The threat of peak oil demand arriving sooner than predicted and the aggressive push to decarbonize the world economy in a post-Paris Agreement world is creating considerable uncertainty for the global oil industry. Big oil after considerable pressure from environmental groups, investors, and governments with many global energy supermajors is committing to become net carbon neutral. Aside from the push to reduce carbon emissions, the sulfur content of fuels is under intense scrutiny. That has seen governments, as well as various regulatory bodies across the world, clamp down on the sulfur content of fuels to reduce environmentally harmful emissions.
The most recent measure was the January 2020 introduction of IMO 2020 which substantially reduced the sulfur content of maritime fuels. For these reasons, big oil is avoiding developing or operating petroleum projects that are carbon-intensive and produce low-quality crude oil grades with the potential for being processed into high emissions fuels.
As a result, European oil supermajors TotalEnergies and Equinor divested their 30.32% and 9.67% respective interests in Petrocedeño, which operates a carbon-intensive extra-heavy oil project in Venezuela’s Orinoco Belt. Both companies elected to hand in their stake to Venezuela’s national oil company PDVSA and take a loss on the investment rather than continue operating in the near-failed petrostate.
TotalEnergies’ reasoning centered on its “aims at focusing new oil investments on low carbon intensity projects, which does not correspond to extra-heavy oil development projects in the Orinoco Belt.” This indicates that there is a significant headwind emerging for many countries, such as Venezuela and Canada, where most of their oil reserves are sour heavy and extra-heavy crude oil varieties.
Considerable energy is required to extract extra-heavy and heavy crude oil compared to conventional and shale oil. Studies show that Canada’s oil sands produce nearly double the greenhouse emissions of conventional oil operations. It has been estimated that extracting one barrel of extra-heavy crude oil from Venezuela’s Orinoco Belt creates four times, or possibly more, the carbon emissions of producing a single barrel of conventional crude oil. That extra-heavy crude oil, aside from needing to be blended with light oil or condensate so it can be transported and processed, is also more complex and hence energy-intensive to refine.
Venezuela’s principal crude oil grade, known as Merey, is particularly sour and heavy with an API gravity of 16 degrees and 2.45% sulfur content. As a result, it is heavy in contaminants and sulfur making it particularly difficult and energy-intensive to refine. If not processed appropriately, the refined products produced will be high emission low-grade fuels. That makes Merey an unattractive crude oil to exploit in a post-Paris Agreement world focused on substantially reducing carbon and sulfur emissions. Other nations in South America are facing a similar dilemma, although not as dire as Venezuela’s. Colombia’s flagship crude oil grades Castilla and Vasconia are sour and heavy with API gravities of 18.8 and 24.3 degrees as well as sulfur contents of 1.97% and 0.83% respectively.
Ecuador which shares the Putumayo-Oriente basin, a major source of heavy crude oil for both Andean nations, is facing a similar problem. Ecuador’s Napo crude oil variety has an API gravity of 19 degrees and 2% sulfur content meaning it is heavy and particularly sour. Even the lighter Oriente grade, which has an API gravity of 24 degrees, is still particularly sour with 1.4% sulfur. That along with Ecuador’s dilapidated refineries is responsible for the Andean country being incapable of producing IMO 2020 compliant 0.5% sulfur content fuel oil without importing lighter sweeter crude oil varieties to blend with locally extracted petroleum.
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Nonetheless, it is not all bad news for South America. Brazil is undergoing an epic offshore oil boom which sees it pumping over 3.7 million barrels of oil equivalent daily making it the largest oil producer in Latin America. Even the COVID-19 pandemic has done little to diminish the booming oil industry in Latin America’s largest economy. French supermajor TotalEnergies announced it has approved investment in developing phase four of the Mero project in which owns a 20% interest. Mero is in offshore Brazil’s prolific pre-salt Libra oilfield in the Santos basin. This project operated by Petrobras, which holds a 40% interest with partners Shell at 20%, CNOOC 10%, and CNPC 10%, will pump 180,000 barrels of sweet medium grade crude oil with an API gravity of 28.8 degrees and 0.32% sulfur content.
