“The 40-year party is over,” said John Padilla, managing director of IPD Latin America LLC. “They’ve lived and breathed off of Cantarell and Ku Maloob Zaap. Cantarell has collapsed and Ku Maloob Zaap’s ability to sustain production is becoming increasingly tenuous.”

By Peter Millard and Amy Stillman

(Bloomberg) — With the collapse of Venezuela’s once-mighty energy industry and Mexico’s main oil field in rapid decline, Brazil has emerged as Latin America’s best hope for additional crude exports this year.

State-controlled Petroleo Brasileiro SA, the dominant producer, is targeting 10% production growth for 2019. In contrast, Venezuela’s output has collapsed to the lowest since at least 2002 under the strain of U.S. sanctions, and any recovery is uncertain without a change in government. Meanwhile Mexico, the region’s biggest producer earlier this decade, is struggling to turn around its national oil company after years of neglect and mountainous debts.

But despite the support of Brazil’s President Jair Bolsonaro, Petrobras’s plans to pump significantly more oil isn’t a certainty. Output dropped in the first quarter amid heavy maintenance work and startup complications at a major platform. The International Energy Agency slashed its 2019 growth estimate for Brazil by 18% in May to 265,000 barrels a day, even with new mega-projects entering production.

Surging output from what’s known as Brazil’s pre-salt, the largest group of offshore discoveries made this century, has mainly offset plummeting yields from legacy fields in the Campos Basin that’s closer to shore. Even Petrobras’s seven new floating production vessels that have enough combined capacity to surpass Colombia aren’t a silver bullet.
‘Never Happens’

“Every year people pencil in 300,000 barrels a day and it never happens because of declines at the Campos Basin and field maintenance. This year it may only grow marginally,’’ said Robert Campbell, the head of global oil products at Energy Aspects. “That’s as good as it gets for the major Latam producers.’’

New York-based Energy Aspects cut its Brazil growth forecast by 110,000 barrels a day in April, ahead of the IEA’s move. Beyond Brazil, the prospect of extra shipments matters because global oil markets have been rattled by escalating tensions in the Middle East and supply concerns in Libya, Iran and Venezuela.

Petrobras’s output rebounded in April and May from a larger-than-expected decline in the first quarter, Carlos Alberto Pereira de Oliveira, the head of exploration and production, said on a conference call last week where he reiterated the company’s growth estimate. The new fleet of production units are approaching capacity and the company has stabilized declines at the Campos Basin, guaranteeing robust growth, he said.

Better Off

Even if Brazil comes in below target, it is better off than Mexico where output sank to the lowest since 1990 last year. Some of Petroleos Mexicanos’straditional fields are collapsing after years of underinvestment, and it doesn’t have a pipeline of large replacement projects like Brazil has with the pre-salt. The recent oil opening that has attracted foreign explorers to Mexico will only deliver meaningful growth after 2020, said Maria Cortez, a senior research manager at Wood Mackenzie in Houston.

“If energy reform had happened six years prior we could see some more output now, but that’s not what happened,” Cortez said in a telephone interview.

Mexico’s crude output is trailing Brazil’s by the most ever and the gap is set to rise, even if Brazil trails expectations, because the shallow-water fields such as Cantarell and Ku Maloob Zaap that made it a heavyweight producer in the late 20th Century are reaching retirement. Mexico’s private sector oil output is still a fraction of the total, and discoveries by international operators including Talos Energy LLC and Eni SpA aren’t online yet.

‘Party is Over’

“The 40-year party is over,” said John Padilla, managing director of IPD Latin America LLC. “They’ve lived and breathed off of Cantarell and Ku Maloob Zaap. Cantarell has collapsed and Ku Maloob Zaap’s ability to sustain production is becoming increasingly tenuous.”

Pemex’s strategy for Ku Maloob Zaap is to focus on replacing the lost barrels with new fields, Chief Executive Officer Octavio Romero said in a May 15 interview. Output is “stabilizing” after declining every year since 2004, and the first oil from 20 contracts signed this month is likely to come in October or November, he said, while declining to give a production target.

A further slide at Ku Maloob Zaap, Mexico’s top-producing field, will worsen a shortage of heavy crude grades caused by turmoil Venezuela, where U.S. sanctions have constrained exports and rolling blackouts have shuttered operations across its oil patch. Even if a new administration takes over in Caracas, it is unclear how fast production can rebound after years of decay and mismanagement.

“Our forecasts are going to be for a continued decline until there’s a change in government,” Cortez said. “And then it would take four to five years to stabilize the oil sector to be able to talk about growth.”–With assistance from Amy Stillman and Fabiola Zerpa.

To contact the reporters on this story:
Peter Millard in Rio de Janeiro at pmillard1@bloomberg.net;
Amy Stillman in Mexico City at astillman7@bloomberg.net
To contact the editors responsible for this story:
Daniel Cancel at dcancel@bloomberg.net