Spotlight: Latin America battered by plummeting oil prices in 2015

December 21, 2015 12:35 pm 

By Chris Dalby

Mexico CITY, Dec. 21 (PNA/Xinhua) — Latin America's abundance of natural resources was long held as a "secret" to its economic development, with exports of oil, copper, gold, silver and many others accumulated in the 1990s.

National oil companies in the region, such as Brazil's Petrobras, Mexico's Pemex and Venezuela's PDVSA, became household names, sallying forth from their shores to become international heavyweights as oil prices remained high, reaching a peak of USD 144 a barrel in July 2008.

However, the precipitous fall of oil prices since April 2014 has forced these companies to re-adjust, with brazil in a corruption crisis, Mexico in a wave of expensive reforms, and Venezuela in an economic disarray.

MEXICO

In Mexico, the Energy Reform — one of the pillars of President Enrique Pena Nieto's reform agenda — seems a dream coming true.

However, the tumble in oil prices in 2014 and 2015 sent the reform's debut into a tailspin. After all, much of its success was underpinned on foreign companies partnering up with PEMEX in shallow water areas and PEMEX's operations alone in deepwater. However, low oil prices made extractions in shallow waters less profitable and explorations in deepwater more risky.

Any chance in which Pemex was seen as a trusty custodian of the Mexican oil and gas sector also evaporated this year with Pemex reporting a loss of almost USD 10 billion in the third quarter of 2015, its 12th straight quarterly loss.

Such doubts among investors were evident in the first phase of Round One of the Energy Reform. In July, Mexico put 14 shallow water blocks for tender invitation, of which only two were allocated. This forced the government to reduce its investment expectations for this phase from USD 17 billion to just USD 2.6 billion.

The second phase of Round One went a little better in September 2015, with three of the five shallow water blocks being leased out to Italy's Eni, Argentina's Pan American Energy and American company Fieldwood Energy.

Despite an improvement, it did not provide what the Mexican oil sector entirely wanted in 2015. Future tender invitation phases covering virtually unexplored yet resource-rich deepwater fields are expected to be alluring enough for the likes of Shell and ExxonMobil.

The negative effects of low prices were also beginning to bite in December. At an event on Dec. 14, Nieto was directly blasted by the head of Coparmex, Mexico's largest business chamber, for "late payment and non-payment" by the government to its contractors.

With Mexico depending on oil for over a third of its revenue, this slowdown in payment is very noticeable.

BRAZIL

Similarly to Mexico, the problems assailing Brazil's oil industry are not entirely of its own doing. Low oil prices have come against a simultaneous backdrop of record-high production in pre-salt fields and a sweeping anti-corruption probe, with dozens of Petrobras executives, its suppliers and Brazilian politicians arrested.

It might be argued that Petrobras and Brazilian consumers have been among the rare groups to benefit by the fall of oil prices. Since Petrobras is mandated to provide Brazilian consumers with oil at a government-capped rate, lower international prices mean its imports are cheaper and it can now sell them at a profitable rate.

brazil has also seen record-high productions for its lauded pre-salt fields. In July, pre-salt production broke the 1 billion barrels per day barrier for the first time, and then 1.120 billion barrels in September.

Alongside this, Brazil held an auction on Oct. 12, putting up 266 blocks of crude oil and natural gas for tender invitation. However, only 37 blocks were awarded, and the winners were also largely smaller domestic companies after big multinationals and Petrobras itself decided to stay away.

This is where Brazil will suffer. Low oil prices and the country's political and economic turmoils are putting major companies off. Meanwhile, the scale of the corruption which engulfed Petrobras and its suppliers is still being uncovered. This may well put off investors in the foreseeable future.

Furthermore, the labyrinthine impeachment process against President Dilma Rousseff threatens to undo any small positive steps taken in 2015.

Brazil's hope might rest on its anti-corruption story. The way in which prosecutors have torn away a veil of secrecy, investigating the most powerful people in the country, speaks out Brazil's desire to do away with its past and restore business confidence.

VENEZUELA

Oil producing Venezuela was also hit by falling oil prices, as its currency has depreciated, its budget deficit has yawned and its debts have risen.

While the country should arguably have sought to diversify its economy, former president Hugo Chavez surfed a wave of popularity due to broad social policies, guaranteeing education, health and housing to the Venezuelan people, financed by high oil prices.

His successor, Nicolas Maduro, is now struggling to keep up.

High oil prices have also helped the government avoid being fully tarnished by its flagging economy, but with reserves now at just over USD 15 billion, down from 22 billion in January, that is no longer an option. With repayments looming, reserves could run out altogether in 2016.

To stave this off, Maduro has been busy lobbying other OPEC countries, such as Saudi Arabia, to cut oil production, reduce pressure and hopefully drive prices up. His logical appeals have fallen on deaf ears, with OPEC announcing on Nov. 10 that the group was not ready to cut output, as it did not want to see rivals, like the US, grab more market shares.

On Dec. 17, Maduro continued efforts to reshape Venezuela's economy by shedding its dependency on oil, calling for a popular revolution to drive up other productive sectors and blasting the U.S. for allegedly manipulating prices.

"The decision of the Fed led…to oil prices dropping from USD 30 to 28 in just one day," said Maduro, adding that he has warned the OPEC countries of this very matter.

However, different Latin American economies have suffered different impacts this year. Despite its Energy Reform hiccups, Mexico has not been so woefully affected. Brazil has been able to use its own protectionist laws to find some mild benefits from cheaper imports. but Venezuela has fully exposed structural weaknesses in its economy.

Another major change may take place soon, with the US set to lift a decades-oil ban on exporting oil, which will have ramifications on the region.

On all fronts, the year 2016 appears set to be a great leveler, with the entire region potentially suffering if prices do not perk up somewhat. (PNA/Xinhua)

JBP/EBP

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