Scaling up production

The Ukraine war is having a multitude of disastrous effects around the world. The consequences for South America, however, are different; as the EU, the US and other jurisdictions abandon Russian imports of natural gas, crude and refined products, producing nations south of the border have the opportunity to pick up the slack.

Venezuela Venezuela has been the pariah of Latin America for several decades, following the rise of Hugo Chavez and the continuation of his regime under Nicolas Maduro. Production in the world’s largest crude reserves has fallen from over 3 million bpd in 2005 to approximately 500 000 bpd in 2020. But that may be about to change.

For the last several years, the US has imposed tough sanctions on Venezuela in an attempt to topple the Maduro regime. The moves drove the country into the arms of China and Russia, which worked to help dodge the sanctions.

After Russia invaded the Ukraine, the Biden administration announced it would ban the import of Russian oil, about 1 million bpd. Subsequently, the White House made overtures to Venezuela. While most USGC refineries are configured to use heavy crude and would benefit from a resumption of Venezuelan imports, the move is also seen as an attempt to drive a wedge between Russia’s and Venezuela’s geopolitical alliance.

Steps to ease sanctions should have a positive impact on Venezuela’s oil and gas sector. Thanks to mismanagement of the economy and corruption, the infrastructure is in decrepit condition, with breakdowns and leaks from pipelines and storage facilities fouling the land and surrounding international waters. Estimates for repairing the entire sector’s infrastructure exceed US$200 billion.

As many jurisdictions suffer as a result of the Ukraine war, Latin America is experiencing some inadvertent benefits, Gordon Cope writes.

Chevron, the only western oil company still operating in Venezuela, is lobbying Washington to increase its allowed scope of activities. Investment in pipelines and other decaying assets may prove an unexpected boon.

Guyana In April 2022, ExxonMobil announced new discoveries in its Stabroek Block in offshore Guyana, boosting reserves to 11 billion boe. Currently, the company and its partners are producing 130 000 bpd at its Liza Destiny FPSO vessel, and scaling up production at its Liza Phase II FPSO, with a capacity of 220 000 bpd. Two other projects, the Payara (220 000 bpd), and Yellowtail (250 000 bpd), are under construction. In all, a total of 10 projects are planned.

While FPSOs obviate the need for crude pipelines, longer-term plans may include natural gas infrastructure. The 11 billion boe reserve estimates include approximately 20% in the form of natural gas. The Guyanese government has announced plans for a natural gas power plant near the capital of Georgetown; at least 100 km of offshore lines would be needed to bring the gas ashore.

The light, sweet crude being pumped makes it relatively easy to create high-quality fuels in European refineries; ExxonMobil estimates that Guyana’s output could hit 1.2 million bpd by 2027, helping displace Russian imports.

Brazil Brazil has been going through profound changes over the last several years, as legislation to both reduce Petrobras’s monopoly control and to liberalise the oil and gas sector has resulted in major shifts in all aspects of its energy infrastructure.

First and foremost is the growth of presalt offshore crude output. Brazil currently produces approximately 3 million bpd, with 97% of that originating offshore. While Petrobras accounts for the majority of all production, international partners are gaining ground due to the promotion of independent operations and joint venture projects. In early 2022, Petrobras signed agreements to share production at the major offshore fields of Atapu and Sepia with TotalEnergies, Qatar Petroleum, Petronas and Shell, among others.

Brazil relies heavily on hydropower for domestic electricity needs, but recurrent drought has reduced reservoirs to critical levels. Brazil produces 4.7 billion ft3/d of natural gas, with 3.3 billion ft3/d coming from presalt fields. About 2.1 billion ft3/d of the latter is reinjected, however, making it difficult to meet domestic energy needs. President, Jair Bolsonaro enacted the New Gas Market in 2021, scheduled for implementation in 2022. The initiative is designed to unlock Brazil’s offshore gas potential and open access to the country’s three main transportation networks operated by TAG, NTS and TBG; extensive expansion of gas infrastructure will be necessary to achieve long term goals of increasing volumes and decreasing prices.

