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Latin America's oil production struggles to recover

Venezuela and Mexico are still coping with the fallout from the downturn while Brazil is set to start adding barrels again

No region was hit quite as hard by the downturn as Latin America. Oil production across the region has fallen 20%, from 9.6m barrels a day as the crisis took hold in 2015, to around 8m b/d. A region-wide recovery to pre-crash output levels could still be years away—if it ever comes.

Venezuela, of course, has led the decline. The oil-dependent country's economic and political crisis is closely entwined with the industry, fuelling its collapse—with the resulting fall in oil production in turn making the crisis even worse. Output, according to the International Energy Agency, has fallen 35% just since 2015, around 800,000 barrels a day to 1.6m b/d.

The litany of problems facing Venezuela's oil industry is long and daunting. Underinvestment has left Venezuela's oil reservoirs, which once fuelled the region's largest economy, to fall at astonishing rates, with some fields seeing 20% or more yearly declines. Equipment has been left in disrepair and state-run PdV's cash crunch and deep politicisation mean there are fewer and fewer competent personnel and international service firms left to run its operations. President Nicolás Maduro's appointment of a military general to head up the state oil company is more about preserving his own station than rescuing the oil industry.

The country sits atop vast untapped reserves and could one day regain what has been lost over the past 20 years, but any turnaround will take years. In the meantime, the International Energy Agency, and most others, see the freefall continuing. The IEA envisages production testing 1m b/d by 2020. In truth, that could come sooner if the crisis continues to deepen and tensions at PdV, so far simmering under the surface, burst into the open, leading to a major disruption in the company's operations.

By comparison, Mexico's drop seems tame, but it has been a grim few years nevertheless. State-owned Pemex has been forced to cut investment in production sharply in the wake of the price crash, and the result has been a renewed acceleration in output decline. Production has fallen 600,000 b/d—about a quarter—since 2015.

There's clearly a disconnect between the underlying production decline and the success in opening the industry to foreign investment through the country's historic oil reforms. A series of bid rounds have brought dozens of companies into the country pledging to drill dozens of wells and spend billions of dollars.

Two sizable discoveries been made, Eni's Amoca field and Talos Energy's Zama find. Eni has said the Amoca field could start pumping by 2020, and more discoveries will almost certainly come. But the fruits of the oil opening are years away and Pemex is still struggling to stabilise output. The IEA sees Mexico's production stabilising next year at just under 2m b/d, but any recovery isn't likely until well into the next decade.

Brazil, which has emerged from the industry downturn as the region's largest producer, is Latin America's best hope for adding significant new production. A few major projects are due onstream over the next year, including new phases at the Lula field, the new Buzios production system as well as the Lara find. These projects, which are nearing completion, could see Brazil's crude output jump 20%, from 2.77m b/d in 2018 to 3.3m b/d by 2020, according to the IEA. That would offset much of the declines coming from Venezuela if state-owned Petrobras is able to bring those projects into production.

Elsewhere, the prospects are mixed. Argentina has pulled significant investment into its Vaca Muerta shale play, but it's nothing on the scale of America's tight oil giants and the country's output will remain flat. Guyana is a promising frontier and all signs point to first production coming in 2020, with potentially as much as 700,000 b/d being pumped by the end of the next decade. Colombia on the other had probably won't ever return to being a 1m b/d producer.

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