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Brazil's Santos can break even on the $50/barrel mark and will inccrease output this year. Here the Petrobras P55 FPSO. (Photo: Petrobras)
Thursday, January 7, 2021

Latin America Energy: Good Outlook

After difficult year, Latin America oil, gas, electricity sectors face good outlook.

Inter-American Dialogue

The energy sector in Latin America and the Caribbean has had a volatile year, with a plummet in oil prices early in 2020 and significantly lower demand amid coronavirus-related lockdowns. Venezuela’s oil sector writhed under U.S. sanctions, and Mexico struggled to boost oil production, as did Argentina with natural gas output from its Vaca Muerta shale formation. However, Guyana’s oil production stayed on track despite political turmoil, and Brazil managed to weather the instability relatively well. What is the 2021 outlook for Latin America and the Caribbean’s major oil-producing and oil-exporting countries? Are oil prices and demand likely to recover next year? To what extent and in what ways will the energy transition toward renewable sources continue to make strides in the year ahead?

Jeremy Martin, member of the Energy Advisor board and vice president of Energy & Sustainability at the Institute of the Americas: Fortunately, we have taken a few steps back from the ledge since the first half of 2020. Recent data points to the profound impacts on demand derived from Latin America’s stringent and lengthy lockdowns beginning to recede. Drilling activity is up. Rigs are restarting. The return to more typical work patterns, travel, at least domestically, and consumption augur well for 2021. Indeed, if we set aside Venezuela and Mexico—the former the sole occupant of its own sad but unique category, and the latter home to spiraling oil production regardless of the president’s political or ideological persuasion—there is ample reason to be optimistic for the region’s oil and gas producers. From Plan Gas in Argentina, to the major amount of capital being deployed in Colombia and Brazil, to wild-eyed optimism about Guyana and discoveries in neighboring Suriname, the pieces are in place for a resurgent regional oil and gas portfolio. But all of these developments demand contextualization in a far more climate-conscious global setting. The arrival of the Biden administration and commitment to rejoin the Paris Agreement, as well as plans to host a world climate summit in his first 100 days in office must be considered. Also critical is the march to COP-26 in Glasgow in November. How increased production of oil and gas is balanced with climate action may not hit directly home in 2021, but the pressure will be evident. Managing methane emissions and flaring are two of the most important points at the intersection of climate and the region’s oil and gas sector. Further, high-level policy commitments to pursue net-zero and more ambitious climate targets will demand that decarbonization beyond the power sector is addressed. Electrification of transport will gain speed. Hydrogen, and the potential to harness renewable energy for its production, will also be part of the energy landscape and transition in Latin America and the Caribbean. Next year may be the pivot—call it recovery meets energy paradigm shift.

Regina Ranieri, business development manager at UL Renewables: 2021 will undoubtedly be a great year for the electricity sector in Latin America and the Caribbean, as the pandemic considerably modified consumption habits—in favor of residential consumption over industrial consumption— and the GDP recovery expected next year will require a strategic approach to the energy sector. Among the topics that occupy the agendas of all countries in the region, the following stand out: electromobility, green hydrogen (for transport and energy), storage and digitization of the industry. In recent years, there has been a paradigm shift in our sector that has given greater decision-making power to the end user, and where climate change is undoubtedly of vital importance.

In all of these topics, all countries are generating their own rules and regulations, and promoting investments. Issues such as sustainable transport and distributed energy are discussions that have already been taking place in Europe for many years, so the efficient use of these in Latin America and the Caribbean will also be key. Regarding Chile, Colombia and Peru are the great promising promoters of renewable energy, with incentive programs and interesting regulations for investors. Mexico and Argentina are in limbo, with neutral policies in terms of promoting renewables. Brazil continues on its independent course, with a big boom for solar energy. Other countries such as Panama, Ecuador, Uruguay and Nicaragua are taking solid steps to promote renewable energy and transportation.

Schreiner Parker, vice president for Latin America at Rystad Energy: The Latin American energy sector had a very difficult and challenging year, but the outlook for 2021 appears more promising—at least for some. Looking forward globally, Covid-19 is expected to weigh on oil demand in 2021and 2022, as there will be lingering behavioral effects such as working from home and aversion to nonessential travel. Even with the positive vaccine news, it is expected that international flights will remain far below 2019 levels. This lag in demand recovery will continue to affect price, creating a ceiling in the $50/barrel range for the next two years. At that price, oil-producing countries with low project breakevens are set to receive continued investment and boost production.

Both Brazil in the Santos Basin and Guyana in its prolific Stabroek Block have breakeven averages below the $50/barrel mark, and both will see increases in those two categories in 2021. Other sources of production in Latin America look more suspect in a ‘lower for longer’ pricing scenario. Attracting energy investors and capital discipline within national oil companies are key focuses next year in Latin American energy-producing capitals, but not all focus will be on oil and gas. Solar and wind project investment is picking up in the region, although a lack of regulatory clarity in some jurisdictions has slowed the pace. This is a sign that at least some of the region’s governments are beginning to prepare for the energy transition by creating new industries to replace the eventual loss of oil rents. Latin America will greet 2021 as a year of opportunity with its fair share of challenges.

Jose Vicente Zapata, partner at Holland & Knight: As a consequence of worldwide health measures due to Covid-19 and gradual economic reactivation, an improvement in the energy sector should be expected in 2021. Demand will likely increase due to the resumption of activities in the transportation sector, particularly in the airline industry, which has also been affected by the 2020 mobility restrictions. This scenario will make it necessary to increase production, thus the commercialization and exports from Latin America’s producing countries will be a key element to meet the demand for these resources, thereby contributing to international oil prices. Latin America’s contribution will allow for limited recovery from the crises that affected the industry in 2020, especially low demand and low international oil prices. There is cause for optimism about a sustained long-term economic recovery, as long as generalized quarantines are not declared. The region’s energy transition is expected to continue to move forward, but to do so in parallel with the development of the mining and oil and gas industries, since the energy supply needs to remain stable.

In 2021, this transition is expected to create new investment opportunities, namely projects related to the generation, transportation and commercialization of energy from non- conventional sources of renewable energy.

These types of projects will contribute, in the long and medium terms, to energy production within the region’s energy mix and help Latin America slowly reduce its participation in the extractive industries within the energy supply chain.


Republished with permission from the Inter-American Dialogue's weekly Energy Advisor


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