MEXICO CITY (Dow Jones Newswires), Feb. 6, 2009
After dominating Latin American oil production for decades, Venezuela and Mexico are fading fast as Brazil steps into the spotlight with massive investments and rising output.
If Brazil keeps the pace, it will help compensate for waning output elsewhere in a region that pumps about 10% of the world's oil and strengthen the country's economic and political clout. When global oil demand picks up again Brazil will be well positioned to take advantage of rising prices thanks to a larger export base.
Mexico led Latin oil production in December with 2.72 million barrels a day, followed by an estimated 2.35 million barrels a day from Venezuela. Brazil trailed with 1.88 million barrels a day, but the wind blows at its back while Venezuela and Mexico are slipping.
Brazilian state-run energy company Petroleo Brasiero, which accounts for nearly all of Brazil's crude output, expects several new fields to lift production to 2.05 million barrels a day this year. Output has jumped 46% since 2000.
The International Energy Agency expects Mexico to drop at least 7% this year after a 9% drop in 2008 because productivity of its main Cantarell oil field continues to plummet. Cantarell has dragged total Mexican output down by a fifth since 2004.
Insufficient investment, labor unrest and steep natural decline rates have pushed Venezuelan output down by more than 700,000 barrels a day over the past decade. This year state-run Petroleos de Venezuela faces a cash crunch and more production cuts from the Organization of Petroleum Exporting Countries, or OPEC.
The 2008 oil price crash forced oil majors such as ConocoPhillips and Norway's Statoil to slash spending. Petrobras recently announced a 55% increase in its five-year investment plan to $174.4 billion.
The company plans to become one of the world's top five producers, Petrobras Chief Executive Jose Sergio Gabrielli has said.
Noted Goldman Sachs in a recent report: "We believe Petrobras' bold, contrarian new business plan might well make it the best positioned major oil company globally for the next oil price upcycle."
Brazil plans to more than double production by 2020, with over a third coming from recently-discovered, ultra-deep offshore "subsalt" fields.
Petrobras plans to refine the new production domestically to export fuel instead of crude, thereby maximizing export revenues.
"The potential is there for Brazil to become a significant exporter," said David Fyfe, a supply analyst at the Paris-based IEA. "The question is more do we see them as a crude exporter or a products exporter."
He noted that Petrobras needs to find financing during a period of turmoil in international capital markets to stick with its investment program.
Goldman Sachs said Petrobras has outperformed most of its peers in production growth even though it has fallen short of its own targets. The investment bank expects yearly production to grow in the mid-single digits for years to come.
Industry publication Petroleum Intelligence Weekly ranks PdVSA as the world's fourth-largest oil company, while Mexico's state oil company Petroleos Mexicanos, or Pemex, ranks 11th and Petrobras 15th.
The ranking is based on a combination of oil and natural gas production and reserves, as well as refining capacity and product sales.
But Venezuela faces short-term and long-term challenges.
The oil price crash has hit President Hugo Chavez as he spends heavily ahead of a Feb. 15 referendum that would let him run for a third term in office. This leaves less cash for PdVSA, which already has billions of dollars in arrears with equipment and service providers.
"Venezuela is sitting on a pot of gold but is always waiting to produce more," said Roger Tissot, a Latin America energy analyst with Brazilian firm Gas Energy.
The arrears have driven some of PdVSA's suppliers to idle equipment, setting the stage for future production problems.
A major test of investor interest will come at a bidding round for seven Orinoco fields in April when Venezuela, which punished foreign majors with tax hikes and nationalizations during the oil price boom of the past decade, turns to these same companies to form partnerships.
Orinoco oil is expensive to refine into the gasoline and diesel that consumers in the U.S., Europe and Asia need. With oil prices down 70% from all-time highs last July, bidders expect more lenient terms than originally announced last year. Venezuela wants its partners to pay bonuses up front for access to its oil reserves.
"Is Chavez willing to look at the reality of $40 a barrel oil, or is he going to continue with the hardline nationalistic approach?" Tissot said.
Venezuela already pumps 600,000 barrels a day in the Orinoco, and the new fields could bring even more production in less than a decade if development starts soon.
But the spending is coming too late to swiftly reverse imploding production. Pemex lost 280,000 barrels a day last year on average, losses it doesn't expect to recover until 2016.
Outside observers including the U.S. Energy Information Administration and the IEA are more pessimistic than Pemex, expecting production to continue falling at similar rates in 2009 and 2010 as last year.
The problem is Pemex practically lived off one single field, Cantarell, for decades. At its 2004 peak Cantarell produced 2.2 million barrels a day. In December, it had slid to 853,000 barrels a day.
It will take years for Pemex's current exploration and drilling programs to bring new fields on line. And these new fields are much smaller and less prolific than Cantarell.
"Brazil is almost substituting Mexico in its relevance, which is amazing," Tissot said.
A Mexican energy reform approved last fall is only a small step toward bringing new players to Mexico. The reform allows for cash-based service contracts in which oil companies cannot own or sell the oil.
Oil majors are waiting for Pemex to roll out the new service contracts later this year to see if the return on capital can compete with opportunities in other oil countries. In Brazil and Venezuela, for example, oil firms can own stakes in oil projects.
"In 2009 we will know if there is a role for private oil companies in Mexico," an executive with a large foreign oil company said.
Pemex hopes to attract investment from private firms with expertise in deep waters of the Gulf of Mexico, an area where Pemex has little experience but huge potential for oil finds.
(Raul Gallegos in Caracas contributed to this story)
Copyright (c) 2009 Dow Jones & Company, Inc.
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