Latin America oil and gas: the search for efficiency and improved competitiveness

Keyword: 
Natural resource
Topic: 
Agricultural - Natural Resource Economics
Microeconomics - Competition - Productivity

Image: Zukiman Mohamad

Latin America is an important energy producer

This article was previously published in the World Economic Forum Blog, on April 5, 2017.

Latin America needs to embark on a new phase of economic and social development that, while building on past achievements in terms of economic growth and poverty reduction, has to focus on long-term infrastructure, public services and living standard improvements. A change in the social and political arena is currently taking place, as policies shift to the improvement of competitiveness in the context of social inclusion.

Argentina – the host of this year’s World Economic Forum on Latin America, which meets this week – aims to develop its economy through its engagement with the world, cooperation between the public and private sectors, and reshaped relationships among stakeholders. I envision the evolution of the Argentinean oil and gas industry becoming a milestone in this wider transformation.

Energy as a case study of the Latin American challenge

At a regional level, the nature of the industry’s resource base has changed. Latin America is an important energy producer that contributes 12% of the world’s oil and 7% of the world’s natural gas, and a significant consumer too.

Yet the bulk of Latin America’s current oil and gas production comes from mature, conventional fields while new resources are shale, pre-salt, deep-water and oil sands. All of these resources are bordering their technical and economic limits in today’s price environment. Current hydrocarbon prices, which resulted from the 2014 oversupply crisis, make sustaining production levels difficult for the producing countries in the region.

In such an environment, production companies in Latin America are modifying their way of working by focusing on:

(i) adjusting each company’s exploration and development capex strategy,

(ii) reviewing and redefining the relationship among different stakeholders in the industry, i.e. government, operating companies, service companies, trade unions and clients, and

(iii) introducing advanced technologies in the field.

These factors converge to the same goal: to achieve greater efficiency so as to make projects economic and thus increase production and reserves.

Argentina is not an exception. The unconventional resource potential sheds hope of a new stage in the production trend and reserves replacement. The industry is setting the grounds for the development of Argentina’s shale and other unconventional oil and gas resources.

Recently, the stakeholders of the industry have signed an agreement that defines the terms under which Vaca Muerta will be developed. This agreement is aimed at operating efficiency, regulatory stability and price signals aligned with international markets.

The agreement is a promising first step towards expanded activity and employment levels that would build up on the experience of companies and workforce already established in the basin.

In addition, other aspects need to mature as well: the oilfield services market to become more competitive; infrastructure to stretch and reach the margins of the basin; and overall logistics to improve to grant accessibility to the very large volumes of materials that unconventional exploitation demands. Finally, the latest technologies and techniques need to be introduced to improve productivity.

Together with the challenge of developing the new resources, Latin America’s producing countries and operating companies need to tackle the challenge of sustaining production from conventional fields at competitive standards.

The fight against production decline is based on a constant improvement of operations efficiency and a continued inflow of investments.

Cerro Dragón, a mature field operated by Pan American Energy with sixty years of production history, has been revitalised through operational excellence and a long-term investment view, turning it into Argentina’s main producing oil field. The large-scale development strategy adopted in this field has shown to be robust as it went through regulatory changes and market ups and downs.

The new market context and the resources reality place efficiency at centre stage of the oil and gas discussion in Latin America.

A great opportunity to join the discussion

For the oil and gas industry it is time to work together on developing the region’s vast hydrocarbon resource base in order to achieve sustainable growth and bolster employment. This topic together with energy markets’ integration, the transition to a lower carbon economy and others, make the Energy agenda in our World Economic Forum on Latin America more interesting than ever.

Viewed through the prism of the energy industry the broader challenges the region faces can be perceived as well. In our World Economic Forum discussions, enriched by the involvement of participants of all industries and of both the public and the private sectors, we will find out what solutions may be achievable and what challenges still remain. For sure, regional stakeholders will gain from the global perspective we will all bring along to this summit.

Share this