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Latin America takes a hit

The region’s oil output continues to fall and recovery won’t be swift

Traders seeking signs of a market recovery have spent the past 18 months scouring US data, focused on shale. They should spend time looking further south as well. Outside the US, Latin America's oil production has been the hardest hit of any region.

Petroleum Economist analysis shows crude output from the region's major producers has dropped in the last year and a half by about 0.7m barrels a day, or almost 7%. In June, it amounted to just 9.09m b/d. It is a marked turnaround for a region that just a couple of years ago was expected to suck in investment and be a major contributor to global oil output growth.

The national oil companies that dominate Latin American production are largely to blame, but policies that have repelled foreign investment haven't helped either. Venezuela's PdV, Mexico's Pemex and Brazil's Petrobras are all going through largely self-inflicted crises that have severely crimped investment in the region's biggest oil deposits.

Venezuela has suffered the largest decline of any of the countries, with output over the past 18 months falling by as much as 340,000 b/d-13%-to 2.36m b/d, according to the data the country has submitted to Opec.

Searching for cream

As the Venezuelan government's cash cow, PdV was ailing even as it entered the downturn. It is now going through a severe cash crunch that is debilitating day-to-day operations. The company is struggling to buy the diluent it needs to lighten Orinoco oil, because traders fretting about PdV's financial stability are demanding up-front payment.

The lack of maintenance at key installations like ports and pipelines has slowed business. Most worrisome for PdV was a decision earlier this year from a handful of major service providers, including Schlumberger and Halliburton, to scale back their operations in Venezuela as their unpaid bills mounted. PdV relies on those companies for complex reservoir management at mature fields and to keep rigs humming in the Orinoco.

After Venezuela, Mexico has seen the steepest overall production declines. Output has fallen by 175,000 b/d, around 8%, since the start of 2015, according to Pemex. The state oil company's monopoly on production can't end soon enough for Mexican officials hoping for a revival in the country's depressed oil patch. Weighed down by high labour costs, taxes and rising debt-servicing payments, the company has sunk further into financial quagmire, leaving it unable to invest in maintaining output. In the past three and a half years it has managed to rack up losses of more than $70bn, and earlier this year it needed a $4bn bailout from the government to catch up with payments to its suppliers.

Brazil has managed a modest 60,000 b/d gain in production through the worst of the downturn-but it's a dismal performance compared to Petrobras's ambitious growth plans and the vast amount of cash spent in recent years. The country's output in June was 2.54m b/d, up from 2.48m b/d at the end of 2015. The figure would be even lower if it weren't for a 260,000 b/d uptick in output over the past couple months.

Hurdles to growth

The multi-billion-dollar Lava Jato (Carwash) corruption scandal has wrought havoc on Petrobras's financial and operational performance and has had a chilling effect on investment throughout the industry.

Perhaps the biggest surprise has been how steeply production in Colombia has fallen. There, output has tumbled 12% in the past year and a half; from just over 1m b/d to 0.88m b/d, its lowest level since early 2011. Colombia had proved to be fertile ground for smaller independents during the industry's boom years, but it is quickly giving up much of those gains. The country's heavy oilfields need a steady flow of investment and drilling to keep output flowing, but upstream spending has collapsed and natural depletion is now stalking the sector.

At the current pace of declines, output from across the region would fall by another 200,000 b/d or so by the end of the year. All told, this would mean 1m b/d of Latin American output had been lost in just two years.

While a price rise can be expected to revive American shale output, the recovery further south will be slower, and probably need a higher price band. That is largely because of the deep financial hole that the national oil companies have dug themselves into.

It will take at least a year of prices above $60 a barrel for the region's largest producers to start paying down debt and ramping back up investments.

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