Few other industries are more exposed to the volatility created by the invasion of Ukraine than the oil and gas industry

The invasion of Ukraine has shown how interconnected the world is in the 21st century, probably more so than any other event outside of COVID. There is no doubt that while Putin hammers his Slavic neighbor the ramifications of his actions will be felt around the world.

Few other industries are more exposed to the volatility created by this invasion than the oil and gas industry. The war also shows how reliant the world still is on hydrocarbons and highlights the nature of the industry’s low demand elasticity. The perceived threat to supply caused by sanctions (and potential sanctions) was enough to send prices soaring to heights not seen in the last 15 years.

In Latin America big oil producers such as Brazil will see coffers filled because of sustained higher oil prices. As sanctions against Russian oil imports are adopted in the United States and even in Europe Latin American barrels could be an attractive alternative. Particularly Venezuela, with its extra heavy oil, has come into focus again as a potential importer to the U.S. Only four years ago Venezuela was sending a half a million barrel a day to the Gulf Coast whose refineries are set up to run heavier crude slates. The Biden administration has been in direct contact with the Chavistas as to this point, although whether a deal is struck is ultimately hard to predict.

LNG is the other side of this coin. With Latin American buyers exposed completely to the spot market LNG cargos are now more costly than ever. This is a problem for countries like Brazil and Argentina who import LNG to cover the deficient during peak demand, which is quite seasonal. In the medium term this may push both countries to develop more fully their domestic gas supply so as to become self-sufficient. Each has the belowground potential to do so, but lacks infrastructure and other specific components to make that happen today.

As this war continues volatility will be the name of the game. Latin America as a region will face both headwinds and tailwinds as the fallout continues. It’s about knowing about which way wind is blowing at any given time.

Tudo de bom,
Rio de Janeiro
March 17, 2022

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

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Vaca Muerta gas hits new record amid favorable consumption, trade balance

Argentina’s Vaca Muerta shale saw oil production surge to a new record in January, while gas volumes posted a robust recovery amid an expansion in domestic consumption and favorable trade balance – with exports to Chile almost offsetting imports from Bolivia for a fourth month in a row. While production data for the month is still marginally incomplete with some operators yet to fully report their numbers, preliminary data suggests that Vaca Muerta oil output surpassed 220,000 barrels per day (bpd) in January, while gross gas volumes increased from 1.56 billion cubic feet per day (Bcfd) in December to 1.67 Bcfd in January. As such, the basin’s oil output maintains a pace of 80,000-90,000 bpd year-over-year growth. The gross gas total already exceeds the pre-Covid-19 peak by more than 400 million cubic feet per day (MMcfd) despite persistent bottlenecks associated with both the Neuquen takeaway capacity and the overall nationwide gas balance.  

Local procurement rules, inflation impact development costs in Brazil

In the past two years, inflation has run rampant around the globe with Brazil especially impacted. Recent data indicates that the annual inflation rate in Brazil was above 10% in December 2021, one of the highest in the world and 3% higher than in the US over the period. The increase has driven oil and gas development costs higher in Brazil, particularly in areas where local content requirements mean work must be undertaken within country rather than internationally. In this commentary, we assess the impact of rising procurement costs on Brazilian developments and local wage increases and the way in which inflation in these areas will impact development costs through to the end of this decade. From 2022 to 2030, we estimate that greenfield capital expenditure (capex) on facility development for Brazilian oil and gas fields will top $75 billion and represent over 80% of total capex. In general, this means that understanding local content requirements and country-by-country inflationary trends will be critical as a means of minimizing cost increases for projects in Brazil through this decade.

