Venezuela hard­est hit by low crude oil prices

Financial Mirror (Cyprus) - - FRONT PAGE - By Paul Au­sick

The plunge in oil prices that be­gan at about this time in 2014 has cut the price of crude in half and put se­vere strains on coun­tries that de­pend heav­ily on oil for rev­enue gen­er­a­tion. In most cases, that rev­enue is driven by ex­ports be­cause de­mand from within th­ese coun­tries isn’t enough to soak up all the oil pro­duced.

The poster child for the im­pact of low crude prices is Venezuela, a found­ing mem­ber of OPEC and the coun­try with the largest proved re­serves in the world, with more than 298 bil­lion bar­rels of vis­cous, sul­furous crude that costs nearly $30 a bar­rel to ex­tract. Venezue­lan crude sells at a dis­count to light, sweet Brent or West Texas In­ter­me­di­ate (WTI) no mat­ter what the price be­cause the heavy crude is much more costly to re­fine. Ac­cord­ing to a new re­port from Vis­ual Cap­i­tal­ist at Eq­ui­, Venezuela’s cost per bar­rel to ex­tract its oil av­er­aged $23.50 in 2015, com­pared with $9.90 in Saudi Ara­bia, holder of the world’s sec­ond largest amount of proved re­serves. Venezue­lan oil ex­ports ac­counted for 96% of ex­port rev­enues in 2012, ac­cord­ing to a World Bank study, and nearly half the coun­try’s fis­cal rev­enue. The av­er­age price for a bar­rel of Venezue­lan crude was $103.42 in 2012, the high­est it’s been since 2008. In 2015 the av­er­age was $44.65 a bar­rel, a drop of nearly 50% from $88.42 in 2014.

When half the govern­ment’s rev­enue is cut by 50%, and that half rep­re­sents vir­tu­ally all Venezuela’s ex­port rev­enues, there is al­most no chance that any­thing good will re­sult. Vis­ual Cap­i­tal­ist points out the gen­eral ef­fects of the tum­bling prices and the rel­a­tively high fixed costs:

- Coun­tries that have a high cost of pro­duc­tion per bar­rel are go­ing to find it tough to make money in a low oil price en­vi­ron­ment.

- Coun­tries that are ma­jor pro­duc­ers or ex­porters tend to rely on oil rev­enues as a ma­jor eco­nomic driver.

- Oil pro­duc­ers that are ma­jor ex­porters also have to deal with another fac­tor: the ef­fect that low oil prices may have on their cur­ren­cies.

Coun­tries where pro­duc­tion costs are higher even than in Venezuela are Brazil, where the coun­try’s gi­gan­tic off­shore fields drove costs to an av­er­age of $48.80 a bar­rel in 2015, and Canada, where oil pro­duc­tion costs run to $41.10 a bar­rel. With Brent crude putting up a bench­mark price of nearly $50 a bar­rel Mon­day, it’s not hard to see how lit­tle mar­gin Brazil’s fields op­er­ate on.

Canada’s mar­gin is some­what bet­ter, but ear­lier this year re­search firm IHS es­ti­mated that a new oil sands mine, with­out up­grad­ing fa­cil­i­ties, would re­quire a WTI price of $85 to $95 a bar­rel to break even. A new steam-as­sisted grav­ity drainage (SAGD) project needs about $55 to $65 to break even, and ex­pand­ing an ex­ist­ing SAGD project re­quires a WTI price of be­tween $50 and $60 a bar­rel in or­der to break even.

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