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Transition slips down the Latin American energy priority list

State-controlled energy companies are well placed to lead the decarbonisation vanguard but must weigh other key government priorities

Net zero has become the latest buzzword to sweep the energy sector, with European majors pledging ambitious targets for 2050 and promising to overhaul their portfolios. This is in sharp contrast to their US counterparts, which continue to prioritise the shale patch boom in Texas and New Mexico with the briefest of nods to wind power or algal biofuels.

South of the border, Latin American NOCs have largely followed their US peers and made little progress towards decarbonisation. State-controlled firms have made few commitments beyond curtailing operational emissions and investing in research, while companies have largely avoided the social and investor backlash that has raised the profile of climate change in Europe and influenced decisions in boardrooms.

The region also risks further slowdown in the face of the Covid-19 pandemic, at least for the near-term. Latin America is fast becoming a global hotspot for the virus, and with governments taking on more debt during what is expected to be substantial recession there is unlikely to be the funds or motivation to offer state support to overhauling the region’s energy mix.

“[Covid-19] will likely impact Petrobras’ divestment plans because increasing economic uncertainty makes it difficult to value assets and get financing” Ghulam, Raymond James

US sanctions have crippled Venezuela’s oil output in recent years, actually substantially cutting the country’s emissions. But huge volumes of oil are projected out of Guyana in the next few years, and Suriname hopes to follow suit. Regime change in Venezuela would also likely see the gradual return of millions of barrels of oil to the market, offsetting many of the climate change gains achieved in the region. 


Any decarbonisation targets have taken a back seat to financial priorities in recent years for Brazilian NOC Petrobras. Company debt ballooned to $100bn in 2015 in the wake of the Lava Jato corruption scandal and rapid expansion of non-core assets. Successive administrations have been forced to prioritise financial health at the expense of net-zero ambitions.

Petrobras has instead focused on expanding its prolific pre-salt oil portfolio and started shedding non-core assets, including stakes in biofuels—a renewables sector not without controversy but in which Brazil as a country can claim to be a world leader—and renewables. Last year, the company successfully lowered its debt burden by $21bn, mainly through $16bn in asset sales.

Petrobras plans to push ahead with further divestment this year but acknowledges that Covid-19 and low oil prices will likely affect asset value and investor sentiment. “It will likely impact Petrobras’ divestment plans because increasing economic uncertainty makes it difficult to value assets and get financing and because stay-at-home orders and travel bans make it difficult to perform due diligence, inspect assets, and negotiate deals,” says Muhammed Ghulam, senior associate at US bank Raymond James.

The Brazilian firm expects the Covid-19 economic impact to leave its debt at $87bn in 2020, the same figure as last year, but is still pursuing a long-term target of $60bn.

Petrobras’ natural gas pipeline divestments have already been delayed, risking the government’s plans to open up the sector to new entrants and investment and to lower the country’s Scope 1 emissions. Gas is still widely flared in the pre-salt region due to lack of key midstream infrastructure, although Petrobras has pledged to reach zero flaring by 2030.

The pandemic’s economic fallout will also likely entrench Petrobras’ focus on its pre-salt oil reserves and delay near-term investment in low-carbon energy.  Brazil’s pre-salt oil production has boomed over the last year, with Petrobras targeting total oil output of 3.5mn bl/d by 2024, with 66pc coming from the pre-salt.

Petrobras’ management has warned oil prices may take years to recover to above $50/bl, with global oil demand potentially never returning to previous levels given permanent structural economic changes. Against this backdrop, Petrobras may see itself in a race against time to maximise its oil output before it is too late.


Like Petrobras, Mexican NOC Pemex faces a barrage of financial constraints, which have largely deterred any portfolio overhaul or strong decarbonisation commitments. Recently, Pemex overtook Petrobras to become the world’s most indebted oil company, with over $100bn in net debt.

70pc – Share of renewables in Colombia’s energy mix by 2030

Mexico’s oil production has also plummeted since it peaked at 3.4mn bl/d in 2004, making the country’s energy security the immediate priority for President Andres Lopez Obrador.

But, rather than continue with the energy reforms of his predecessor—lessening the financial burden on Pemex and encouraging new entrants into the country’s upstream—Lopez Obrador has frozen bidding rounds and tasked Pemex with driving the country’s oil recovery. The company is solely financing the start-up of over 20 new shallow-water oil fields.

Unlike European IOCs, which are swayed by investor pressure, Pemex largely serves political interests. Lopez Obrador appoints the company’s top management and has strongly encouraged fossil fuel production. This is in contrast with previous administrations, such as that of President Felipe Calderon, who pledged to cut greenhouse gas (GHG) emissions by 30pc by 2020. Like Petrobras, Pemex has made little effort to lower its Scope 3 emissions—those made by end-users of hybrocarbons ultimately produced by the firm—instead focusing only on Scope 1.   


Argentina’s YPF has made some of the best progress among Latin American NOCs in shifting towards low-carbon energy. The company added renewables to its portfolio in 2013 with electric utility YPF Luz, a power generating firm with wind as well as thermal assets. YPF also pledged to lift the share of renewables in its generation mix to 20pc by 2023.

But, on the flipside, Argentina has suffocating debt obligations and risks missing national emissions targets. The country was bailed out by the IMF for a record $57bn in 2018, and this year has repeatedly defaulted on its payments, instead pleading with bondholders to agree to debt restructuring.

Argentina has also yet to capitalise on its huge unconventional oil and gas reserves in the Vaca Muerta shale play. Successive regimes have promoted the development of the resources, but progress has been slow given the risky economic conditions in the country.

Like Brazil, the threat of looming peak oil demand and price means Argentina will likely prioritise the growth of its oil sector as the global economy recovers from Covid-19. And with YPF holding the bulk of acreage and current production in the Vaca Muerta basin, the immediate urgency will be to focus on existing assets rather than diversification.

This position also risks YPF missing its emissions goals. The company pledged to lower direct operational emissions by 10pc by 2023 but has instead seen volumes increase. Between 2015-18, total direct GHG emissions rose from just under 15.5mn t to 17.95mn t. Growth of the Vaca Muerta—a key earner for the company—will likely only increase the trend.   


Unlike most Latin American NOCs, Colombia’s Ecopetrol has outlined plans to lower its Scope 3 emissions and has diversified materially into renewables in recent years. The company has acquired solar assets and aims to develop more projects, including a solar farm to generate power from its second largest oil field. Colombia as a country also wants to build more wind and solar projects to diversify its power mix beyond an overreliance on hydroelectric dams.

The rate of growth could be slowed, though, in a similar way to Mexico, due to slumping oil reserves and energy security concerns. Colombia has tried to offload more prospective oil and gas acreage to foreign investors and wants to develop its unconventional resources, a controversial proposal with strong domestic opposition.

But the government has supported the climate agenda, and in 2019 President Ivan Duque pledged that Colombia would reach 70pc renewable energy use by 2030, putting it alongside Ecuador, Peru and a number of Central American and Caribbean nations.

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