OIL&GAS Intelligence Series. OIL&GAS Intelligence Series (2)

Transcription

1 2016

2 Introduction As was to be expected, BNamericas 2016 Oil and Gas Survey paints a fairly dismal picture of the hydrocarbons business in Latin America. The price of oil remains low and is highly unpredictable, spending is down, and the general perception of the attractiveness of the industry is lower this year than in any of the previous years we have conducted the survey. But within the results, a few noteworthy trends emerge, including the rise of Argentina as a place of interest, dropping costs and continued belief in the longer term importance of the region as a key global supplier. The survey received 90 responses from executives representing 20 countries in Latin America and the Caribbean. Representatives from oil and gas companies (35%) and service providers (32%) formed the largest proportion of survey takers, which also included professionals from consultancies, NGOs, regulatory agencies and engineering firms. Costs Down in 2016 Costs will drop in 2016, according to 57% of respondents. This is the strongest sign we have seen that costs will fall since BNamericas began running the survey in Only 15% of survey takers saw costs rising. One respondent, representing an oil consultancy in Mexico, says that the costs of most equipment and services have been falling due to lack of demand while a representative from a Brazilian oil firm asserts that everybody is renegotiating contracts seeking discounts. Mexico s state oil firm Pemex says its production costs are now among the lowest in the world, even below US$10 per barrel (b) at its active fields. At some shallow water field wells, costs dip to as low as US$7/b, Pemex says. The NOC argues that a strengthening dollar has helped: the majority of services required in Mexico s oilfields are paid for in Mexican pesos. Venezuela s PDVSA, meanwhile, says its average cost per barrel is US$20. Ratings agency Fitch says half-cycle costs for most Latin American integrated oil and gas companies have generally remained below market prices, while those of independent players are at or above current prices. Of the independent companies, Geopark and Pacific find themselves at the highest risk due to low energy prices with Pacific already announcing interest payment suspension at the beginning of 2016, Fitch says. In 2016 operating costs in the local oil and gas industry will

3 Spending Down for Second Consecutive Year Spending is being slashed across the region. Almost 70% of survey takers agree that spending will fall in 2016 compared to 2015, a year in which spending was already significantly lower than previous years. Thus we are set for two consecutive years of spending declines - a rare event which hasn t occurred since the 1986 oil price downturn, according to Fatih Birol, the head of the International Energy Agency. According to BNamericas research, national oil companies (NOCs) that have provided capex plans for 2016 will invest on average 7% less in 2016 in comparison to Colombia s Ecopetrol will slash capex by 39%, the most among NOCs, to US$4.8 billion. Brazil s state oil firm Petrobras has reduced its spending program for 2016 to US$19bn, from US$27bn, as it struggles with a devastating corruption scandal and Brazil s rapidly depreciating currency. In contrast, Pemex is adding almost US$5.5bn to its plan, with a focus on non-upstream spending including refinery upgrades and co-generation projects. Meanwhile, multinationals are cutting back with greater urgency. In January, oil and gas major BP announced plans to slash 4,000 jobs worldwide to counter the impact of sinking crude prices. BP s regional operations include exploration and production activities in Brazil, Mexico and Trinidad and Tobago. The layoffs will account for about 5% of the company s total workforce. According to one estimate, oil companies have cut some 250,000 jobs since prices began dropping in June, Budgets will be reduced to cope with the storms caused by lower oil prices, one survey respondent says. Some commitments will be kept as they represent future assets in place when the markets turn around. Less critical ones will be delayed or mothballed. Some will be unavoidable, such as the case with PDVSA s deteriorating field assets that desperately need to be repaired, maintained and revamped to remain a leader in the market and also meet commitments made to customers. In 2016, spending by the local O&G industry will

