Latin America's oil producers sweat to cover costs as price war takes toll

A price war between the world's oil powerhouses is leaving many producers in Latin American struggling to cover production costs, boosting chances of output cuts and investment delays in coming months.
Global oil price benchmarks have had their steepest declines in decades in a perfect storm of falling demand during the coronavirus epidemic and surging supplies after Russia and Saudi Arabia failed to reach a deal to extend output cuts.
"Latin America's flowing production is over 7 million barrels per day. At current prices, we estimate that half is non-economic, taking into account all costs, including transportation and taxes," said Ruaraidh Montgomery from oil research firm Welligence.
US benchmark WTI last week tumbled 29%, its biggest fall since the 1991 Gulf War. In two weeks, the US crude lost around half its value, while benchmark Brent crude dropped about 40%.
Latin America's heavy crudes, mostly indexed to these benchmarks and to Mexico's Maya crude, accumulated a 42% fall in the same period, leaving some grades priced in the single digits, according to independent calculations.
Analysts expect global demand to contract at least 10% this year, increasing pressure on loss-making oil operations and planned investments.
Latin America's average cost for lifting an oil barrel is close to $13 since 2019 excluding indirect costs and taxes, according to a Reuters calculation based on data provided by state-controlled Ecopetrol from Colombia, Petroecuador from Ecuador, Pemex from Mexico and Petrobras from Brazil , as well as experts watching Venezuela's PDVSA.
Until last month, sale prices covered those essential costs.
But the price war is drying up spot sales of Latin American heavy grades, knocking regional benchmarks like Mexico's Maya while dragging down Venezuela's flagship crude Merey to as little as $8 per barrel last week.
Fuel demand in the United States, the main market for Latin American crude has slumped during coronavirus shutdown, so appetite for heavy oil from US Gulf refiners has tumbled.
On March 18, Mexico's Maya slid to its lowest level in 18 years, with sales to the US Gulf Coast closing at below $13 per barrel according to S&P Global Platts, creating panic among neighbors.
"There will not be a fast recovery from these low prices," said one trader of Latin American oil, who asked not to be identified. "We are now seeing demand destruction, and we all know what comes after that: layoffs, production cuts and investment postponed."
With few options on the table, the most expensive oil ventures are starting to cut back output or delay investments around the world.
The oil industry globally has so far announced some $40 billion in cuts to investment for 2020, with an average cut by company of 35%, according to Welligence calculations. In Latin America, that figure is higher, at 43%.
High-cost operations typically include offshore ventures like some deep and shallow water fields in Brazil, where production costs last year were between two and five times higher than the $5.6 per barrel registered for pre-salt, according to Petrobras' data.
Also at risk are extra heavy crudes that need upgrading such as Venezuela's output from its Orinoco Belt joint ventures and shale projects like many in Argentina.
The price slump could slam countries already struggling due to output inefficiencies and heavy government takes such as Mexico and Ecuador, as well high transportation costs like companies operating in Colombia.
"Petrobras should have a slower development in its investment case, while Ecopetrol and (Argentina's state-run) YPF would struggle as they have a breakeven of $30 per barrel and $40 per barrel, respectively," said investment firm UBS in a note to clients.
Ecuador's Energy Minister Rene Ortiz told Reuters that Petroecuador's production costs are between $15 and $19 per barrel. "Our production continues uninterruptedly. Exports of Oriente and Napo crudes are normal, according to schedule made before the sanitary crisis," he said in an email.
PDVSA, Pemex and YPF did not reply to requests for comment. Petrobras declined to comment.
While production cost typically refers to the cost of lifting an oil barrel to the surface, breakeven price is the sale price needed to cover all operational and financial costs of that barrel, including lifting, workforce and taxes.
An Ecopetrol spokesman said output costs were not yet above sale prices, so no fields have been shut. The Colombian firm has a target of producing at least 745,000 barrels of oil equivalent a day in 2020.
Colombia-focused oil producer Frontera Energy on Monday announced a 60% reduction in capital expenditures for 2020.
In Venezuela, oil sale prices and export volumes have been the most punished by the market due to the additional weight of US sanctions.
Venezuelan President Nicolas Maduro this month confirmed that PDVSA, whose lifting costs are around $11 per barrel, is selling its oil below production costs. However, he did not outline any plans to curb production.
"The overall result (of low prices and reduced investment) will be a lower production growth trajectory for the region in the long-term," Montgomery said.
Even though it is partially protected by a hedging program and has credit lines available, Mexico's highly-indebted Pemex seems the most vulnerable among Latin American peers to low crude prices. Petrobras is in a stronger position due to the productivity of Brazil's pre-salt region.
Pemex upstream business (exploration and production) does not generate enough cash flow to cover operational and financial costs at prices below $20 per barrel, Fitch Ratings said last week.
So far this year, Pemex exploration and production costs, excluding financial costs and taxes, average about $16 per barrel, according to company data. But the firm, which is on the verge of losing its coveted investment grade rating, has full-cycle costs of more than $80 per barrel after taxes, according to Fitch.
Under pressure by legislators, Mexico's Energy minister Rocio Nahle on Sunday said the country, which has offered to mediate between Russia and Saudi Arabia, is in talks with other producers while Pemex is applying a tax-easing program.