With crude prices now below the break-even point for many Latin American producers and the coronavirus pandemic paralysing demand, the future looks bleak for the region’s oil sector. Eleanor Wragg reports.


As 2019 drew to a close, most forecasts were for a relatively prosperous 2020 for the Latin American region. With Brent crude generally assumed to be trending towards US$57 a barrel, ratings agency Fitch said it saw the region’s oil production as “stable”. In its quarterly economic outlook in January, Spanish bank BBVA forecast that, notwithstanding issues including high public debt in Brazil, political uncertainty in Mexico, high inflation in Argentina and large current account deficits in Colombia, the region would return to a more solid growth of 1.4% in the coming 12 months, up from just 0.6% in 2019. The International Monetary Fund (IMF) was more optimistic still, putting its prediction for growth at 1.6% in 2020 and 2.3% in 2021.

But before the ink on those forecasts had had chance to dry, the world presented the region with not just one, but two external shocks. The global economy screeched to a halt amid the Covid-19 outbreak, triggering a warning from the International Energy Agency of a fall in oil demand of as much as 730,000 barrels per day (bpd). Then, a pricing war between Saudi Arabia and Russia which flooded the market with cheap crude dragged oil down to 18-year lows of US$22.58 a barrel. Like many oil-producing regions, Latin America’s fortunes are irreparably tied to those of the commodity, and this double whammy has left it reeling.

“It’s fair to say that since Latin America’s recovery started, off the back of the 2017 bull market, it has constantly been one shock away from crumbling,” says Marcos Casarin, chief LatAm economist at Oxford Economics.


Colombia’s return to the oil stage cut short

After a five-year break from oil exploration, 2020 was going to be Colombia’s year for oil, with an expected 23% investment in the industry as state-owned Ecopetrol ramped up exploration and production (E&P) capex.

“Colombia was going to be back in the game again. There were big projects to expand in 2020. Now, Ecopetrol is having to rethink all of its projects,” says Carlos Caicedo, associate director, Latin America, country risk at IHS Markit. The company recently announced it would cut its 2020 investment plan by US$1.2bn to US$3.3-4.3bn, with several projects either delayed or cancelled. “Many of the companies that have partnered with Ecopetrol and already have projects planned in Colombia will postpone those,” adds Caicedo.

The country may escape having to turn off the tap altogether, though, according to Carlos de Sousa, lead emerging markets economist at Oxford Economics. “Colombia’s lifting costs are between US$25 and US$30. Ecopetrol is in a decent financial situation, as is the Colombian government, so they could sustain production for now. That said, Colombia doesn’t have a lot of proven reserves, and with exploration now paused, it is doubtful that this could be sustained for long.”


Vaca Muerta lives up to its name

With the world’s fourth-largest shale oil reserves, concentrated in the Vaca Muerta formation, Argentina seemed, for a fleeting moment at least, to be on the way to replicating the success of the US shale boom. The Alberto Fernández administration had put in place an ambitious strategy to double oil and gas production within five years, and spoke optimistically of the potential of increased export sales to bring in much-needed hard currency.

In April, though, reports by Diario Río Negro that state energy firm YPF had cut production by half at the Loma Campana development site amid slumping domestic demand seemed to have put paid to the Argentinean government’s dreams.

“The Vaca Muerta play requires a price of US$35-40 to be viable or to be operational or to invest. Many companies such as Chevron and Repsol have put any plans there on hold because it is just not feasible. The projections are extremely, extremely bleak,” says Caicedo.

Even if oil prices pick up in the near term, some are sceptical of the project’s recovery. “Vaca Muerta has been failing to attract the kind of investments the government had hoped for a variety of reasons,” says Jill Hedges, senior analyst for Latin America at Oxford Analytica. She points to concerns about the country’s regulatory environment as well as to growing environmental criticism of shale hydrocarbons. “Oil companies are aware that in the longer term they will need to shift investment increasingly towards renewables rather than expensive and environmentally-unfriendly projects like Vaca Muerta. Some companies are keeping their foothold there but we are not likely to see the kind of investments the government had hoped for, even when the oil price recovers.”


