focus: latin america's “big four” struggle to raise production

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Latin America’s ‘‘Big Four’’ struggle to raise production

Latin America’s four largest oil producers: Mexico,Venezuela, Brazil, and Colombia, all face difficultiesin increasing their oil production in 2014. Preliminaryfigures for 2013 show output almost unchanged from2012 and it is unlikely that this year will be muchbetter. The state oil companies of Mexico and Venezuelaboth face challenges arising from a shortage of fundsfor capital investment. In Brazil, the issues are bothfinancial and technical as the country comes to relyincreasingly on the development of new fields lying indeepwater offshore. For Colombia, the problem is oneof low reserves.

Stagnant output

Latin America’s ‘‘Big Four’’ produced 8.73 mn bpd ofoil in 2012. Preliminary estimates for output in 2013show a total of 8.72 mn bpd. Of the four, only Colombiarecorded an increase. Output from both Mexico andBrazil declined; Venezuela’s production looks to havebeen unchanged.

Colombia’s production rose above 1 mn bpd for thefirst time, increasing by an estimated 60,000 bpd or6.3% compared with 2012, taking it to 1.01 mn bpd.Venezuelan production began in 2013 just above2.70 mn bpd before dipping slightly in the second halfof the year. The net result appears to have little orno change compared with 2012 for the year as awhole.

Mexico’s estimated output of 2.89 mn bpd in 2013 isjust 30,000 bpd or 1.0% below the previous year’s total.The Brazilian decline was 40,000 bpd or 1.9%, taking itto 2.12 mn bpd. The four countries combined producedan estimated 8.72 mn bpd, down 10,000 bpd or 1.1% (seeTable A).

Mexican decline

Mexico’s oil production has declined each year since2004 when it stood at just over 3.8 mn bpd. The annualrate of decline has fallen recently and there havebeen one or two promising discoveries. There is alsoguarded optimism over the prospects for the deeperparts of the Gulf of Mexico. Last year, the nationaloil company, Petroleos Mexicanos (Pemex), reportedpromising results from new field developments bothoffshore and onshore.

One of the problems for Pemex, however, is that itsnew developments are small compared with those itrelies on for the bulk of its output. These new fields arerequired to replace the country’s oldest fields that arenow in decline, notably the Cantarell field in the Sound

Table ALatin American Big Four: Oil Production 2012 v 2013

Country Production

2012∗ 2013† Change(mn bpd)

Mexico 2.92 2.89 (0.03)Venezuela 2.70 2.70 —Brazil 2.16 2.12 (0.04)Colombia 0.95 1.01 0.06Total 8.73 8.72 (0.01)

∗Actual†EstimatedTotals roundedSource: (2012) IEA

(2013) Pearl Oil

Table BMexico: Oil Profile, 2013

Proven Reserves 10.3 bn bbl∗

Reserves Remaining 9.6 years†

(mn bpd)Production

Crude 2.5NGL 0.4Total 2.9

ConsumptionTotal 2.1

Net ExportsTotal 0.8

∗As of 1.1.13†Based on 2013 productionTotals roundedSource: (Reserves) Oil & Gas Journal

(Production) IEA(Other) Pearl Oil estimate

of Campeche, which produced 2.2 mn bpd at its peakand is now down to about 400,000 bpd.

The country’s main field-complex is now theKu-Maloob-Zaap (KMZ) group of fields, but outputthere is only about half that of Cantarell at its peak.There were high hopes of a considerable contributionfrom the onshore Chicontepec field, but the complicatedgeology of the hydrocarbon basin has kept productionat levels well below those originally forecast for the field.Output there was reported at 75,000 bpd during the firsthalf of 2013. Output for the whole country in 2013 isestimated at 2.9 mn bpd (see Table B).

Proposed reform

Since the nationalization of Mexico’s oil industry in1938, Pemex has been the country’s sole producer of oil

© 2014 John Wiley & Sons Ltd

4 FOCUS OIL AND ENERGY TRENDS, FEBRUARY 2014

but it has lacked the resources to develop the oil industryas planned.

