Latin American downstream

The truth is that global demand will not remain paralyzed indefinitely. There will come a point when demand increases, refinery operations return to standard levels and margins grow as oil prices remain lower than expected – then what? Well the analysts are predicting that lower-than-normal demand and low oil prices could remain for 2-3 years and that Peak Oil Demand could now be coming far sooner than originally suggested. At the LARTC Advisory Board Meeting last month in Bogotá, the consensus between the likes of Ecopetrol, YPF, Raizen, Petrobras, ENAP & Refidomsa was that peak oil demand would arrive in Latin America and the Caribbean sometime between 2040-2050 and potentially beyond that. The era of oil was coming to an end with or without the OPEC+ price war and the Covid-19 global pandemic and it was expected to bring about the era of gas and a growing presence of renewable energy to make up the ‘New Energy Mix’. However, the situation we find ourselves in has propelled us to a point where in 2020 there is increasing uncertainty and lower returns in fossil fuel activity. Combine that with the ambitious policies being put forward by politicians globally such as European Carbon Neutrality by 2050, the proposed ban on combustion engine car sales in multiple countries as early 2025 and the continued pledges of the oil ‘majors’ to invest in a greener future – the paint on the canvas of a rapidly accelerating energy transition is starting to dry

There is however, reason for hope, and it is two-fold. Primarily, in the short-term, when the social restrictions being placed on citizens all over the world are lifted – the demand for oil products will surge and the prices will be far lower than they were before the isolation measures were first enforced. It has been said before that the pole-position driver of the energy transition is the consumer. When gasoline prices, air fares and other consumables are available at a competitive price, the refiners will be benefitting, as we are beginning to see with China. This doesn’t mean that refiners everywhere will be operating for the next 5 years at the expected levels of oil demand growth, but it nonetheless buys time and is reason to remain positive. Secondly, government priorities could also be re-assessed amongst this turmoil. 3-6 months of economic immobility will leave millions more unemployed in Latin America, and globally. When faced with an economic crisis, there will not be a long queue of governments looking to set expansive policies that inhibit an industry that generates billions of dollars of revenue and employs millions of citizens. In fact, it is far more likely that in looking to emerge out of a recession, governments will form a queue to enable the industry to prosper and as such refined products should theoretically see an increase in demand. So in spite of the acceleration of the energy transition and the undoubted increase of renewable energy project investments, two of the key drivers of the regional downstream sector: the consumer and governments, will be de facto supporters of the recovery of the region’s oil companies in the years to come.