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LATIN AMERICA INVESTMENT OPPORTUNITIES IN OIL & GAS: RISK/REWARD ANALYSIS
Latin America Investment
Opportunities In Oil & Gas:
Risk/Reward Analysis
Published by: BMI Research
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kind as to the accuracy or completeness of any information hereto contained.Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
CONTENTS
Latin America Risk/Reward Index .................................................................................................................. 3
Upstream Oil & Gas: NOC Dominance Holding Back LatAm.................................................................................................................................... 3
Top Rankers Anchored By Rewards ............................................................................................................................................................................ 5
NOC Dominance Offsetting Potential ......................................................................................................................................................................... 6
New Upstream O&G Risk/Reward Index .................................................................................................................................................................. 10
Downstream Oil & Gas: LatAm Consumption Growth Will Outpace Refining Gains............................................................................................... 11
Outperformers Boosted By Rewards ......................................................................................................................................................................... 13
Upstream Focus Impedes Downstream Potential ..................................................................................................................................................... 14
New Downstream O&G Risk/Reward Index.............................................................................................................................................................. 19
Brazil - Q4 2017 .............................................................................................................................................. 20
Headline Forecasts (Brazil 2015-2021) ............................................................................................................................................................... 20
Argentina - Q4 2017 ....................................................................................................................................... 22
Headline Forecasts (Argentina 2015-2021) ......................................................................................................................................................... 22
Chile - Q4 2017 ............................................................................................................................................... 24
Headline Forecasts (Chile 2015-2021) ................................................................................................................................................................ 24
Peru - Q4 2017 ................................................................................................................................................ 26
Headline Forecasts (Peru 2015-2021) ................................................................................................................................................................. 26
Oil & Gas ......................................................................................................................................................... 28
Methodology ............................................................................................................................................................................................................. 28
Sector-Specific Methodology..................................................................................................................................................................................... 29
Oil & Gas Upstream Risk/Reward Index .................................................................................................................................................................. 30
Indicators - Explanation And Sources - Upstream RRI ........................................................................................................................................ 33
Downstream Oil & Gas Risk/Reward Index .............................................................................................................................................................. 34
Indicators - Explanation And Sources - Downstream RRI ................................................................................................................................... 37
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Latin America Risk/Reward Index
Upstream Oil & Gas: NOC Dominance Holding Back LatAm
BMI View: Latin America underperforms across several components of our Upstream Oil & Gas RRI
due to elevated above-ground risks. The region outperforms globally with respect to rewards thanks to a
vast resource base and continued production growth, supporting its overall Upstream score. Resource-
rich Brazil and Trinidad & Tobago rank highest, while high state ownership and a lack of competition set
Ecuador and Venezuela at the bottom of the regional pack.
© Business Monitor International Ltd Page 3Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
High Rewards Offset By Country Risks
Latin America - Upstream RRI Heat Map
Scores out of 100, higher score = lower risk. Source: BMI Risk/Reward Index
Main Regional Features & Latest Updates:
• The region of Latin America (LatAm) scores just above the global average in our overall
Upstream Risk/Reward Index (RRI) with a score of 50.6. This reflects how the region's above-
ground risks largely offset its vast resource potential.
• Upstream rewards in LatAm are stronger than the global average at 54.4 due to its vast reserves
and comparatively large production base. Upstream risks underperform at 41.8 as a result of a
© Business Monitor International Ltd Page 4Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
less-favourable regulatory framework and elevated political/operational risk in a number of
producing countries.
• Regional outperformers include large oil and gas producers and those that enjoy more investor-
friendly development terms. Brazil's vast deepwater potential and improving investment climate
keeps it to the top spot while considerable private sector involvement and low above-ground
risks placed Trinidad & Tobago (T&T) second, with Bolivia ranking third.
• Though LatAm holds significant undeveloped resources, strong pullbacks by heavily-indebted
national oil companies (NOCs) weigh on the region's upstream potential. This has accelerated
efforts to reform in a number of countries, suggesting a shift in the rankings in subsequent
quarters.
Regional Snapshot: Venezuela's Risks Overrun Rewards
LatAm Upstream RRI
Scores out of 100, Higher Score = Lower Risk. Source: BMI RRI
Top Rankers Anchored By Rewards
LatAm houses some of the most prolific resource basins in the world, particularly onshore Venezuela and
deepwater Brazil. However, this alone does not equate to a stronger Upstream score given the importance
of the regulatory and policy-making environments with respect to the sector.
© Business Monitor International Ltd Page 5Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
This dynamic is illustrated via our upstream rankings where Brazil and T&T remain the top two
performers in the region, due in large part to their strong rewards profiles. Both countries significantly
outrank their peers as well as the regional and global averages. This is a result of upstream growth and
strong production prospects in Brazil while extensive supporting infrastructure and favourable investment
incentives boost T&T's O&G rewards.
Latam Rewards Ahead Of The Curve
Upstream Risk/Reward Scores
Note: Dashed line = Global Upstream Average Score. Source: BMI RRI
Elevated rewards helped push Brazil and T&T to the top tier of our global Upstream rankings, at 11 and
13, respectively. This illustrates the strength of these countries' resource potential and the extent to which
elevated political risk and prolonged fiscal constraints have hindered growth elsewhere in the region.
