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Latin American governments seek to capitalize on
upstream resources
Amid persistent geopolitical and energy market volatility, the
Latin America and Caribbean region stands out as a resilient
upstream investment destination. The region's governments are eager
to generate socioeconomic gains from their oil and gas resources by
offering numerous upstream assets under competitive investment
conditions.
Latin America offers considerable oil and gas resource
opportunities under a generally favorable above-ground environment.
According to IHS Markit Petroleum Economics and Policy Solutions
(PEPS) analysis of above-ground E&P investment conditions,
countries in the region rank among the most competitive
jurisdictions globally.
The PEPS Oil and Gas Risk Hydrocarbon Sector Entry score
provides a direct assessment of how welcoming a host country is to
new foreign upstream investment. The chart below plots countries on
the metrics of upstream openness and political stability, the
latter of which is critical in shaping the durability of investment
policy.
Of the 11 countries assessed in the region, 8 place within the
quadrant that encompasses the countries that are most open to
third-party upstream investment and are the most politically stable
(i.e., scoring above 5 on both metrics). Latin American
oil-producing and gas-producing countries have enacted, are
enacting, or are planning to enact, over 2021-23, a range of
policies to attract investment, expedite contractual awards, and
accelerate production. Actions encompass fiscal, contractual, and
regulatory changes as well as the offering of investment
opportunities through upstream licensing.
IOCs look to Latin America as they seek to high grade
upstream portfolios
From a company perspective, the global oil and gas investment
environment has become more challenging over the past decade
because of multiple price collapses, shareholder pressure, and
climate regulations. To tackle these challenges, companies are high
grading their portfolios with respect to consideration of profits,
returns, and emissions intensity. This trend has led international
oil companies (IOCs) to consolidate operations around core
countries and to be more selective about future exploration and
development opportunities.
The Latin America and Caribbean region continues to attract a
range of multi-jurisdiction companies—spanning US-based and
Europe-based companies—that otherwise have different approaches
to balancing their core upstream portfolio with future
decarbonization efforts. The region is home to a raft of recent
large-scale discoveries—featuring less carbon-intensive light
and medium crude grades—that can be expected to progress to
developments with low breakeven prices and will play a core role in
these companies' portfolios throughout this decade.
While national oil companies (NOCs) within Latin America are
delivering on their mandates to develop domestic resources, IOCs
are allocating more resources to the region. This is reflected by
forecasts of absolute production growth and the global share of
production to come from the region.
Compared with other regions, Latin America is leading in terms
of production growth. For the IOCs assessed in this report, Latin
American production is expected to increase at a 7.8% compound
annual rate from 2020-30 compared to a median of 0.9% across all
regions (after taking the effects of the Russia-Ukraine conflict
into account). Based on production data for 12 IOCs covered in this
report, their collective Latin American oil and gas output is
forecast to surge from 1.6 MMboe/d in 2020 (7.4% of global output)
to 3.4 MMboe/d in 2030 (14% of global output).
Recent M&A underlines relative attractiveness of
Latin American upstream opportunities
Upstream mergers and acquisitions (M&A) activity in Latin
America has remained strong in recent years relative to global
trends, and the region will continue to play a prominent and
growing role in both organic and inorganic company strategies. The
global IOCs and large international independents are—and will
remain—prominent players in Latin America, especially in
deepwater opportunities across Brazil, Guyana, Suriname, Colombia,
and Mexico, where they can capitalize on lower-cost,
high-productivity, and relatively lower carbon-emitting "advantaged
barrels".
The competitive landscape in the region, however, will likely
continue to broaden. Regional independents and private equity
players have been gaining significant market share in Latin America
in recent years, finding ample inorganic opportunities for growth
and expansion. In fact, since 2020, this new class of investors has
become the most active buyers of upstream assets in Latin America.
Most recent buyers of assets in Latin America have been local
E&P companies, many of which are backed by private equity
capital, but in some cases are private equity firms themselves.
Over the past two decades, private equity capital apportioned to
the upstream industry has largely been concentrated on the United
States. But as this trend has reversed course somewhat since 2015,
with these firms now having become net sellers of upstream assets
in the United States, many of these same firms have redeployed
their capital to other areas of the world, including the Latin
America upstream. Indeed, upstream M&A investment on the part
of private equity firms has been growing in Latin America, with
this group of companies now, on average, net buyers in the region -
in particular since 2018.
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