Delivering offshore gas to the mainland is key. Federal agencies have mapped out a total of 11 gas lines to connect various offshore fields to onshore facilities. One of the projects involves a JV between Equinor and Repsol Sinopec to co-develop the BM-C-33 presalt field, located 200 km offshore of Rio de Janeiro state. The gas/condensate field will be produced using an FPSO with a capacity of up to 125 000 bpd of crude and 500 million ft3/d of gas. The former will be exported via carriers, while the latter will be processed and integrated into the onshore gas transmission network that emanates from the Petrobras TECAB site at Cabiúnas. If all goes to plan, marketable natural gas production is expected to increase to 6.1 billion ft3/d by 2025.

As for the impact of the Ukraine war, the US has been in discussions with Brazil to help stabilise the international market; the Energy Ministry expects exports to rise from 1 million bpd in 2021 to as much as 1.2 million bpd in 2022, as crude output expands by an estimated 300 000 bpd over the course of the year. Multi-billion dollar plans are also underway to expand export terminals and related infrastructure.

Mexico Much of recent oil and gas related news coverage in Mexico has been focused on the efforts of populist President, Lopez Obrador (AMLO) to re-nationalise the energy sector by suspending lease auctions, building new refineries, reducing crude exports and prioritising statechampion Pemex over international companies.

But that obscures the fact that the largest expansion of its natural gas pipeline network has been occurring over the last decade. As CFE (the state electricity utility) switches aging power plants from bunker fuel to natural gas, a major transmission network has been growing to allow gas from the US Gulf coast states to flow south.

According to the EIA, US exports to Mexico averaged 6 billion ft3/d in 2021, and are growing at a rate of 12% annually. There is currently over 11 billion ft3/d of export capacity; the latest addition has been the Whistler pipeline, which added 2 billion ft3/d between the Permian Basin and the Agua Dulce hub in southern Texas, that serves trans-border transmission lines.

Once it reaches the border, major lines carry the gas south to urban regions. Mexico-based Fermaca recently completed the final leg of its 5 billion ft3/d Wahalajara pipeline network stretching from Waha, Texas to Guadalajara.

And much remains to be done; CFE and TC Energy are planning to extend the country’s natural gas network to the Yucatan peninsula. A new offshore pipeline will be built from the Tuxpan terminal in the state of Veracruz to connect to the Mayakan pipeline system in the states of Campeche and Tabasco.

Several headwinds threaten to slow domestic growth, however. AMLO has introduced constitutional reform legislation that would cap foreign ownership in the electricity sector, restricting investment. Environmental and Indigenous concerns, as well as stalled negotiations with CFE, continue to delay projects; TC

Energy has repeatedly postponed the completion of its 886 million ft3/d Tula-Villa de Reyes natural gas pipeline.

One positive development has been the rise of LNG. Sempra Energy’s Energía Costa Azul (ECA) LNG in Baja California, is located just south of the US border. A former LNG import site, it is already connected to existing pipelines. The 2.5 million tpy train, scheduled for completion in 2024, will use an estimated 370 million ft3/d. The Mexico Pacific Limited (MPL) project is located south of ECA on the Sea of Cortez in Sonora State. The plan is to build three trains totalling 14.1 million tpy. Cargoes are likely to go to Asia, offsetting demand pressures to Europe.

The high crude prices associated with the turmoil surrounding the Ukraine war are unlikely to abate soon, and are having an impact on highly-indebted Pemex. In 1Q22, the state firm saw profits rise to US$6 billion, the highest in at least 18 years.

Argentina Paradoxically, producers in Argentina cannot take advantage of surging commodity prices. Government controls cap the price of crude at US$60/bbl, roughly half of international prices, in order to protect domestic consumers.