NOC Dominance Offsetting Potential
Few countries have been impacted by growing operational risks more than Venezuela, the last-ranking
country in our LatAm RRI. The country houses the largest oil reserves in the world at nearly 300bn bbl.
However, shrinking investment by its dominant NOC PdVSA has all but suspended upstream
development while decline rates simultaneously accelerate in the country's mature basins.
© Business Monitor International Ltd Page 6Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Industry Rewards Power Latam
Brazil & Venezuela vs Latam & Global Averages
Source: BMI RRI
Fellow OPEC member Ecuador has also suffered in the wake of the price crash given its dependence on
state-led growth. Weak showings in both the Risks and Rewards segments of our index have ranked the
country ninth out of 10 in the region, suggesting systemic inefficiencies will continue to hold back
potential.
Compared to our global rankings, both Venezuela and Ecuador perform poorly. The region as a whole
modestly outpaces the global average; however these underperformers score well below, with Venezuela
ranking 81st and Ecuador 72nd out of 87 countries. This is due in large part to the tenuous financial
situations at both countries' NOCs, which is felt to a greater extent in Venezuela.
Given a lack of reform momentum surrounding PdVSA, we do not foresee its Upstream ranking
improving over the next several quarters. By contrast, countries that advance efforts to boost private
sector participation will reach and remain at the top of our Upstream RRI.
© Business Monitor International Ltd Page 7Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Upstream Risks vs. Rewards
LatAm Upstream RRI
Scores out of 100, Higher Score = Lower Risk. Source: BMI RRI
© Business Monitor International Ltd Page 8Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Upstream Rewards
LatAm Upstream Rewards Index
Scores out of 100, Higher Score = Lower Risk. Source: BMI RRI
© Business Monitor International Ltd Page 9Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Upstream Risks
LatAm Upstream Risks Index
Scores out of 100, Higher Score = Lower Risk. Source: BMI RRI
New Upstream O&G Risk/Reward Index
We have overhauled our oil & gas RRI methodology to more accurately capture the different elements
that impact the investment attractiveness of a country's upstream sector. We have increased the number
and variety of indicators that make up the final index's core and have reassessed the weightings of the
Reward and Risk indicators to ensure the environment is accurately reflected through our matrix. The
RRI uses a combination of our proprietary industry forecasts and analyst assessment of the regulatory
climate. As regulations evolve and forecasts change, so the Index scores change, providing a highly
dynamic and forward-looking result.
© Business Monitor International Ltd Page 10Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Downstream Oil & Gas: LatAm Consumption Growth Will Outpace
Refining Gains
BMI View: Latin America underperforms in our Downstream Oil & Gas Risk/Reward Index due to
strong state intervention in the market. The region is held back by a lack of investment into the
downstream as national oil companies prioritise upstream production capacity amid lower oil revenues.
Low political and economic risk put Chile at the top of our index while poor infrastructure and
significant policy uncertainty places Venezuela at the bottom of the regional pack.
Venezuela At The Bottom
LatAm - Downstream RRI Heat Map
Scores out of 100, Higher Score = More Attractive Market. Source: BMI Risk/Reward Index
© Business Monitor International Ltd Page 11Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Main Regional Features & Latest Updates:
• Latin America (LatAm) scores below the global average in our overall Downstream
Risk/Reward Index (RRI) with a score of 47.0. This score is 0.6 points below last quarter and
reflects how the region's challenging above-ground environment outweighs its downstream
potential.
• Downstream rewards in LatAm are in line with the global average, supported by the well-
developed infrastructure and favourable demand dynamics in a number of key markets.
Downstream risks underperform at 42.6 due to more frequent political instability and continued
use of fuel subsides in several countries across the region.
• LatAm's outperformers include its largest fuel consuming markets as well as those with a
lower political and economic risk profile. Chile's more stable policy environment and favourable
regulations held it at the top of our Downstream RRI, followed by Brazil thanks to its large
refining capacity and strong demand growth. Meanwhile, high operational and above-ground
risks placed Venezuela at the bottom of our index, ranking 84 out of 88 countries globally.
• A stronger focus on the upstream has limited investment into the refining sector throughout the
region, a trend we believe will continue over the next several years. The few countries where
state-led operators are investing downstream, including Peru and Chile, are therefore likely to
improve their ranks in subsequent quarters.
© Business Monitor International Ltd Page 12Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Regional Snapshot: Chile On Top
LatAm - Downstream RRI
Scores out of 100, Higher Score = More Attractive Market. Source: BMI Risk/Reward Index
Outperformers Boosted By Rewards
The downstream sector in Latin America is supported by its industry rewards segment which outranks
that of the global average by 0.5 points. This measure is supported by large refining capacity and elevated
domestic demand in a number of markets. However, this alone does not equate to a stronger downstream
score given the importance of consumption growth and the quality of local refining assets.
This dynamic is demonstrated in our downstream rankings where Chile and Brazil took the top spots in
the region. Both countries outrank their peers as well as the regional and global averages, as do Argentina
and Trinidad & Tobago, which follow just behind. However, Chile was supported by a more lower risk
profile, while Brazil outperformed with respect to rewards.
Though the two top performers fared well within the region, they were less promising on the global scale.
Specifically, Chile and Brazil ranked 32 and 34 respectively, with each having fallen by one point versus
last quarter. This illustrates the insufficient pace of downstream development within the region relative to
demand.