Bolsonaro’s Petrobras privatisation plans gather dust

Brazil’s Petrobras notched up a new production record in the last quarter of 2019 as investments in the prolific pre-salt formation started to bear fruit. However, given marginal costs of lifting there are around US$35, any further investments are likely to be put on ice, says Oxford Economics’ de Sousa.

Consequently, President Jair Bolsonaro’s plans to privatise the state-controlled oil company before the end of his term in 2022 now look extremely unlikely. “The plan was to sell different assets and refineries, but Petrobras will have to postpone this until prices recover,” says Caicedo.

Whether Brazil will be able to continue to attract investment into its oil sector given its current political environment is also in doubt. “We had already seen some reluctance to commit to expensive oil operations last year, when the government’s deep-water auctions performed much worse than expected,” says Hedges. “There were no international oil company (IOC) bids in the end. Bids came only from Petrobras and two Chinese companies, CNOOC and CNODC. This seems to reflect both concern about Petrobras’s role as operator and the high signing bonuses the government expected to achieve.”


From bad to worse for Pemex

Nationalist, left-leaning president Andres Manuel Lopez Obrador’s plans to turn Pemex, Mexico’s inefficient state-owned company, into a tool of economic development have seen a near-total reversal of the liberalisation process started by the previous government of Enrique Peña Nieto, who opened the energy sector to foreign investors for the first time in almost 80 years. “The government has also taken a number of other steps that have frightened off investors, such as the decision to cancel the new Mexico City airport,” says Hedges. With the present government demonstrating an ideological resistance to private investment in the oil sector and Pemex shedding investment grade ratings at a rate of knots, it was already unclear as to where the necessary funding would come from to drive Mexican oil growth even before the current crisis.

“Oil companies are really unhappy with the direction of Mexico’s energy policy,” says Caicedo. “For Lopez Obrador’s plan for Pemex to be the leading oil company in Mexico to be feasible, you need oil prices of more than US$60-65.” As the world’s most indebted oil company, borrowing more money with oil prices now at around a third that looks all but impossible.


The sums still add up for the world’s youngest petrostate

One of the poorest countries in the western hemisphere, Guyana started production on its estimated 8 billion barrels of recoverable crude in December last year. The transformative economic prospects of its oil reserves led the IMF earlier this year to crank up its estimate for the country’s 2020 GDP growth to an eye-watering 86%, up from 4.4% in 2019.

American oil firms Exxon Mobil and Hess Corporation have put a huge chunk of their budget into exploration and production of offshore Guyana developments, but with the breakeven price reportedly at US$35, could the Guyanese party be over before it has even begun?

“It is not a problem for traditional or big oil producers to adapt to a low oil price situation. It is more of a problem for the new technology, the shale oil producers, or the countries and companies that were already in a tight financial situation and cannot afford to produce at a loss,” says de Sousa. He adds that, given Exxon Mobil’s financial muscle, there is little doubt that the country will keep shipping oil. “However, the prospects that were really good for Guyana to increase production over the next five years, some people say to as high as 700,000 bpd from zero last year, have definitely diminished until the oil price recovers to something like at least US$40 to justify moving forward with those investments,” he says.

Although the Organization of the Petroleum Exporting Countries Plus (OPEC+) has now reached an agreement to cut oil production by 9.7 million bpd, the ‘Great Lockdown’ rages on, and oil remains on a downward spiral. As even competitively placed assets in countries such as Guyana start looking uneconomical as price stresses continue, the outlook for Latin America is far from rosy. Instead of being a driver of growth as many governments in the region had hoped, the economic infeasibility of oil production and exploration activity now looks set to drag it deeper into the pandemic-led recession.