Oil price drop hits Latin America

Updated: 2014-12-01 05:00

By PAUL WELITZKIN in New York(China Daily Latin America)

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Mexico and Venezuela must open their oil sectors to outside investment while Brazil needs technology and the financing to realize the huge potential for its offshore reserves in the Atlantic Ocean, according to the chief economist for the International Energy Agency (IEA).

Fatih Birol, speaking at the Council on Foreign Relations on Nov 25 in New York, also said global oil prices, which have fallen by more than third since June, will probably stay depressed for as long as two years before beginning a comeback.

Venezuela has been severely affected by the slump in oil prices. The country failed to convince other member nations of the Organization of Petroleum Exporting Countries (OPEC) earlier to trim production. President Nicolas Maduro added $4 billion he borrowed from China into reserves to help boost investor confidence in the country’s economy last month.

Birol said Venezuela will need outside help to develop its heavy-oil reserves. "Venezuela faces hard times as long as oil prices remain depressed," said Birol. He believes the country will continue to rely heavily on China.

Birol said Mexico must not hesitate on plans to open up its energy sector to private investment. In August, Mexican President Enrique Pena-Nieto signed into law new measures that will make it easier for international oil and gas exploration and production companies to come into Mexico.

"The decline in production in the Mexican fields has been steep," Birol told China Daily. He believes that Mexico needs the outside investment and expertise to improve production in existing fields and to develop new areas.

"They must avoid a stop-and-go policy in regard to outside participation in oil development," he added.

Brazil’s offshore reserves in the South Atlantic may have the potential to make the Latin American nation a major crude exporter in the future. Crude production amounted 2.2 million barrels a day (bpd) in 2012 and the IEA projects that production could jump to 4.1 million bpd by 2020.

Birol said Petrobras, the country's government-controlled oil firm, has some balance-sheet issues the company must address. "If (crude) prices remain low Brazil will be negatively affected. It won’t be able to produce the cash flow that will be required to finance such costly projects," he said.

OPEC and other producers like Russia and Norway are grappling with a changed global crude market. A boom in shale oil production in the US and weaker growth in China and Europe have combined to pressure prices.

Despite the current crude environment, Birol cautioned against "counting out" Middle East oil-producing nations.

"The Middle East has always had an unstable political situation. But its reserves are among the least expensive to develop. That will always enable them to be a factor in the world energy scene."

Birol also discussed how electricity will be changing in the world. Because a large number of power plants in the US, Japan and Europe are getting old, they will have to be retired and replaced.

"This will give the developed nations an opportunity to change the power mix from coal to natural gas," he said. "About 50 percent of new plants will use renewable energy like solar, wind and hydro."

Birol also praised the agreement last month between the US and China to curtail greenhouse gas emissions.