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Matthew Smith

Matthew Smith

Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located…

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Why South America’s Offshore Oil Sector Is Exploding


Nearly a decade ago South America’s emerging offshore oil boom was viewed as a fad triggered by soaring oil prices which by 2011 had recovered from the Great Recession to be trading at over $100 a barrel. In early 2012, the international Brent price peaked at over $128 per barrel and stayed on average at over $100 a barrel until the late-August 2014 price crash. At those prices high cost oil projects, including offshore Brazil, became popular among global energy majors as they sought to take advantage to boost oil reserves, production and profits. During 2012 there was little if any production from Brazil’s massive offshore pre-salt oil fields, by 2015 they pumped around 50% of the country’s total oil output and were responsible for three-quarter by the end of September 2020. That can be attributed to steadily decreasing production expenses due to steadily improving drilling technology, growing knowledge and increased infrastructure. 

When the pre-salt oil boom emerged in 2012 breakeven costs were estimated at over $60 per barrel. Since then they have progressively fallen, with Petrobras estimating $55 per barrel in 2014 and the Natural Resource Governance Institute stating in August 2020 that they were $45.50 per barrel for offshore Atlantic Brazil. Brazil’s national oil company Petrobras believes breakeven costs will fall to as low as $35 per barrel. Petrobras claims that the average breakeven cost across its operations is $21 per barrel, making them profitable even in the current challenging operating environment. According to energy industry consultancy Rystad Energy, Petrobras is responsible for 88% of South America’s deep-water operational expenses, highlighting that Brazil is the key driver of the continent’s offshore boom. There are signs of a bigger boom ahead for Brazil, which will support Petrobras’ views that breakeven costs will keep falling, particularly for all-important pre-salt oil production. Sharply weaker oil prices and the COVID-19 pandemic have done little to blunt Petrobras’ pre-salt expansion. For the third quarter 2020 Brazil’s national oil company’s oil output expanded by a healthy 5.4% compared to the previous quarter, and by 2.6% year over year to an average of just under 3 million barrels daily. This makes Petrobras one of the very few global energy majors to have grown its oil production during 2020. That is important to note because it is a rare event in the current harsh operating environment where oil output has been declining for most upstream oil producers on a year over year basis. The poor global outlook for oil and sharply weaker prices forced energy companies around the world to slash exploration and development spending. Many were also forced to shut-in wells that were uneconomic to operate in the current harsh business environment. Production declined significantly for most energy companies when compared to 2019.  Related: World’s Largest Copper Miner Is Taking A Shot At Lithium

The fact that Petrobras keeps expanding its 2020 oil production bodes well for the continuing success of Brazil’s offshore boom, particularly with its ramping-up spending on its pre-salt oil fields. The pre-salt Buzios and Tupi oil fields are responsible for 63% of Brazil’s total oil output and 72% of the country’s pre-salt production. Both fields produce medium grade sweet crude oil which is in high demand among Asian refiners. Already the Buzios field is producing more than Petrobras’ onshore and shallow water oil fields combined. Despite slashing its 5-year capital spending to between $40 and $50 billion from the $64 billion originally planned, Petrobras is committed to ramping-up activity at its pre-salt oil fields, notably Tupi and Buzios. Due to the poor outlook for crude and weak prices, Petrobras is investing only in those projects which breakeven at $35 Brent with a focus on its pre-salt assets having earmarked 71% of its exploration and production budget for those operations. Such a low breakeven price will ensure those assets are cash flow positive even in the current harsh operating environment. Petrobras plans to bring 12 floating production storage and offloading vessels online by 2025 with 4 earmarked for the Buzios oilfield. This will substantially boost the output of Petrobras’ sweet medium crude which has become a hit with Asian refiners, seeing Brazil become the third largest supplier of crude oil to China by the end of September 2020.

The offshore oil boom in South America is not only confined to Brazil. Recent developments in Guyana and neighboring Suriname point to both countries being on the verge of major offshore oil booms of their own. Offshore Guyana’s attractiveness is growing, especially since supermajor ExxonMobil made 18 major high-quality oil discoveries. The company claims it has more than 8 billion barrels of recoverable resources in the Stabroek Block alone. Those events point to tremendous oil potential in Guyana’s part of the offshore Guyana-Suriname Basin. Exxon commenced production in the Stabroek Block in December 2019 at the Liza Phase One operation. Exxon is in the process of developing Liza Phase Two, which will add 220,000 barrels daily to its oil production in the Stabroek Block. The oil supermajor recently received approval to proceed with the $9 billion Payara development which will add up to another 220,000 barrels of oil to its offshore Guyana production in 2024. Exxon envisages pumping 750,000 barrels of crude in the Stabroek Block by 2025. The attractiveness of offshore Guyana for investment from international energy companies is underscored by Hess Corporation, Exxon’s partner in the Stabroek Block, claiming breakeven costs are around $35 per barrel pumped. There is every indication that as more infrastructure is established and drilling expertise as well as technology improves, those costs will fall. The end of Guyana’s political impasse points to greater stability, bolstering its appeal to international energy companies.  Related: How China Is Racing To Expand Its Global Energy Influence

Suriname, which shares the offshore Guyana-Suriname Basin, is also progressing with its own nascent offshore oil boom. International energy company Apache and partner Total have made three significant oil discoveries in offshore Suriname during 2020. Those have been identified as light crude oil with API gravities of 40 degrees and over. It is speculated that breakeven costs in offshore Suriname will be similar to Guyana or even lower. Operators will be able to leverage off the knowledge gained in Guyana and the oil infrastructure established to support offshore operations in the former British colony. Suriname’s new government and national oil company Staatsolie are focused on developing the impoverished Dutch colony’s considerable oil potential. There are emerging signs that Guyana and Suriname could become preferred destinations for investment by international oil majors because of low breakeven costs, growing political stability and the light to medium sweeter crude oil blends held by the Guyana-Suriname Basin.

While talk of a South American oil boom used to conjure up visions of Venezuela and Colombia’s enormous onshore heavy oil fields, the continent has become a leading location for offshore oil exploration and production. Brazil’s pre-salt oil discoveries have been a game changer for South America’s oil industry. The emerging boom in nearby Guyana as well as growing exploration activity in Suriname are adding momentum. Even the March 2020 oil price collapse, the poor outlook for oil and the COVID-19 pandemic have all had a negligible impact. Falling breakeven costs and sharply rising demand for the light to medium sweet crude oil blends will ensure that the boom will continue despite the current difficult operating environment. The experiences of Brazil, Guyana and Suriname provide important lessons for other petroleum rich jurisdictions on how to tap their own hydrocarbon wealth.

By Matthew Smith for Oilprice.com

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