Latin America to attract 2020s upstream investment dollar
The region is well-placed to shrug off any transition headwinds, according to Welligence
The best upstream oil and gas opportunities will attract investment over the coming decade, despite headline-grabbing messaging around the energy transition. And a flurry of business development activity in recent years which have seen the industry’s largest E&P firms rapidly build exposure to some of the best resource opportunities around, from the Brazilian pre-salt to Argentina’s unconventionals, reinforce that Latin America will remain an attractive destination for investment
While political risk in the region is, admittedly, never far from the surface, the industry’s appetite for what the region has to offer is clear.
Exploration and development
With uncertainty persisting around oil demand outlook in the long-term, E&P firms have been looking to move their portfolios down the cost curve–in other words, to build exposure to assets that work under any oil price. And some of the most attractive opportunities are to be found in Latin America (see FIG. 1).
We expect development spend will increase over the 2020s. In Brazil, the likes of state-owned Petrobras and Norway’s Equinor will develop billions of barrels of pre-salt resource, ExxonMobil continues to fast-track the exploitation of 6bn+ bl oe in the Stabroek block alone in Guyana, while US independents Talos and Fieldwood and national oil company (NOC) Pemex bring their shallow-water projects to first oil in Mexico.
In Argentina, multiple Vaca Muerta shale projects are ready to move into the full development phase. There will inevitably be a slowdown in spend as the new left-leaning administration settles in. But we believe that the exploitation of the unconventional resource is just too important to Argentina’s future economic well-being to be put at risk.
Latin American exploration activity should also ramp up following a period of intense licensing. A diverse range of companies from the majors to exploration specialists like Anglo-Irish producer Tullow are active across the region. The focus areas are the offshore hotspots of Brazil and Guyana, which have delivered some of the best deepwater discoveries of all time. And, despite the hostility of the current Mexican government to private investment, companies have dozens of well commitments to fulfil in the country over the next three years and will be hoping to add to the success of Talos’ Zama discovery.
The post-2014 oil price downturn was a wake-up call for (most) countries in the region. Their hydrocarbon sectors are enormously important sources of revenue and jobs, and they will need to ensure the terms on offer remain attractive to compete with each other—and the rest of the world—for capital.
Furthermore, Latin America’s most easily exploited onshore and shallow-water hydrocarbon resources are mature–the big growth opportunities, deepwater and unconventionals, are technically challenging and capital intensive. The set of companies capable of developing these resources is limited to larger players, especially taking political risk into account.
It is always a balancing act between ensuring a fair government take and providing an adequate return to investors, and misjudgments do happen. A good example is the recent relative failure of Brazil’s PSC rounds, which offered up prime exposure to the pre-salt. A mix of regulatory uncertainty and a high cost of entry led companies to stay away. Establishing sensible minimum bidding criteria and allowing the market to ultimately set the value is the best way to ensure a country remains competitive.
Baby steps on transition
The energy transition is, of course, a hot topic globally, and it is not being entirely ignored by the region’s NOCs. But, in the absence of external pressures from investors and activist groups, they are well behind the majors when it comes to investment–Colombia’s Ecopetrol plans to spend $150mn in the space in 2020, representing 3pc of its capex budget, while Petrobras’ investment of US$850min out to 2024 is just over 1pc.
Latin America is already well-served by hydroelectric power, and investment is flowing into solar and wind. But it is not the incumbent NOCs driving these moves, and—while their investment will pick up as the decade progresses—it will not be a quick shift given their dominance of the domestic upstream sectors and government reliance on hydrocarbon revenues.