Depressed crude oil prices are putting new pressure on Latin American producing countries to improve terms if they expect to attract outside investment for developing resources, speakers said during a Feb. 25 discussion at the Center for Strategic & International Studies.
“Persistently high prices created a set of convoluted incentives,” observed Carl Meacham, who directs CSIS’s Americas program. “The countries which were insulated were better prepared. But many governments are looking to their oil companies to help finance broader reforms when prices have come down.”
National oil companies in Mexico and Venezuela are under pressure to reverse production declines and develop fields, other speakers noted. “The challenge for Venezuela this year is where it will put the limited amount of oil money it has: into more production, satisfying the population, or paying its creditors,” said David Voght, a managing director and founder of IPD Latin America, a US-based energy consultancy.
Petroleos de Venezuela SA (PDVSA) has a new board, which wants to spend more on exploration and production, Voght said. “PDVSA and the government are offering options which give private companies more control over their projects,” he said. “It’s more progress than PDVSA has seen in years, but it’s occurring when the government’s troubles are increasing and crude oil prices have fallen.”
Mexico’s upcoming bidding rounds represent long-term investments that probably won’t be affected much by depressed crude prices, suggested John Padilla, an IPD partner who also specializes in aboveground risks in Colombia and Brazil. “The bid rounds will have to be wildly—not mildly—successful,” he said. “Ten bids per block won’t cut it. An extremely robust market contract will be needed.”
He said Petroleos Mexicanos faces two main questions: whether production can be sustained when the government has cut its budget by $4 billion, and how quickly private sector production can begin to augment its own output once partnerships are formed.
Problems magnified
“What Mexico has achieved in its reforms so far is monumental, but oil price declines are magnifying problems,” Padilla said. “Industry reaction was indifferent when the first 14 shelf exploration blocks were offered in December because they weren’t true production-sharing contracts. A tremendous amount of work still needs to be done. Further delays are possible. How negotiations and discussions proceed will be critical.”
In Brazil, depressed crude prices could jeopardize investments in its offshore presalt layer, where production reached 500,000 b/d in July, he said.
Production growth there will be essential for the country to meet its 4 million b/d production goal in 2020, “but chances are quite high that a lot of new activity will be delayed,” Padilla said. “Many questions also revolve around how the recent corruption scandal [at national oil company Petroleos Brasileiros SA] is received. It’s very much a moving target.”
Low crude prices also are magnifying problems in Colombia following “a fantastic run over the last decade,” he noted. “Without strong [capital expenditures], it faces a 30% decline rate. Anybody who can delay or defer spending is doing so. Some operators are finding it more economical to pay penalties and return contracts to the government.” Offshore has been a bright spot, and there has been a push to develop more unconventional production capacity, Padilla said.
Argentina’s outlook is more optimistic because it has undergone a shale revolution similar to that in the US with most reserves in the Neuquina basin, Voght said. “The government provides some compensation for new natural gas production that’s modest compared to import costs,” he said. “Unions understand the oil industry’s importance and tend to work with companies. Issues involving YPF and Repsol have been resolved, creating a more investor-friendly environment.”
Latin American producing countries that have hoped to rely heavily on LNG exports may need to reconsider that strategy, Padilla said. “From a macro-perspective, there have been massive finds around the world,” he said. “Latin America needs to develop domestic markets after emphasizing exports for decades.”
Contact Nick Snow at [email protected].
