Oil slump will reduce investment in Latin American

Jan 15, 1998 01:00 AM

Current oil prices are expected to affect oil and gas investment in Latin America. The private sector is most likely to reconsider mega-projects and high risk exploration, while the big state oil companies, excluding Brazil's Petrobras, can expect a raid from the finance ministry if prices stay low, according to industry analysts.
"Private sector investment projects that are on line I don't think will be affected, but national oil companies will see an impact and they will have to reschedule spending," said Jaime Varela-Walker, Chevron Latin America's vice-president for business development.
In the public sector, Pemex and PDVSA are most vulnerable to budget cuts, said Rafael Quijano of Petroleum Finance Co in Washington, because planned oil spending will be needed to fill holes in fiscal expenditure if prices stay low.
Both companies have insisted they can go ahead with current petroleum sector spending plans by economising in other parts of the budget, but Quijano was sceptical:
"In both these cases it will be macro-economic financial drivers that will push for a cut in the budget of the national oil companies. It is not that the projects are less profitable, although they are."
The relatively low geological and political risks in Latin America will weigh in the region's favour for major oil company money, said Wilson Crook, Mobil Corp director of South American natural gas. "A big fall in oil prices has got to hit everybody, but Latin America has the advantage it is a mature hydrocarbon province and as a result the geological risk is not that great," he said. "When you look at country risk, I would stack up on any country in South America versus central Asia."
Ecopetrol and Petroecuador will also see budget pressure from the price fall, but importers such as Petrobras will actually benefit from cheaper crude oil costs and bigger refining profits, Quijano added.
Venezuela, depending for two-thirds of government revenue on oil, has already cut its spending by $ 800 mm to help in the government's anti-inflation battle. PDVSA president Luis Giusti said that the cut, which will slice 70-80,000 bpd off 1998 output and brings its budget down to $ 7.4 bn, is all that's required.
Quijano said Venezuela will also benefit from a growing proportion of private sector spending and rising output, but still saw it as vulnerable if prices stay low.
Pemex contributes about a third to Mexico's public purse and it is planning $ 9.1 bn oil and gas spending in 1998 as part of a $ 25 bn three-year programme.
The government has announced a $ 1.8 bn cut in the overall budget due to weak oil prices, but said that spending on major upstream petroleum projects would not be affected.
"If you take only the national oil companies then Venezuela will suffer much more from low prices than Mexico and therefore the pressure to cut PDVSA's budget will be higher. But Mexico has more of a tradition of cutting the Pemex budget than Venezuela has with PDVSA," Quijano said.
Brazil cut $ 890 mm off its planned petroleum sector spending as part of a belt-tightening exercise to fend off an attack on its currency.

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