Offshore oil extraction is transforming the economy of one of South America's smallest and poorest countries, Guyana. In 2015, ExxonMobil, an American oil giant, found the first of what are now 11 billion barrels of proven crude oil reserves, or about 0.6% of the world's total.
In 2028, it could reach 1.2 million barrels per day—a rate that would currently make Guyana one of the 20 largest oil producers. This is impressive for a country with a population of around 800,000. If a US giant like ExxonMobil is already present in Guyana and benefiting from high oil prices, this is bad news for Brazilian companies, which appear to be missing the boat on investing in Guyana.
In the market, it is said that by 2028, about a quarter of the additional oil supply will come from Latin America, reversing a decade of declining production in the region. Argentina, Brazil, and Guyana will grow, while other countries will decline. Although oil will still be needed throughout the energy transition, it will have to be produced cheaply and with low carbon emissions to remain competitive. Brazil and Guyana are likely to benefit more than most exporters.
On the other hand, the energy transition will be punitive for other Latin American countries. Many state-owned oil companies are inefficient and produce dirty barrels. Countries such as Ecuador, Venezuela, and Mexico are unprepared, and this will have economic consequences.
In Brazil, this growth has been ongoing since 2006, with the discovery of pre-salt oil reserves. The image of President Lula with his hands covered in oil and wearing Petrobras orange overalls is unforgettable. Production from these fields increased from 41,000 barrels per day in 2010 to 2.2 million per day last year. The pre-salt fields have transformed Brazil into the eighth largest producer in the world. The geology, combined with Petrobras' investments in cutting-edge technology, makes extraction particularly efficient. It has long been known that Brazil can profitably produce oil at US$35 per barrel, less than half the current price. The amount of CO2 equivalent emitted per barrel is almost a third of the global average. This less polluting oil is already drawing the world's attention to the privileged barrels of Brazil and Guyana.
The Northeast is the new focus of Brazilian oil
The new Lula administration is betting on another round of good news. Petrobras plans to spend nearly half of its exploration budget over the next five years on the equatorial margin, an area in northeastern Brazil near Guyana. The government hopes that the area holds the equivalent of the pre-salt fields. IBAMA recently denied a license to drill in the area, but it is hoped that these environmental regulator requirements can be overcome. Brazil's current Minister of Mines and Energy has called the equatorial margin a "passport to the future."
In Argentina, even with triple-digit inflation and strict capital controls, oil and gas production has increased. Sanctions on Russian oil have benefited Argentina's production increase. It has the second-largest shale gas reserves and fourth-largest shale oil reserves in the world, and is now seeking the Brazilian government's support for investment in this sector.
Latin America has the second largest proven oil reserves after the Middle East. According to the Inter-American Development Bank (IDB), if the region's reserves are properly exploited, revenues will range from $2.7 trillion to $6.8 trillion. But mismanagement and political instability are the norm in Latin America. According to Francisco Maonaldi of the University of Houston, if all the oil in the region were exploited with the same expertise and in a regulatory environment similar to that of Texas, Latin America would be producing more oil than the United States. Today, it produces half as much.
If the region is rich in oil and can leverage large long-term investments, why are Brazilian companies not benefiting from these investments? I am not referring only to oil extraction companies, but also to infrastructure companies. Brazil has expertise, a proven track record, technology, and engineering capabilities, but there is no news of Brazilian companies' presence in Guyana. Part of the explanation lies in the damage that Operation Car Wash has done to infrastructure companies, leading to their collapse and leaving the sector's economy in ruins. Another explanation is the slowness with which the government is acting (if it is doing anything at all) on new investments in national infrastructure. It is unbelievable that Brazilian companies are struggling to secure new contracts in Brazil.
The government needs to do its part and urgently rescue infrastructure companies.
I am not referring to subsidies, but to generating contracts— backlog, as they say in the industry—so that these companies can get back on their feet financially. It is also necessary to reactivate export credit, an institution that is still poorly understood and has been the victim of fake news from the previous administration. In addition to establishing government partnerships with countries in the region to provide incentives for Brazilian companies to operate in these countries. Entering the Latin American oil market late could be fatal.
Brazilian companies, in turn, need to be faster and more efficient. Abroad, they must plant their flag in other countries such as Guyana. In Brazil, they need to be effective with a lean governance structure, less subject to internal bureaucracy, and more competitive in public tenders. The financial fragility and lack of dynamic governance of the remaining companies, combined with the lack of government support, is gradually destroying the country's infrastructure sector, a strong generator of jobs and taxes.
Oil, as a primary energy source, will be replaced, but until then Brazilian companies need to actively participate in the investments and revenues generated by the sector in Latin America. Letting North American and European companies ride this wave alone is a business crime.
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