In analyzing manufacturing prices in Brazil, several key metrics point to a dramatic increase in procurement costs in the past two years. For example, metallurgy prices have risen 80% with machinery and equipment manufacturing rising roughly 30% over the period due in part to global supply chain issues . ages have increased far more modestly over the period but are expected to increase more rapidly from this year through to 2025. Looking at segments of the oil and gas industry necessary for project development including oil country tubular goods (OCTG) and engineering, construction/installation-related jobs, year-on-year wage rate increases for these blended categories were less than 1% from 2019 to 2020. For 2021, wages in these categories will be markedly higher than in 2020 at roughly 4%. We anticipate that wage growth will follow inflation trends in the broader economy, resulting in a compound annual growth rate (CAGR) of 6% for OCTG-related jobs, 5% for engineering roles and 4% for construction and installation-related positions from 2022 to 2025.

Suriname cheers sixth offshore find as TotalEnergies wildcat hits pay

Suriname has taken another stride towards rivaling emerging hydrocarbons powerhouse and neighbor Guyana after TotalEnergies revealed yet another oil and gas discovery on Block 58, its fifth on the prolific tract and Suriname’s sixth offshore. The French major and US independent partner Apache have hit pay at the Krabdagu-1 wildcat, extending a string of exploration successes broken only by an uncommercial find at the Bonboni probe late last year. These finds, together with the Sloanea discovery on Block 52 by operator Petronas and partner ExxonMobil, will increase calls for Suriname to create a sovereign wealth fund to reap the benefits from future oil and gas production to help bolster a flagging economy and improve living conditions for its citizens.

The Krabdagu-1 well was drilled in 780 meters of water east of the Keskesi discovery towards the eastern boundary of Block 58, flanking Petronas’s Block 52. The wildcat well, as with other wells on the block, was targeting multiple stacked reservoirs within the Maastrichtian and the Campanian intervals and is communicated to have encountered about 90 meters of good quality net oil pay. Comparing this with previous discoveries on the block, Kravdagu-1 is one of the most successful wells in terms of net pay encountered. Maka Central, which broke a series of failures and marked Suriname’s maiden offshore success, encountered 50 meters of net pay within the shallower Campanian section and 73 meters in the deeper Santonian section. Sapakara West encountered a cumulative column of 79 meters within the shallower and the deeper sections. Kwaskwasi, the best of the lot, encountered a cumulative column of about 278 meters, 149 in the shallower section and 129 in the deeper section. Krabdagu-1 appears, therefore, to not have penetrated the deeper section, thus providing additional upside potential to be tested during appraisal.

The one failure on Block 58, Bonboni-1, was drilled towards the northern part of the block, away from the strike line of the other discoveries. The uncommercial well was, however, the first exploration effort to prove the hydrocarbon prospectivity towards unchartered terrain.

Ambitious 80 GW Brazil offshore wind plans in motion but fine print pending

A new decree in Brazil promises to outline the steps developers must follow to exploit offshore wind resources in the country, leading to a 45% jump in capacity under pre-application from domestic and international players eyeing its untapped potential. Projects at the environmental impact study stage currently total 80.4 gigawatts (GW_AC) of capacity under assessment. This is great news for a country that heavily relies on hydropower, which left Brazilians stranded during the most recent dry season. While the bar is set high, Rystad Energy estimates that the nascent offshore wind market in Brazil – given the many regulatory and logistical hurdles ahead –  will end the decade with no more than 3 GW_AC of installed offshore wind capacity.

Aggressively dry weather between March and May 2021, led to a water supply shortage in Brazil, with disastrous consequences for the country’s economy and power sector. The Parana River Basin, which supplies water to the Itaipu dam (the second largest hydropower facility in the world), reached the lowest discharge levels of the past 90 years. The lowest level last year was seen in August, when hydropower generation fell 25% compared to August 2020. For a country where hydropower accounts for more than 60% of the power sector, this drop had significant consequences. And last December, Brazil awarded in an emergency auction 1.2 GW_AC of capacity over 17 projects, mainly natural gas, revealing that overreliance on a single power source could end up challenging energy security. As such, the federal government is trying to diversify the Brazilian power mix as soon as possible to avoid future risks – queue in offshore wind.