The Age of Abundance

At the time of writing, the price of Brent oil is US$46 per barrel (b), about half what it was when BNamericas wrote the Outlook last year, when the oil industry was just starting to worry about declining prices. That worry has now turned into panic; there doesn't seem to be any certainty about how much lower prices can fall, or in which direction they're headed.

"Frankly at the end of the day, none of us have a great sense for where oil prices are going," Al Walker, the chief executive of giant oil company Anadarko, said earlier this year at an energy conference.

Like earthquakes, oil prices are famously difficult to predict. In 2014, experts surveyed by BNamericas saw oil prices staying in the US$100/b region. They were, we now know, drastically off.

"We were all surfing the great wave of $100 a barrel," Cristina Pinho, the executive manager for exploration and production at Brazilian state oil company Petrobras said at an event in Rio de Janeiro. "It won't get to US$100 again. If it gets to US$70, we'll be happy."

The fact is that the globe, only a decade after the notion of peak oil was very seriously debated, is in an age of oil and gas abundance.

Unlike in the US, where production is likely to fall about 1 million (M) b/d this year compared to last year because of low prices,  Latin American oil production hasn't really been impacted by the change. In fact, some oil companies, like Brazil's Petrobras, are seeing rising production as new projects, planned during the commodities boom, come onstream.

A Petrobras platform offshore Brazil. CREDIT: AFP

But budgets are being slashed. All the main oil companies in Latin America have lowered their spending plans. They have no choice: Wood Mackenzie, the UK-headquartered consultancy, says US$1.5 trillion of planned hydrocarbons spending is uneconomic with oil at less than US$50/b. As a result, industry operators are attempting to drive down the cost of new projects by 20-30%. Already, some 200,000 oil workers worldwide have lost their jobs this year, or roughly 5% of the total work force, according to Oklahoma City-based Continental Resources.

Still, though oil and gas in Latin America is generally costly and unconventional, there are certain factors that actually make it attractive in the current environment. First, there are the reserves. When Royal Dutch Shell ended its nine-year effort to explore for oil in the Alaskan Arctic in September, having spent more than US$7 billion, it was largely because their finds had been paltry. In Latin America's most attractive basins, such as Orinoco in Venezuela, deepwater in Mexico and Brazil, and the Vaca Muerta shale play in Argentina, the resources are in place. Venezuela, it needs no reminding, has the highest resource of oil on the planet.

There is also the fact that oil production in Latin America is not, on the whole, determined by prices. State companies dominate the national landscape and can make counter-market decisions, while the major projects in Latin America are complex and require five, ten, even twenty years to come together. Moreover some countries that depend on oil revenues, such as Colombia, have incentive to produce more to make up in volume for what they lose in price. (This is the case in many parts of the world: this year, Russia has achieved record production.)

Another factor favoring Latin American upstream is that oil production is being hardest hit in Canada, home to the most expensive breakeven prices, and the US, where market factors are primary. This provides a comparative advantage to those nations that can still pump at current prices.

Finally, though the nature of the energy matrix is changing, oil demand will remain in place at least for the next few decades, according to the International Energy Agency (IEA), meaning longer term projects in Latin America will find offtakers. This year, global oil demand growth is expected to hit a five-year high of 1.8Mb/d, the IEA says, while gasoline sales in the US are rising at the fastest year-over-year rate in 14 years, according to the US Energy Information Administration (EIA). Energy giant BP expects the global vehicle fleet (commercial vehicles and passenger cars) to double from around 1.2 billion today to 2.4 billion by 2035.

Of course, the above analysis must be weighed against local realities; each country is different, as we shall see in the below analysis.

Figure: Where is Brent Headed?

Figure: Where is WTI Headed?


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