4 Financing s Difficult Scenario in 2016 Financing will be hard to come by in oil and gas in Latin America in Higher interest rates in the US and low oil prices do not bode well for liquidity in the resource business. Last year, 46% of respondents felt that financing would get worse; this year, that number jumped to 61%. Eventually it will improve, one executive said, but not in 2016 when everyone is rethinking their commitments and sizing risk levels. Investors will be cautious where they put their money. There are exceptions. In Mexico, there was excitement in October when a new infrastructure and energy fund called the FIBRA E was created. Such innovation will be required elsewhere in the region to help raise new funds for longer term, bigger scale ventures. Availability of financing for O&G projects in Latin America in 2016 will Mexico Tops Survey There has been a dramatic shift in investor appetite in oil and gas investment in Latin America over the past half-decade. When we first ran this survey, in 2012, the favorite jurisdictions were squarely Brazil, Colombia and Peru, in that order. Today, it s Mexico, Argentina, and Colombia. Brazil gets scant mention, on the back of the massive corruption scandal centered around its once highly praised national oil company Petrobras, while Peru too has fallen drastically in the estimation of those in the oil and gas business as bureaucratic and other hurdles make securing licenses and starting exploration work cumbersome. Another interesting trend to emerge from the survey is the sudden appeal of Argentina. Last year, Argentina barely received votes. Argentina s place in our survey this year reveals the enthusiasm surrounding the election of Mauricio Macri

5 at the end of 2015, who has already shown a willingness to remove burdensome controls and improve transparency. That said, this year, like last, the major theme remains the interest being shown in Mexico as its energy sector opens to private participants for the first time since the 1930s. In Mexico, The government needs to make the energy reform work by all means because of its contribution to the GDP and economic recovery, says one survey taker. The institutions are new, but they are all embarked in making it work. This sort of commitment was evident in 2015, when auction terms were changed after the first round for shallow water blocks was deemed a flop. Globally, next to Iran, Mexico remains of the most interest for M&A activity and new opportunities, according to energy consultancy Wood Mackenzie. Rounds in 2016 include Mexico s highly touted deepwater assets. Which country has the best investment climate for O&G in 2016? Venezuela Bottom Again Venezuela once again topped the list as the worst jurisdiction for oil and gas investment in our survey. But there were some new countries to make the list, including Brazil and Colombia. While Brazil s place is almost totally related to corruption, Colombia has fallen in esteem because its once booming oil industry has lost its shine - exploration investment is plummeting and oil reserves have fallen to their lowest level in the last 15 years. Much now depends on new regulation to stimulate new investment in Colombia s resource sector.

6 Which country has the worst investment climate for O&G in 2016? Resources in Place, Major Advantage The major competitive advantage of oil and gas in Latin America is, survey takers claim, the resources in place, headlined by Venezuela s 296 billion barrels. The question is, in a world rapidly shifting to newer technologies, how many of these assets will remain stranded? Interestingly, for the first time, government support rose in the survey as a major competitive advantage to working in Latin America. This is a clear sign that regulatory agencies have matured in the region. In the case of Mexico and Colombia, for example, regulators have shown a willingness to adjust rules based on external conditions and the changing and unique needs of the business. Will other governments - Venezuela and Brazil, specifically - do more to appeal to oil companies so their vast resources can be unlocked? Some suggest there is no choice in the matter, given the urgency of the current climate. Says one analyst, Venezuela will have to return to a more rational and balanced exploitation of their resources. Brazil will start recovering towards a normal operation.

7 The single greatest competitive advantage for O&G investment in the afore mentioned countries is Argentina Promise Rests on Shale Argentina was the runaway survey victor for its unconventional resources. Only one of four countries in the world to produce from shale, and the only in Latin America, Argentina has excellent resources in place along with the knowhow to extract shale oil and gas. There are those who suggest that Argentina, mainly with its Vaca Muerta resource in Neuquén province, is the country best poised to repeat the North American shale revolution. Vaca Muerta is... a huge, largely untapped, resource, says one survey taker. Bolstering shale in Argentina is the appointment of former Shell Argentina CEO Juan José Aranguren as president Macri s energy and mining minister. Aranguren has 30 years of experience in the oil and gas business. But can unconventionals be competitive at current prices? In Argentina, a floor on wellhead prices helps producers, but there is every indication that the Macri government will scrap these (though they haven t as of early May), or at the very least bring prices closer in line with international market dictates. Still, given Argentina s costly dependence on imports, in particular LNG, there is every indication that the hydrocarbons will be developed.

