Driven by an impressive array of licensing and farm-in opportunities, plus an upsurge in exploration activity, Latin America’s upstream sector is poised for a banner year in 2018, according to a new insight by Wood Mackenzie, Latin America Upstream: What to look for in 2018, which outlines key themes to watch for in Latin America this year.
"Latin America is poised to be a global upstream leader in 2018," said Mr Matt Blomerth, Head of Latin America Upstream Research at Wood Mackenzie. "With a broad range of licensing and divestment opportunities expected in the year ahead, companies looking to invest in this attractive and lucrative region have a huge variety of entry opportunities."
According to the analysis, the region's recent production ramp up will continue to gain momentum in 2018, driven by seven floating production storage and offloading (FPSO) units deployed in Brazil and Argentina’s shale projects going into full development. Brazil's major offshore projects, particularly in the pre-salt, will continue to sustain the region's production, while shale drilling in Argentina is expected to have a growing role, surpassing tight gas activity for the first time this year.
A leaner and more selective exploration industry has emerged over the past two years. In the year ahead the region is expected to buck the global trend, with intense exploration activity expected in frontier basins in the Equatorial Margin, Brazil, Argentina and Mexico.
"Latin America is firmly back on the radar for many of the E&Ps," said Mr Blomerth. "Last year, portfolio high-grading steered companies to deepwater licensing and M&A in the region and we anticipate that hot streak to continue in 2018. In the coming year we expect to see strong interest from Asian NOCs and Majors in exploration blocks and DROs offered in Argentina, Brazil and Mexico. Ecuador may also get back in the game as the government seeks to replace service contracts with production sharing contracts."
Interest in Latin America's high-potential deepwater basins will continue in 2018, with licensing rounds in Brazil and Mexico expected to draw strong bidding from the Majors and Asian NOCs. Although an expensive operating environment may keep Independents away from Brazil, these companies will look for lower-cost licensing opportunities in Mexico, Uruguay and offshore Argentina.
The analysis highlights three opportunities in particular that are attracting attention – Brazil's pre-salt licensing rounds and redevelopment of its mature Campos basin oil fields, and Argentina's Vaca Muerta shale.
While US tight oil costs are rising and increasingly dense drilling raises questions about well deliverability, Latin America's deepwater breakevens continue to decline. In Brazil's giant Libra pre-salt field breakevens have seen significant reductions in recent years, from US$52/bbl in 2014 to US$45/bbl in 2017, with operators aiming to reach US$35/bbl long term – on par with today's average wellhead break-even price for some of the best shale plays.
"Sizeable reserves, project optimization and good productivity have been driving deepwater costs down. In 2018, we expect already outstanding pre-salt well rates will reach new heights, driven by technological enhancements, further reducing well count and total cost," said Mr Horacio Cuenca, Research Director for Latin America at Wood Mackenzie.
In Argentina, high-profile shale pilot wells in Vaca Muerta will give operators confidence to commit to take-or-pay contracts, allowing much needed infrastructure and pressure pumping capacity build-up. Moreover, Argentina’s vast under-explored frontier offshore acreage will appeal to exploration-focused players, especially the Majors as they look to complement their Vaca Muerta positions with offshore exposure.
Latin America’s upstream sector enters 2018 with strong momentum as recent investor-friendly regulatory changes have enticed operators back to the region. However, investors face some trepidation as highly uncertain presidential elections in Brazil, Mexico, Colombia and Venezuela could slow the region's pace of upstream development. Argentina however stands out as a pro-reform bright spot, the analysis notes. Following big victories for the incumbent administration in recent midterm elections, President Macri’s key focus is to move Argentina continuously toward a more investor-friendly environment.
“2018 will certainly be a transformative year for the region, both economically and politically," notes Mr Cuenca. "Although there is some political uncertainty ahead, the immense exploration and development opportunities available in the region will keep optimism high."