© Business Monitor International Ltd Page 13Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Key Markets Running Short
Latin America - Deficit Of Downstream Capacity By Country, 000b/d
f = BMI forecast. Source: National sources, BMI
Upstream Focus Impedes Downstream Potential
The continued dominance of state-owned companies within the region will undermine efforts to develop
the downstream. Having enacted ambitious strategies earlier in the decade, the sharp fall in oil prices
forced national oil companies (NOCs) to reassess spending targets. This resulted in a sharp pullback in
downstream investment across the region as companies shifted their focus upstream.
We therefore caution that a number of regional markets will suffer from a continued refining
deficit through 2020. We anticipate a significant shortfall in Mexico where the positive impacts of sector
liberalisation within the downstream will not materialise for several years, leaving the burden of
development largely on NOC Pemex in the interim.
© Business Monitor International Ltd Page 14Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Shortfall Will Remain Intact
Mexico - Refined Fuels Supply & Demand
f = BMI forecast. Source: Sener, BMI
Several other countries within Latin America will also struggle to meet demand through domestic
supplies, particularly as regional growth accelerates on the back of stronger commodity prices. However,
growth will prove relatively modest in a number of countries, including Argentina, Chile and Peru
owning to lingering above-ground challenges. We therefore believe net fuels imports into the region will
fall over the next five years from an estimated 1.8mn b/d in 2017 to just over 1.5mn b/d by 2021.
© Business Monitor International Ltd Page 15Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Deficit On The Decline
Latam - Implied Net Fuels Imports, 000b/d
f = BMI forecast. Source: National Sources, BMI
© Business Monitor International Ltd Page 16Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
LatAm Performs Poorly On A Global Scale
LatAm Downstream RRI
Scores out of 100, Higher Score = More Attractive Market. Source: BMI Risk/Reward Index
© Business Monitor International Ltd Page 17Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Industry Upside Offset By Country Level Weakness
LatAm Downstream Rewards Index
Scores out of 100, Higher Score = More Attractive Market. Source: BMI Risk/Reward Index
© Business Monitor International Ltd Page 18Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Underperformance Across The Board
LatAm Downstream Risks Index
Scores out of 100, Higher Score = More Attractive Market. Source: BMI Risk/Reward Index
New Downstream O&G Risk/Reward Index
We have overhauled our Oil & Gas RRI methodology to more accurately capture the different elements
impacting the investment attractiveness of a country's downstream sector. We have increased the number
and variety of indicators that make up the final index's core and have reassessed the weightings of the
Reward and Risk indicators to ensure the Risk/Reward environment is accurately reflected through
our matrix. The RRI uses a combination of our proprietary industry forecasts and analyst assessment of
the regulatory climate. As regulations evolve and forecasts change, the Index scores change, providing a
highly dynamic and forward-looking result.
© Business Monitor International Ltd Page 19Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Brazil - Q4 2017
BMI View: Brazil's vast presalt reserves suggest substantial growth potential over the long term,
underpinning our view that crude, natural gas, and other liquids output will rise through 2026. However,
production growth will be tempered by declining investment funds from Petrobras, potential fallout from
the corruption scandal and a still challenging policy-making environment.
Headline Forecasts (Brazil 2015-2021)
2015 2016 2017f 2018f 2019f 2020f 2021f
Crude, NGPL & other liquids prod,
000b/d 2,527.0 2,614.1 2,784.9 2,936.4 3,073.6 3,178.7 3,295.1
Refined products production, 000b/d 2,041.2 1,910.3 1,807.2 1,839.7 1,883.9 1,912.1 1,938.9
Refined products consumption & ethanol,
000b/d 2,514.0 2,399.2 2,414.5 2,454.5 2,512.3 2,561.1 2,609.0
Dry natural gas production, bcm 23.1 23.9 25.2 26.2 27.1 27.7 28.6
Dry natural gas consumption, bcm 43.7 41.5 42.1 43.0 44.3 45.5 46.5
Brent, USD/bbl 53.60 45.13 54.00 55.00 61.00 67.00 69.00
f = BMI forecast. Source: ANP, BMI
Latest Updates And Key Forecasts
• On August 11, Brazilian national oil company (NOC) Petrobras posted a profit of BRL4.8bn
over H117. This compares to a loss of BRL900mn in H116. Profits were driven by a growth in
domestic output of crude and natural gas which reduced import costs of both goods while
increasing crude exports by 69% y-o-y. We have long held that the more pragmatic approach
spearheaded by CEO Pedro Parente would usher in a more stable financial period for the
embattled NOC.Brazil's economy will stage a modest recovery in 2017, emerging from a
recession that began in Q214. Investment will drive the recovery, as business sentiment
improves in light of decelerating inflation and more business-friendly policies. However, the
recovery will be constrained by substantial slack in the economy, including a large output gap
and still-elevated unemployment. We have downgraded our forecast for growth in 2017 to 0.5%,
from 0.8%.
• The Brazilian oil sector continues on its path toward improvement despite weakness in the
external environment. Nearly three years after the Lava Jato scandal broke open, Petrobras is
accelerating efforts to strengthen its financial performance and secure long-term growth. Since
taking the helm of the company in May 2016, CEO Pedro Parente's more reformist agenda has
© Business Monitor International Ltd Page 20Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
helped stabilise the fallout from the scandal, improving investor confidence via a more
pragmatic upstream strategy.
