Can Latin America fill the global oil supply gap?
President Vladmir Putin’s decision to invade Ukraine, coupled with ever-tighter sanctions on Russia, existing supply constraints and post-pandemic growth, has seen crude oil prices soar to levels record. The latest geopolitical events coupled with Europe’s energy crisis as well as key dependence on Russian oil and natural gas imports are pushing Washington to look for other sources of crude oil. The pressure to find other sources of supply is amplified by the White House Ban on Russian oil imports.
In what could be interpreted as a cynical move by President Joe Biden, the White House has launched a visit to Venezuela aimed at opening a dialogue with authoritarian President Nicolas Maduro. Venezuela is under tough US sanctions aimed at toppling Maduro, who since 2015 has become an important Latin American ally for the Kremlin located less than 3,000 miles from the nearest US border. While easing sanctions to give Venezuela access to international energy and capital markets will allow the OPEC member to bolster crude oil production, it will bolster Maduro’s domestic power and send a signal of US geopolitical weakness. As a result, there is much speculation as to whether major oil-producing countries in Latin America, in addition to Venezuela, can expand production and boost global supply.
A strong regional ally of the United States, Colombia is the third largest oil producer in Latin America behind Brazil and Mexico. The Andean country is a major trading partner with the United States: it provides the fifth largest source of American oil imports behind Saudi Arabia, then Russia in third place. For 2021, United States EIA data shows that Colombia supplied an average of 203,000 barrels per day, or 2.4% of total US crude oil imports that year. While the conflict-torn country once pumped an average of more than a million barrels a day, reaching 1,005,600 barrels a day in 2015, oil production has been falling ever since. In 2021, Colombia only pumped an average of 735,378 barrels per day, which, in addition to being almost 46,000 barrels per day less than the pandemic affected in 2020, was the lowest volume pumped since 2009. There are signs that despite successful call for tenders 2021which saw 30 contracts awarded for an estimated investment of $149 million, Colombian production growth will remain weak and return to pre-pandemic levels of nearly 900,000 barrels per day.
Geopolitical risk is skyrocketing in a country that has seen violence soar since 2018 despite the 2016 peace deal with the largest rebel group the Revolutionary Armed Forces of Colombia (FARC – Spanish initials). This with escalation of civil unrest impacts industry operations, particularly exploration in remote hydrocarbon-rich areas where illegal armed groups operate coca cultivation and cocaine smuggling. This risk is amplified by Colombia entering a presidential election year where the main candidate, Senator Gustavo Petro, has declared that he intends to end oil exploration in the country.
Another South American country receiving considerable attention is Ecuador, which has the third largest proven oil reserves in Latin America, totaling 8.3 billion barrels. The victory at the polls of ex-banker Guillermo Lasso in 2021, last year, provided hope for a country where the economy and the oil industry have suffered from nearly a decade of mismanagement. While President Lasso has promised oil industry reforms building on those completed by his predecessor Lenin Moreno, Ecuador is struggling to boost oil production or meet its stated production target of 1 million barrels per day. Aging badly maintained industrial infrastructure, natural disasters and lack of investment are responsible for the deterioration of Ecuador’s oil production over the past three years. In January 2022, the mountainous South American country pumped an average of only 442,789 barrels per day, 13% less than the equivalent period in 2021. What is more concerning is that this number was 1% lower than the 448,578 barrels per day pumped for the whole of 2021, which is 6% lower than the 479,370 barrels produced during a pandemic that affected 2020.
A major problem for Latin America’s sixth-largest oil producer is continued erosion in many parts of the Amazon basin where key oil fields and infrastructure are located. These persistent problems in the region, especially around the Coca River, with erosion, landslides and rockfalls can be attributed to the Coca Codo Sinclair hydroelectric dam which was completed in 2016. This impacts the operations of the SOTE and OCP pipelines, which connect Ecuador’s major Amazon oil fields to the port city of Esmeraldas on the Pacific coast. Both pipelines were ruptured by April 2020 Landslides caused by heavy rainfall. This caused Ecuador’s worst oil spill in over a decade with more than 6,000 barrels of crude spilling into the Coca and Napo rivers, ultimately threatening the water supply of the nearby town of Coca. The shutdown of the two pipelines forced the closure of oilfields, leading to a sharp drop in Ecuador’s crude oil production, averaging 200,000 barrels per day in April 2020 and 333,000 barrels in May 2020.
During December 2021 the pipes, as a precaution, have been closed (Spanish) due to further regressive erosion along the banks of the Coca River which threatened their structural integrity. This saw monthly production drop to an average of 278,574 barrels per day, forcing Quito to declare force majeure on production contracts and oil exports from Ecuador. Then in January 2022, the OCP pipeline, after being hit by rockfall caused by heavy rain, burst again, spilling over 6,000 barrels of crude oil. Erosion, landslides and rockfalls remain a constant risk that can have a significant impact on Ecuador’s oil production, because if the SOTE or OCP pipelines are closed, oil production in the Ecuadorian Amazon must be closed. Until these headwinds are resolved and Quito can attract enough private investment. , Ecuador is unable to increase production or meet the Lasso target of more than doubling production to 1 million barrels per day. Quito is also under considerable pressure to repay more than 15 oil-backed loans from China.
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Brazil, Latin America’s largest oil producer, which also has the region’s second-largest oil reserves at 12.7 billion barrels, was the only country in the region to increase oil production crude during the 2020 pandemic. Brazil is on track to significantly increase crude oil production from its offshore pre-salt basins. For January 2022, Latin America’s largest oil producer pumped a little more 3 million barrels (Portuguese) per day, a notable increase of 5.6% compared to the same month of the previous year, although the total production of liquids in 2021 was 1.8% lower than in 2020. The oil company Brazilian national Petrobras, end of 2021, increased investment in operations to $68 billion with 84% of this capital going to exploration and production. Over the next nine years, it is estimated that exploration and production in Brazil will be boosted by an increase in capital investment from $428 billion to $474 billion. Such huge investments are expected to boost Brazil’s oil production from around 3 million barrels per day to 5.2 million barrels per day by 2031.
This investment-driven industry development is essential for Latin America’s largest oil producer to become the world’s largest producer. fifth oil exporter. Analysts estimate Brazil will add the most oil production capacity for any country outside of OPEC and the United States by 2026, with hydrocarbon production ahead reach around 4 million barrels per day by 2024. This strong production growth will go a long way to bolster global crude oil supplies and partially fill the revenue shortfall created by Russian oil export sanctions. However, it will take some time for additional production from Brazil to come online. This means that it will not act as an immediate solution for the oil supply lost due to the Russian oil export ban. This becomes even more evident if you consider that Russia exports around 5 million barrels per day.
For the reasons given, the United States must look elsewhere if it wants to find additional supplies of crude oil to increase supplies and replace those lost due to the ban on Russian imports. Venezuela is the logical choice, especially considering that many Gulf Coast refineries are configured to process Latin American heavy and extra-heavy grades of crude oil. Any move to ease sanctions on Venezuela in order to increase U.S. oil supplies, limit soaring gasoline prices, and lower inflation is fraught with consequences. geopolitical risk but domestic economic pressures may prove too strong, forcing Washington’s hand.
By Matthew Smith for Oilprice.com
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