Many Latin American countries struggle to weather crude price declines
By Starr Spencer, with Charles Newbery, Stephan Kueffner, Jeff Fick and Chris Kraul
January 06, 2015 - The new year finds Latin American oil producing nations strapped for cash at a time when a cache of important new finds require significant capital outlays for development. Production declines in recent years have taken bites out of the region's revenues, making matters even worse.
Shale oil, subsalt oil, heavy oil -- all make up part of Latin American's diverse petroleum systems, and there have been new discoveries in all these arenas in recent years in Argentina, Brazil and Venezuela respectively, while the deepwater beckons in Colombia. Meanwhile, natural gas player Bolivia believes lower international oil prices could be a boon for its gas output.
The first of a two-part Platts outlook on Latin America details what producing countries are doing to weather the current industry down cycle and position themselves for what they anticipate may be sunnier years ahead once oil prices recover.
Analysis continues below...
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Among the world's largest nations for shale potential, Argentina is attracting global majors, helped by 2014 oil reform that is calming concerns about a shaky economy and profit-damping public policies.
Chevron made the first bet, teaming up with state-run YPF in 2013 on a $16 billion shale development project to drill more than 1,500 wells that would produce 50,000 b/d of crude and 3 million cu m/d of associated natural gas. By the end of 2014, they were producing 35,000 b/d of oil equivalent from Vaca Muerta, the country's largest shale play.
Other majors are following. Malaysia's Petronas has teamed with YPF on a three-year, $550 million shale oil pilot in Vaca Muerta due to start in 2015. Shell and Total plan $250-$300 million of investment in their first shale efforts. The commitments come after conventional oil and gas production dropped 20% in the past decade as price controls, unstable regulations and restrictions on sending profits out of the country soured investment.
The decline led to a surge in energy imports -- and a turnaround in energy policies. The government cut export taxes, allowed energy prices to rise, and reformed oil policies to provide tax breaks, longer field licenses and other incentives, including the ability to export some output tax-free and keep the proceeds out of the country on shale projects of more than $250 million.
Plenty of money is needed. Industry group Argentine Oil and Gas Institute estimates that $20 billion/year must be invested in the energy sector in the next two decades -- including about $10-12 billion in upstream. But snaring those sums won't be easy. With the economy in recession, inflation at 40% and global oil prices down, investment decisions could take longer.
Bolivian president Evo Morales, an ally of Venezuela's Nicolas Maduro and Ecuador's Rafael Correa, has acknowledged his country will see some negative fallout for Bolivian gas from the knock-on effect of falling oil prices. As a result, state-owned YPFB has reduced investment plans for 2015-2019 to $2.42 billion/year, from $3.03 billion booked for 2014. Analysts point to a weakness in exploration for new fields.
Output in 2014 averaged around a record 63 million cubic meters/day, according to government officials. Canadian consultancy GLJ in July certified 10.45 Tcf in reserves, with an output horizon through 2025 some 20% more than critics had estimated.
While gas revenue stands to fall, on the positive side, the oil price slide helps to support the competitiveness of Bolivian gas compared with Brazilian offshore oil and shale production in Argentina. The poorer outlook for non-conventional deposits in the region could spur fresh exploration for Bolivian gas. In December, YPFB hired French consultant Beicip Franlab to assist in gas and oil exploration. Gas deliveries to its eastern and southern neighbor Brazil topped $5.5 billion in 2014, supported by higher-than-normal peak volumes over the Southern Hemisphere winter from drought-induced Brazilian demand.
State-run oil company Petrobras started to reap the fruits of its ambitious investment spending in 2014 as crude oil production rose throughout the year. But tumbling oil prices and an ongoing corruption investigation could mean big changes for the company in 2015.
Petrobras said in November it expects output to grow 5.5%-6% this year from 2013's 1.931 million b/d. That will be the company's first significant output growth since 2010, although down from the 7.5% target set at the start of 2014. Driving output growth are subsalt fields -- billions of barrels of crude trapped miles below the seabed by a thick layer of salt.
