LatAm's oil and gas future: Shale, deep water and the elephant in the room

Latin America is expected to play an increasingly important role in the global oil and gas value chain despite – or perhaps because of – the ever-accelerating clean energy transition. Carlos Garibaldi, executive secretary of the Association of Oil, Gas and Renewable Energy Companies of Latin America and the Caribbean (Arpel), discusses the sector's key investment drivers and the challenges that lie ahead. 

Garibaldi will be the keynote speaker at the Arpel-Naturgas Week to be held April 8-12 in Cartagena, Colombia. This is the second of a two-part interview. The first part can be seen here. The interview was conducted via email.

BNamericas: Given the financing difficulties facing the sector amid the ever-accelerating clean energy transition, how can countries in the region continue to attract investment in E&P?

Garibaldi: To achieve both the hydrocarbon monetization and the decarbonization goals, our region will require significant long-term capital investment inflows. To attract, enable and retain them, countries in our region must show clear and consistent sector policies of State at the national levels. There must be better coordination within governments to have efficient concession, contractual and environmental permitting processes for all relevant energy projects, and cooperation among governments to seek further integration and infrastructure compatibility.  

Most importantly, to attract the required capital, our countries must demonstrate that they can offer legislative, fiscal, judicial, and regulatory systems that are robust, aligned with the policy objective, efficient, transparent and, above all, stable. Massive and long-term investment decisions of any kind demand confidence and predictability. 

In an era of constrained foreign investor flows to our sector, each country needs to become more competitive. The cost of doing business in any country is mostly measured by its rent split between government and investor, which should provide an attractive enough return on capital employed. This government “price signal” should be commensurate with the perceived prospectivity, idiosyncratic risks, physical costs, and political risks.  

BNamericas: We realize that you can't be seen to be favoring any particular country or company, but which basins/areas does Arpel feel are the most attractive for E&P investments in the region and why? (Perhaps you could mention several.) 

Garibaldi: Driven by prospectivity, unit costs, returns, and welcoming contractual and fiscal frameworks, the spotlight examples in the region today are Argentina (Vaca Muerta shale still underdeveloped and its emerging continental margin), Brazil’s pre-salt in the Santos basin, and the exponential output growth in the Guyana-Suriname fairway on the Equatorial Margin, which extends into Brazilian waters. Mexico (with significant deepwater potential), Colombia and Ecuador are not sending encouraging signals to foreign investors today, and Venezuela (the elephant in the room) needs to sort out its institutional framework to recover at least part of its potential. 

But both our region and the world need and demand the complementarity of all energy sources. LAC [Latin America and the Caribbean] holds a vast sunbelt, sustained wind alleys in Patagonia and coastal areas (favoring onshore and offshore green hydrogen), and deep geothermal opportunities along its Andean, Central American, and Caribbean volcanic arches. 

These low-carbon alternatives are not fully mature for their immediate and ubiquitous deployment due to technological, infrastructure and regulatory limitations, or bottlenecks in their value chains. Hence, we must supplement and synergistically complement them with natural gas while they come to fruition. 

We thus can grow our natural gas and our renewable energies in parallel. This way, we can lower even further our regional greenhouse gas emissions while assuring our own energy security and buttressing our socioeconomic development. Any hydrocarbon surplus may be exported. The region thus has a window of opportunity to capitalize on the global need for securing proper energy supply and phasing out coal from the global energy sector.   

BNamericas: What competitive advantages does Latin America's oil and gas sector have compared to other regions of the world? In other words, why would E&P companies choose to invest in the region ahead of, say, the US/Canada, the North Sea, the Middle East or Africa? 

Garibaldi: In some countries in the region political, governance and transparency issues must be resolved. But the region’s potential in such young and prolific plays as the ones that I have mentioned, generously offset those issues. For example, US shales have been thoroughly developed, same as the Gulf of Mexico and the North Sea. In comparison, our shales and continental margins seem underdeveloped or underexplored. 

Historically, when one focuses on the long term instead of the volatility, on the signal instead of on the noise, the region has always been profitable for investors. Moreover, the region has ample metal and critical mineral resources to feed the transition with more electrification. 

While we believe that irrespective of the aspirational decarbonization scenarios hydrocarbons (gas in particular) will play a role in the global energy matrix for the conceivable future, they will eventually hit a peak demand ceiling. LAC must get its act together and act nimbly to monetize its hydrocarbon resources while advancing in its own energy transitions. 

We must also keep in mind that an arc encompassing Venezuela, Colombia, Ecuador and Peru holds about 60% of the planet's heavy and ultra heavy oil resources, more vulnerable to curtailment for the transition. It would be a shame if they stay trapped underground due to procrastination. 

BNamericas: The US temporarily lifted some sanctions on Venezuela in October, but Washington has since said that restrictions could be reinstated. Are you optimistic about the oil and gas sector in Venezuela in the short-medium term? What is Arpel's message to its member companies that have existing investments there or are considering entering the Venezuelan market? 

Garibaldi: We are hopeful yet cautious about Venezuela’s largely anticipated production surge. It is rebounding from a very low base after decades of mismanagement and sanctions. The revitalization of Chevron’s Boscan field and the possibility to develop the Dragon gas field offshore Venezuela through Hibiscus in Trinidad & Tobago, and onwards to the gas industrialization complexes onshore, give reason for hope. 

Moreover, Venezuela concentrates about two thirds of the region’s hydrocarbon resources, albeit much of it is ultra heavy crude and associated gas. But it must rectify its institutional framework for the OFAC barriers [the sanctions] to be completely lifted.