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Energy Update: Dampened Oil Fervor in Brazil, Peru, and Venezuela

Brazil is only exploring 5 percent of its deep-water oil reserves. (Image: Programa de Aceleração do Crescimento)

September 26, 2012

With new offshore oil discoveries on the Atlantic coast and a growing role for state-run energy companies, Latin America seems poised to become one of the world’s energy powerhouses. But in Brazil, Peru, and Venezuela, oil industries face obstacles as rising imports, production delays, and capacity limitations continue to thwart prospects for growth.

Learn more about energy in the hemisphere from AS/COA's Energy Action Group.

Frustrated Expectations for Offshore Oil in Brazil

In spite of strong hopes after discovering large offshore “pre-salt” oil deposits in Brazil beginning in 2007, the country’s petroleum industry experienced numerous hurdles in recent months. First, logistics brought challenges. “In terms of the pre-salt, there was a moment of euphoria, and then came disappointment,” writes Globo finance journalist Miriam Leitão. She explained that Petrobras found lots of carbon dioxide mixed in with the oil, making prices rise and productivity drop. In addition, Brazilian law requires oil companies to use 65 percent locally made goods and services, leading to higher costs and delays.

As a result, oil production fell short of living up to its potential. Companies are currently exploring only 5 percent of the country’s deep-water oil reserves, Brazilian National Agency for Oil Director Magda Chambriard said on September 17. Last year, output from state oil company Petrobras grew at its slowest rate in four years and has been unable to meet production targets. As gasoline demand outstripped supply, Brazil increased petroleum imports—up by 43 percent during the first seven months of the year. Finally, after a November 2011 oil spill, a court ban against two foreign petroleum firms could harm production further if it goes into effect next month, analysts say.

Brazil also has limited refining capacity, though Petrobras hopes to find new partners to change that situation. In some cases, refinery construction experiences delays. Under construction since 2007, the Abreu e Lima refinery in Pernambuco state is not yet operational and still awaits funding from Venezuelan state oil company PDVSA.

Another lingering issue is exploration rights. Brazil held its last concession sale around five years ago, and Congress’ failure to pass a new oil-royalties law prevented new rounds from being held. Last week, Brazil's Energy Minister Edison Lobão announced that two auctions will be held in 2013: the first in May for onshore and offshore blocks, the second in November for offshore pre-salt drilling rights. This will be the first time the government offers concessions for the pre-salt fields. Lobão warned that the royalties law must pass before the auctions occur, though he expects the legislation process to conclude before the end of the year.

Scaling up the Hydrocarbons Industry in Peru

Like Brazil, rising demand in Peru means a need to import more fuel. State oil company Petroperú reported a 13 percent increase in oil imports last year, as well as a 12 percent decline in exports. Also similar to its neighbor, Peru’s refining capacity needs expansion. An upcoming $1.7 billion project to upgrade one of the country’s largest refineries, the Talara complex, could potentially impact the country’s GDP, adding over $1.2 billion over the next three years. At the heart of Peru’s main oil-producing region, Talara represents other challenges to the industry. After former President Alberto Fujimori began privatizing the publicly owned and run Talara oil fields in 1994, investment dropped as did production. The refinery produced 115,000 barrels a day in 1992, a rate that has fallen to 65,000. The refinery upgrade would bring production closer to 1990s levels, create cleaner fuel, and generate more jobs.

Now, the government hopes to expand the country’s hydrocarbons industry with Petroperú in a central role. Peru will auction concessions worth $2 billion in energy and hydrocarbons over the next two years, and in November, the government will begin the bidding process for 36 oil lots. Petroperú’s participation will range from 25 to 49 percent, though the company won’t invest capital during the initial exploration period. In addition, Petroperú plans to begin selling shares on Lima’s stock exchange before the end of the year. The measure has popular appeal: an Ipsos survey found that 65 percent of Peruvians would invest in the firm.

Yet one of the country’s biggest challenges in Peru’s energy and mining industries are intractable social conflicts, which delay or stop projects in their tracks. As AS/COA’s Christopher Sabatini explains in a CNN GPS blog post, areas in Peru with natural resource extraction sites often see protests from localresidents. “The failure of governments to provide the foundation for socioeconomic demands of these communities means that these conflicts will simmer, and with it the tensions between company and community,” he wrote. According to Peru’s National Society of Mining, Petroleum, and Energy, these types of conflicts delayed $2 billion worth of hydrocarbon exploration and the oil-rich but underdeveloped Talara region could experience such social conflicts. Local communities have struggled to access potable water for decades, leading to ongoing discussions with local and national leaders to prevent public unrest.

With these new oil concessions due soon, Peru will begin conducting consultations with local communities in accordance with a 2011 law that requires the government to hold such talks before beginning extraction projects. These talks—which begin in February—aim to address potential sustainability and environmental problems, as well as concerns from community members.

Operational Hurdles in Venezuela

One of the region’s largest oil producers faces a number of challenges. First, the country struggles to reach production targets, and so far this year failed to reach the goal of 3 million barrels a day. Even disappointing production data from the government may not be reliable, since it stopped allowing independent auditing of these numbers in March 2011. The country also faces rising domestic demand for electricity generation.

Venezuela saw oil trade suffer in 2012. State-run oil company PDVSA exported 18 percent less petroleum products to the United States in the first six months of this year, while oil imports from the United States rose by nearly 94 percent over the same period. Venezuelan economist Odoardo León-Ponte believes investment is part of the problem, writing: “There’s no money to invest in the petroleum industry to maintain or to increase refining production, potential, and capacity….oil production and refining capacity declined.”

Operational problems within the industry also affect refining, some observers say. The country saw its worst oil refinery disaster in history in late August, when an explosion at the Amuay refinery killed 42 people. Production stopped for nearly a week, and the refinery still isn’t running at full capacity. The cause of the blast remains unknown, but some analysts believe it could stem from problems within the industry, such as poor oversight and a failure to upgrade technology. Energy consultant and former PDVSA executive Gustavo Coronel commented on the incident, saying: “[W]e are not talking about bad luck but about lack of maintenance and inept management.” Following the Amuay disaster, lightning caused a massive fire at El Palito refinery on September 19, which burnt for three days.