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The 'toxicity' of Russian crude revives the oil dream in Latin America


Moscow's isolation offers an unexpected opportunity for the region with the world's largest oil reserves. The objective: to present itself as a reliable supplier, in contrast to the volatility of other exporters

General view of the oil refinery of the Lukoil company in Volgograd, Russia, on April 22, 2022.REUTERS

At the beginning of March, the United States, the European Union and the United Kingdom publicly announced their joint desire to stop depending on Russian oil and gas.

The political and economic objective was (and is) to stop depending on a regime in which – in the words of the head of the EU executive, Ursula von der Leyen – they feel unable to trust.

Washington and London soon took the step, and were soon followed by Canada and Australia.

Brussels has taken a little longer, but this week it has already announced a community veto on crude oil from the Eurasian giant.

With this radical change in outlook, the thirteen countries of Latin America and the Caribbean that have some kind of fossil fuel reserve have been given a wide open window of opportunity that they did not even remotely count on: that of replace, even partially, the energy that until now came from Russia and that since the beginning of the war has become toxic material in the West.

The loot to which they opt is not minor: Moscow sells to the world eight million barrels a day, five of crude oil and another three of derivatives.

The promise of new exports leaves behind the years of ruinous business, in which in many geographies extracting a barrel cost more than what was obtained from its sale.

With crude oil now clearly above $100, the mood has taken a radical turn: from sorrow and unease, to increasingly evident hope.

“Until now, in the oil market only the price ruled: the cheapest barrel was bought.

This has changed [after the Russian invasion of Ukraine]: the price is still important, but also that the origin is a friendly country, that is not going to blackmail you.

After this change, Latin America has gone from being poorly positioned to having an enormous opportunity, which it must now take advantage of,” Mauricio Cárdenas, former Colombian Minister of Energy, explains by phone.

"The high prices will boost oil activity in Latin America, but the other side of the coin is that the increase in the price of refined products will also have a negative impact," outlines Marcelo de Assis, head of the specialized consulting firm Wood Mackenzie for the region.

On paper, the potential is very considerable.

Most of the oil-producing countries of the bloc still have a margin of exploitation before them, in light of the ratio of daily production (barrels) to proven reserves (in millions of barrels).

And all of them have to step on the accelerator of extraction to prevent their huge reserves from ending up staying underground: with the energy transition launched —and probably accelerated by the war—, the majority of experts consulted believe that the current one will be the last decade in which crude oil will still play a significant role in the energy matrix.

In the current situation, moreover, there is no contradiction from the environmental point of view: it is about replacing an oil that was previously sold by another producer (Russia), not about increasing the total volume that is placed on the market.

"It is a competition to see who is going to replace Russian crude, and the region has a great opportunity to present itself as a reliable supplier: Europe does not want to diversify by looking at other volatile exporters," says Luisa Palacios, a professor at Columbia University.

This, she says, makes "the most stable exporters—Brazil, Colombia, Ecuador—the most obvious candidates."

In the rest, the analysis must be case by case.

Brazil will have a substantial production boom in the coming years, adding more than a million barrels to its current production, which will translate into an injection of money through exports.

Mexico has it "more difficult", in the words of Palacios, "because its Government continues to see the resource for internal consumption and not as an export element."

In Argentina “everything will depend on the macro and political risk, which slows down investment despite having enormous reserves of oil and

shale gas.

[the one obtained through the hydraulic fracturing technique]”, explains the Columbia professor.

“It is unknown: the potential of Vaca Muerta is very important, and with these prices more investment will come, but it will depend a lot on regulatory conditions,” adds Francisco Monaldi, director of the Latin American Energy Program at the Baker Institute of Rice University (Texas). , USA).

Next is a bunch of smaller countries that few talk about, but that have a notable and oiled production capacity: Guyana, Trinidad and Tobago —which in addition to oil, exports gas— and Suriname.

“Among them, the gold medal goes to Trinidad and Tobago, because in addition to oil, it produces gas and fertilizers,” predicts Cárdenas.

Guyana, for its part, will repeat this year (+47%) and the next (+35%) as the country with the highest growth in the world, according to the latest projections by the International Monetary Fund.

More information

Guyana: the last oil miracle

Few regions of the world are as linked to oil in the collective imagination as the immense strip of land that runs from the Rio Grande to Tierra del Fuego.

Everything, despite having such a relatively small importance on a global scale: just over 6% of the crude oil consumed in the world is of Latin American origin.

With prices hitting the rise again, after a long lethargy that seemed to completely shatter the oil dream, the region's main producers are once again raising their heads in the hope of reviving a sector that has given as much material joy as it has inflicted environmental damage. .

The entire region leveraged the discoveries of deposits during the 20th century (first half in Mexico and Venezuela, second in the rest) to build something similar to sustained growth.

That scant 6% of the global oil matrix made up a good part of the difference between remaining among low-income countries and rising to the level of middle-income countries.

Which part, exactly?

For Venezuela, which has the largest reserves not only in the region, but in the entire world, it was almost everything.

Today, the South American country does not have a production rate even remotely comparable to what it reached in its day: a country of 33 million inhabitants (27 after the mass exodus of 2013) that produced more than three million barrels a day .

That is the figure reached today by Brazil, which is seven times its size.

Thus, while oil is only 2% of Brazilian GDP (in any case, a very considerable figure), the latest figure for Venezuela was over 11%.