In 2013 Mexico’s President, Enrique Pena Nieto an-nounced a radical and far-reaching reform of the coun-try’s oil industry designed to end the Pemex upstreammonopoly, as well as allowing private companies toenter the refining and oil transportation business, withthe aim of attracting both foreign capital and expertise.

One thing missing so far, however, is the privatizationof the state oil giant, which remains short of the moneyit needs to develop new oil and gasfields, especially onthe deeper parts of the continental shelf. Pemex has alsorevealed ambitious plans to explore shale oil and gasliquids in the north of the country where reserves havebeen estimated around 60 bn boe.

Mr Nieto has suggested that his reforms wouldadd 500,000 bpd to Mexico’s crude oil productionby 2018 and 1 mn bpd by 2025. The bill to approvethe changes was passed by the Mexican Congress inDecember, although the precise details of the newupstream contracts remain to be settled. This will bedone by secondary legislation during 2014. The mostlikely outcome will be a licensing round held under thenew rules sometime in 2015.

Outlook

The reforms do nothing to address Mexico’s immediateproduction problems. There is unlikely to be any increasein output of either crude oil or natural gas liquids (NGL)during 2014. Production for the year as a whole isforecast at 2.85 mn bpd, a decline of 40,000 bpd or 1.4%,compared with 2013 (see Table F) which would make2014 the tenth year in a row in which Mexican outputhas fallen.

Venezuelan conundrum

With large reserves and an impressive reserves to pro-duction ratio (see Table C), Venezuela ought to be facinga bright future as a producer and exporter of oil. Instead,the country’s output is in steady decline and it is unableto meet production targets. Like Mexico, it also has anational oil company that apparently lacks the financialand technological resources to reverse the decline.

The figure for proven reserves greatly overstatesVenezuela’s production capability, as nearly all thesereserves consist of extra-heavy oil, lying mostly in theOrinoco Belt area in the south-east of the country.Production there is limited in part by the capacity of theunits required to upgrade the heavy crude in order totransport it to market. Upgrading capacity is reportedto be just over 600,000 bpd.

Light crude reserves are estimated to be less than 7%of the country’s total reserves, and many exist in older,declining fields. In 2013, the Oil Ministry announced

Table CVenezuela: Oil Profile, 2013



(mn bpd)Production

Crude Oil 2.5NGL 0.2Total 2.7

ConsumptionTotal 0.8

Net ExportsTotal 1.9


(Other) Pearl Oil estimate

plans to raise production from all types of field to 4 mnbpd in 2014 and to 6 mn bpd by 2016. The plan envisagesthat the increase will come not only from new extra-heavy deposits in Orinoco, but also from a revival ofoutput in several older, existing fields.

One mature area marked for the revival of productionis Lake Maracaibo, where commercial oil productionbegan in 1914. It is hoped that new infrastructure therecould boost output by 200,000 bpd. There is also to bemore enhanced oil recovery (EOR) at existing fields.The majority of activity, however, is planned for theOrinoco Belt.

Raising production

The principal body responsible for production is thestate oil company, Petroleos de Venezuela (PDVSA),which plans to spend about $135 bn between 2013 and2019. The problem for PDVSA is that a substantialproportion of its revenues is taken by the government tofund its ambitious social programs, leaving the statecompany insufficient for its own investment plans.The government has sought investment from overseasand from Asia in particular, but it has not yet raisedsufficient funds to allow it to fulfill all its productionplans.

Relations with foreign investors have been strainedfor a number of years. Many of the problems date fromthe nationalization of oil company assets that took placeunder the country’s former President, Hugo Chavez,who was in power from 1998 until his death in early2013. In 2007, Chavez nationalized a number of largeforeign shareholdings in the oil industry. Two years later,a further 60 small oilfield service companies were alsotaken over.