• Ultra-deepwater deposits will drive upstream growth in Brazil over the next decade. Given large
operators' heightened focus on offshore acreage, we expect ultra-deepwater crude will comprise
the bulk of domestic output before 2019.
• The acceleration of Petrobras' divestment opportunity disclosure phase underscores the
company's growing dependence on upstream asset sales. The smaller size and favourable terms
of the shallow water concessions will encourage junior producers to invest, but will fail to
generate substantial cash for Petrobras.
• In August, 14 companies were approved for the 14th licensing round which will take place in
September. The round will offer 287 blocks in the offshore basins of Sergipe-Alagoas, Espírito
Santo, Campos, Santos and Pelotas and the onshore basins of Parnaíba, Paraná, Potiguar,
Recôncavo, Sergipe-Alagoas and Espírito Santo. Combined, the available acreage totals about
122,622 sq km
• Brazilian consumption of refined fuels will return to growth in 2017. Following a two-year
recession, we believe improving business sentiment will boost investment into the country and
revive economic activity over the coming year. However, demand growth will be limited by
continued slack in the economy, particularly with respect to employment and output. We
therefore forecast a 0.6% y-o-y increase for the year, compared to a 2.5% y-o-y decline in 2016.
© Business Monitor International Ltd Page 21Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Argentina - Q4 2017
BMI View: Highly prospective acreage, a strong competitive landscape and supportive pricing dynamics
will help the Argentine O&G sector offset losses from aggressive clawbacks in industry spending. The
core Neuquén shale province will continue in its growth trajectory, while more peripheral shale
formations will take longer to grow amid increased austerity on the part of developers.
Headline Forecasts (Argentina 2015-2021)
2015e 2016e 2017f 2018f 2019f 2020f 2021f
Crude, NGPL & other liquids prod, 000b/d 698.3 679.1 655.7 648.7 660.4 673.3 687.5
Refined products production, 000b/d 642.7 633.1 631.2 634.3 636.2 638.1 641.3
Refined products consumption & ethanol, 000b/d 742.8 749.4 774.3 810.0 859.6 925.9 1,010.0
Dry natural gas production, bcm 42.9 45.6 46.4 47.6 49.1 51.0 53.1
Dry natural gas consumption, bcm 45.0 45.4 46.1 47.1 48.3 49.8 51.4
Brent, USD/bbl 53.60 45.13 54.00 55.00 61.00 67.00 69.00
e/f = BMI estimate/forecast. Source: Minem, BMI
Latest Updates And Key Forecasts
• We forecast real GDP to grow by 2.9% in 2017. Argentina's economic recovery is coming into
focus, led by record agricultural harvests and infrastructure investment. The economy exited
recession in Q117, expanding 0.3% y-o-y. Growth continued to pick up in Q217 in line with our
view, with monthly activity expanding 4.0% y-o-y in June,
• Public capital expenditures have jump started infrastructure investment, export growth is
accelerating and foreign capital inflows remain robust. Disinflation has taken hold and
confidence is improving, supporting consumption.
• Argentina's efforts to reform its hydrocarbon sector continue to progress, encouraging a
sustained return to growth in the upstream. However, we expect crude production in Argentina
will contract by an average rate of 5.3% y-o-y in 2017, having declined by 3.9% y-o-y in 2016.
Our downgrade is due to a combination of sector-based and broader macroeconomic factors.
• Argentina's continued appeal amongst the majors supports our upbeat long-term natural gas
production outlook. Shrinking capital budgets will limit growth over the remainder of 2017,
while rising private investment generates stronger output through 2021.
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• YPF's natural gas production through July grew by 11.1% y-o-y thanks to increased efficiencies
across the unconventional development process. As of Q2, tight gas production comprised 31%
of total output at YPF. This is up from 22% of production in Q416, underscoring the company's
sharpening focus on unconventional blocks.
• Though financial pressures within the sector remain strong, we believe that Argentina will attract
increased capital investment as profits improve and firms return to their most promising assets.
Chevron, BP, Shell, Total and Dow are expected to invest an estimated USD5bn in 2017, rising
to as much as USD15bn per year after.
© Business Monitor International Ltd Page 23Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Chile - Q4 2017
BMI View: Chile's oil and gas industry will remain little changed over 2017, characterised by limited
prospects and a heavy reliance on energy imports. The Magallanes region will remain the focal point of
hydrocarbon exploration and production activities, though achieving significant progress will be
challenged by lower oil prices and corresponding spending pullbacks among upstream firms.
Headline Forecasts (Chile 2015-2021)
2015 2016e 2017f 2018f 2019f 2020f 2021f
Crude, NGPL & other liquids prod, 000b/d 7.9 6.8 6.6 6.5 6.6 6.6 6.7
Refined products production, 000b/d 218.5 179.6 170.6 180.8 195.3 203.1 209.2
Refined products consumption & ethanol, 000b/d 338.6 325.1 334.8 344.9 357.0 369.4 384.2
Dry natural gas production, bcm 1.1 0.9 0.8 0.8 0.9 0.9 0.9
Dry natural gas consumption, bcm 4.5 4.9 5.1 5.2 5.4 5.5 5.7
Brent, USD/bbl 53.60 45.13 54.00 55.00 61.00 67.00 69.00
e/f = BMI estimate/forecast. Source: JODI, BMI
Latest Updates And Key Forecasts
• We forecast total crude oil and natural gas liquids (NGL) production for 2017 at 6,550b/d,
extending production losses for a third year.
