What country may be Central or South America’s number one oil producer in a few short years? Mexico? Venezuela? No-Brazil. Mexico and Venezuela may outproduce Brazil now, but that’s poised to change. A combination of increasing Brazilian oil production and declining oil production in Mexico and Venezuela may lead to an inversion in the Latin American hierarchy of fossil fuel production.As the Wall Street Journal reported on December 17, Brazil has recently made major offshore petroleum and natural gas finds. Much of the new reserves lie deep under the ocean floor, in “subsalt” formations that pose significant technical challenges to drilling. However, improvements in drilling technology and methods, combined with crude prices that make oil production attractive even at great expense, have made deep reserves economically viable. These new reserves-one field alone is estimated to hold between 5 and 8 billion barrels of oil-greatly add to Brazil’s existing proven reserves of 12.6 billion barrels.
Brazil’s finding of these new reserves is not itself the real story behind its rise-and Mexico’s and Venezuela’s decline. The real issue is why Brazil has become more successful in finding and exploiting fossil fuel reserves then the traditional local petroleum powerhouses.
Brazil’s state-run oil company, Petroleo Brasileiro or “Petrobras,” is hungry. It lost its monopoly on Brazilian oil production in the mid-1990s, which opened it up to private competition. That led to increased exploration, by private concerns which saw an opportunity, and by Petrobras, because it had to explore to keep up its revenue. Petrobras also improved the efficiency of its operations, again, due to the necessity of keeping up with competitors. For the state-run company, finding itself in competition with private business meant it had to improve or face potential economic death.
The result? Brazil’s oil production has grown 50 percent since 2000 and looks to keep growing. Currently producing around 2 million barrels per day, Petrobras expects to produce 2.25 million barrels daily in 2010, 2.43 million in 2011, and 2.58 million (a 29 percent increase over 2009) by 2012.
At the same time, Venezuela’s and Mexico’s state oil companies, Petróleos de Venezuela, S.A. (PDVSA) and Pemex, respectively, were fat and complacent. Protected by monopoly positions, flush with large, easily exploited reserves, they had little incentive to invest in expensive exploration or new production facilities or techniques.
Unfortunately, in the world of oil production, there is no standing still: to stand still is to fall behind. All wells and fields experience a reduction in output over time as more readily accessible reserves are drawn down. Exacerbating that is that the infrastructure of oil production-the wells, the pipes, the pumps-consists of large machinery, subject to high stresses, with more than a few moving parts. Unless you continually maintain the machinery, it, too, will decline.
Mexico, which has relied on a few large fields in heavy production, has been particularly susceptible to time-related declines. For example, production at its most important field, Cantarell, has declined by over 300,000 barrels per day since last year. Currently producing only 639,000 barrels a day, it’s well down from the 2.2 million it was putting out as recently as 2004. In response, Pemex has begun engaging in more exploration, including deep-water wells in the Gulf of Mexico. However, while it has made some promising finds, production at these new sites isn’t expected to even begin until 2015.
Venezuela has suffered from political problems as well as aging fields and infrastructure. Its populist president, Hugo Chavez, props up his regime with heavy social spending drawn from the oil sector, diverting money that would otherwise be available for exploration and capital investment. He’s also followed a leftist ideology and nationalized foreign assets in Venezuela’s oil sector, taking fields away from more efficient foreign production and turning them over to the inefficient state oil company. The net effect has been to decrease Venezuelan production by more than 700,000 barrels a day over the course of the last 10 years, to a point where the nation is producing around 2.22 million barrels per day-a low volume on proven reserves of at least 170 billion barrels, and a testament to inefficiency. (For comparison, Saudi Arabia has around 50 percent larger reserves-but produces over 500 percent as much oil daily.)
In brief: Brazil has been deliberately making itself a petroleum power. Mexico and Venezuela have not.
What’s the likely impact on oil and heating oil prices? As we’ve written, there’s little consistency in projections for 2010 and beyond, with some analysts and institutions projecting increased oil demand and higher prices, while others see stable demand but increased production, leading to a continued surplus of supply over demand and falling prices. Those bearish analysts typically site production growth in traditionally second- or third-rank oil producers, such as Brazil or Nigeria, as powering the growth in supply.
However, even if you don’t or are unwilling to put a firm stake in the ground on demand, suffice to say that an increase in production from a physically close, politically stable, and relatively U.S.-friendly nation can only be good for American consumers.
Source: www.heatingoil.com