Capital investment continues to increase in Latin America

Siddhartha Sen

IHS Markit, Houston

IHS Markit expects global gross domestic product to remain resilient over the next few years, backed by low interest rates across regions and a relatively low inflation rate. Latin America upstream spend is still expected to see an increase of 37%, from $80 billion in 2018 to $110 billion in 2022. However, the main countries—Argentina, Brazil, and Mexico—are experiencing fiscal and external deficits and weak economic recovery.

Activity remains strongest in Brazil, Argentina, and Mexico. Brazil deployed four floating production, storage, and offloading vessels in 2018: one in Tartaruga Verde field, one in Buzios field, and two in Atlanta field. Of the seven FPSOs that Brazil’s state oil firm Petroleo Brasileiro SA (Petrobras) had plans to award in 2018, four are currently in the bidding process and are expected to be awarded soon. The total capacity addition from these seven FPSOs would be 910,000 b/d.

Argentina was planning its first offshore bid round in nearly 2 decades in February. The blocks to be put up in these bid rounds are the Argentina Norte, Austral, and Malvinas Oeste.

For Mexico, uncertainty exists with the new administration and three bid rounds had been postponed from late 2018 to February 2019.

Utilization rates for the global offshore rig markets have come down from an average of 90% in 2014 to about 60% currently. Supply has exceeded demand, and while 160 rigs were retired globally since 2014, only 12 were from Latin America. The average drilling rig day rate in Latin America is close to $265,000. Most of the Latin American countries have long-term contracts (3-7 years) with extension periods, hence the day rates of a lot of their current drilling rig fleets are based on old contracts.

Brazil is one of the most important countries for subsea activity, followed by Mexico. Latin America will remain the largest regional deepwater rig market. Demand is expected to continue to grow as activity picks up in deepwater exploration in Mexico. Recently operators have pushed towards having shorter-term contracts to enable them to shift gears and maneuver volatility in commodity prices.

Crude pipeline infrastructure in Argentina is located around the main crude-producing basins, thus connecting the production to the main refineries in the region. In Brazil, pipeline infrastructure is limited in its reach and for the population not living close to a refinery, the common mode to transport is rail, barge, or truck. Mexico’s pipeline infrastructure is quite extensive and reforms have opened opportunities for private players to invest in.

A breakeven price for a major field like Cerro Dragon in Argentina is estimated to be $30/bbl. For projects such as Lapa, the producing phases have very competitive breakevens at $25/bbl, while new phases have breakeven close to $46/bbl. With increased activity in the region, the pressure on contractor’s market, supply chain, and infrastructure is expected to rise. Countries like Argentina are expected to manage these constraints by balancing development activity between onshore unconventional and offshore conventional activity. Production for Argentina’s unconventional assets is expected to contribute 33% of total production by 2020, increasing to 64% by 2025.

Most of the upstream activity in Latin American countries is driven and managed by state oil companies. However, with the opening of the region, there are opportunities for international companies to collaborate with state oil companies and develop the oil and gas resources in the region. A fair exchange of technological knowhow, along with fair and equitable fiscal regime, could lead to increased exploration and development activity in the region. This is expected to bring with it cost pressures and hence it will be important for international operators to enter the region while the opportunities exist.