• Total gas production in 2017 will fall from 0.89billion cubic metres (bcm) to 0.84bcm, while gas
consumption will rise from 4.9bcm to 5.1bcm this year.
• In August, state-owned Empresa Nacional Del Petróleo (ENAP) released its Q2 results,
disclosing a USD40mn net profit. This compares to a USD79mn profit in Q216, with declines
attributed to an increase in cost of goods sold, offsetting a 26% y-o-y increase in sales.
• The Magallanes region will remain the focal point of hydrocarbon exploration and production in
Chile. In June 2016, Chilean national oil company (NOC) ENAP announced it had signed an
agreement with the US independent NOC ConocoPhillips to explore for and produce natural gas
in the region, with the company retaining a 51.0% operating stake in the project. In May 2017,
ENAP announced the country's first multi-frack stage well would be drilled in the Coiron block
by the end of the year.
© Business Monitor International Ltd Page 24Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
• In May 2017, the governments of Chile and Argentina agreed to extend their LNG re-export
programme for another season, supporting our previous view. The agreement allows for the
transfer of up to 276 million cubic metres (Mcm) of gas between June 1 2017 and August 31
2017, averaging 3mcm/d. ENAP, Enel and Aprovisionadora Global de Energía will supply 54%,
32% and 14% of the total volume, respectively.
• Emphasis on fiscal prudence will see Chile raise government spending by the least in 14 years in
2017, which could adversely impact demand for refined fuels. Nonetheless, the long-term
macroeconomic outlook remains positive, with real GDP growth set to average 3.8% per annum
through to 2026.
© Business Monitor International Ltd Page 25Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Peru - Q4 2017
BMI View: Production of crude and natural gas will grow over the next decade due to a strong project
pipeline and continued government support. The country will, however, produce below its potential as a
history of strong environmentalist opposition and a highly competitive regional market will reduce the
attractiveness of the country's supplies.
Headline Forecasts (Peru 2015-2021)
2015e 2016e 2017f 2018f 2019f 2020f 2021f
Crude, NGPL & other liquids prod, 000b/d 151.9 136.3 140.9 143.3 145.3 149.1 152.6
Refined products production, 000b/d 204.5 219.0 219.0 219.0 229.9 239.1 243.9
Refined products consumption & ethanol, 000b/d 254.0 278.8 305.8 352.3 420.8 533.0 724.7
Dry natural gas production, bcm 12.5 14.0 14.4 14.9 15.4 16.0 16.5
Dry natural gas consumption, bcm 5.5 6.0 6.2 6.5 6.7 7.3 7.6
Brent, USD/bbl 53.60 45.13 54.00 55.00 61.00 67.00 69.00
Source: National sources, BMI
Latest Updates And Key Forecasts
• Widespread flooding and continued delays on major infrastructure projects has taken a heavy toll
on Peru's economic activity in recent months, causing us to revise down our growth forecast in
2017 to 2.8%. This is a downwards estimate from 4.0% and compares with growth of 3.8% in
2016.
• The restarting of Peru's northern crude pipeline will provide much needed support for the sector
as connected fields revive operations. The return of block 192 will revive one of Peru's largest
oil fields and help moderate the sharp declines exhibited over 2016. We have upgraded our crude
production forecast for 2017 following the return of operations at block 192. We expect output
will rise by 5.3% year-on-year (y-o-y), averaging 42,500 barrels per day (b/d) for the year.
• Over our forecast period to 2026, Peru's net imports of crude will rise slightly while imports of
refined fuels will rise strongly from 30,000b/d in 2016 to about 90,000b/d in 2026. This negative
trade balance will stem from stagnating crude oil and condensates production, coupled with
rising demand for refined products - namely distillate fuel oil and liquefied petroleum gas.
• China National Petroleum Corporation has announced plans to invest USD2bn in the gas-heavy
block 58 in southern Peru between 2017 and 2023. The company plans to start drilling its 60
© Business Monitor International Ltd Page 26Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
well plan this year. Investment into the hydrocarbons sector will largely go toward natural gas
given Peru's position in the liquefied natural gas (LNG) export market and rising domestic
demand.
• We expect the completion of the USD7.3 billion Southern Gas Pipeline (GSP) will be delayed to
2020 following the exit of its operator Odebrecht in April 2016. On January 23, the government
announced it was cancelling the construction contract for the project and would retender it later
in the year. The GSP - which is currently 37.6% completed - will supply feedstock to two new
thermal power plants in Ilo and Mollendo. A re-tender is now planned for H118, as announced in
summer 2017.
• The commissioning of the third 4.5 million tonnes per annum train of the Sabine Pass
liquefaction facility over the summer will threaten Peru's LNG market share. Although this will
compete with Peruvian exports, we believe the country will remain a dominant player in the
region due to its lower variable cost of production compared to the US.
© Business Monitor International Ltd Page 27Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Oil & Gas
Methodology
Industry Forecast Methodology
BMI's industry forecasts are generated using the best-practice techniques of time-series modelling and
causal/econometric modelling. The precise form of model we use varies from industry to industry, in each
case being determined, as per standard practice, by the prevailing features of the industry data being
examined.
Common to our analysis of every industry is the use of vector autoregressions. Vector autoregressions
allow us to forecast a variable using more than the variable's own history as explanatory information. For
example, when forecasting oil prices, we can include information about oil consumption, supply and
capacity.
