Home to 20% of the world's reserves but only 8% of global production, the underground potential of Latin America to deliver and meet long term demand is immense. The problem in the region, as with many, is above ground, preventing these resources from being successfully and efficiently used. Even leaving aside Venezuela, where the problems with lack of funds are well known, and a beleaguered PDVSA's productivity per employee has dropped to the lowest since 1940, the challenges facing the rest of the countries are varied and immense.
Brazil stands out in this regard. Brazil holds the second largest reserves in Latin America. After years of delay, when pre-salt output hit a record high, a corruption scandal broke out at the country's state oil company, and its ability to raise money from international credit markets was cut off. Yet, the high degree of complexity involved in deep and ultra-deepwater extraction requires expensive technology and manpower, so significant capital is needed to develop.
The company is expecting to draw on $23 billion in cash reserves, and scale back capital investments by $11 billion-$13 billion, while raising asset sales. Low oil prices are not helping, given full cycle costs are closer to $75 per barrel. And with post-salt wells declining at 15% annually, any cutback in investment will mean lower production going forward. Indeed, while a low 2014 base will help H1 15 growth, we believe Brazilian production will exit 2015 lower y/y, and early 2016 will likely see outright production declines, before rising later in the decade.
Meanwhile Colombia, a success story in developing output from a low reserve base, faces several different challenges, as we highlight in the main focus piece. The cost of developing Colombia's oil is high, with Ecopetrol budgeting for $90 Brent. The company has scaled back investments by 26% in 2015. And with costs rising by a CAGR of 18.4% between 2008 and 2014, Colombia faces some significant headwinds ahead. Rising water cuts at its maturing fields are pushing up declines (which increased to 16% last year, relative to the historical norm of 10%), and we expect production to fall between now and 2020.
Argentina is the only country in the region that has maintained its $6 billion Capex programme. Rig counts have risen to a record high in 2015 as it continues to develop its shale resources. The impact on production growth will be limited however, as the current government strategy of stimulating drilling is more to reveal the potential reserve size. Out to 2020, we forecast average annual production growth of 20 thousand b/d as its unconventional programme (mostly gas) gathers pace, but only just offsets declines from mature basins.
While we do not delve into the outlook for Venezuela and Ecuador (i.e. the OPEC members), overall, the outlook for Latin American production is difficult. Brazil, and to a lesser extent Argentina, have the potential to deliver, but the above ground challenges continue to impede output growth. Moreover, the low oil price environment is likely to push back the production growth profile for a few years, made worse by the corruption scandal at Petrobras. Investment by China against the promise for oil in the future will be the key to future development. In short, Latin American production on aggregate is likely to decline y/y in 2016, and possibly even by late 2015, with growth likely to return only later in the decade.