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LatinNews Daily Report -28 November 2014

The end of the OPEC era

Development: As widely trailed in advance, Saudi Arabia exercised its muscle at the Organization of Petroleum Exporting Countries (Opec) on 27 November, rejecting any cut in the group’s 30m barrel per day (b/d) output target.

Significance: For Latin American oil producers the news is uniformly bad, including for the likes of Mexico, which is gearing up for the first round of concessions under its landmark new energy reform. With Venezuela and Ecuador (both Opec members), Colombia and Brazil also set to be hit by lower oil export income in 2015, the already-subdued economic outlook for the Southern Cone region could get cloudier. Venezuela's preferential oil customers in Central America and the Caribbean will also be nervous about reduced supplies and tighter payment terms. On the upside, for regional oil importers not reliant on Petrocaribe, lower prices will of major assistance. Lower oil prices also mean a stronger US dollar, however, by and large making other categories of regional imports more expensive and potentially reducing investor interest in the region.

  • By far the worst hit by the Opec decision is Venezuela, and the country’s foreign minister (and decade-long energy minister), Rafael Ramírez, reportedly flounced out of the Opec meeting in Vienna yesterday, refusing press questions. Venezuela’s President Nicolás Maduro last night said that Venezuela would defend oil at US$100/b, but that's wishful thinking. The president of the state oil company Petróleos de Venezuela (Pdvsa), Eulogio del Pino, admitted to tough times ahead, but insisted that Pdvsa was prepared for “the worst scenario”.
  • The figures say it all: Venezuela is dependent on oil sales for 96% of export earnings and about 40% of fiscal revenues. Its fiscal deficit is running at anywhere between 7% and 15% of GDP. International reserves were at US$22.2bn on 27 November, of which only about a third are liquid, meaning that import cover runs to days, not months. Foreign exchange debts to internal suppliers are in the region of US$10bn, at least. The country has US$17.6bn in debt service due on bonds in the next three years. Oil production is stagnant at about 2.9m b/d. Analysts calculate that oil export revenues will now drop by about US$15bn in 2015, from an estimated US$75bn in 2014, a fall of 25%. Although the Maduro administration continues to deny it, the fastest way to rectify its fiscal dilemma is to devalue, followed by cuts to the country’s US$12bn-US$15bn annual fuel price subsidy – but with legislative elections due late next year, and hyperinflation entrenched already, that will be tricky.
  • Dollarised Ecuador is in a similar, but less critical, situation. Its 2015 budget is based on an average oil price of US$79.7/b and projects a fiscal deficit of about US$5.4bn (5% of GDP). Oil contributes up to 40% of budget income. Total 2015 financing needs, including debt amortisations of US$3.6bn, are put at US$8.8bn, although real financing needs will be upwards of US$10bn. The left-wing government led by President Rafael Correa will increase borrowing to sustain its high public spending, but it expects the current fiscal squeeze to be temporary, until major new oil reserves come on stream from 2016. Overall public debt remains low at less than 25% of GDP, but 2015 and 2016 nonetheless promise to be tricky years. Fitch Ratings, for example, calculates that because of accumulated fiscal slippage from last year, Ecuador’s 2014 fiscal breakeven oil price is over US$140/b, compared to US$115/b for Venezuela.
  • In Mexico, where oil income accounts for about a third of budget revenues, the CFO of the state oil company Petróleos Mexicanos (Pemex), Mario Beauregard, recently told our sister publication, Latin American Economy & Business, that he was “relaxed” about lower oil prices. Mexico recently completed its 2015 oil hedge, insuring 228m export barrels at US$76.4/b for next year. Energy Minister Joaquin Coldwell appears confident that investor interest in the upcoming oil concessions will not be affected. The cost of production of Mexican deepwater oil is in a range of US$25/b-US$60/b, while Mexican conventional oil costs around US$20/b. So even in a bearish oil price scenario, while development might be slower; it will still be profitable to produce oil across a large part of Mexico’s blocks.
  • For Brazil’s deepwater oil reserves, which are more expensive to reach, some estimates put the breakeven price at up to US$120/b, although the state oil company, Petrobras, puts it at about US$40-US$50/b.  Lower international oil prices will allow Petrobras to reduce the losses it has had to incur between global and government-controlled domestic fuel prices, but the net effect from a sustained rout in global prices will eventually pinch, at a time when it is investing a massive US$227bn in the deepwater sector to 2018; and with the company also hit by a major corruption scandal, coming months will be rough.
  • Colombia depends on oil for about 14% of budget income, but oil exports account for a significant share (about 30%) of total exports, making them critical to the balance of payments position. On some estimates, the country stands to lose US$420m for every US$1 drop in the price of oil, and on that basis has lost US$10bn already in income since July 2014. The country’s efforts to bring in additional investment to the oil sector might be trickier given the much softer price outlook.

Looking Ahead: Finally, Chevron’s plans to develop Argentina’s vast Vaca Muerta shale gas reserves could face re-examination in light of the falling oil prices.

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