When forecasting for some of our industry sub-component variables, however, using a variable's own
history is often the most desirable method of analysis. Such single-variable analysis is called univariate
modelling. We use the most common and versatile form of univariate models: the autoregressive moving
average model (ARMA).
In some cases, ARMA techniques are inappropriate because there is insufficient historic data or data
quality is poor. In such cases, we use either traditional decomposition methods or smoothing methods as a
basis for analysis and forecasting.
BMI mainly uses OLS estimators and in order to avoid relying on subjective views and encourage the use
of objective views, BMI uses a 'general-to-specific' method. BMI mainly uses a linear model, but simple
non-linear models, such as the log-linear model, are used when necessary. During periods of 'industry
shock', for example poor weather conditions impeding agricultural output, dummy variables are used to
determine the level of impact.
Effective forecasting depends on appropriately selected regression models. BMI selects the best model
according to various different criteria and tests, including but not exclusive to:
• R2 tests explanatory power; adjusted R2 takes degree of freedom into account;
• Testing the directional movement and magnitude of coefficients;
• Hypothesis testing to ensure coefficients are significant (normally t-test and/or P-value);
• All results are assessed to alleviate issues related to auto-correlation and multi-collinearity.
© Business Monitor International Ltd Page 28Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
BMI uses the selected best model to perform forecasting.
Human intervention plays a necessary and desirable role in all of BMI's industry forecasting. Experience,
expertise and knowledge of industry data and trends ensure that analysts spot structural breaks,
anomalous data, turning points and seasonal features where a purely mechanical forecasting process
would not.
Sector-Specific Methodology
There are a number of principal criteria that drive our forecasts for each energy indicator.
Energy Supply
This covers the supply of crude oil, natural gas, refined oil products and electrical power, which is
determined largely by investment levels, available capacity, plant utilisation rates and national policy. We
therefore examine:
• National energy policy, stated output goals and investment levels;
• Company-specific capacity data, output targets and capital expenditures, using national, regional
and multinational company sources;
• International quotas, guidelines and projections from organisations such as OPEC, the
International Energy Agency (IEA), and the US Energy Information Administration (EIA).
Energy Consumption
A mixture of methods is used to generate demand forecasts, applied as appropriate to each individual
country:
• Underlying economic (GDP) growth for individual countries/regions, sourced from BMI
published estimates;
• Historic relationships between GDP growth and energy demand growth in an individual country
are analysed and used as the basis for predicting levels of consumption;
• Government projections for oil, gas and electricity demand;
• Third-party agency projections for regional demand, from organisations such as the IEA, EIA
and OPEC;
Extrapolation of capacity expansion forecasts based on company- or state-specific investment levels.
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Cross Checks
Whenever possible, we compare government and/or third-party agency projections with the declared
spending and capacity expansion plans of the companies operating in each individual country. Where
there are discrepancies, we use company-specific data as physical spending patterns to determine capacity
and supply capability. Similarly, we compare capacity expansion plans and demand projections to check
the energy balance of each country. Where the data suggest imports or exports, we check that necessary
capacity exists or that the required investment in infrastructure is taking place.
Source
Sources include those international bodies mentioned above, such as OPEC, IEA, and EIA, as well as
local energy ministries, official company information, and international and national news, plus
international and national news agencies.
Oil & Gas Upstream Risk/Reward Index
Our Upstream Oil & Gas Risk/Reward Index (RRI) quantifies and ranks a country's attractiveness within
the context of the oil industry, based on the balance between the risks and rewards of entering and
operating in different countries.
We combine industry-specific characteristics with broader economic, political and operational market
characteristics. We weight these inputs in terms of their importance to investor decision making in a given
industry. The result is a nuanced and accurate reflection of the realities facing investors in terms of: 1) the
balance between opportunities and risk; and 2) between sector-specific and broader market traits. This
enables users of the index to assess a market's attractiveness in a regional and global context.
The index combines our proprietary forecasts and analyst assessment of the regulatory regime. As
regulations and forecasts change, so the index scores change providing a highly dynamic and forward-
looking result.
The Upstream Oil & Gas Risk Reward Index comprises 87 countries.
Benefits of using BMI's Upstream Oil & Gas RRI
• Global Rankings: A global table, ranking all the countries for upstream oil & gas from least
(closest to zero) to most (closest to 100) attractive.
• Accessibility: Easily accessible, top down view of the global, regional or sub-regional
Risk/Reward profiles.
© Business Monitor International Ltd Page 30Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
• Comparability: Identical methodology across 87 countries for oil and gas allows users to build
lists of countries they wish to compare, beyond the confines of a global or regional grouping.
• Scoring: Scores out of 100 with a wide distribution, provide nuanced investment comparisons.
The higher the score, the more favourable the country profile.
• Quantifiable: Quantifies the rewards and risks of doing business in the upstream sector in
different countries around the world and helps identify specific flashpoints in the overall
business environment.
• Comprehensive: Comprehensive set of indicators, assessing industry-specific risks and rewards
alongside political, economic and operating risks.
• Entry Point: A starting point to assess the outlook for the upstream oil & gas sector, from which
users can access more granular forecasts and analysis to gain a deeper understanding of the
market.
• Balanced: Multi-indicator structure prevents outliers and extremes from distorting final scores
and rankings.
