Oil & gas risk in Latin American hotspots

Brazil, Mexico, and Guyana represent critical E&P hotspots within Latin America. However, Brazil and Mexico appear to be embarking on divergent paths regarding E&P policy and upstream investment opportunities following presidential elections in both countries last year. And Guyana's game-changing deepwater discoveries are continuing against the backdrop of emerging political risks. Ford Tanner, an analyst covering oil and gas risk in Latin America, shares his views on the most important above-ground risks facing E&P investors in the Latin America in our latest Upstream in Perspective podcast. Here's an excerpt of the conversation:

Jessica Nelson:

So, I want to start by level setting with our listeners. I know in the past you've said Latin America is likely to see pendulum swings given political changes in the region. Of course, a lot of those have been pretty high profile in the news lately, but today's conversation is going to focus on Brazil, Mexico, and Guyana, as those represent critical ENP hotspots at the moment. All three of those countries rank in the top half of IHS Markit's oil and gas risk ratings.

Ford Tanner:

Yes, that's correct. I think Brazil and Guyana are in the top probably 30%. Mexico's about halfway in our rankings. We rank countries on 21 different risk factors and cover 131 countries in total.

Jessica Nelson:

Let's talk about those three countries. So, Brazil and Mexico appear to be embarking on divergent paths regarding E&P policy and upstream investment opportunities. At the same time, Guyana's game changing deepwater discoveries are continuing against the backdrop of political risks in that region.

Jessica Nelson:

So, let's start with Brazil. Brazil seems to be maintaining the previous administrations competitive E&P approach. In fact, the right-wing nationalist government of Jair Bolsonaro has ambitious plans for bid rounds over the next couple of years. What's your take on Brazil's bid round opportunities?

Ford Tanner:

Right, so 2019 is going to be a huge year in terms of the bid rounds. There's three bid rounds this year. One non pre-salt bid round and two pre-salt bid rounds. The non pre-salt bid round is round 16. That one has 36 blocks. I believe 13 blocks in the Campos basin, and 11 blocks in the Santos basin. And our view is that those 24 blocks in the Campos and Santos basins are going to be the most competitive because they abut the so-called pre-salt polygon.

Some of those blocks are believed to have pre-salt potential. That's a tax royalty bid round. The royalties are really on par with what we saw in the very successful round 15, in which almost half of the blocks were awarded. So, for round 16 think at least a third upward to half of the blocks will be awarded in that bid round.

There's some other blocks in more frontier basins up the coast. The Camamu-Almada, Jacuípe and Pernambuco-Paraíba basins. Those are more frontier areas. In terms of the competitive mix, we'd expect independents and select majors to participate in that bid round. That'll be competitive. But the pre-salt bid rounds are going to be most competitive in our view. The sixth pre-salt bid round has five blocks in the Cantos and Santos basins. And then there's the surplus volumes transfer of rights bid rounds.

Ford Tanner:

IHS Market has done analysis. We estimated surplus volumes of the transfer of rights at around 7.4 billion barrels of oil equivalent in recoverable. So, massive resource there. And in fact, if all the blocks in the ToR (the transfer of rights) bid rounds, are awarded, the signature bonuses alone would amount to about $27 billion, US dollars. So, given the scale of the pre-salt areas, both in terms of resource and capital commitment, we would expect the world's largest oil companies to be the primary participants there.

Ford Tanner:

So, majors, large national oil companies, and of course, Petrobras, Brazil's national oil company. So, a very competitive year in 2019, in terms of the bid round opportunities in Brazil. Then, thinking about beyond 2019, we do anticipate continued bid rounds in line with the schedule that the government has announced.

Jessica Nelson:

Sounds like some good opportunities. What about some risks associated with this year's bid rounds?

Ford Tanner:

In those frontier basins that I mentioned in round 16, environmental licensing is probably the biggest risk. Those basins don't have a whole lot of environmental data. We noted in previous bid rounds, the frontier areas really can get hamstrung by the environmental licensing process. So, that's a risk for those basins in particular.

Ford Tanner:

Unitization is another regulatory risk that we've analyzed. Our analysis has shown that harmonizing, operatorship, fiscal terms, local content requirements…all of that can easily take a year when you do the negotiations between different companies and then bring in the government stakeholders that have to be involved. The bid rounds, all three of this year have blocks that could be so susceptible or subject to unitization across multiple contracts regimes, which could make it even more complicated. So, you've got tax royalty blocks, a budding production sharing contract box in and around the pre-salt polygon. Those could be susceptible to unitization. It could be a lengthy process.

Jessica Nelson:

You mentioned that you expect some majors to be investors. I know in the past some investors have raised concerns about how the government's anti-establishment approach to politics might trigger new political risks. Do you share that concern also?

Ford Tanner:

I mean, to some extent, yes. I think one of the things we're watching, and it's been the case over the last month, kind of a deteriorating relationship between the administration, the Bolsonaro in our government, and the oil workers' union. Over the last couple of years, we've seen the oil workers' unions try to put legal injunctions in an effort to stop Petrobras divestments, and actually even hold up bid rounds.

Ford Tanner:

They haven't been very successful in doing that, kind of successful in delaying some of those divestments. I would expect that to continue under Bolsonaro. So, that's a risk, and it is factored into our risk methodology that you referenced. We have a labor unrest score, and Brazil's labor unrest score really already reflects that. So, we don't see major downgrades going forward. It's kind of already baked in.

Hear what Ford thinks is ahead for oil & gas investment opportunities in Mexico and Guyana on the full podcast.

Download details about our risk methodology or learn more about our oil & gas risk solutions.

Posted 7 May 2019

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.