8 Which country has the most attractive unconventional resources? Best Investment Climate for Unconventionals - Argentina, too Argentina was also seen as the country with the best investment climate to support the development of unconventional hydrocarbons resources, above Mexico and Colombia (the winner last year), based, we can presume, on the new administration. There is already evidence of heightened investor interest in Argentina. In mid-january, Argentine national oil company YPF and US-based American Energy Partners (AELP) announced a plan to jointly invest US$500 million in a shale gas E&P project targeting the Vaca Muerta formation. AELP is helmed by Aubrey McClendon, a veteran of the US shale industry who founded and formerly ran Chesapeake Energy, today the second largest natural gas producer in the US. The announcement follows news that YPF and Dow Chemical will jointly invest US$500 million in 2016 at the nearby El Orejano shale gas project.

9 Which country has the best investment climate to support unconventional resources? LNG This year, respondents felt that LNG was too expensive. This is likely a response to the fact that natural gas prices are extraordinarily low, and that many countries continue to pay prices for LNG that far exceed the industry standard set by Henry Hub. But the results were mixed, showing that LNG remains a growing energy option in the region, one required to secure natural gas security. With the US now an LNG exporter, coupled with the upcoming expansion of the Panama Canal, BNamericas expects LNG to continue to remain an important part of the region s energy mix.

10 LNG import projects in the region Price Uncertainty Oil prices will not rise above US$50 in 2016, according 69% of survey respondents. This is a severe turnaround from two years ago. When we ran this survey in early 2014, respondents overwhelmingly predicted prices would remain in the region of US$100/b. Last year, there was still optimism that prices would rise during the course of the year. This year, that optimism is all but gone. The question is, how low can they go? Oil cartel OPEC expects prices to stabilize over the coming four years - reaching US$70/b by 2020, driven by supply cuts, higher consumption and climbing operational costs. Moreover, given the globe s demand for oil (oil demand hasn t fallen since the mid-1980s), the cartel has said that the global oil and gas industry will require investments of around US$10 trillion over the next 25 years to avoid the threat of energy shortages. Still, if there is one thing the survey is telling us, it is that the industry does not expect a drastic improvement in prices this year.

11 In 2016, the price of oil will average Will Latin America s O&G sector be more or less attractive in 2016 compared to this year? According to 68% of respondents, the industry will be less attractive in 2016, compared to This is unsurprising, given the external environment, but also worrying considering how difficult the year just gone was. Wood Mackenzie has said 2015 was the slowest year for oil sector mergers and acquisitions in more than a decade. The average monthly deal count fell by over a third compared to the previous two years, the consultancy said. It added that only 14 transactions worth more than US$1 billion were announced last year, compared to 46 in According to one survey respondent, Multinationals will evaluate their ROI and risks levels worldwide and concentrate on those that bring in the larger benefits. Latam s socio-economic and political climate will reduce the attractiveness to invest. Idle periods will come without jeopardizing any of the commitments in place. Will 2016 see a flurry of M&A in the region? About 60% of survey respondents expect M&A activity to rise in Latin America in the next 12 months, a significant if not wholly convincing response.

12 Will Latin America O&G sector be more or less attractive in 2016 compared to this year? Violence Still a Concern Violence, which includes pipeline theft in Mexico and bombings on infrastructure in Colombia, remains a major concern in Latin America, according to 65% of survey takers. Unfortunately, Latin America is home to the 10 most violent cities in the world not at war, says Mexican think tank Consejo Ciudadano para la Seguridad Pública y Justicia Penal, and violence is an issue that operators and service providers must take into consideration in many parts of the region. Figure: Major Questions

13 Conclusions After a decade of boom, the oil and gas industry faced severe difficulties in This trend, according to our survey, will continue in But there is evidence that the momentum caused by the upstream surge in the region will continue to mean high levels of activity in Latin America over the longer term. Moreover, the picture at a governmental level is improving as sophistication and understanding of the business has matured. Respondents don t seem worried about nationalizations (37% felt that the nationalization of YPF was part of a larger trend and that nationalizations were a major concern in Latin America, compared to 46% last year), and 63% of survey takers said the regulatory and legislative outlook had improved in the last five years. Perhaps the most telling statistic is that almost 72% of respondents said that in the next decade Latin America will be increasingly important as a global O&G supplier. Mexico remains highly attractive in energy circles. Argentina, meanwhile, given its new administration, could once again become a net energy exporter.

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