But it has nothing to do with what it was: in 2005 it accounted for a third of its economy and in 2011, more than a fifth.

In both cases, before —after the sanctions came into force— their extractive infrastructure entered a dangerous spiral of lack of investment and deterioration.

Decisions on oil exports are politically strategic for a government that lives in regional isolation.

Venezuela is today the nation in the world that most underutilizes its potential: its ratio of daily production compared to available reserves is minimal, one of the lowest on the planet.

This logic, present in all the cartelized countries in OPEC+ (the expanded version of OPEC, already with Russia included), has been able to maintain itself thanks to the fact that political instability has not affected its production rate excessively: despite the sanctions and lack of maintenance, Caracas continues to put a respectable amount of crude on the market.

In all probability, Joe Biden had these magnitudes in mind when he chose to leave behind the purchases of Russian oil: heavy crude, so iconic in the South American country,

it is indispensable for your refineries.

This week, the US president has gone a step further, by easing some of his oil sanctions on the Nicolás Maduro regime.

In Mexico, the rise in the price of oil is a powerful ball of oxygen both for Pemex —something more than a state company: something like a national emblem for several generations— and for the Budget of Andrés Manuel López Obrador, prepared on the basis of based on a price of 55 dollars (half of its current price).

As in the rest of the region, however, part of this improvement will be eaten by the necessary increase in subsidies for the purchase of fuel, with which it is tried to avoid a fatal blow to the families' pockets.

"Furthermore, Pemex has not been able to demonstrate the capacity to reverse the drop in Mexican production," adds Cárdenas.

The countries of the bloc compete for oil exports to the United States and Europe, although not directly, since their crude oil is different.

Also, due to its high sulfur content, Venezuelan crude needs more refining than Colombian grades before it can be used by end customers, such as power plants or petrochemical companies.

The future, in renewables

This kind of regional oil


offers an economic respite that the region did not imagine just a few months ago.

The long-term trend, however, runs along a very different track: that of renewables.

And in this race, too, Latin America and the Caribbean also start with several bodies ahead: although technological dependence on foreign countries is total —as in the case of oil—, it has one of the best resources of wind and sun in the world. world.

This availability is already being transferred to the field of facts: the new wind and photovoltaic power will reach a new historical record in the region this year, according to data from BNEF, the arm of Bloomberg for the study of green energies.

Gas and diesel, Achilles heels

The block also has two other Achilles' heels: gas and fuel, especially diesel.

In the first case, and despite having large reserves of this fuel, only a couple of countries (Trinidad and Tobago and Peru) have gone beyond crude oil in the exploitation of their hydrocarbon markets.

The rest have turned their backs on gas in their productive matrix, something that can be explained historically —it always had the label of less profitable— but difficult to understand in an environment like the current one: the price of gas has multiplied by five in less of a year

It will not be easy, but —unlike in previous super cycles— this time Latin American oil tankers have the capacity to get on that train.

The exit from the market of part of the Russian crude production has opened an opportunity for those willing to fill the gap.

And the global thirst for liquefied natural gas (LNG, which is transported by ship and not by tube) allows the future use of a resource that, until now, had a testimonial weight in the regional export matrix.

To do this, however, beforehand it will be necessary to undertake massive investments that many countries are not in a position to make without the support of money from abroad, which is much more difficult to achieve today due to the certainty that fossil fuels —and gas is no exception— have the days numbered

“It was a historic mistake not to have bet on natural gas before, and we are realizing it now: except for a few cases, the region does not compete in gas or derivatives;

only raw”, analyzes Palacios.

These counted cases are basically four: Peru, Bolivia, Trinidad and Tobago, and —more recently— Colombia.

The rest have to rely on imports to cover their domestic consumption.

And at a time like the present, that is a major problem.

Colombia is one of the countries that has taken this turn from oil to gas seriously in recent times.

The country's gas prospects had been especially positive: in 2016, the state-owned company Ecopetrol and Canada's Pacific Rubiales completed the construction of a liquefaction plant in Puerto Bahía (Cartagena) with an annual capacity of three million tons and which it was later bought by the American company Excelerate Energy.

Since 2017, the plant has allowed Colombia to grow its LNG export: according to data from the energy consultancy Wood Mackenzie, sales totaled around 2.5 million tons in 2019 (doubling the value of 2018), which generated some Revenue close to $1 billion.

Most of the exports have so far gone mainly to Asia (especially China), there was also a growing interest among European companies, as well as in some Latin American countries such as Argentina or Chile.

Aware of this, the Colombian authorities have explicitly stated their intention to replace Russian gas both on the continent and in the US and Europe.

However, the obstacle to Colombia's entry into the US and European LNG markets has become almost immediately evident: the lack of capacity, reflected in the need for a second liquefaction plant.

There are plans for the construction of a new facility in Puerto Bahía, with an annual capacity of six million tons, but it seems impossible that it will be ready in the coming months or even years.

In the case of diesel, the numbers sing.

The three largest destinations for diesel produced in the US - one of the largest producers in the world - are Latin American: Mexico, Brazil and Chile.

With Europe buying more and more American diesel to supply the part that arrived from Russia, the competition for this product has become fierce.

And with it, prices have skyrocketed.

"This is a key moment for Latin American countries to truly commit to decarbonizing transport and taking advantage of its enormous potential for biofuel production," the Columbia professor claims.

Source: elparis

All business articles on 2022-05-22

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