That hasn’t stopped them from rapidly expanding production. The unconventional Vaca Muerta formation in Neuquen province contains up to 16 billion bbls of recoverable crude and over 300 trillion ft3 of gas. With only 10% of the reserves under production, the play already produces 910 million ft3/d of natural gas and 136 000 bpd of crude. Analysts estimate that unconventional resources could help double Argentina’s output to 1 million bpd by 2026, increasing exports from current levels of 100 000 bpd to over 500 000 bpd.

The growth in production has led to a need for more pipeline infrastructure. Currently, Neuquen province is served by the 260 000 Oldelval pipeline, which connects Neuquen to Puerto Rosales in Buenos Aires province. The operator has announced plans to spend US$500 million to almost double capacity to 500 000 bpd. The 100 000 bpd Otasa pipeline, which runs 400 km from Neuquen province to a 116 000 bpd refinery in Chile, is currently mothballed, but plans are underway to recommission it by late 2022. Shell Argentina is building a 120 000 bpd crude line between Neuquen and Rio Negro province, scheduled to enter service at the end of 2022.

As for natural gas, the extended drought in Brazil has placed severe constraints on its hydropower capacity, motivating the country to investigate continental sourcing with Argentina. The latter government has announced plans to build a 1.5 billion ft3/d line from Neuquen province to Brazil; the first stage is expected to come online in 2023.

High LNG prices have also spurred Latin America’s industry leaders to discuss Greenfield projects. Pan American Energy has proposed a US$15 billion facility to supply Argentinian LNG to countries looking to reduce supplies from Russia. Pipeline operator TGS said it has plans to supply feedstock to the project.

Colombia Prospects for Colombia’s oil and gas sector are looking up. After several adversarial years (including COVID-19, insurgents and mass protests in oil-producing regions), investment in the sector is expected to climb from a low of US$2 billion in 2020 to US$4.4 billion in 2022. In March 2022, Baker Hughes reported that 31 rigs were actively exploring in the country, up from half that two years ago. Although Colombia’s heavy sour crudes are discounted by refineries seeking lighter alternatives, buoyant commodity prices are proving a boon to a country that relies on crude exports to earn approximately 20% of government revenues.

Much still needs to be done. Colombia’s crude reserves remain stuck at 1.8 billion bbl, enough to keep production of 750 000 bpd going for another six years. Attacks on crude infrastructure, including the 210 000 bpd Caño Limón-Coveñas oil pipeline running from the Colombia-Venezuela border to Colombia’s Caribbean port of Coveñas, continue to plague exports. In June 2022, Gustavo Petro was elected president; during his campaign, he vowed to stop issuing oil exploration licenses, and gradually phase the sector out.

Hydrogen The world currently produces around 75 million tpy of hydrogen, primarily using the steam-methane reforming process, where high-temperature steam is used to strip hydrogen from natural gas. The International Energy Agency (IEA), estimates that greenhouse gas emissions associated with the production amounted to roughly 830 million tpy of CO2e; many jurisdictions, including the EU, have announced plans to increase green hydrogen production through the use of renewable energy and electrolysis, which emits no CO2.

The invasion of the Ukraine has super-charged those plans. Countries such as Germany, which relies heavily on Russian gas, are keen to accelerate the development of alternative fuel sources. The EU recently announced a €300 million hydrogen funding package aimed at reducing the dependence on Russian gas, by ramping up the current target of 3 million short t by 2030 to 15 million t. While the potential for Latin America to produce CO2-free hydrogen is huge, so far, only a few projects have been announced; Australian firm Enegix plans to take advantage of northeast Brazil’s abundant wind and sunshine by constructing a 600 000 tpy green hydrogen plant in Ceará state.

In conclusion, while the Ukraine conflict has created inadvertent benefits to South America’s oil and gas sector, many challenges remain. Jurisdictions will need to deal with domestic issues (such as regulatory regimes, fiscal incentives and corruption), in order to beneficially develop the continent’s vast natural resources. Regardless, the potential for new transportation infrastructure in Brazil, Argentina and Guyana over the next decade remains huge.