• Methodology is a combination of proprietary BMI forecasts, analyst insights and globally
acceptable benchmark indicators (for example, World Bank's Doing Business Scores,
Transparency International's Corruption Perceptions Index).
© Business Monitor International Ltd Page 31Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Weightings of Categories And Indicators
Upstream Risk Reward Index
Source: BMI
The upstream RRI matrix divides into two distinct categories:
Rewards:
Evaluation of an Industry's size and growth potential (Industry Rewards), and also macro industry and/or
country characteristics that directly impact the size of business opportunities in a specific sector (Country
Rewards).
Risks:
Evaluation of micro, industry-specific characteristics, crucial for an industry to develop to its
potential (Industry Risks) and a quantifiable assessment of the country's political, economic and
operational profile (Country Risks).
Assessing our Weightings:
Our matrix is deliberately overweight on Rewards (70% of the final RRI score for upstream markets) and
within that, the Industry Rewards segment (60% of final Rewards score). This is to reflect the fact that
when it comes to long term investment potential, industry size and growth potential carry the most weight
in indicating opportunities, with other structural factors (demand outlooks and infrastructure integrity)
weighing in, but to a slightly lesser extent. In addition, our focus and expertise in Emerging and Frontier
Markets has dictated this bias towards industry size and growth to ensure we are able to identify
© Business Monitor International Ltd Page 32Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
opportunities in countries where regulatory frameworks are not as developed and industry sizes not as big
(in USD terms) as in developed markets, but where we know there is a strong desire to invest.
Indicators - Explanation And Sources - Upstream RRI
Indicator Source Rationale
Rewards
Industry Rewards
Oil Reserves (bn bbl) BMI data Indicates size of the opportunity for oil developments
Gas Reserves (bcm) BMI data Indicates size of the opportunity for gas developments
Discoveries Rate - last FIVE
years BMI Calculation Outlines the prospectivity and potential of the upstream
Hydrocarbon Production (boe) BMI forecast Five-year forward looking indication of production volumes
Hydrocarbon Production Growth
(boe, %) BMI forecast Five-year forward looking indication of production growth
Country Rewards
State Asset Ownership (%) BMI Calculation Demonstrates the potential access and restrictions to resources
Divides resource base by the approximate number of
Competitive Landscape BMI Calculation companies operating to indicate the level of competition.
Calculates the extent and quality of oil and gas infrastructure,
indicating ease of access and level of maintenance investment
Infrastructure Integrity BMI Calculation needed.
Risks
Industry Risks
Outlines a country score based on whether oil and gas licenses
are offered as concessions, production sharing agreements or
Licence Type BMI Calculation service contracts.
Government
Income Tax Source Outlines the relative tax rate incurred by oil and gas companies.
Government Indicates further required payments (and supplementary taxes)
Royalties & Special Taxes Source beyond income tax.
BMI Operational Outlines the ease of business processes, with a particular
Bureaucratic Environment Risk Score emphasis on mitigating the risk of delay to project timelines.
A second ease of business indicator, highlighting potential
BMI Operational challenges with the transparency and effectiveness of rule of
Legal Environment Risk Risk Score law.
Country Risks
The LT ERI takes into account the structural characteristics of
economic growth, the labour market, price stability, exchange
rate stability and the sustainability of the balance of payments,
Long-Term Economic Risk BMI Country as well as fiscal and external debt outlooks for the coming
Index Risk Index decade.
Short-Term Economic Risk BMI Country The ST ERI seeks to define current vulnerabilities and assess
Index Risk Index real GDP growth, inflation, unemployment, exchange rate
© Business Monitor International Ltd Page 33Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
fluctuation, balance of payments dynamics, as well as fiscal
and external debt credentials over the coming two years
The LT PRI assesses a country's structural political
characteristics based on our assumption that liberal, democratic
states with no sectarian tensions and broad-based income
BMI Country equality exhibit the strongest characteristics in favour of political
Long-Term Political Risk Index Risk Index stability, over a multiyear timeframe.
The ST PRI assesses pertinent political risks to investment
BMI Country climate stability over a shorter time frame, up to 24 months
Short-term Political Risk Index Risk Index forward.
The ORI focuses on existing conditions relating to four main
BMI Operational risk areas: Labour Market, Trade and Investment, Logistics,
Operational Risk Index Risk Index and Crime and Security.
Source: BMI
Downstream Oil & Gas Risk/Reward Index
Our Downstream Oil & Gas Risk/Reward Index (RRI) quantifies and ranks a country's attractiveness
within the context of the downstream industry, based on the balance between the risks and rewards of
entering and operating in different countries.
We combine industry-specific characteristics with broader economic, political and operational market
characteristics. We weight these inputs in terms of their importance to investor decision making in a given
industry. The result is a nuanced and accurate reflection of the realities facing investors in terms of: 1) the
balance between opportunities and risk; and 2) between sector-specific and broader market traits. This
enables users of the index to assess a market's attractiveness in a regional and global context.
The index combines our proprietary forecasts and analyst assessment of the regulatory regime. As
regulations and forecasts change, so the Index scores change providing a highly dynamic and forward-
looking result.
The Downstream Oil & Gas Risk/Reward Index comprises 87 countries.
Benefits of using BMI's Downstream Oil & Gas RRI
• Global Rankings: A global table, ranking all the countries for downstream from least (closest to
zero) to most (closest to 100) attractive.
