New Risks To The Fore?
BMI View: Latin America is set to be the fastest-growing region in terms of oil production over the next decade. However, evolving risks in some of the region's largest producers threaten to derail some of that progress over the short-to-medium term. Among these risks are the spectre of political transition in Venezuela, a deteriorating macroeconomic environment in Argentina, and mounting scepticism of reforms in Brazil and Mexico. On the other hand, strengthening business environments and considerable below-ground potential will allow Colombia and Peru to remain strong outperformers.
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 deposits in Argentina also highlight further upside potential, and recent renewed interest in them by foreign companies could be a sign of better things to come for its struggling energy sector. Yet some acute risk factors could limit the realisation of such significant potential in the short-to-medium term, particularly among the region's largest producers. 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 & Consumption, 2001-2021|
Key Themes In Latin America's Oil & Gas Sector:
Venezuela's long-term potential is undeniable, with the country's proven reserves now estimated to be the largest in the world. However, it is looking increasingly likely that President Hugo Chavez may not survive to the end of 2013, leading to mounting concerns over the country's leadership transition, with direct implications for the energy sector. While political change could mean the beginning of a gradual shift away from unorthodox economic policies and towards a more sustainable long-term production picture, political risk is set to remain elevated in the short term. Indeed, we believe potential for political rivalry and the entrenched nature of President Hugo Chávez's policies mean that a smooth transition is far from assured, with potential negative implications for oil production.
Our Country Risk team is forecasting a 'perfect storm' in Argentina in 2013, which includes a major devaluation of the country's exchange rate. Similarly, deepening political challenges for President Cristina Fernández de Kirchner could pave the way for more erratic policymaking and reduce the predictability of Argentina's government. Such political volatility in a country prone to interference in its strategic sectors, as well as a broad worsening of an already strained economic environment, does not bode well for the Argentine energy sector. The recently-nationalised YPF is desperate for foreign partners and capital in order to monetise the country's shale resources. Although some partners have emerged in recent months - Chevron being the most significant partner at the time of writing - a 'perfect storm' could deter them from providing the much-needed foreign investment into the country's energy sector. We are currently holding on to our forecasts, for now.
|Betting On Shale|
|Argentine Proven Gas Reserves & Production, 2001-2021|
Before entering office, Mexican President Enrique Peña Nieto made the liberalisation of state-owned oil monopoly Petroleos Mexicanos (Pemex) a 'signature issue' of his election campaign. Yet the reform outlook is looking less rosy than last quarter. Although Peña Nieto is placing energy sector liberalisation high on the agenda, the politics are increasingly looking to be too hard to make the large-scale reform that the sector needs. As such, it is likely that only some liberalisation will occur . This would fall short of what is needed for comprehensive reform, while disappointing those investors betting on a rapidly improving Mexican production outlook .
|Banking On Reforms For A Production Trend Reversal|
|Mexican Oil Production & Net Exports, 2001-2021|
We are keen to emphasise our bullish long-term outlook for the Brazilian oil & gas sector. Over the short-to-medium term, we retain our cautiously optimistic view on Petrobras, the most important player in the sector. The company continues to target the right areas of reform despite weak quarterly earnings and significant investor disappointment. Looking ahead, the most important questions for Petrobras surround its ability to successfully affect the Brazilian government's policies which contribute to an unsustainable status quo (including domestic fuel pricing), as well as its commitment to pursuing internal reforms which favour long-term growth over short-term profit. The country's long-term production picture depends on these reforms, but staying focused on the end game amid mounting immediate pressure will not be easy. A significant deviation from the company's reform agenda is a clear risk, and would place downward pressure on our solidly bullish outlook.
|A Steady Climb|
|Brazil's Proven Oil Reserves & Production, 2001-2021|
Bolivia's natural gas reserves base is in decline, despite our forecast s for production to increase 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 . I ncreased nationalism across the country's strategic sectors, including electricity generation and mining , is causing a deterioration in Bolivia ' s business environment and the downside risks in the sector are substantial.
|Running Out Of Steam|
|Bolivian Proven Gas Reserves and Production, bcm|
We have been highlighting the important privatisation trend underway in Peru, where state-owned Petroperú has announced plans to resume production in collaboration with private partners. The timing is right for the state-owned company to regain a slice of domestic oil and gas production, as we forecast both indicators will rise rapidly over the next several years, and remain elevated through to the end of our forecast period in 2021. The underexplored nature of the energy sector, combined with an increasingly attractive business environment for foreign investment, creates further upside risks to our forecasts. It also supports our view that Peru will remain one of the most dynamic economies in Latin America over the forecast period. However, downside risks do exist, particularly in the form of a return to leftist government policies, as well as active militant groups. Indeed, recent attacks have been carried out by the Shining Path group, targeting the country's natural gas assets.
|Export Potential Within Reach|
|Peruvian Oil Production & Exports, 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 25% and 22% rise s in oil consumption, respectively.
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 to 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.