BMI View: Latin America is set to be the fastest-growing region in terms of oil production over the next decade. Strengthening business environments in Colombia and Peru, in addition to the prospect of reform in Mexico, support this trend. Yet considerable above-ground risks could limit the potential of some of the region's largest producers. Indeed, regulatory challenges in Brazil, a major refinery disaster and impending regime change in Venezuela, and the deteriorating business environments in Argentina and Bolivia could all constrain potential over the short- to- medium term .
We are forecasting strong oil and natural gas production growth in Latin America through 2016. Brazil's offshore subsalt oil province and Venezuela's Orinoco heavy oil belt will be at the forefront of any surge in oil production, leading to an increasingly large export capacity. Large shale discoveries in Argentina also highlight further upside potential. Yet sustained and emerging above-ground risks could limit the realisation of such significant potential, particularly in Venezuela and Argentina. As for natural gas, we forecast that demand will outpace production growth, leading to a rise in the volumes of natural gas being imported into the region.
|Increased Oil Export Capacity, Gas Import Dependency|
|Latin America Oil & Gas Production and Consumption, 2001-2021|
Key Themes In Latin America's Oil & Gas Sector:
Mexico's president-elect, Enrique Peña Nieto, made the liberalisation of state-owned oil monopoly Petroleos Mexicanos (Pemex) a 'signature issue' of his election campaign. Reform is necessary, as foreign investment remains the country's best hope of boosting production over the long term. Yet the coalition-building process is ongoing, and the timing or comprehensiveness of a reform agenda remains to be seen. For his part, outgoing president Felipe Calderon emphasised the need for oil sector reform during his last few months in office.
Interest in Argentina's shale gas potential is rising, despite the country's poor business environment. Recently-nationalised YPF is seeking a partner to invest US$4.5bn in jointly developing the Vaca Muerta formation. Several companies have already expressed interest, including Chevron, ExxonMobil, and Apache. Argentina is estimated to have the world's third largest shale resources - behind only China and the United States - with approximately 21.9trnn cubic metres (tcm) of technically recoverable hydrocarbons. As such, the successful development of the country's shale resources could delay or even potentially reverse our current forecast for a sustained long-term fall in production.
|Betting on Shale|
|Argentine Proven Gas Reserves and Production, 2001-2021|
We are keen to emphasi se our bullish long-term outlook for the Brazilian Oil & Gas sector and remain cautiously optimistic over the next few quarters. This view has been formed primarily on the back of state-owned Petrobras' recent US$236.5bn investment plan, which aims to ad d ress some of the company's most serious challenges and correct imbalances. However, t he sector is facing some short- and long- term headwinds. One of the most immediate will be whether or not an injunction against Chevron and Transocean over the Frade oil spill proceeds, which will have significant knock-on effects for overall Brazilian oil production as well as the business environment. Despite this, the prospect of increased production is such that we do see upside risks to our medium - term production forecast of an average of 6.8% growth between 2012 and 2016.
|A Steady Climb|
|Brazil's Proven Oil Reserves and Production, 2001-2021|
V enezuela's long-term oil and gas potential is undeniable, with the country's proven reserves now estimated to be larger than those of Saudi Arabia. Nevertheless, the short-to-medium term outlook for the sector is predicated upon the government's ability to mitigate many above-ground risks, including the country's poor economic situation. The mismanagement of the sector also came into full view in August, with PdVSA's Amuay refinery explosion representing one of the worst disasters in the industry in decades. Political risks are also mounting given the ongoing uncertaint y with regard to the stability of the regime .
Bolivia's natural gas reserves base is in decline, despite our forecast for rising production increasing 22% through 2016. The longer-term prospects for Bolivia as a major regional gas supplier are therefore contingent upon new and successful gas exploration. A ttracting that type of investment will be difficult, however, given Bolivia's deteriorating business environment on the back of increased nationalism across the country's strategic sectors, including electricity generation and mining.
|Running Out Of Steam|
|Bolivian Proven Gas Reserves and Production, bcm|
An important privatisation trend is underway in Peru, where state-owned Petroperú has announced plans to resume production in collaboration with private partners and has expressed interest in an October 2012 Ecuadorean licensing round for blocks near their shared border. The country, a liquefied natural gas (LNG) exporter since 2011, is also set to become an oil exporter as of 2014, according to our forecasts. Gas discoveries such as the September 2012 Sagari discovery will help to ensure adequate volumes are available for both export and domestic consumption, which has become a politically sensitive issue. However, we highlight the need for continued investment in infrastructure necessary to process and transport gas if Peru is to unlock its full potential.
|Export Potential Within Reach|
|Peruvian Oil Production and Export 2001-2021|
Strong regional economic growth will see demand for oil rise rapidly over the coming years, and we forecast that regional consumption will rise 13% between 2011 and 2016. Brazil and Trinidad and Tobago will each record the largest percentage increase in oil demand over the forecast period, registering a 25% and a 22% rise in oil consumption, respectively.
Ecuador expects overall production to increase to 530,000b/d in 2013, a rise from 2012's 510,000b/d target. However, we believe Ecuador will fail to achieve its ambitious production targets, with production in 2012 forecast to only reach 515,500b/d and then fall to 500,000b/d by 2013. Moreover, we expect this trend to continue, with production on a slow annual decline until the end of our forecast period in 2021 , largely on the back of mature fields and a lack of experienced foreign partners.
Regional refining capacity is forecast to rise alongside consumption, with Brazil and Venezuela to remain the two countries with the largest overall capacity. Brazil will also undergo the largest refinery capacity expansion over the forecast period, with an anticipated 50% increase. We are forecasting Peru and Venezuela will also increase their refining capacities by 20% and 6%, respectively. The development of refining projects will be dominated by state-run companies.
The Latin American gas market will be divided sharply : surging demand in the Southern Cone countries will exacerbate their import requirements , while the northern countries will further realise their growing export potential, particularly Trinidad and Tobago, the region's largest LNG exporter (although not without significant degradation of its reserves base), and Peru. Indeed, Peru ' s natural gas outlook has improved significantly, with production forecast to increase by 73% between 2011 and 2016. The region ' s most important pipeline trade will continue to be between Bolivia and its southern neighbours, Brazil and Argentina.