A series of protracted disputes over compensationtook place. Some foreign companies remained inVenezuela after agreeing to new terms that reduced


OIL AND ENERGY TRENDS, FEBRUARY 2014 FOCUS 5

the money they could make there. A small numberof international oil firms remained in Venezuela viajoint ventures with PDVSA, including BP, Chevron,Repsol, Statoil, and Total. The government in Caracashas tried to replace those that left–such as ExxonMobiland ConocoPhillips–with new investors in the shapeof state-owned national oil companies, including ChinaNational Petroleum Corporation (CNPC) and India’sOil & Natural Gas Corporation (ONGC).

The principal role of Venezuela’s current foreigninvestors is to develop the heavy oil deposits of theOrinoco Belt. This is done through joint ventures withPDVSA in which the Venezuelan state company has, bylaw, a shareholding of at least 60%. PDVSA, however, hasnot been able to pay the full share of its investment costsin many cases. In March 2013, it was even reported tobe seeking loans from some of its joint venture partnersto cover its investment commitments.

CNPC has emerged as the largest of these newinvestors, starting with the Petrosinovensa and Petrozu-mano joint ventures to develop some 170,000 bpd of newproduction. It now has another for a 400,000 bpd fieldknow as Junin Block 4. Other joint ventures includeJunin Block 5, which involves ENI and is designedto produce 240,000 bpd, PetroVietnam’s Petromacareoventure and Petromiranda, which involves Russia’sLukoil and Rosneft.

Outlook

A number of foreign companies, including CNPC,Chevron, ENI, Gazprom, Repsol, and Rosneft, haverecently announced new investments in Venezuelacovering a series of projects ranging from extra-heavycrude to natural gas. Despite these and other investmentsVenezuela will not be able to achieve its 4 mn bpdproduction target this year, nor 6 mn bpd in 2016. Themost likely scenario for 2014 is for little or no change inoutput (see Table F).

Brazil moves deeper offshore

Brazil is Latin America’s third-largest oil producer, withan estimated output of 2.1 mn bpd. Its proven reservesare the second-largest, at 13.2 bn bbl (see Table D).Prospects for increasing production depend on costlyfields in deepwaters in the Atlantic Ocean.

Unlike Mexico or Venezuela, Brazil has recorded ahealthy increase in oil production in recent years. In thedecade up to 2013, output rose by 585,000 bpd or 38.1%to an estimated 2.12 mn bpd (see Table A); the largestincrease in volume of any Latin American country.

Part of the increase in output has come from anarea more than 150 mi offshore in the Atlantic Oceanknown as the Santos Basin, which lies below 6,000 ftwater. The Tupi field in the Santos Basin was thought to

Table DBrazil: Oil Profile, 2013



(mn bpd)Production

Total 2.1Consumption

Total 2.8Net Imports

Total 0.7


(Production) IEA(Other) Pearl Oil estimate

Table EColombia: Oil Profile, 2013



(mn bpd)Production

Total 1.0Consumption

Total 0.3Net Exports

Total 0.7

∗As of 1.1.13†Based on 2013 productionTotals roundedSource: (Reserves) Oil & Gas Journal(Production) IEA(Other) Pearl Oilestimate

contain over 5 bn bbl of oil and be capable of producing1 mn bpd, but both its reserves and production potentialappear to have been exaggerated. Tupi’s output lookslike being in the range of 100,000 bpd this year and thismay well prove to be close to its maximum level.

There are other prospective areas offshore, includingthe Campos Basin, which provides most of Brazil’sproduction at present and the Santos Basin mayeventually prove to contain a number of large oildeposits, but no major increase in output is likely for afew years and Brazil’s production target of 4.2 mn bpdby 2020 is unlikely to be achieved.

There are nevertheless some positive signs from theSantos and Campos Basins. At the beginning of 2013, thenational oil company Petrobras announced some highlypromising results from a well in a prospect known asCarcara, in the Santos Basin. No reserve estimate wasgiven but commercial production was forecast for 2018.

