Oil Price War Inflicts Collateral Damage in Latin America

LONDON: Latin America’s oil producers have become caught in the crossfire between OPEC and the North American shale drillers.

The number of onshore rigs drilling for oil and gas in the region fell to just 272 in January, from 339 in July 2014, according to data published on Friday by oilfield services company Baker Hughes.

In both absolute and percentage terms the slowdown in onshore drilling is worse than in any other area outside the United States.

The number of active land rigs has fallen sharply in OPEC members Ecuador (down by 46 percent) and Venezuela (21 percent) as well as non-OPEC Bolivia (60 percent), Colombia (18 percent) and Mexico (45 percent).

The only country where there is no evidence of a slowdown in activity, so far, is Argentina, where the number of rigs operating has climbed steeply over the last three years and has remained stable in recent months.

The Vaca Muerta shale in Argentina’s Neuquen Basin is seen as one of the most promising shale plays outside the United States and has attracted strong interest from international oil companies.

But across the rest of the region, oil and gas plays are more marginal, thanks to high costs, uncertain geology and the threat of fiscal renegotiation.

Many of the international companies drilling in Latin America have been hit hard by the downturn in prices and are seeking to conserve cash by scaling back or abandoning speculative drilling programs.

National companies like Petroleos Mexicanos (Pemex) have announced big cuts to capital spending programs.

Even OPEC producers such as Petroleos de Venezuela (PDVSA) and Petroecuador are being forced to cut development drilling sharply as revenues plunge.

The slump in oil prices is often characterised as a battle for market share or price war between OPEC, led by Saudi Arabia, and the entrepreneurial exploration and production companies at the forefront of the North American shale revolution.

There is a lot of truth in this. US oil output has increased by more than 4 million barrels per day (60 percent) since the start of 2009, according to the US Energy Information Administration.

Price wars can, however, inflict substantial damage on bystanders too. It would be wrong to assume the global oil market will rebalance exclusively through a reduction in output by OPEC, the shale drillers, or both.

While growth in shale output will certainly slow, the biggest losers may be outside North America and the Middle East Gulf.

(Source: ArabNews.com)

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