President Vladmir Putin’s decision to invade Ukraine coupled with ever-stricter sanctions being imposed on Russia, existing supply constraints and growing post-pandemic saw crude oil prices soar to record highs. The latest geopolitical events coupled with Europe’s energy crisis as well as key dependence on Russian oil and natural gas imports has Washington seeking alternate sources of crude oil. Pressure to find alternate sources of supply is magnified by the White House’s ban on Russian oil imports.
In what could be construed as a cynical move by President Joe Biden the White House initiated a visit to Venezuela aimed at opening dialogue with authoritarian President Nicolas Maduro. Venezuela is subject to strict U.S. sanctions aimed at unseating Maduro who since 2015 emerged as an important Latin American ally for the Kremlin located less than 3,000 miles from the nearest U.S. border. While softening sanctions to give Venezuela access to international energy and capital markets will allow the OPEC member to bolster crude oil output it will strengthen Maduro’s domestic power and send a signal of U.S. geopolitical weakness. As a result, there is considerable conjecture as to whether major oil producing countries in Latin America, besides Venezuela, can expand production and boost global supply.
Staunch regional U.S. ally Colombia is Latin America’s third largest oil producer behind Brazil and Mexico. The Andean country is a major trading partner with the U.S: providing the fifth largest source of U.S. oil imports behind Saudi Arabia and then Russia in third place. For 2021, U.S. EIA data shows that Colombia supplied an average of 203,000 barrels per day or 2.4% of total U.S. crude oil imports for that year. While the conflict torn country once pumped on average over 1 million barrels per day, reaching 1,005,600 barrels daily in 2015 oil production has been steadily declining since then. During 2021 Colombia only pumped an average of 735,378 barrels per day, which aside from being nearly 46,000 barrels per day less than pandemic affected 2020 was the lowest volume pumped since 2009. There are signs that despite a successful 2021 bid round, which saw 30 contracts awarded for an estimated $149 million of investment, Colombia’s production growth will remain soft and return pre-pandemic levels of nearly 900,000 barrels daily.
Geopolitical risk is ratcheting upward in a country which has seen violence soar since 2018 despite the 2016 peace deal with the largest rebel group the Revolutionary Armed Forces of Colombia (FARC – Spanish initials). That along with heightened civil unrest is impacting industry operations, particularly exploration in remote hydrocarbon rich regions where illegal armed groups operate cropping coca and smuggling cocaine. This risk is magnified by Colombia entering a presidential electoral year where the leading candidate senator Gustavo Petro stated he intends to end oil exploration in the country.
Another South American country receiving considerable attention is Ecuador which has the third largest proved oil reserves in Latin America totaling 8.3 billion barrels. Ex-banker Guillermo Lasso’s 2021 victory at the ballot box, last year, provided hope for a country where the economy and oil industry have suffered from nearly a decade of mismanagement. While President Lasso promised petroleum industry reforms building on those completed by his predecessor Lenin Moreno Ecuador is struggling to boost oil production or meet his stated production target of 1 million barrels per day. Aging poorly maintained industry infrastructure, natural disasters and lack of investment are responsible for Ecuador’s oil output deteriorating over the last three years. During January 2022, the mountainous South American country only pumped an average of 442,789 barrels per day, which was 13% lower than the equivalent period during 2021. Of greater concern is that number was 1% lower than the 448,578 barrels per day pumped for the full year 2021, which in turn was 6% less than the 479,370 barrels produced during a pandemic affected 2020.
A major problem for Latin America’s sixth largest oil producer is ongoing erosion in many parts of the Amazon Basin where key oilfields and infrastructure are located. Those ongoing issues in the region, notably around the Coca River, with erosion, landslides and rockfalls can be attributed to the Coca Codo Sinclair hydro-electric dam which was completed in 2016. This is impacting the operations of SOTE and OCP pipelines, which connect Ecuador’s main Amazonian oilfields to the Pacific coast port city of Esmeraldas. Both pipelines were ruptured by April 2020 landslides caused by heavy rainfall. That caused Ecuador’s worst oil spill in over a decade with more than 6,000 barrels of crude flowing into the Coca and Napo Rivers eventually threatening the water supply of the nearby city of Coca. The outage of both pipelines forced oilfields to be shuttered causing Ecuador’s crude oil production to plunge sharply averaging 200,000 barrels per day during April 2020 and 333,000 barrels for May 2020.
