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A Changing Oil and Gas Landscape

The globe now consumes about 92 million barrels of oil per day (b/d), compared to 76 million b/d in 2000. In 2000-2014, the price of oil quadrupled, from about US$25 per barrel in 2000 to US$100/b over the past few years. This rise in production and prices led to a lucrative period for many segments of the oil industry, but 2015 could be a turning point.

The events propelling the paradigm shift are varied. The United States' current ban on exporting crude, a strangely protectionist policy that has been in place for decades, could well be lifted in 2015, sending a glut of cheap supply into global markets. The US, which is quickly becoming the world's biggest oil producer, has already authorized four LNG export terminals to send natural gas to free-trade partners. In conjunction with this, re-injected supply from Libya along with new non-OPEC supply, lower demand from Europe and China, slowing emerging markets, the expansion of the Panama Canal allowing for larger cargos, and a push to efficiency and a lower carbon world could have telling impacts on the availability, and price, of oil in 2015 and beyond.

Change is already afoot. West Texas Intermediate crude, the basis for the New York futures contract, slipped below US$80/b on October 27, a two-year low. This year, the International Energy Agency (IEA) has repeatedly lowered its demand outlook. While global oil demand is still forecast to expand by 1.1 million b/d in 2015, to 93.5 million b/d, OECD oil use is projected to contract by 0.1 million b/d next year.

Oil cartel OPEC, of which Venezuela and Ecuador are a part, claims that speculation is behind the drop in prices and has called for multilateral action to tackle the problem. "The Organization needs the help of all other stakeholders - for them to show the same level of commitment, especially in such challenging times." Within the organization, Saudi Arabia appears content with prices as low as US$80, while Venezuela has made it clear prices under US$100 seriously jeopardize its already deeply deteriorated economic health.

This macro scenario is important for Latin America for various reasons. For one, in the above-mentioned boom period, Latin America, which has the second largest reserve base of hydrocarbons in the world as a region after the Middle East, failed to properly cash in. Production fell or stagnated in most countries, with the notable exceptions of Brazil and Colombia. The reasons for this are numerous, and debatable, and include onerous state oil companies, changing political climates and poor investment decisions and planning. But the result is the same. If the region failed during the heights of oil profitability, what is to say that under a less-attractive external environment performance will improve?

Many new and ongoing exploration and production ventures are costly, whether in the deep waters offshore Brazil or the Falkland Islands, or in the Orinoco Belt in Venezuela, meaning they require higher price conditions to be viable in the long run.

Luis Guisti, the former head of Venezuela's state oil company PDVSA, is categorical about the implications.

"OPEC thinks $100/barrel is a good price and brings balance to market. But a new pressure is starting with oversupply. A world of US oil and gas exports could add more pressure. If prices withdraw, how will OPEC react? How will the industry? Today, 85% of oil has breakeven of US$70-75 a barrel, while the rest has a breakeven of US$80-90."

The IEA suggests that only about 2.6 million b/d of world crude oil production comes from projects with a breakeven price in excess of $80/b. But what happens if prices fall further? Additionally, many Latin American countries send their crude to the US, where import needs have more than halved since 2005. In fact, total US net imports of energy are at their lowest level in 29 years, according to the US Energy Information Agency (EIA). Who will be the new buyers of Latin American oil?

"One of the things we have to think of in Latin America in light of crude exports from the US, is we have to prepare to preserve the value of our crude," Giusti said at the BNamericas Oil and Gas Conference in Houston, Texas. "It could mean buying refineries abroad. It is going to be a buyer's market, and the US won't be there to buy massive amounts of crude."

Having provided this broad picture, it is important to remember that each country in Latin America is vastly different from its neighbor. Mexico is in the midst of the biggest overhaul of its energy sector in 80 years, Argentina will soon change its government and sits on the best new unconventional oil and gas resource in the region, while Venezuela continues its troubled social experiment that relies heavily on oil income. Indeed, many countries, including Bolivia, Colombia and Ecuador, use oil and gas as a crucial prop to their economies and their fortunes can rise and fall alongside the fortunes of the fossil fuel industry. Other nations, like Chile, are net oil importers, and could serve to benefit from the changing picture.

For this reason, despite the great shift on a global scale, it is important to look at each country in isolation to pinpoint its precise outlook for 2015.

Figure: Dropping Oil Prices
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