Pandemic, politics and energy transition are looming large in Latin America

Looking forward in time, Latin America is in for an interesting ride. Pandemic, politics and the energy transition are all looming large in the region, and each will play its part in shaping the course of events in 2022 and beyond. Omicron is providing another solid example of how far we are from the ‘end of COVID’, whatever that might look like. 

The COVID-19 pandemic has been destructive in more ways than one in Latin America. Of course, the loss of life was tragic and potentially avoidable had politicians taken different steps. The same applies to the component economies. Although real GDP growth was robust in the first quarter of 2021 for the entire Latin America and Caribbean region, that growth lost momentum in the second quarter in different countries mostly due to a rebound in COVID-19 cases. 

Real GDP is forecasted to reach 6.3 percent growth in 2021. However, the forecast for 2022 is more modest at 3% and in any case will not catch up with pre-pandemic trends in the medium term as currency devaluations, social unrest and continual weakness in labor markets lingers to undermine development. On the bright side, external conditions remain favorable with high commodity prices and pent-up demand contributing to short term growth. 

Political incumbents will be judged almost solely through the lens of this ongoing pandemic and with presidential elections coming up for both Brazil and Colombia next year the right-left orientation of the continent is subject to change. The resurgence of the ‘pink tide’ is evident in Peru, Argentina, Chile and Mexico. Lula would like to see Latin America’s largest oil producer added to that list. 

The question becomes how a swing to the left in the political landscape could then affect energy policy, which is already under strain due to the new realities of ESG conscious investing in the extractive industries. Only time will tell, but for Latin America as a whole, there is a lot that hangs in the balance. 

Todo lo mejor,
Houston, Texas
December 21, 2021

W. Schreiner Parker
Senior Vice President and 
Head of Latin America

Press releases  

Colombia’s energy self-sufficiency and GDP at risk as reserves, production and investments plunge. >> Article

Triggering more lockdowns, Omicron could cost oil demand almost 3 million bpd in early 2022. >> Article

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Argentina’s oil output to surpass 600,000 bpd in 2H22 on Vaca Muerta rally

Argentina’s massive Vaca Muerta shale play reported yet another month of outstanding oil production growth, with October volumes surpassing 190,000 barrels per day (bpd) for the first time in history on the back of a record-high number of wells put on production (POP). The latest data beats Rystad Energy’s forecast published at the start of the year by two months. That level of output implies a growth of 65% for October year over year, which definitely confers the title of the fastest growing tight oil play in the world this year to the Vaca Muerta region. Only the top producing basin in the US, the Permian, delivered a bigger increase, but in absolute volumes and not in terms of the rate of growth. Those gains have pushed Argentina’s total oil output to a whole different league in the country’s modern history, with volumes in the second half of 2022 looking set to flirt with the highs last touched way back in 2008, Rystad Energy’s research shows.

Latest well output data for October published earlier this week showed POP activity increased to an all-time high of 52 oil wells in the third quarter, along with an aggressive build-up of more than 15,000 bpd extending from September to October. POP activity levels in October, of 14 wells in oil zones, remain comfortably above the count needed to maintain production, which currently stands at around 10-11 wells per month. With a number of wells put on production in September still in a build-up phase, a steady expansion in oil volumes is inevitable, with the play most likely surpassing the 200,000-bpd mark before the end of the year, our analysis shows.

Gas output from the Vaca Muerta shale peaked at 1.57 billion cubic feet per day (Bcfd) in August, with the seasonal slowdown that started in September becoming more pronounced in October. Both YPF and TecPetrol implemented sizeable production curtailments on their legacy wells in October on the back of a seasonal decline in domestic consumption, which likely persisted in November too.

Latest oil production increases from the Vaca Muerta play have pushed the nation’s output into an uncharted territory. With total output averaging at 542,000 bpd in October, the seven-year high of 544,000 bpd, set in early 2014, is now within reach. Based on the current base case growth projection for 2022, we believe that 600,000 bpd is achievable in the second half of 2022 – the last time Argentina produced more than 600,000 bpd was in the first quarter of 2008. In October 2021, Vaca Muerta accounted for more than 35% of the nation’s oil supply, up from 24% in October 2020.

Oil production increases in October came as nearly all major operators executed major completions in the third quarter. Notable, the most mature Loma Campana block belonging to YPF was the biggest driver of the play’s growth, with output increasing from 45,200 bpd to 51,100 bpd – a record high. All other YPF blocks collectively produced 63,400 bpd in October, growing by about 4,300 bpd that month. Shell and Vista kept tracking each other closely in terms of operated oil production, with Shell narrowing the gap to around 700 bpd in October and each producer delivering about 20,000 bpd in the first month of the fourth quarter.

Mechanically lined pipe industry pushes for large diameters

An uptick in Brazilian deepwater field activity looks to be improving the outlook for the subsea umbilicals, risers and flowlines (SURF) sector, with new opportunities emerging for rigid risers in sub-salt developments. It follows rising use of mechanically lined pipe (MLP) since 2019 with Brazilian projects such as Mero 1, Sepia and Buzios 5 among those to have switched to MLP technology for significant pipe lengths. Brazilian major Petrobras recently indicated that its upcoming tenders for Mero 4 and Buzios 9, expected in 4Q21 and 1H22 respectively, will include requirements for rigid solutions. Replacement lines in the Tupi and Buzios developments 1-4 are also set to be tendered in the coming months.

MLP technology has benefited from operator concerns around technical issues associated with flexible risers in pre-salt areas, including stress corrosion cracking, particularly in water-alternating gas (WAG) lines. While technical developments are underway to improve the competitiveness of flexibles, the latest contract tenders indicate there is a way to go for flexible solutions to compete in all areas. Buzios 11 is expected to be the next Brazilian project where flexibles will compete directly with MLPs. Demand for MLPs is expected to average close to 240 kilometers annually in Brazil alone over the 2022-25 period, with the majority in the 9 5/8 inch outside dimeter (OD) range using alloy 625 as the inner liner.

While leading E&P operators in Brazil, notably Petrobras and Equinor, are among the main users of MLP, a shift in the wider corrosion-resistant linepipe industry is gathering pace. German manufacturer EBK recently announced plans to start producing large-diameter MLPs to displace clad pipe for trunkline projects in regions such as the Middle East. The EBK proof-of-concept focused on 12-28 inch OD lines with X65 as the carbon outer layer and alloys 625, 825 and 316L as the corrosion resistant alloy (CRA) liner. Butting and Cladtek are also actively exploring or developing solutions for larger diameter MLPs. The potential cost savings of MLP compared to competitive-bonded clad technology are driving this shift and have contributed to consideration of increased MLP kilometres over clad for major upcoming projects including Eni’s Rovuma, ADNOC’s Hail and Ghasha, Inpex’s Abadi and Masela, and others. Historically, MLP technology has rarely been used above 20-inch OD. These tubulars are complicated to manufacture with a number of challenges, including consistency in the weld overlay triple weld at the end of each section. The technical success of these projects will be critical in determining the competitiveness of the technology solutions over the longer term.