Oil: the risks faced by oil-producing countries in Latin America due to the energy transition

“The Stone Age did not end for lack of stones and the age of oil will end long before the world runs out of oil.”

The above phrase, attributed to Ahmed Zaki Yamani, Saudi Arabia’s Oil Minister between 1962 and 1986, has been used for decades in the energy world as a warning about the eventual transition to a world in which hydrocarbons are no longer the main fuel in the world.

That moment seems to finally be looming on the horizon, after the climate change summit in Glasgow (COP26), held in November, when the promises of governments and companies to move towards a world with zero greenhouse gas emissions seemed to gain momentum.

The date set to reach that goal is 2050, but before It is estimated that it is necessary to reduce global CO2 emissions by 45% by the year 2030.

The energy transition is a favorable objective for the planet, but what does it mean for the oil-producing states in Latin America?

Uncertainty and investments

Francisco Monaldi, director of the Latin American Energy Program at the Baker Institute of Rice University (Texas, USA), points out that this process implies several risks for these countries, the first of which has to do with the uncertainty about the speed with which it is going to be executed.

“We expect that the demand for oil will begin to fall at some point in this decade, but it is not clear if it will do so drastically,” he tells BBC Mundo.

He explains that while there are some scenarios in which it is proposed that to achieve the goal of zero emissions a drop in demand for crude oil of 75% is required from now until 2050, there are other analysts who consider that by that date the demand will be will be located slightly above where you are now.

“The latter, in any case, implies that we are going to reach a peak in demand and that this is going to begin to decrease, but obviously it would not be a scenario even remotely so catastrophic. In any case, it is inevitable that the energy transition will occur and that the demand for oil will not continue to grow how I did it in the past ”, he adds.

Doubts about the pace of execution of the energy transition will affect the ease with which financing can be obtained for oil projects.

Monaldi explains that the uncertainty makes it more difficult to carry out oil projects that require large initial investments and that will produce oil for 20 or 30 years.

“Imagine, for example, a Mexican exploration project in the deep waters of the Gulf of Mexico. These types of projects are going to be started less and less. Those that are already underway, such as those that Brazil has in process in the pre-salt (oil reserve), are going to be developed, but the new projects have it more difficult. Brazil, for example, has not done well in recent rounds of bidding, in part because the risks of them ending up with stranded assets have risen, in which you invested but now you will not be able to continue using because the energy transition is accelerating, “he says.

Countries under the greatest pressure

Although the decline in the fall in demand will affect all oil producers in the region, the impact will be felt more in those who have a greater dependence on crude oil: Venezuela, Ecuador and Colombia, according to Monaldi.

Historically, before the marked decline in recent years by the state oil company PDVSA and the subsequent sanctions imposed by the United States, around 95% of the foreign exchange that entered Venezuela came from oil.

In 2019, Venezuelan crude sales totaled US $ 12.2 billion, equivalent to 83% of the country’s exports, according to data from the Observatory of Economic Complexity (OEC).

That same year, Ecuador obtained some US $ 7,850 million for this same activity, which represents 34% of the value of its exports.

In the case of Colombia, oil sales abroad totaled US $ 13,000 million, equivalent to 32% of its exports, according to OEC figures.

Monaldi affirms that Colombia’s dependence on oil is exacerbated by the fact that that country does not have many crude oil reserves, as its production costs are also high. “In his case, dependence on oil represents a risk in any scenario,” he points out.

The expert points out that the energy transition can also affect Mexico, Brazil and Argentina, countries that do not depend on oil, but in which it has a significant weight in the economy.

In these countries, the hydrocarbon industry is one of the largest in terms of tax revenues, exports and investments.

Monaldi notes that Pemex is the most important company in Mexico in terms of income generation and it is also the most indebted oil company in the world.

“The Mexican State has had to be providing capital to it because the company has not even recently been able to pay its debt,” he says.

“This implies that although Mexico is no longer as dependent on oil as it was in the past, neither from the macroeconomic point of view nor from the fiscal point of view, this has an important weight and can be a big problem for that country,” he adds.

The expert points out that Brazil has become “the great oil producer in Latin America”, with almost three million barrels a day, a figure similar to that reached by Venezuela and Mexico “in their good days.”

“Brazil is not dependent on crude oil, but the size of Petrobras and its importance make it a relevant issue for the future,” he points out.

In the case of Argentina, Monaldi highlights that the country discovered unconventional oil fields – known shale or shale oil-, which has colossal potential, but whose discovery coincides with this moment of energy transition.

Opportunities

The ongoing energy transition does not spell the imminent end of the oil industry, so even in this context oil-producing countries have some opportunities.

“The most reasonable scenarios indicate that a lot of oil will still be consumed in the next three decades. So, the countries that are going to be able to continue producing and making the business profitable are those that achieve two things: first, be much more efficient and reduce their production costs; and, second, reduce its intensity of carbon and other greenhouse gases ”, says Monaldi.

He explains that Petrobras is betting on this strategy thanks to the fact that they have deep-water wells that are very productive, which favors them from the point of view of carbon intensity.

By contrast, he points out that Venezuela has extra-heavy oil, the production of which generates more CO2 emissions because it must be transported and requires further processing.

The advantage of Venezuela, according to Monaldi, is that its production costs are relatively low and that it has many projects that already have all the infrastructure, so they could start producing and generating profitability in the short term.

“If the oil sector in Venezuela were well managed it could also last. If there were no penalties, if there were none of the problems that are there today, you could drill a well and pay for it in a matter of months because the cost of production is about US $ 10 and the price of a barrel has recently been US $ 80. So, imagine the profitability of a project like this ”, he says.

He assures that although there is still a window of opportunity for Venezuela to take advantage of part of its oil reserves, that country has to prepare for a future in which oil will no longer be what it was.

“If Venezuela today manages to raise its production to three million barrels a day, that would not support a standard of living like the one it had in the past. I mean, what oil Venezuela is over, but the same is true for countries like Colombia, where oil has a lot of weight in its exports, or like Mexico, which although it is no longer dependent, has that state-owned company that has thousands of employees who have a great impact on the economy “, He says.

Explain that the three factors that will define which oil projects will survive are: costs, intensity of greenhouse gas emissions, and whether the investment is short-cycle or long-cycle.

“All these countries have to prepare for this transition, taking advantage of the opportunities that remain within the logic of global climate change policy, but understanding that this is a business in decline,” he warns.