• Accessibility: Easily accessible, top down view of the global, regional or sub-regional
Risk/Reward profiles.
© Business Monitor International Ltd Page 34Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
• Comparability: Identical methodology across 87 countries for downstream oil allows users to
build lists of countries they wish to compare, beyond the confines of a global or regional
grouping.
• Scoring: Scores out of 100 with a wide distribution, provide nuanced investment comparisons.
The higher the score, the more favourable the country profile.
• Quantifiable: Quantifies the rewards and risks of doing business in the downstream sector in
different countries and helps identify specific flashpoints in the overall business environment.
• Comprehensive: Comprehensive set of indicators, assessing industry-specific risks and rewards
alongside political, economic and operating risks.
• Entry Point: A starting point to assess the outlook for the downstream sector, from which users
can access more granular forecasts and analysis to gain a deeper understanding of the market.
• Balanced: Multi-indicator structure prevents outliers and extremes from distorting final scores
and rankings.
• Methodology is a combination of proprietary BMI forecasts, analyst insights and globally
acceptable benchmark indicators (for example, World Bank's Doing Business Scores,
Transparency International's Corruption Perceptions Index).
© Business Monitor International Ltd Page 35Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
Weightings of Categories And Indicators
Downstream Risk Reward Index
Source: BMI
The downstream RRI matrix divides into two distinct categories:
Rewards:
Evaluation of an industry's size and growth potential (Industry Rewards), and also macro industry and/or
country characteristics that directly impact the size of business opportunities in a specific sector (Country
Rewards).
Risks:
Evaluation of micro, industry-specific characteristics, crucial for an industry to develop to its
potential (Industry Risks) and a quantifiable assessment of the country's political, economic and
operational profile (Country Risks).
Assessing our Weightings:
Our matrix is deliberately overweight on Rewards (60% of the final RRI score for a market) and within
that, the Industry Rewards segment (60% of final Rewards score). This is to reflect the fact that when it
comes to long-term investment potential, industry size and growth potential carry the most weight in
indicating opportunities, with other structural factors (demographic, labour statistics and infrastructure
availability) weighing in, but to a slightly lesser extent. In addition, our focus and expertise in Emerging
© Business Monitor International Ltd Page 36Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
and Frontier Markets has dictated this bias towards industry size and growth to ensure we are able to
identify opportunities in countries where regulatory frameworks are not as developed and industry sizes
not as big (in USD terms) as in developed markets, but where we know there is a strong desire to invest.
Indicators - Explanation And Sources - Downstream RRI
Indicator Source Rationale
Rewards
Industry Rewards
Refining Capacity ('000b/d) - Quantifies the current size of the refining sector as a comparison to
five-year average BMI Forecast peer markets
Utilisation Rates (%) - five- Outlines the efficiency of the existing facilities, identifying over or
year average BMI Calculation under capacity
Domestic Fuels demand Shows the size of the domestic market demand as a comparison to
('000b/d) - five-year average BMI Forecast peer markets
Fuel Demand (% Growth) - Indentifies the domestic demand opportunity and trend in
five-year average BMI Forecast consumption patterns
Regional Fuel Demand - Shows the regional export market size to represent the opportunity
five-year average BMI Forecast for exports
Approximate calculation of the life span of infrastructure to identify
Life Span of Infrastructure BMI Calculation the need remaining operating life
Theoretical Net Crude
Exports ('000b/d) - five year Identifies spare capacity of domestic oil supply as a potential
average BMI Calculation feedstock
Country Rewards
Indicates how much of the given market is open for private
State asset ownership (%) BMI Calculation investment
A metric used to identify the level of maintenance, upgrade and
Infrastructure Integrity BMI Calculation modernisation required in each market
Risks
Industry Risks
BMI Operational Offers a comparative indicator on ease of transport for feedstock
Logistics Risk Rating Risk Index supply, fuels distribution and import/export flexibility.
Penalizes a market's score if fuels prices are sold at below market
Fuel Subsidies BMI Calculation costs.
Country Risks
The LT ERI takes into account the structural characteristics of
economic growth, the labour market, price stability, exchange rate
Long-Term Economic Risk BMI Country stability and the sustainability of the balance of payments, as well
Index Risk Index as fiscal and external debt outlooks for the coming decade.
The ST ERI seeks to define current vulnerabilities and assess real
GDP growth, inflation, unemployment, exchange rate fluctuation,
Short-Term Economic Risk BMI Country balance of payments dynamics, as well as fiscal and external debt
Index Risk Index credentials over the coming two years
© Business Monitor International Ltd Page 37Latin America Investment Opportunities in Oil & Gas: Risk/Reward Analysis
The LT PRI assesses a country's structural political characteristics
based on our assumption that liberal, democratic states with no
sectarian tensions and broad-based income equality exhibit the
Long-Term Political Risk BMI Country strongest characteristics in favour of political stability, over a
Index Risk Index multiyear timeframe.
Short-Term Political Risk BMI Country The ST PRI assesses pertinent political risks to investment climate
Index Risk Index stability over a shorter time frame, up to 24 months forward.
The ORI focuses on existing conditions relating to four main risk
BMI Operational areas: Labour Market, Trade and Investment, Logistics, and Crime
Operational Risk Index Risk Index and Security.
Source: BMI
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