August 2020

South America will lead the recovery of offshore projects

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Oil projects off the coast of South America, have lower breakeven prices and competitive payback times in comparison to similar projects in other parts of the world, which makes them more resilient in the current turbulent times. Offshore activity in Latin America is expected to recover from 2021 with more than 3 million barrels per day of peak production estimated to be sanctioned in Brazil and Guyana alone by 2025. Of this, more than 80% of the capacity has breakeven prices of less than $45 per barrel and is expected to get sanctioned despite the current market environment. Around 30 offshore oil projects are expected to be given the green light across the continent over the next three years that will require a cumulative greenfield investment in the range of $50 billion. These projects are operated by mix a of national oil companies (NOCs), majors and independent companies, showcasing the confidence the operators have in the region.

Overview of major offshore producing regions
Among major offshore producing regions, Brazil and Guyana combined will account for more than one-third of the offshore investments and the capacity to be sanctioned over the next five years. They will also account for more than 40% of the reserves to be sanctioned. The region is, therefore, expected to emerge as the largest offshore player by the end of the decade. Apart from South America, the United States Gulf of Mexico (GoM) and the North Sea will also see significant expenditure on offshore projects in the medium term while lower investments are expected in Africa and the Middle East.

Brazil leads the way in terms of production and investments to be sanctioned with around 16 major offshore oil projects expected to enter the development phase in the country over the next five years. Of these projects, 14 are planned to be developed by FPSOs. The pre-salt fields Mero, Buzios and Bacalhau will account for the bulk of the reserves and capex to be sanctioned in the country. Total production capacity of 2 million barrels per day is expected to be added that is more than double of any other region. The Brazilian NOC Petrobras is expected to lead the charge along with the local and international operators. It can be seen that the operators have remained confident of the recovery of prices and demand as they move ahead with the tender processes of major projects including Mero-3, Mero-4, Itapu and Buzios-6.

Guyana will be a new entrant this decade in the list of major offshore producing regions thanks to the discovery of more than 8 billion boe of reserves in the ExxonMobil operated Stabroek block. Close to 4 billion boe of reserves are expected to be sanctioned by 2025 that will require investments in the range of $30 billion and will contribute more than 900,000 barrels of oil per day at peak production. The recent capex cuts announced by owners ExxonMobil and Hess will not significantly affect the development of Stabroek as it remains an attractive asset even in the current low price scenario.

Latin America leads the way in breakeven prices
Offshore projects in South America have lower breakeven prices in comparison to other regions, which makes them lucrative even in a low-price environment. This demonstrates why operators have been moving ahead at a brisk pace with these relatively recent discoveries already in the development phase in the two countries. In Guyana, all discoveries in the Stabroek block and major Brazilian projects that are expected to be sanctioned by 2025 including Buzios, Mero and Bacalhau, have a breakeven of less than $45.

2020 breaks momentum but expect a faster recovery

2019 was a breakthrough year for South America with as many as five FPSO projects sanctioned in Brazil and one in Guyana. All five projects in Brazil were approved by Petrobras, which included major oil fields Lula, Marlim, Mero and Buzios, while ExxonMobil approved Liza phase 2 in Guyana. All these projects are estimated to have total greenfield investments in the range of $20 billion.  Moreover, Pemex embarked on the development of 17 priority offshore fields that would require an investment of $16 billion during their lifecycle and are expected to contribute 300,000 bpd. The year 2020 was also expected to follow suit with as many as seven FPSO contracts expected to be awarded at the start of the decade by various operators across the continent. Petrobras was expected to lead the awards with three FPSOs while ExxonMobil, Premier Oil, Equinor and Enauta were expected to award one FPSO contract each across Brazil, Guyana and Falkland Islands. But then the market was struck by the double whammy of rock bottom prices and faltering demand as a result of the Covid-19 pandemic and all the contracts mentioned above were delayed to either 2021 or 2022.

Over the past decade, only 2016 saw a low level of activity with no FPSO contract awarded in the region, but the activity rebounded quickly from 2017 to 2019 with as many as 11 FPSO contracts awarded in South America making the region the hub for FPSO developments. This time around as well we expect a speedy recovery in sanctioning with 17 FPSO projects expected between 2021 and 2023 of which 13 are in Brazil alone.

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Before the pandemic took hold, the year 2020 was expected to be a milestone year off the coast of Latin America with a significant number of projects expected to enter the development phase across the continent. However, the market turmoil has forced operators to reduce their capital expenditure for the year. Although this sent a cloud of uncertainty over many projects that were in the pipeline, operators acted swiftly to quell any doubts over projects in this region. While some projects will be slightly delayed, they will still go ahead as companies will focus on their cash cow developments in the near future and postpone initiatives that yield lower returns.