During December 2021 the pipelines, as a precaution, were shuttered (Spanish) because of further regressive erosion along the banks of the Coca River which threatened their structural integrity. This saw monthly production plummet to an average of 278,574 barrels per day forcing Quito to declare force majeure over Ecuador’s oil production contracts and exports. Then in January 2022 the OCP pipeline, after being struck by rockfalls caused by heavy rain, burst again spilling over 6,000 barrels of crude oil. Erosion, landslides, and rockfalls remain a constant risk which can sharply impact Ecuador’s petroleum output because If the SOTE or OCP pipelines are shuttered then oil production in Ecuador’s Amazon must be shut in. Until those headwinds are resolved, and Quito can attract sufficient private investment, Ecuador is incapable of expanding production nor meeting Lasso’s goal to more than double output to 1 million barrels per day. Quito is also under considerable pressure to repay more than 15 oil-backed loans from China.
Related: Mission Impossible: Can Biden Bring Oil Prices Down?
Latin America’s biggest oil producer Brazil, which also has the region’s second most voluminous oil reserves of 12.7 billion barrels, was the only country in the region to boost crude oil output during the 2020 pandemic. Brazil is on track to substantially lift crude oil output from its offshore pre-salt basins. For January 2022, Latin America’s largest oil producer pumped just over 3 million barrels (Portuguese) per day, a notable 5.6% increase compared to the same month a year earlier, although total 2021 liquids output was 1.8% lower than 2020. Brazil’s national oil company Petrobras, at the end of 2021, upped investment in operations to $68 billion with 84% of that capital earmarked for exploration and production. Over the next nine years, it is estimated that exploration and production in Brazil will be stimulated by rising capital investment of between $428 billion to $474 billion. It is anticipated that such considerable investment will lift Brazil’s petroleum production from around 3 million barrels per day to 5.2 million barrels daily by 2031.
That investment-driven industry development is key to Latin America’s largest petroleum producer becoming the world’s fifth-largest oil exporter. Analysts estimate that Brazil will add the most petroleum production capacity for any country outside of OPEC and the U.S. between now and 2026 with hydrocarbon output expected to reach around 4 million barrels per day by 2024. Such strong production growth will go a long way to bolstering global crude oil supplies and partly making up for the shortfall created by sanctions applied to Russian petroleum exports. It will, however, take some time for Brazil’s additional production to come online. This means it will not act as an immediate solution for oil supply lost due to bans on Russian oil exports. That becomes even more apparent when it is considered that Russia exports around 5 million barrels daily.
For the reasons discussed, the U.S. must look elsewhere if it is to find additional supplies of crude oil to boost supplies and replace that lost from the ban on Russian imports. Venezuela is the logical choice, especially when it is considered that many Gulf Coast refineries are configured to process Latin American’s heavy and extra-heavy crude oil grades. Any move to ease sanctions on Venezuela in order to boost U.S. petroleum supplies, cap spiraling gasoline prices, and bring down inflation is fraught with geopolitical risk but domestic economic pressures may prove too strong thus forcing Washington’s hand.
ADVERTISEMENT
By Matthew Smith for Oilprice.com
More Top Reads From Oilprice.com:
- Oil Prices Plunge As China Locks Down Shenzen
- Canada Says Its Oil Could Replace U.S. Imports Of Russian Crude
- Shale CEO: U.S. Can ‘’Easily’' Replace Russian Gas
However, if the gap refers to global oil supply, the answer will be an emphatic no given the tightness in the market and the limited global spare oil production capacity including OPEC+ resulting from underinvestment in oil and gas exploration and capacity expansion since 1019.
Neither Latin American countries of Ecuador, Colombia and Brazil combined nor Venezuela could on their own currently replace the banned Russian oil exports to the United States. Moreover, even if for the sake of argument Venezuela can, it will never export a single barrel to the United States until all US sanctions against it are lifted.
Moreover, no country or a group of countries combined can replace 8.0 million barrels of Russian crude oil exports in ten years or ever. It will take at least ten years of annual investments of $600 bn in oil and gas to fill the growing gap in global oil supplies.
Dr Mamdouh G Salameh
International Oil Economist
Visiting Professor of Energy Economics at ESCP Europe Business School, London