Oil-price collapse may aggravate producing nations’ other problems

The recent global crude-oil price plunge could be aggravating underlying problems in Mexico, Colombia, and other Western Hemisphere producing nations, speakers suggested during a Feb. 4 discussion at the Woodrow Wilson International Center for Scholars.

“Mexico is a perfect storm—a serious production decline and a low oil price,” said Duncan Wood, who directs the center’s Mexico Institute. “It instituted modest energy reforms that look more like service agreements than production-sharing contracts. This might explain why only seven [international oil companies] have asked to see data rooms for the 14 offered contracts. There’s a perception the program has failed.”

Continued lower crude prices could force Mexico’s government to make moves so there would be more interest from outside the country, Wood said. “If it does, it could affect social programs and affect the popularity of [President Enrico Pena Nieto’s] government.”

Colombia used a steady increase in oil income to fund an economic transformation over the last decade, according to Alfonso Cuellar, president and managing director of Hill & Knowlton Colombia. Each $1/bbl price decline reduces its crude revenue by an estimated $20 million, and the national budget was bullish on prices above $85/bbl, he said.

The country’s crude production doubled in 10 years as prices swung from $25/bbl to $100/bbl and the government instituted social reforms. These included requirements for the industry to consult with affected indigenous communities, which companies strongly dislike, Cuellar said. But there also haven’t been any new oil resources discovered in Colombia since the Cupiagua basin in 1993, he added.

Cuellar said Colombia faces an added problem as its government tries to come to terms with the Revolutionary Armed Forces of Colombia (FARC), a Marxist insurgent organization that has operated there since 1964. Its activities may be keeping outside producers from showing more interest, he said. “Many defenders of the peace process remain mired in 1970s arguments,” he said.

2015 could prove critical

Wood said this year could prove critical to Mexico’s actually achieving meaningful oil-sector reforms. While oil’s share of the country’s gross domestic production has fallen to 10% from 40% a decade ago and “it’s important to remember than $45/bbl is not a historically low price,” conflict of interest and corruption charges that have emerged could make the next few months difficult, he said.

For Mexico’s state oil firm Petroleos Mexicanos (Pemex), Wood said the biggest challenge will be getting its workers to start thinking they work for an entity that produces oil and not a government agency, Wood said. The government did not help matters when it helped itself to $3-4 million of Pemex’s financial reserves for social programs a few months ago, and announced more recently that the company’s budget will be cut.

Wood said that Augustin Carstens, the governor of Mexico’s central bank, helped matters last year when he hedged much of Pemex’s 2015 production at $79/bbl.

“Don’t forget that Mexico has a strong economy,” Wood said. “It produces more manufactured goods than the rest of Latin America combined. Its economy is going to feel pressure, but it’s not going to collapse.” The government nevertheless has begun to cancel projects, but is continuing to fund social programs because there will be midterm elections this summer, he added.

“The situation is more serious for Venezuela,” said Cuellar. “It has tremendous reserves, but not the capacity to produce them. [President] Nicolas Maduro’s government did not get the response from his friends in China and Cuba that he’d hoped for.” Many petroleum engineers and top managers have left national oil company Petroleos de Venezuela SA as it has grown more political and moved to Colombia, he said.

Cuellar said that Brazil also is dealing with corruption problems at Petroleos Brasileiros SA (Petrobras) after it previously served as a model for other countries’ national oil companies by instituting more market-based procedures and practices. Its chief executive, Maria das Gracas Foster, and 5 other senior executives have resigned (OGJ Online, Feb. 4, 2015).

Impacts in Canada

Impacts of much lower crude oil prices also are being felt farther north. “Every day, there are announcements of spending cuts and project delays” in Canada’s oil sands, observed a third speaker, Jon Rozhon, president of Oak Leaf Energy Training and a senior researcher at the Canadian Energy Research Institute. “But nothing going on today indicates the projected 2015 growth will not occur.” A weaker Canadian dollar and lower oil prices were good news for the country’s manufacturers, but the federal and Alberta governments’ revenue dropped, he said.

While the US Environmental Protection Agency told the US Department of State a few days earlier that lower crude prices might justify a second look at the proposed Keystone XL crude oil pipeline’s potential greenhouse gas emissions impacts (OGJ Online, Feb. 3, 2015), Rozhon said it was too early to say what the consequences would be for the project. “TransCanada [Corp.] is committed to building it,” he said. “I’m certain the oil will find its way to markets, although no Canadian pipeline is a slam-dunk project now.”

Rozhon added that Canada is nowhere near a point where governments are considering cutting social programs, although the political opposition could try to take advantage of the situation if that occurred. “So far, no one in Alberta or Toronto blames companies for low oil prices,” he said.

Longer-term fundamentals remain favorable since global demand rose 11% in the past decade despite a severe recession and economic downturns, he said. “We’re nearing the end of this cheap oil price period,” Rozhon said. “Demand is growing worldwide. Five years from now, cheap oil will be seen as a dip in a longer term path upward.”

Wood said Canada, Mexico, and the US should consider reactivating the North American Energy Working Group their governments formed 20 years to maximize capacity and increase capacity. “We have a regional challenge on electricity, pipelines, ports, and surface transportation,” he said. “Infrastructure will need to be improved, but the governments can’t do it by themselves. We’ll have to look more to public-private partnerships.”

Even Western Hemisphere producing countries’ governments with the most severe problems won’t necessarily be finished by weaker markets for crude, Cuellar said. “Predicting what’s going to happen in Venezuela is like predicting the price of oil,” he said. “There are people who periodically say its government won’t be around in another 6 months, but it carries on for years. A low oil price increases pressure on it, but won’t necessarily make it collapse by itself.”

Contact Nick Snow at [email protected].