Mero’s characteristics are like those of other oil varieties extracted from the Santos basin which have become especially popular among Asian refiners. A key reason for that are low breakeven prices, estimated to be on average as low as $35 per barrel, and the strong demand for the sweet medium crude oil grades extracted. It is Brazil’s Lula and Buzios crude oil varieties, both of which are sourced from pre-salt oil basins, which have experienced a sharp spike in demand from Asia, notably China. This is because Asia is a major shipping hub and demand for 0.5% sulfur content fuel oil has spiked since the introduction of IMO2020. For the first sixth months of 2021 Brazil was the sixth-largest supplier of crude oil to China.
Lula is an especially sweet medium crude oil with a sulfur content of a low 0.27% and API gravity of 29 degrees, with a high diesel yield making it particularly popular among China and India’s refiners. As a result, Lula trades at a $1 per barrel premium to the international Brent benchmark. Buzios possesses similar characteristics with an API gravity of 28 degrees and 0.31% sulfur content, triggering strong demand from Asian markets which has also seen cargoes sell at a premium to Brent. For these reasons it is anticipated that Brazil will become the world’s fifth-largest oil exporter by the end of this decade.
It is not only Brazil that has emerged as a key petroleum player in Latin America, neighboring Guyana and Suriname are also on track to benefit from gargantuan oil booms. The deeply impoverished former British and Dutch colonies share the Guyana-Suriname basin which has become one of the most exciting offshore drilling locations globally. Oil supermajor ExxonMobil along with partners Hess and CNOOC have enjoyed outstanding success in offshore Guyana’s 6.6-million-acre Stabroek Block, making 21 high-quality discoveries since 2015. Those have given the consortium around nine billion barrels of recoverable oil resources with further discoveries tipped to occur as Exxon executes an ambitious 2021 drilling campaign. In fact, it was only late last month when Exxon made its 21st discovery in the Stabroek block with the Whiptail-1 well.
The appeal of investing in offshore Guyana, aside from the favorable agreements secured by Exxon and the country’s low royalty rate of 2% is the high-quality oil being discovered. Exxon’s Liza phase one operation, which reached full capacity in December 2020 producing 120,000 barrels daily, is pumping light sweet low contaminant crude oil. Liza crude oil has an API gravity of 32 degrees and sulfur content of 0.58% which along with its low breakeven price of $35 makes it especially attractive to exploit. Those characteristics also mean it is less carbon-intensive to produce and refine than many onshore crude oil grades found in South America. The other half of the Guyana-Suriname basin in offshore Suriname has also been the location of significant high-quality oil discoveries.
TotalEnergies and Apache have made five quality oil discoveries in offshore Suriname block 58, the latest being the Sapakara South-1 well at the end of July 2021. The crude oil found, according to Apache, has API gravities of between 27 to 43 degrees indicating that it is medium to light. The notable volume of quality conventional medium to light oil discoveries, coupled with a projected breakeven price of $40 per barrel, makes offshore Suriname an attractive proposition for energy companies seeking to boost their reserves and crude oil output.
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Despite developed nations seeking to rapidly decarbonize the global economy and reduce dependence on fossil fuels, crude oil will remain an important part of the world’s energy mix for the foreseeable future. Petroleum rich low-cost jurisdictions such as Brazil, Guyana, and Suriname which are capable of pumping low carbon sweet medium and light crude oil grades are fast becoming the preferred investment destinations for big oil. For these reasons, offshore South America will become the world’s leading offshore oil boom.
By Matthew Smith for Oilprice.com
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As for the entire Continent of Latin America "lockdowns" have been an unmitigated disaster now to go along with China imploding all of East Asia to include Australia now too.
Plus Civil War in Russia plus negative interest rates in Europe and Japan plus trade Wars by the United States plus real War defeat by the USA in the entire Middle East.
Sure sounds like the worst set up ever for every commodity ever. Makes the Great Depression look like good times in point of fact.