Feature: Latin America continues to adjust to coronavirus fallout

Reported cases of coronavirus continue to climb throughout Latin America and countries in the region are tightening restraints to curb the outbreak, drastically affecting economies on all fronts in the process.

Despite having less confirmed cases than the US and Europe, Latin America has a significantly more limited infrastructural capacity, from medical professional and hospital bed shortages to insufficient fuel storage. According to Johns Hopkins University, as of Thursday, there were 42,281 confirmed coronavirus cases in Latin America, including 3,181 cases in Mexico, the single largest buyer of US refined products.

With stay-at-home orders now in full effect, and some countries increasing restraints, regional markets are seeing a dramatic drop in fuel demand, in turn creating a storage shortage as stocks build up.

"Buyers aren't buying, sellers aren't selling, so there's no room to store," one Latin American source said. "Everyone then cuts down on [refining], but then there's no room for crude storage, either."

MEXICO

One of the last countries to issue stay-at-home orders, Mexico finally implemented one on March 27. The previous week had already begun to see effects of the anticipated order, as it closed with gasoline imports falling to the lowest level since June 2019, according to energy ministry data. That week, ending March 21, saw gasoline imports at 442,000 b/d, down 23% and 40%, respectively, from the previous two weeks.

Mexico imported 18.06 million barrels of gasoline in December, 93% of which came from the US, according to ministry data. Mexico took about 60% of US gasoline exports the same month, according to US Energy Information Administration data.

Gasoline demand was 797,000 b/d the week ended March 21, up slightly from 792,000 b/d the previous week. Gasoline inventories were at 5.997 million barrels, down from 6.637 million barrels the previous week.

While Mexico lacks long-term fuel storage capacity, it has accumulated more gasoline stocks than in the same period of the last five years, the data showed. That growth has come as independent companies have built out storage and delivery operations throughout the country.

On April 5, Mexican President Andres Lopez Obrador announced that the government would grant a tax cut worth Peso 65 billion ($2.6 billion) to state-controlled Pemex in order to cope with falling oil prices and the pandemic.

Lopez Obrador reiterated that state Pemex remained a priority and said he will present a long-awaited package of public-private investments for the energy sector worth $13.5 billion. The investment package, expected by the industry since the beginning of the year, is seen as essential to increase crude production and meet the government's ambitious goal of pumping 2 million b/d of oil by the end of the year, up from roughly 1.7 million b/d.

Oil revenues in Mexico accounted for 19% of government revenues in 2019, down from 39% in 2012. Meanwhile, the crude price considered by the government for this year's budget is $49/b, well above current prices, and Pemex had an outstanding financial debt of over $100 billion at the end of 2016.

Speaking April 1 at a webinar hosted by Rice University, Tony Payan, fellow for Mexican studies at the Baker Institute, noted the federal government has not yet discussed restructuring its budget to limit investment in social programs and infrastructural projects, such as the much promised Dos Bocas refinery. Mexico has already spent 60% of a "stabilization fund" intended to last 10 years and Pemex's credit rating was recently downgraded by S&P Global Ratings, so it is "unlikely the country will have much choice," he said.

BRAZIL

State-led oil company Petrobras set a production target of 2.07 million b/d for April amid a lack of crude oil storage capacity and reduced domestic demand for refined products, the company said Tuesday. The company slashed investments to $8.5 billion from $12 billion and cut oil output by 200,000 b/d in two separate moves less than a week apart in late March and early April.

The production cuts were largely driven by increased storage costs as the world runs out of capacity during the price rout, amid the price war between Russia and Saudi Arabia, Petrobras CEO Robert Castello Branco said April 2.

"We've had to contract ships to maintain stocks floating at sea until we find a buyer," he said.

Following suit, independent producer Petro Rio suspended about $90 million in investments for 2020, including a new drilling campaign at the Frade Field that was pushed into 2021.

Another large Brazilian independent producer, Enauta, opted not to slash spending in the face of collapsing oil prices and reduced demand, instead maintaining plans to invest $196 million over the next two years, the company announced March 7. Enauta said Thursday it planned to fight a Petrobras plan to declare force majeure at the Manati Field because of a dramatic drop in natural gas demand.

In an effort to encourage increased production, Brazil's National Petroleum Agency, or ANP, said March 7 it would be easing reporting deadlines, increasing gas-flaring volumes this week and reducing its own efforts to audit production and take fluid samples during the pandemic, among other measures. The latest measures should facilitate what would otherwise be a cumbersome process given that most oil companies are currently operating with skeleton crews, including many administrative employees working from home.

The ANP on Wednesday denied a request by branded service-station owners to sell refined products purchased from rival distributors amid a collapse in domestic sales, saying that such a major structural change would need to pass through a regulatory process before approval.

ARGENTINA

The government implemented an obligatory quarantine on March 19, which has wreaked havoc on domestic consumption levels and limited production capacity. State-backed YPF said that by the end of March, the stay-at-home measures had slashed oil demand 30-40%, but a market source told S&P Global Platts that refined product sales were down 70%-80% from before the lockdown.

