Latin America's continental contraction
The region has seen a decade of surging crude consumption come to a crashing halt. Refining woes mean imports are still on the rise
For most of the world, the economics of fuel demand are fairly straightforward. When oil prices fall, consumers take advantage and burn more of the stuff. As fuel prices fell in the US, drivers almost immediately started hopping back into gas-guzzling SUVs and rekindled their love of the great American road trip. Drivers across Europe, China and elsewhere have also taken advantage of cheaper pump prices, fueling strong global demand growth.
In Latin America's commodity-dependent economies, though, that calculus is flipped on its head. Crashing prices for crude and other raw materials have inflicted economic pain across the region, hitting hard an emergent middle class that was behind a decade of surging growth. Any stimulus to demand provided by lower prices has been swamped in the slump. After adding 2m barrels a day in new demand from 2004 to 2014, hitting a record 9.1m b/d, consumption has slipped to 8.8m b/d—3% beneath the peak and lower than in 2012 when oil prices topped $100/b.
Brazil, by far Latin America's thirstiest fuel consumer, has gone through its worst recession in decades. Auto sales have fallen for five straight years, unemployment is stubbornly high and industrial activity, much of which revolves around pulling the country's vast natural resources out of the ground, has nosedived. Oil demand is down 7% from 2014's high to around 3.1m b/d. As the economy has started to recover, demand has hit a trough this year, but a return to the roaring growth of the past decade isn't on the cards.
Venezuela's economic crisis has been even more severe. Activity has all but seized up in what was once Latin America's richest country—the product of a toxic brew of extreme economic mismanagement and falling oil prices. GDP has contracted by a quarter over the past three years. Oil demand has tracked this broader economic collapse, falling 25% from 0.573m b/d in 2014 to 427,000 b/d in 2016, the lowest level in a more than a decade, according to figures from state oil company PdV. This consumption collapse comes even though fuel is sold on the domestic market for pennies a gallon.
7% - Decline of Brazil's oil demand since 2014
Demand has also dropped in Mexico, Argentina, Chile and Colombia. Peru has bucked the trend: consumption growth has been about 6% a year for three of the past four years. But its 240,000 b/d of demand makes it a minnow in the regional market.
The forces pushing against fuel demand have probably been helped by steps to ease fuel subsidies, largely taken to plug the gap in national budgets left by falling oil sales. In Mexico, President Enrique Peña Nieto removed subsidies on gasoline and diesel earlier this year, resulting in a 20% leap in prices. Cutting the subsidy was designed to help the government's budget and to draw new investors into the newly deregulated downstream. In Brazil, Petrobras subsidised its customers when oil prices were high, buying fuel and crude at international prices and selling it at a loss on the domestic market, a policy that enraged its private shareholders. But it hasn't fully passed on the steep decline in global fuel prices, and now sells into the market at higher prices than those seen elsewhere. Argentina's president Mauricio Macri has also lifted fuel subsidies as part of his broader economic reforms.
Mind the import gap
While consumption has slipped, imports have been rising thanks to chronic underinvestment in refining infrastructure. Again, the downturn has played a central role, amplifying the region's long-term problems in keeping up with demand. The majority of Latin America's refineries are owned and operated by national oil companies—and their finances have been gutted by the price downturn. That has left little cash available to make investments needed to keep the plants running at full capacity, let alone add the new capacity needed to catch up with the strong growth seen over the past 15 years. By 2020, the region will be short nearly 1m b/d in both gasoline and diesel, according to Arthur D Little, a consultancy.
Venezuela's refining system is only operating at 50% of its nameplate capacity of 1.3m b/d, according to PdV data. As a result, fuel imports, mostly shipped in from the US, have been increasing—they averaged around 90,000 b/d through the first seven months of 2017.
Mexico's Pemex is also struggling to keep its creaky refining system pumping anywhere near its full capability. Fuel production fell to a recent low of 0.83m b/d in July this year, just 54% of Pemex's 1.54m b/d of nameplate throughput. As a result, product imports have surged, hitting 0.975m b/d in July. That these imports surpassed domestic product output is a glaring sign that all is not well in oil-rich Mexico's downstream.
The region is littered with stalled or abandoned refining-project proposals that aimed to cut its import dependence. Ecuador has for years promised imminent progress on the proposed $12bn, 300,000-b/d Refinery of the Pacific project. But the facility is no closer to being built today than it was a decade ago. Several potential financiers have pulled out. Pemex has long talked about expanding its refining base, but has struggled to muster the cash. Brazil's multi-billion-dollar "carwash" corruption scandal emanated from Petrobras' downstream unit, highlighting billions of dollars that were wasted on dubious refining contracts. The scandal put the brakes on a slew of new refining projects in the country. Costa Rica pulled the plug on a scandal-plagued $1.2bn, 100,000-b/d China-backed refinery last year. Colombia's Ecopetrol was forced to shelve its expansion and modernisation of the Barrancabermeja refinery last year after slashing its budget and prioritising spending on the upstream business.
There are some bright spots. Mexico's energy reforms have opened up the downstream and could lead to some enticing opportunities. Petrobras is courting partners for its Abreu e Lima expansion project and the new Comperj facility.
But Latin America's downstream will likely continue to struggle even after the industry turns around. Costs for the region's refineries typically run at least 10% to 20% higher than nearby rivals on the US Gulf Coast, so finding outside investment is difficult. China has seemed a willing backer as it expands its foothold on the continent, but Beijing-backed ventures have struggled to get beyond the planning stages. The large-scale projects run by national oil companies have also been magnets for politicisation and controversy, leading to delays and cost overruns. The region's project developers have also failed to keep up with the global trend of building larger, more complex mega-refineries, often integrated with nearby petrochemical facilities, which helps lower costs.
The region's refining woes have been a boon to US Gulf Coast refiners, which have plugged the yawning gap between demand and local output. Fuel-product exports from the US into Latin America have risen by 1m b/d since the start of 2014, hitting a new high of around 2.8m b/d in July this year. With little prospect of a refining recovery soon, that figure is likely to continue rising, especially if the region's economies are able to recover and consumption growth resumes.
This article is part of an in-depth series on Latin America's upstream. Next article: Petropolitics hang over Latin America's producers