Despite lengthy lockdowns and closed borders across South America, the continent is one of the worst affected by the COVID-19 pandemic. Three countries, Brazil, Argentina and Colombia rank among the top 12 nations for cases while Brazil and Colombia are in the top 12 countries globally by deaths. A third devastating viral wave is spreading across South America, triggering further lockdowns and restrictions on movement aimed at slowing the virus’s spread as the health systems of many countries struggle to cope and are pushed to breaking point. The regional economic fallout has already been devastating, causing South America’s 2020 gross domestic product, according to the IMF, to shrink by almost 7%, making it one of the worst-performing regions globally. The pandemic battered South America’s hydrocarbon sector. Energy companies were forced to shutter operations in response to the March 2020 crude oil price collapse and to comply with government efforts to contain the coronavirus. That only magnified the economic damage, particularly in those countries like Colombia and Brazil, which are economically dependent on crude oil production. There are growing fears that the latest viral wave engulfing South America will force further lockdowns and oil industry shut-ins. The arrival of a third viral wave in South America, which is believed to have initially emerged in Brazil’s Amazon, is severely impacting the continent. It not only appears to be more infectious and lethal but is endangering the continent’s anticipated economic recovery, with the IMF earlier this year forecasting South America’s GDP will expand 4.4% during 2021. Brazil, at over 14.5 million confirmed COVID cases, has the highest number in South America and ranks third globally, behind the U.S. and India. Latin America’s largest economy has reached over 398,000 fatalities, putting Brazil behind the U.S. and ahead of Mexico. Viral outbreaks on offshore oil rigs have already forced Brazil’s national oil company Petrobras to temporarily suspend some operations impacting production and delaying first oil at the Mero oilfield in the offshore Libra Block. For the first quarter of 2021, Brazil’s oil output declined by 5% year over year, illustrating how severely the latest viral outbreak is impacting petroleum industry operations. Data from Brazil’s petroleum regulator (Portuguese) shows March 2021 hydrocarbon output declined 0.2% month over month to 3.6 million barrels of oil equivalent daily, which was also 93,551 barrels less than January. There are growing concerns that the latest COVID outbreak in Brazil could derail the country’s massive petroleum, which appeared immune to the pandemic. That would have a deep impact on Brazil’s economy, causing growth to slow and be significantly less than the 3.7% estimated by the IMF for 2021.
Colombia, Latin America’s fourth-largest economy and third-largest oil producer, reinitiated lockdowns in many of its major cities around two months ago as a third wave took a deadly toll on the Andean country. Those events along with the rapidly rising case count, which according to the World Health Organization has reached 2.8 million confirmed COVID cases and almost 73,000 fatalities, are threatening Colombia’s economic recovery and crucial oil industry. Colombia’s economy shrank by almost 7% during 2020 and was expected to grow by 5% this year, but the latest developments are imperiling that forecast. The government’s 2021 budget deficit has blown out to over 9% and its finances are in ruin. Economically crucial oil production, which accounts for over 30% of exports by value, 3% of GDP, and 17% of fiscal revenue, remains soft with Colombia only pumping 745,769 barrels per day during February 2021, a worrying 15% less than a year earlier.
Poverty, in what was Latin America’s second most unequal country before the pandemic, is soaring with it estimated that up to 49% of the population is living in poverty. That in turn is fueling a marked uptick in violence, lawlessness, and crime. Oilfield invasions are rising as is petroleum theft, which Colombia’s national oil company Ecopetrol stated at the start of 2021 was 46% higher than a year earlier. Major cities were swamped by recent protests against President Duque’s planned tax reform, unwillingness to implement the three-year-old peace agreement with the FARC, and rising violence. According to Colombian think tank Indepaz (Spanish) there have been 33 massacres since the start of 2021 or nine more than for the same period a year earlier. International ratings agency Fitch, which rates Colombia just one notch above junk status, believes increasing taxation will potentially adversely affect corporate credit and blunt the urgently needed economic recovery. Fitch asserted that Colombia’s tax system “remains more burdensome for business than other Latin American countries.” The ratings agency later made a statement describing tax reform as essential to stabilizing government finances. Growing political turmoil and simmering discontent with the Duque administration will spark further protests which along with community blockades could interrupt oil industry operations, just as they did in 2019 and 2020. Bogota’s tax reform, if approved, will likely remove many of the incentives and tax breaks offered to energy companies operating in Colombia. That along with rising violence and growing insecurity will make Colombia an unattractive jurisdiction for foreign oil companies.
Peru which experienced violent protests targeting its oil industry during 2020 is struggling to recover from the pandemic, a major economic slump with GDP last year plunging 11%, and a deep-rooted political crisis. The protests which rocked Peru’s onshore oil industry in the country’s Amazon Basin were a direct result of Lima’s neglect of the region’s impoverished communities despite the oil industry generating considerable government income. Lima committed to a six-year $1.7 billion program to aid communities in Loreto to end the violent protests which included invasions of the Bretana oilfield operated by Canadian driller PetroTal and state-owned pumping stations.
There are renewed fears of another wave of resource nationalism in Peru if leading presidential candidate Pedro Castillo, a former union activist and school teacher, emerges victorious from the presidential runoff to be held in June. He has campaigned on a platform focused on widespread nationalization, alarming the local oil industry and foreign investors. A resurgent pandemic is weighing heavily on Peru’s outlook and amplifying the headwinds facing the country’s oil industry. According to the World Health Organization Peru has nearly 1.8 million confirmed COVID cases and registered 59,000 deaths. The reactivation of Peru’s hydrocarbon sector is crucial to bolstering the economy and assisting the economy’s return to growth. While 2021 GDP is predicted to expand 8.5%, political turmoil, the threat of resource nationalism, and the fallout from the pandemic could derail Peru’s economic recovery.
Coronavirus is severely impacting all aspects of economic and social life in South America, amplifying many of the structural weaknesses that existed before the pandemic emerged. The social costs of the pandemic in the region are uneven and heavily skewed toward low-income groups, who have also proven to be the most vulnerable to contracting the virus. It is placing considerable stress on the region’s fiscally weak governments, stretching underfunded health systems to breaking point, causing poverty to soar, and leading to a higher incidence of crime and violence. It has battered South America’s economically crucial petroleum industry, which many governments are hoping will spearhead a broad economic recovery, especially with oil having rallied nearly 34% since the start of 2021. The latest viral wave triggered fears that South America’s much-vaunted economic recovery is under threat and that the oil industry in many countries on the continent will not make a full recovery, possibly for years, further damaging local petroleum-dependent economies.
By Matthew Smith for Oilprice.com
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