Oil price plummet brings new woes to LatAm’s economies

This week’s 27-per cent drop in global oil prices sparks concern for Latin America’s state oil companies and their oil-dependent economies, especially as oil demand is weak amid the measures imposed to contain coronavirus and the slump in global travel.

According to Tom Ellacott (pictured), UK-based energy consultancy Wood Mackenzie’s senior vice president of global research, “the price collapse could be the trigger for a new phase of deep industry restructuring – one that rivals the changes seen in the late-1990s”.


“This is not the first time we’ve seen a price war – the last was as recently as 2015/16,” he said. “But this time, oil demand is also weak as the coronavirus outbreak depresses global economic growth.”

“The macro-economic backdrop is completely uncharted waters for oil and gas companies.”
However, the oil and gas industry’s financials are in much better shape, thanks to the actions taken following the last price collapse.

“At current activity levels, we estimate that many companies need an average Brent price of $53 per barrel to break even in 2020, including dividends at expected current levels and announced buybacks,” he said.

But gearing levels remain high for many players, limiting their ability to absorb any sustained oil price weakness through the balance sheet.

Fraser McKay, head of upstream analysis at Wood Mackenzie, said, “sustained prices below $40 per barrel would trigger a new wave of brutal cost cutting. Discretionary spend would be slashed, including buybacks and exploration. But given the lack of excess in the system, the cuts to development activity will be necessarily fast and brutal”. 


“Unsanctioned conventional projects will also be delayed, and in-fill, maintenance and other spend categories scaled-back.”

“There is much less obvious excess spend to cut this time around after five years of disciplined investment and austerity,” according to Ellacott. 

“Raising capital is also much harder now, especially for US Independents, and upstream M&A market activity is at record lows. In addition, many companies have already made the most of the obvious asset sales.”