.
Earlier this year, both Ecopetrol and ExxonMobil signed joint venture agreements with Spanish oil company Repsol for offshore exploration in the Caribbean. The ventures will target two blocks of about 988,000 acres (400,000 hectares) each.
Colombia recorded the greatest number of oil and gas discoveries worldwide in the second quarter of 2019, according to a report from data analytics and consulting company GlobalData. It reported seven discoveries, all onshore.
Five were conventional oil discoveries in the Putumayo and Llanos Orientales basins, and the other two conventional gas finds in the Lower Magdalena Valley basin.
YPF, Argentina’s national oil company, is pursuing expanded operations in the country’s Vaca Muerta shale play. According to news service BNamericas, the company won a bid round for the play’s Aguada del Chañar area in June.
In a strategic move, YPF has shifted its focus to further shale oil development to offset oil and gas production declines. Its shale investments are expected to grow from this year’s planned $1.5 billion to $3 billion in 2022.
From the Vaca Muerta shale, “we saw 40,000 barrels of oil a day at the beginning of 2018. At the end of the year we could see that going up to 80,000, so there are already steps being taken,” Ravi noted.
Total natural gas production from Vaca Muerta exceeded 1 billion cubic feet per day in December 2018, he said.
“Argentina began exporting gas in June. It plans to export during the summer season, basically, when domestic demand is lower. The demand would still exceed supply during winters,” he observed.
Gas from Vaca Muerta also helped the country export its first LNG(Liquified Natural Gas) cargo from the Tango floating liquefaction unit, although for Argentina, LNG is “not a game changer, but just to monetize over-supply,” Ravi said.
In recent years, Argentina has struggled to support unconventional development with subsidies, including a supported price for natural gas. Difficulties came partly from the industry downturn and its effects, party from the country’s own internal financial problems.
“The government promises $7 and it makes up the difference – if gas is at $4.50 it adds the other $2.50. The government sort of subsidizes production. That makes it quite profitable for investors,”
He described the general outlook for Latin American oil and gas as a mixture of exploration and development opportunities with a serious, imminent need to address production declines.
“Overall it’s flattish because of the decline in Mexico and Venezuela being offset mainly by Brazil and Guyana in the late 2020s,” Ravi said.
For big production, “Guyana is definitely next. Exxon is going to keep adding more and more floaters as we go along through the years,” he noted.
In the foreseeable future, Latin American oil production looks like it will be a balancing act, according to Ravi.
“Where there is growth there’s huge growth. And where there’s decline, there’s huge decline,” he said.