YPF's three refineries, which have a total of 319,000 b/d of processing capacity and supply about 50% of the country's diesel and gasoline, have been forced to make significant cuts to activity.

CEO Daniel Gonzalez said the company will continue to export crude, even at a loss, to limit a decline in production while avoiding running out of storage capacity as demand declines and stocks build. Gonzalez added that YPF will have to reduce its investment this year because of a decline in sales and lower international oil prices.

The La Plata refinery was operating at 50% as of April 1, and YPF is running 30%-40% less crude through its refineries.

Argentinian oil producer Roch said March 31 that it has had to halt crude oil exports because coronavirus cases have shut loading facilities in both of its export terminals. Petroquimica Comodoro Rivadavia, another oil producer, said Monday that its crude supply contract with

YPF had been suspended as the lockdown depressed fuel demand.

There does not appear to be any immediate intention to roll back containment measures as the government has said the shutdown could even be extended, at least partially, if there is no letup in coronavirus cases. Health minister Gines Gonzalez Garcia has forecast that the number of cases could peak at the end of April or even by mid-May.

US investment bank Goldman Sachs, meanwhile, has estimated Argentina's economy will shrink 5.4% this year, far higher than its previous estimate of a 1% contraction.

COLOMBIA

S&P Global Platts Analytics had forecast a decrease of 2%-4% of Colombian crude output by the end of the year, in line with a 1.6% decrease in February, and recent developments have only aggravated the situation, causing its top two crude producers to announce a slash in capital investment.

State-led Ecopetrol announced March 17 that it would implement capital investment cuts of $1.2 billion, introducing a new range of spending between $3.3 billion to $4.3 billion, down from the previously announced spending range of $5 billion to $5.5 billion. The nation's second-largest crude producer followed, as Canada-based Frontera Energy announced a two-thirds cut for 2020 spending to about $130 million to $150 million, down from $325 million to $375 million.

The extent of the repercussions from the coronavirus do not appear to be clear for exports of crude and refined products. Shipments totaled 6.39 million mt the first two months of the year, up 4.8% from exports in January and February in 2019, according to data from DANE, the government agency tracking foreign trade.

In a study released Monday, oil services group Campetrol indicated that the damage to the Colombian oil patch from the pandemic, and its "double barreled" effects on supply and demand, likely will be severe. Before the outbreak, the country expected oil field investment to reach as high as $6.2 billion in 2020, or double of $2.8 billion in 2019. However, no more than $4.6 billion investment is anticipated currently, possibly much less.

PERU

Peru implemented a nationwide lockdown to curb coronavirus contagion on March 15, issuing a state of emergency and closing its land, sea and air borders.

State Petroperu shut its 65,000 b/d Talara refinery in February to begin a year-long revamp of the facility. The refurbished refinery, expected online in the first quarter in 2021, will have a capacity of 95,000 b/d.

The Peruvian government appointed ex-Deputy Minister Eduardo Guevara as president and CEO of Petroperu on March 7, relieving the interim President Carlos Barrientos of his post. Former President and CEO Carlos Paredes resigned in late February over the finance ministry's refusal to grant additional financing for a $5 billion oil refinery expansion, though concerns abound that with the latest developments, additional funding will be near-impossible to secure.

"If funding was hard to find before, it will likely be impossible to find now," one source said.

In addition to taking over the $5 billion expansion of Talara, Guevara will also manage a projected overhaul of Petroperu's 200,000 b/d North Peruvian Oil Pipeline and plans to produce crude oil in Block 64 in the northern Amazon.

As crude prices plummeted, Peru's oil and gas producers have urged the government to draft a bailout plan for the country's producers. The appeal to lawmakers, made by the Peruvian Hydrocarbon Society, or SPH, requested the suspension of royalties, taxes and all investment commitments for producers until July to avoid shutdown of oil and gas fields. Whether or not lawmakers will concede these requests remains to be seen.

VENEZUELA

Venezuela's oil industry had already been crippled largely by US sanctions prior to the virus outbreak, with refineries operating well below capacity and crude exports severely limited. On March 16, President Nicolas Maduro issued a national quarantine decree, limiting the mobility of people and vehicles throughout the country.

According to internal technical reports reviewed by Platts, Venezuela's state PDVSA and its foreign partners increased crude production despite weaker prices and US sanctions against the government. In the first few days of April, daily production at oil fields in three states rose to 717,000 b/d, compared with 590,000 b/d in February.

Venezuela's economy will be the most affected of any Latin American country by the oil crash, as it is the most dependent on oil revenues for its budget, former Colombia energy minster Mauricio Cardenas said March 31. This explains the motivation to increase crude production, as the government attempts to make up lost revenue through increased sales, he said.

Lines at the pump in Maracaibo, the capital of the oil-rich state of Zulia, often last hours and prices are exorbitant, in excess of $100 per tank. This in a country where the monthly minimum wage is Bolivar 250,000, or equivalent to about $25. If this continues, consumption could be driven even lower.