Investing in Latin America: Today’s Energy Market Transformation
With announcements of major potential investments of over $300 billion in the next 10 years, Latin America is rapidly becoming one of the most attractive regions globally for investments by the world’s largest oil companies. Compelling opportunities are emerging, such as Brazil’s pre-salt, Argentina’s shale and Guyana’s frontier oil play. Therefore, many governments are taking solid market-oriented approaches.
The opportunities come from a widespread recognition that resource nationalism has brought more impediments to the fore, raising the costs of production in a more competitive global environment characterized by an abundance of resources. Brazil and Guyana are benefitting from the dramatic drop in production costs and the security of investment capital, helping to lead to continued market liberalization and investments elsewhere, including in Argentina and Colombia. The opening in Mexico under its last government continues to provide attractive opportunities there as well. But elsewhere the history of resource nationalism has dramatically undermined the production system in Venezuela and poses obstacles to continued reform in Argentina, Ecuador and Mexico.
In this feature, Peter Langshaw, Citi’s Global and Latin America Sector Sales Head for Treasury and Trade Solutions, interviews some of the key policy makers, industry leaders and specialists within the region. This feature helps bring together key insights on why oil majors and national oil companies (NOCs) are embracing these market opportunities through new technology and the digitization transformation of the energy sector, and why it will contribute to future success.
|“Latin America’s oil and gas industry is undergoing a dramatic transformation with huge potential investment opportunities for local and foreign firms, yet with a number of concerns. Even so, new huge developments in Latin America will keep the Atlantic Basin in surplus, especially in oil, and will help ward off the resource curse wherever production can grow.”
Ed Morse, Global Head, Commodities, Citi
Brazil offers one of the most promising oil and gas opportunities in Latin America, home to the largest offshore oil discoveries of the last decade, including most of the world’s deep-water oil discoveries and 36% of the world’s oil discoveries. Huge potential remains in onshore, conventional offshore and unconventional deep-water, pre-salt reserves. Currently, there is less than five percent of the sedimentary areas contracted, which presents a significant opportunity for expanded exploration of oil and natural gas reserves.
“An enormous transformation is happening in our industry now: the success that we have achieved attracting large companies to operate in the pre-salt reserves, the new measure we are taking in order to attract small and mid-sized companies to the mature fields and the opening and the diversification in the natural gas downstream sector. This puts us in a circumstance that we have never been in the verge of creation of the diverse, competitive and attractive oil and gas sector in Brazil as a whole. It’s a unique opportunity not only for the large companies, but especially for the suppliers.”
Consequently, the government is focusing on boosting exploration and production, as well as encouraging capital investments from private players. Brazil is relaxing bidding rules to reassure local firms and medium-size foreign explorers to participate, joining majors already established in its vast pre-salt region. These changes have included developments of a five-year licensing round agenda, the creation of a regime of open access for onshore, mature field investments and the restructuring of Petrobras, Brazil’s semi-public energy company.
Recent bidding rounds held in Brazil have attracted seventeen of the largest energy companies, resulting in $7.4 billion in upfront fees, with $112 billion in investment revenue and $425 billion in additional tax revenue expected over the next ten years. There are two waves of open acreage bidding rounds taking place from 2019 until 2021, with the next round in October 2019. The first wave will offer 722 blocks in nine onshore basins and 162 blocks in six offshore basins, in the second wave, 85 blocks in seven onshore basins and 969 blocks in 13 onshore basins. Large pre-salt and concession bidding rounds will also take place over this period.
On the upstream side, the Transfer of Rights (TOR), a zone off the coast of southeastern Brazil and part of the larger pre-salt, oil-producing zone, has emerged this year as one of the world’s most promising conventional oil plays. While the government granted Petrobras the rights to extract five billion barrels of oil, the volumes are estimated to be much larger (six billion to 15 billion barrels per day). The surplus is being tendered in November this year, for the rights to extract the excess oil in the TOR. Besides the bonus payment to the government (total of $27.5 billion), plus compensation of $9 billion to compensate Petrobras for exploratory work already invested, further investments of $105 billion are expected to follow.
Argentina has emerged as the world’s most successful source of shale oil production outside the U.S. With several leading oil companies from around the world already positioned through direct equity ownership or through joint ventures with the Argentine national oil company, YPF (Yacimientos Petrolíferos Fiscales S. A), Argentina is poised to move to full commercial development in the next few years. The Vaca Muerta formation attracted $4 billion of investments in 2018 and is expected to attract $7.49 billion of investments in 2019.