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Lisa Viscidi

Lisa Viscidi

Lisa Viscidi is director of the Energy, Climate Change and Extractive Industries Program at the Inter-American Dialogue.  Viscidi has written numerous reports and articles on energy…

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Low Oil Prices Have Silver Lining For Latin America’s Heavy Crude Producers

Low Oil Prices Have Silver Lining For Latin America’s Heavy Crude Producers

The recent decline in oil prices has been devastating to the government coffers of some of Latin America’s oil-dependent countries, including Venezuela, Colombia and Ecuador. But seldom mentioned is that lower prices may also have an upside for the region’s biggest exporters, as high-cost producers in competing Canada take a hit.

Over the past decade, many of the world’s most expensive oil fields were developed for the first time thanks to a sustained period of high prices. For years, the US boom was enabled by $100 crude that allowed producers to employ costly drilling techniques to extract oil from shale. Indeed, it is widely agreed that the surge in production of light oil from shale formations in the United States was a key driver in the eventual oil price collapse. The US crude benchmark West Texas Intermediate (WTI) has declined by more than half since June to around $45 per barrel.

New investment in production from high cost projects around the world has reshaped global trade patterns. For oil markets in the Americas, one of the most important impacts of the price surge was the rise in production of heavy crude from Canadian oil sands. Canada alone now provides one third of US oil imports and has pushed out some shipments from the United States’ traditional suppliers of heavy crude -- Mexico and Venezuela. Because oil produced from shale rock is light crude, the US continues to import large volumes of heavy crude for blending, and competition among these top three heavy crude exporters has intensified. The Canadian Association of Petroleum Producers projects that the country’s production will nearly double by 2030 to 6.4 million b/d, with most of the additional output coming from oil sands. These figures alarm officials in Mexico and Venezuela, as both countries are concerned about losing more US market share.

Related: Oil Price Winners And Losers In Latin America

However, these growth projections will change if oil prices remain low. Canadian oil sands crude is among the most costly to produce as it is mined or pumped from the earth and converted to lighter synthetic crude before being transported thousands of miles by pipeline or rail to refineries. The most expensive oil sands projects break even at a US crude price of over $100 per barrel. A recent analysis by consulting firm Wood Mackenzie finds that with international benchmark Brent at $40 per barrel, 1.5 million barrels per day of global production is cash negative, most of which comes from several Canadian oil sands projects. While most companies will not abandon oil sands projects that are already producing or under construction because of the very high sunk costs, they will likely curtail future development.

Production costs in Mexico and Venezuela, in contrast, are generally much lower. In Venezuela, most wells can be drilled at relatively shallow depths using conventional drilling techniques, and there is virtually no exploration risk. Production costs for fields already in operation are just $10 per barrel, according to Citi Research.

Caracas has for years sought to increase production from new projects in the Orinoco heavy oil belt, where the need to build expensive upgraders to process the extra-heavy crude would bring break-even cost up to about $60 per barrel on average – still much lower than Canadian heavy oil. But those plans have been on hold for years anyway due to PDVSA’s financial and operational struggles and to international oil companies’ reluctance to step up investment in Venezuela. So, while the government is certainly reeling from the decline in oil export revenues, production is unlikely to be directly affected by lower oil prices.

Related: China Buying Up Latin American Oil

In Mexico -- where officials are gearing up for the first bidding round this year following an energy reform that opened the industry to private investment – most projects will be profitable at current oil prices, although some of the more complex projects may be delayed. Production costs for existing fields average just $10 per barrel, while the break-even point for developing new conventional onshore and shallow water fields in Mexico is less than $40 per barrel. The first phase of Round One will offer shallow water blocks, where costs may be half that amount. However, for new deepwater Gulf of Mexico and unconventional projects -- to be auctioned later this year – the break-even point will likely be around $40-$80 per barrel. Still, Mexico’s production will almost certainly increase in the coming years, even amid current low oil prices.

The oil price outlook for this year is bearish, and oil-dependent countries everywhere are increasingly worried. Analysts are at odds over whether prices will slide further or recover in the coming weeks, but an immediate return to $100 oil looks highly unlikely. Goldman Sachs recently lowered its average WTI oil forecast for 2015 to $47.15 per barrel from $73.75 per barrel. Global oil demand growth remains tepid. And it would take several months at a minimum for low prices to spur production cuts that would eventually reverse the slump.

But if prices do remain depressed in the long term, low-cost producers will gain a leg-up in export markets. Oil market fluctuations always create winners and losers; for Venezuela and Mexico, there may be unexpected benefits to low prices that dampen the competition.

By Lisa Viscidi

Source - www.thedialogue.org/energy 

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Leave a comment
  • jhaynes on January 22 2015 said:
    i liked your perspective. who will cry uncle first and stop producing that extra 2mil barrels per day that seems to be driving the price down?
  • Jules on January 30 2015 said:
    Does the low price of oil affect how much these new investors in Mexico will pay for the new leases? Could this in anyway be one the reasons why oil producers won't lower production to increase prices? Cheap leases?

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