Latin America's largest country produced a record 2.393 million b/d in October, according to the latest data from Brazil's National Petroleum Agency ANP. Subsalt fields accounted for 607,149 b/d in October. Output should continue growing in 2015 as Petrobras and its subsalt partners ramp up production from the 10 new production facilities installed over the past two years. Petrobras expects to install a single new platform in 2015.
But financing the $221 billion in spending planned for the next five years to raise output to 3.2 million b/d by 2018 could be difficult in 2015. Petrobras has delayed filing up-to-date financial statements while it evaluates the impact of a bribery-and-kickback scheme revealed by former downstream director Paulo Roberto Costa, who testified Petrobras was bilked out of billions. The company needs to resolve law-enforcement investigations and shareholder lawsuits in Brazil and the US related to the allegations.
Petrobras officials said the company will weather the storm by cutting costs, raising product prices and increasing crude oil and natural gas output. Startup of the Refinaria do Nordeste refinery should also slash about 100,000 b/d in product imports. Hefty gasoline and diesel imports have drained the company's finances in recent years as it struggled to overcome a refining shortfall and meet domestic demand. The new refinery's first train should reach full capacity of 115,000 b/d by mid-2015; a second 115,000 b/d train should start operations in May 2015.
Oleo e Gas Participacoes, formerly called OGX, should emerge from bankruptcy protection in first-quarter 2015. But its survival remains in doubt as output from the Tubarao Martelo field has disappointed. OGPar is counting on revenue from oil sales to fund further development and solidify its finances.
Oil majors looking to enter or expand in Brazil will get an opportunity to buy new acreage in first-half 2015, when ANP hosts its 13th round of new exploration and production concessions. Blocks up for bid will focus on the Eastern Margin of Brazil's Atlantic Ocean coastline.
Colombia's oil panorama, one of the global industry's brightest in recent years, turned gloomy in 2014 and odds are against sunny skies returning in 2015 if the current lower price trend holds firm.
Leading players Ecopetrol and Pacific Rubiales Energy announced cuts to 2015 capital investment of 25% and 40% respectively, an indication of reductions across the board. A majority of the 37 members of the Colombian Petroleum Association polled recently said they would divert part of their budgets from Colombia to other countries, mainly Mexico where the geology and regulatory framework is perceived as more inviting.
Lower investment translates into fewer wells and ultimately lower production, leaving a trend line in Colombia that can only be described as disheartening. Exploratory wells drilled in 2015 probably will mark a decline from the 110 drilled in 2014, which was a drop from 115 in 2013 and 131 in 2012.
After output nearly doubled from 2005 to 2013, when it averaged 1,007,000 b/d, Colombian production declined in 2014 to 990,000 b/d and caused big headaches for the government which relies on oil royalties and taxes for 20% of its budget. No mega-discoveries of oil have been made since the early 1990s, and crude reserves are in decline when figured as years of inventory. The finance ministry projects a rebound in 2015 crude production to 1,030,000 b/d, which may be overly optimistic given oil price and capex scenarios.
Also casting a pall on 2015 for many players is a hike in government take -- i.e., royalties plus taxes -- to 75% from a current 70%, which Congress passed in December. The government said it had little choice given a $6 billion hole in its fiscal accounts due to lower revenues from oil, coal and other natural resources.
Bright spots include scheduled inauguration in June of the $6.5 billion Reficar refinery near Cartagena. The ultra-modern 165,000 b/d facility will turn owner Ecopetrol into a net hemispheric exporter of diesel fuels.
Another positive event could occur once Ecopetrol and partners Petrobras and Repsol disclose projected output from the Orca-1 well in deep Caribbean waters off Colombia's Guajira Peninsula near the Venezuelan border. The partners announced the discovery, the first-ever in the country's deepwater, in early December but deferred further details pending additional evaluation.
Next: Silver lining emerges for others in Latin American oil scene