In June 2014, the price of one barrel of West Texas Intermediate (WTI) was US$107 according to Tradingeconomics.com. By January 2015, the price of one barrel of WTI was approximately US$45. As of October 4th, 2020, the price of one barrel of WTI was US$39. WTI is a specific blend of crude oil produced in the United States. WTI is one of three benchmarks used to analyze crude oil prices used globally, the other two being Brent blend and Dubai Crude. The fall in the global oil prices from over US$100 to under US$40 is a massive drop. Many US and Canadian SME oil and gas service companies which were generating profits prior to 2015 are no longer able to do so since 2015 right up to the present day.
From 2015 to July 2020, 231 oil and gas companies filed for bankruptcies in the US and Canada alone with over US$171 billion in debt, according to “Haynes And Boone, Llp Oil Patch Bankruptcy Monitor”. The figures from the Haynes and Boone report show that US and Canadian SME oil and gas service companies are not generating enough cashflow to repay their debts and keep their companies operational. According to Rystad Energy’s UCube database, the cost of production of one barrel of WTI in 2015 was US$36. Even if we made the assumption that the cost of production did not increase from 2015 to 2020, there would only be a profit of US$3 per barrel of oil produced at today’s oil price.
For an SME oil and gas company producing 1,000 barrels or less of WTI per day this is a relatively small profit. However, there are other expenses which a company will have to pay which are not included in the production cost. The company will have to pay to have the oil transported, there would be equipment and pipeline maintenance and most importantly taxes including corporation tax. Therefore, a gross profit of US$3 per barrel of oil disappears into expenses and suddenly the company has no money to repay their debt or even grow their company.
Increasing taxation, new environmental laws, new renewable energy sources, increased funding and legislation supporting renewable energies and cutting the funding for the oil and gas sector are all impacting the economic fundamentals of US and Canadian SME oil and Gas companies.
In 2020, the COVID-19 pandemic brought the entire world to a halt as many countries around the world implemented mandatory shutdowns and quarantines. Large consumers of oil and gas such as China, India and the US were all on lock down forcing flights, transportation, and manufacturing to be halted for months. With a reduced demand for oil, the global storage of oil became a problem. At one point the price of a barrel of oil went to zero and negative as brokers and merchants were paying people to take physical delivery. Russia and Saudi Arabia feuding in OPEC over the production levels of oil, further drove the oil prices into the negatives.
In October 2020, the oil prices have returned to just about US$40. For many SME oil and gas service companies in the US and Canada, the oil prices are still too low to break even. They must find a way to produce cashflow, avoid bankruptcy and keep their companies operating. With coronavirus potentially being a global issue for the next 1-2 years, oil and gas consumption, and higher prices may take up to 3 years to return to “normal”. SMEs need to take action because they cannot continue to meet payroll and other operational expenses for such a length of time.
SME oil and Gas property owners in Latam, who have lower productions costs, remain unable to access capital for growth. They are too small to obtain bank and private equity institutional financing. Latam companies and owner managers are also outside the private fund-raising networks in the US and Canada. Many banks do not fund oil and gas production projects under US$100m. Thus, Latam SME oil and gas property owners have the land, the oil and low production cost but no funding to get production started and keep going. The average production cost of one barrel of oil in Argentina is US$26. The production cost can decrease based on the specific oil well, location of the oil field or even the daily number of barrels of oil being produced. This means at present oil can be produced in a Latin American country on average for US$10 less per barrel than WTI oil produced in the US. The right management approach may even reduce production costs further.
One potential solution for SME oil and gas service companies in the US, Canada and Latam SME oil and gas property owners is to form international joint ventures. With North American capital combined with Latam assets and local expertise to produce oil and gas in Latin America. Oil and gas production in Latin America cost less than the production of oil and gas in the US and Canada. There is more current opportunity to generate cashflow in Latin America via an international joint venture. The US and Canadian SME oil and gas service companies have access to funding, equipment, and material which Latam oil and gas property owners could use to reduce production costs and produce positive cash flows.
If we look back at the cost of production of a barrel of oil in Argentina, and US or Canadian oil and gas company entered a joint venture with a latam oil and gas property owner, the joint venture could produce oil in Argentina and make an average profit of US$13. The joint venture will not only reduce the certain costs as the latam oil and gas property owners would already own the land. Also the US and Canadian oil and gas service company may have spare or idle materials and equipment. A joint venture also reduces the risk for each party when producing oil and gas as the risk would be split among each member of the joint venture.
With potentially reduced costs for purchasing land or mining rights to land, purchasing or renting equipment, obtaining skilled workers, lower risks for each member involved, all act to lower production costs. This is the time for SME oil and gas companies in Latin America, the US and Canada to form joint ventures. The time is now for wealth creation for small play owners of oil and gas companies to come together across borders as there is much uncertainty in the oil price ahead.