Outlook

Brazil has ambitious plans to double production by 2020,taking it to 4.2 mn bpd. This target in fact represents a


6 FOCUS OIL AND ENERGY TRENDS, FEBRUARY 2014

Table FLatin American Big Four: Outlook for Oil Production, 2014

Country Production

2013∗ 2014† Change(mn bpd)

Mexico 2.89 2.85 (0.04)Venezuela 2.70 2.70 —Brazil 2.12 2.20 0.08Colombia 1.01 1.05 0.04Total 8.72 8.80 0.08

∗Actual†EstimatedTotals roundedSource: Pearl Oil

downward revision of 710,000 bpd or 14.5%, on theoriginal target, set in 2011, acknowledging that manydeepwater offshore fields are proving more difficult todevelop than planned. Production actually fell in 2013(see Table A) but is expected to rise in 2014 as somenew offshore developments begin production. A rise of80,000 bpd is forecast, with a larger increment likely in2015 (see Table F).

Colombia looks for reserves

After Brazil, Colombia is the only major Latin Americanoil producer to have increased production over the lastdecade. From 2004 to 2013 output rose by just over480,000 bpd to 1.01 mn bpd (see Table A), which gaveit a percentage increase of 91.3%, the largest anywherein the Western Hemisphere. This high rate of growth isunlikely to go on much beyond 2014, however, unlessfurther reserves can be added. Colombia’s presentreserves of 2.2 bn bbl give it only six years’ productionat present levels (see Table E).

What would ideally suit Colombia would be the dis-covery of a field of a billion barrels or more, but no suchdiscovery has been reported for more than two decades,leaving only a string of minor discoveries, although thereare some hopes of larger finds offshore in the Caribbean.There are also said to be good prospects in the Llanosregion but any finds there are likely to be of heavy crude.

Exploration of the Llanos has been held back to someextent by the high cost of processing and transportingthe heavy crudes, some of which are as low as 9◦

API. Activity there is picking up however, and the

state oil company Ecopetrol recently announced thatit would commission a newly-discovered 50,000 bpdfield in 2015 and increase production at its La Castillaheavy oilfield by 45,000 bpd to 170,000 bpd by 2016.Heavy oil production in Colombia is now approaching600,000 bpd and Ecopetrol is the largest producer.

The crude is expensive both to produce and totransport. Before it can be carried by pipeline or tanker,it must be diluted with lighter hydrocarbons. Ecopetrolmainly uses naphtha, but Colombia’s refineries do notproduce sufficient naphtha, forcing Ecopetrol to importlarge quantities from the US and Canada. Anotherexpense is the disposal of the water that is producedin conjunction with the heavy crude. In some parts of LaCastilla the ratio is about 10 bbl of water to 1 of crude.

Outlook

Two further impediments to further increases inproduction are the inadequacies of the oil pipelinenetwork and the frequent attacks by guerrilla groupson the country’s oil transport network. Many of theattacks are by groups connected with the illegal tradein cocaine [1]. The future of Colombia’s productionlies with solving these problems as much as with thediscovery of further oil reserves. This year oil productionshould nevertheless show a slight increase of 40,000 bpd,raising it to 1.05 mn bpd (see Table F).

Regional outlook

Of the four main oil producers in Latin America,only Brazil and Colombia are likely to increase theirproduction in 2014, with Brazil potentially having thelarger rise. Venezuela should manage to keep its outputat last year’s level, whereas Mexico declines slightly (seeTable F). These four countries are by far Latin America’slargest producers, accounting as they do for 89% of itsentire production, and they are also the only countriesthere with any realistic prospects of long-term growthin output.

Reference1. Looking Ahead: New pipeline to help Colombia’s

output to grow. Oil and Energy Trends 2013; 38:8;pp 18–19, DOI: 10.1111/oet.12090.


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