(John Kemp is a Reuters market analyst. The views expressed are his own)
By John Kemp
LONDON, Feb 9 (Reuters) - Latin America’s oil producers have become caught in the crossfire between OPEC and the North American shale drillers.
The number of onshore rigs drilling for oil and gas in the region fell to just 272 in January, from 339 in July 2014, according to data published on Friday by oilfield services company Baker Hughes.
In both absolute and percentage terms the slowdown in onshore drilling is worse than in any other area outside the United States (link.reuters.com/pyp93w).
The number of active land rigs has fallen sharply in OPEC members Ecuador (down by 46 percent) and Venezuela (21 percent) as well as non-OPEC Bolivia (60 percent), Colombia (18 percent) and Mexico (45 percent).
The only country where there is no evidence of a slowdown in activity, so far, is Argentina, where the number of rigs operating has climbed steeply over the last three years and has remained stable in recent months.
The Vaca Muerta shale in Argentina’s Neuquen Basin is seen as one of the most promising shale plays outside the United States and has attracted strong interest from international oil companies.
But across the rest of the region, oil and gas plays are more marginal, thanks to high costs, uncertain geology and the threat of fiscal renegotiation.
Many of the international companies drilling in Latin America have been hit hard by the downturn in prices and are seeking to conserve cash by scaling back or abandoning speculative drilling programmes.
National companies like Petroleos Mexicanos (Pemex) have announced big cuts to capital spending programmes.
Even OPEC producers such as Petroleos de Venezuela (PDVSA) and Petroecuador are being forced to cut development drilling sharply as revenues plunge.
The slump in oil prices is often characterised as a battle for market share or price war between OPEC, led by Saudi Arabia, and the entrepreneurial exploration and production companies at the forefront of the North American shale revolution.
There is a lot of truth in this. U.S. oil output has increased by more than 4 million barrels per day (60 percent) since the start of 2009, according to the U.S. Energy Information Administration.
Price wars can, however, inflict substantial damage on bystanders too. It would be wrong to assume the global oil market will rebalance exclusively through a reduction in output by OPEC, the shale drillers, or both.
While growth in shale output will certainly slow, the biggest losers may be outside North America and the Middle East Gulf.
Full-cycle production costs in the main North American shale plays range from $30 to $80 per barrel, according to industry estimates.
But geological conditions are well understood. Infrastructure is good. Pipeline gathering systems and railroads to take away the crude are already available. Capital intensity is modest. Shale production is modular and scalable. And the tax and regulatory system is relatively stable and favourable.
U.S. shale will continue to be the marginal supplier of crude to the global market and set benchmark prices. The only real question is what level of prices and production are needed to balance the market.
In the rest of the world, however, conditions are far less favourable for producers and future production is at much greater risk.
Offshore production in the North Sea is capital intensive and much of the existing oil gathering infrastructure is nearing the end of its design life and set for decommissioning.
Arctic fields require complex and costly engineering in some of the toughest weather conditions on Earth and amid intense scrutiny from environmental groups.
Deepwater and ultra-deepwater fields off the coasts of Latin America and Africa require major capital commitments which international oil companies are reluctant to make when their revenues have been slashed and they are under pressure to increase capital discipline to maintain dividend payouts to investors.
Shale is proving such a disruptive force in the oil market because it has emerged in the middle of the cost curve rather than at the top.
North American shale plays may be more expensive than conventional fields in the United States, Canada and around the Middle East Gulf.
When the shakeout is completed, North American shale drillers will not be the only, and perhaps not even the main, losers.
But they compete directly in terms of price and risk with Canada’s oil sands, the North Sea and many deepwater projects.
And they can probably undercut much of the frontier drilling in the Arctic as well as high-cost high-risk engineering projects like Kashagan.
The shale revolution is therefore scrambling oil price and investment calculations for more than half of the global oil industry. (Editing by Susan Thomas)