Oil and gas prices are on the up and Latin American producers should be able to reap some benefits thanks to recent cost-cutting efforts, according to a new report from Fitch Ratings.

WTI crude price consensus

Latin American oil and gas companies have before tax full-cycle costs of approximately $34/bbl, Fitch said. This is well below most price forecasts for this year and the coming years.

Bank of America Corp. (BofA) analysts said last week that pent-up demand and an accompanying spike in travel this summer and into next year should put upward pressure on oil prices, with Brent crude potentially peaking at $100/bbl in 2022.

Average before-tax full-cycle costs for Latin American oil producers have marginally declined over the past three years to $34/bbl in 2020 from $36 in 2018 due to modest decreases in lifting costs, and average finding and developments costs, Fitch analysts said.

So far this year Brent and West Texas Intermediate (WTI) prices are averaging around $63/bbl and $60/bbl, respectively, up from $42/bbl and $39/bbl in 2020.

“Following the debilitating market conditions of 2020, we expect upstream profitability or netbacks to improve in 2021 supported by higher prices, continuation of costs savings from the pandemic and stabilizing production levels,” said Fitch senior director Lucas Aristizabal.

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Fitch thinks Latin America’s oil and gas production may also marginally increase in 2021 as the region recovers from the pandemic impact.

According to a new survey of energy companies conducted by Evercore ISI, exploration and production (E&P) spending by select firms in Latin America fell by 14% y/y in 2020, but this trend should change this year.

Last year’s spending decline was more modest than the 26% plunge forecast by Evercore in a similar report published late last year. As a result, capital expenditure (capex) by select firms in the region is now projected to rise 10% y/y in 2021, versus the 27% rise previously forecast, said the team of Evercore researchers led by James West.

Spending in the region “has generally bounced along a narrow band since bottoming in 2017, with 2021 capex about 16% higher than the 2017 trough, 5% lower than 2019 levels and 56% lower than the 2014 peak,” researchers said. “E&P capex in Latin America is now about on par with 2018 levels.”

Latin America accounts for about 10% of global E&P capex, with national oil companies driving spending. Mexico’s state-owned Petróleos Mexicanos (Pemex) and Brazil’s NOC Petróleo Brasileiro SA (Petrobras) represent more than 60% of regional upstream spending, the Evercore team said. 

Pemex Not so Lucky

Not all national oil companies are poised to benefit equally, however.

Pemex’s after-tax, full-cycle, break-even oil prices of about $60/bbl in 2020 were the highest in the region, due to elevated production taxes and declining gas realization prices last year, Fitch analysts said.

Before-tax, full-cycle, break-even prices for Pemex in 2020 were around $47/bbl and “may be below crude oil realization prices in the future.” This would occur if Pemex “maintained its current trajectory” of reducing finding, developing and acquisition costs and lifting costs, while continuing to stabilize production.

The company is aiming to take advantage of the price scenario and produce 1.94 million b/d in 2021, up from 1.69 million b/d realized in 2020, with production peaking at 2.16 million b/d in 2024. 

Pemex expects to continue increasing upstream capex to boost reserve replacement, “which may be positive for the asset base but further pressure already negative free cash flow, absent tax reductions,” Fitch analysts said.

Meanwhile Petrobras’ pre-tax, full- and half-cycle, break-even levels have been falling steadily in the past few years to levels now below the regional average. Half-cycle, break-even implied crude oil prices declined to about $17/bbl in 2020 from $21/bbl in 2019 and more than $25/bbl in 2018.

This was the result of cost-cutting initiatives that drove lifting costs down and lower interest expenses resulting from lower debt. Petrobras reduced financial debt to about $54 billion as of the end of 2020 from about $126 billion at the end of 2016.

This decline in replenishing costs has reduced Petrobras’ full-cycle, break-even levels to $31/bbl from above $40/bbl historically.