How Will Biden’s Presidency Impact South America’s Oil Boom?

Much has been made of President-elect Joe Biden’s energy policies and the negative impact they will have on the U.S. oil industry, which is laboring to survive a global oil supply glut and sharply weaker energy prices. This is in stark contrast to outgoing President Trump’s pro-industry policies, which it is claimed helped the U.S. shale industry survive the worst oil price slump since the early 1990s. Energy sector analysts and insiders expect Biden’s commitment to ban new oil and natural gas leases on public lands, aggressively reduce emissions, rejoin the Paris Climate Accord and reinstate the Iran nuclear deal to harm the U.S. petroleum industry. It is feared, if those policies are successfully implemented, they will cause oil prices to soften and place greater pressure on U.S. shale oil drillers. Arguably, Trump’s hard-nosed foreign policy, petro-diplomacy, and constant intervention in global energy markets added an unhealthy degree of volatility to oil prices, even suppressing them, doing more damage to the domestic energy industry than heightened regulation. During 2018, when Brent soared to the highest prices seen since 2015 and flirted with $80 per barrel, Trump applied substantial pressure to OPEC to push oil prices lower by opening the spigots and increasing production. While Saudi Arabia and its allies, including Russia, sought to stabilize the price at around $75 per barrel, Trump insisted they boost output by 2 million barrels. The rationale for Trump’s constant meddling to manipulate oil prices is simple; significantly lower prices are a form of economic stimulus at no cost to the U.S. federal government. Nor does it create the inflationary risks linked to money creation which is the stimulus policy of choice for the U.S. Federal Reserve. Biden’s policies, while increasing the regulatory burden and hence operating costs for upstream U.S. oil producers, could cap petroleum output from the world’s largest oil and natural gas producer. That would provide some relief for a world awash in oil and mired in a six-year-long supply glut that is responsible for the prolonged price slump. Regardless of the hype surrounding an anticipated rapid uptake of electric vehicles and the emergence of peak oil demand, fossil fuels will remain a crucial part of the global energy mix for some time. While the existing global supply glut will weigh on prices for the foreseeable future, demand for fossil fuels will remain firm for at least a decade.

Biden’s multilateral approach to foreign policy with a focus on the U.S. resuming its role as a world leader and promoting democracy, human rights, and free trade will encourage greater global geopolitical stability. That will ease international tensions and boost global trade thereby spurring greater demand for crude oil, which is the world’s principal source of energy. Such policy will reduce the volume of geopolitical shocks meaning the heightened volatility of oil prices witnessed even before the pandemic should decrease significantly. That combined with the potential for greater oil consumption will be a boon for the global oil industry which is struggling to shake off the fallout from the COVID-19 pandemic. Biden’s values-based cooperative strategy in Latin America will strengthen regional ties thereby boosting geopolitical stability. This is particularly the case because of the president-elect’s focus on bolstering regional democratic institutions, enhancing human rights, alleviating poverty, eliminating corruption, and fostering free trade in Latin America. Those measures will promote regional economic growth, boost political stability, and make Latin America a less risky and more appealing destination for foreign investment. The change in Washington’s policy toward Latin America will blunt the growing regional influence of Russia, China, and Iran. Trump’s hardnosed transaction-based foreign policy which included threats of military intervention in Venezuela, the imposition of tariffs on various regional exports, and an unsympathetic stance on immigration alienated many Latin American leaders. That allowed China, Russia, and Iran to beef-up their presence in South America, notably Venezuela, boosting their political leverage at the expense of U.S. regional influence as local leaders sought to a counterweight to Trump’s policies. Russia and Iran’s growing presence has further destabilized South America, emphasizing the need for the U.S. to change how it engages with the region.

These developments will give South America’s burgeoning oil boom a solid lift, especially because breakeven prices in many jurisdictions are less than the $45 per barrel estimated for the U.S. shale oil industry. Colombia pumps crude oil with an average after-tax breakeven price of $40 to $45 per barrel. National oil company Ecopetrol claims to be pumping crude oil with an even lower breakeven price of $30 per barrel. Colombia’s national government is taking measures to boost foreign investment in the country’s economically crucial petroleum industry, which during 2019 received almost a fifth of all foreign direct investment. Biden’s plan to strengthen the relationship with Colombia, a key regional ally, as well as bolster security, human rights and economic development in the strife-torn country will improve political stability. That dials-down the risk associated with investing in the Andean country, should improve security and open additional territory to onshore petroleum exploration and production. This is particularly important because there have been no major hydrocarbon discoveries in Colombia for over a decade, and the country’s low proven oil and natural gas reserves only have a production life of six and eight years respectively. Colombia’s energy ministry expects to attract $3.4 billion of industry investment during 2021 and for offshore exploration to soar. For these reasons, Colombia’s oil industry is ideally placed to benefit from a Biden presidency, particularly with Brent selling for over $54 per barrel.

Guyana’s offshore oil boom will gain additional momentum during 2021. Over the last six years global oil super major ExxonMobil has made 18 significant oil discoveries in the offshore Stabroek block, the latest being the September 2020 Redtail find. Exxon estimates in the Stabroek Block alone it has over 8 billion barrels of recoverable oil resources. The integrated oil company commenced production at the Liza oilfield, in the Stabroek Block, during December 2019 and anticipates pumping over 750,000 barrels daily by 2026. According to Hess, Exxon’s partner in Guyana, the Liza field is pumping crude oil with a breakeven price of $35 per barrel which is expected to fall to $25 a barrel when the FPSO Liza Unity is deployed as part of the Liza Phase Two project. Guyana’s increased political stability after its five-month electoral crisis ended in August 2020 with Mohamed Irfaan Ali being sworn in as president, along with closer ties to the U.S., will bolster geopolitical stability increasing the appeal of investing in the former British colony.

Suriname’s oil boom is heating up. The ousting of former military strongman Dési Bouterse in the former Dutch colony’s June 2020 elections bodes well for greater political stability and economic growth in an impoverished country sharply impacted by the COVID-19 pandemic. The four-party coalition led by former police chief Chandrikapersad Santokh is determined to promote law and order, strengthen government institutions and rebuild the economy. A series of significant oil discoveries were made in Suriname during 2020 with Apache and Total announcing three in offshore Block 58. The latest was Exxon’s December 2020 discovery in offshore Block 52 with partner Petronas. Suriname’s national oil company and industry regulator Staatsolie is ramping up activity which includes the launch of the shallow offshore 2020/2021 bid round during November 2020.

Brazil’s state-controlled oil company Petrobras claims to be pumping crude at an impressive breakeven price of a mere $21 per barrel. That is significantly lower than analyst estimates of $35 to $45 per barrel for offshore Brazil. China has become an important driver of Brazil’s massive offshore oil boom. The pre-salt Lula and Búzios sweet medium grade crude oils are extremely popular in China, where they sell at a premium to Brent, because they can be easily refined into high-grade low sulfur content fuels, including maritime bunker oil which is IMO2020 compliant.

Biden’s plans to bolster democratic institutions, human rights, security, trade, and economic growth in Latin America will give the region’s oil industry a solid sustained boost. This will form an important part of the broader economic recovery for a region that is one of the worst affected globally by the COVID-19 pandemic.

This article is reproduced at oilprice.com