Oil price drop said to expose LatAm NOC inefficiencies

The roughly 50% drop in global oil prices since mid-2014 has exposed the inefficiencies of Latin America's national oil companies (NOCs).

Former Inter-American Development Bank (IDB) energy division head Leandro Alvez cited the example of Ecuador, where state-run PetroEcuador and private firms control 90% and 5% of crude oil reserves, respectively, yet private firms account for nearly half of oil production.

"That's an efficiency issue," Alvez said at a panel discussion hosted by the Council of the Americas business association on the impact of low oil prices in the region.

"And we see that not only with Ecuador, we see it in Venezuela, we see it in Brazil, we see it obviously in Mexico with the [energy] reforms."

Breakeven prices for oil companies in Latin America are higher than in other parts of the world, leaving operators more exposed to prices, he said.

As in North America, many Latin American unconventional oil and gas projects are no longer viable due to oil's price plunge. In shale gas projects, Alvez said, liquids account for 10-30% of output and are often what make the projects viable.

"These national behemoth companies that have done so well in the last five to six years," Alvez said, "they need to really change the way they focus [so that] they can produce at US$50/b."

When asked what countries can do to attract private investment in energy projects even in a low oil price environment, Alvez said that predictability and sustainability are the main factors that investors consider.

Once a country is investment grade, investors look at the likelihood that rules and regulations will change, and then at the volatility of the underlying commodity.

"It's better to have bad rules than to change rules," said Alvez, who runs Falvez Energy, a firm that seeks to attract and facilitate US investment in Latin American renewable energy projects.