Latin America changes and attracts major oil companies

The largest oil companies in the world are making huge investments in Latin America, an oil-rich region that many companies have avoided in the past because of restrictive economic policies and a threat of nationalism in the sector.

Exxon Mobil, Shell and other companies participated in auctions of deepwater oil fields in Mexico and Brazil, shale oil reserves in Argentina and major discoveries in Guyana.

The wave of interest comes after several countries, including the two largest economies in the region, Brazil and Mexico, have liberalized their markets in an attempt to compensate for falling oil production or fiscal difficulties. The changes attracted most of the major Western oil companies.

To arm themselves against political risks, Exxon, Chevron and other companies have entered into partnerships with state-owned companies

Companies have few alternatives. Latin America has become one of the few areas in the world outside the US where it can find lucrative well-drilling opportunities. Many countries with significant oil and gas reserves, such as Saudi Arabia and Iraq, generally reserve their best opportunities for their own oil companies, while US sanctions put Russia and Iran out of the game.

“All of the great expansion of reserves available in the world is in the Americas,” says Amy Myers Jaffe, an energy expert at the Council on Foreign Relations in Washington. “The center of the oil universe is going there.”

The timing of these first investments in the newly opened Latin America is fundamental, as concerns are emerging about a shortage of supply. Brent rose to U$ 80 a barrel this month for the first time in four years, and global daily demand for the commodity is expected to exceed 100 million barrels this year for the first time, according to the Energy Information Administration, from the USA.

But not everything is exciting in the region. For many companies, Venezuela is a case that recommends caution. Under former President Hugo Chavez’s government, a decade ago, the country expropriated assets from Exxon and ConocoPhillips. Despite holding the world’s largest oil reserves, production has fallen by almost 40% over the past five years due to corruption, debt crisis and underinvestment.

Some observers see similar political risks in training in Mexico as the country approaches a presidential election in July. Nationalist leftist Andres Manuel Lopez Obrador leads the polls by wide margin and is against the 2013 constitutional amendment that opened the Mexican energy sector for foreign and private investors. Mexico has signed 110 contracts with companies from 20 countries in the last three years, having raised more than US $ 2 billion in revenues, bonus payments and investments in the joint venture regime with state oil company Pemex.

López Obrador said winning the election will not reverse the new rules, but will freeze new prospecting and production auctions until the benefits of existing contracts can be reevaluated.

World oil companies are expected to invest tens of billions of dollars in Latin America in the coming years, and these actions are a significant part of their growth plans. Executives at Exxon said the outlook in Brazil and Guyana is among the company’s best assets. To shield themselves from political risks, Exxon, Chevron and other companies have entered into partnerships with state-owned companies, executives say. Exxon and Shell entered into joint ventures with Petrobras to participate in several deepwater projects. The Australian BHP Billiton became, in 2016, the first foreign company to partner with Pemex, partnering to explore in the Gulf of Mexico.

“By 2025, the world will demand additional supplies of 25 to 28 million barrels a day,” said Steve Pastor, president of BHP’s oil operations. “The question is: where are we going to find this offer? In this scenario Mexico and Brazil become relevant.”

Shell has been aggressive in Latin America, winning concessions for exploration off the coast of Mexico and three in a highly coveted area in Brazil. “Places like Mexico and Brazil have created fair and open tax systems, where you can compete under certain terms,” ​​said Wael Sawan, Shell’s executive vice president for deepwater exploration. “It’s a balance of institutional strength that gives confidence to invest.” Despite this, he recognizes the risks. “There is undoubtedly a political-economic risk. Both countries will hold elections soon,” he adds. “Let’s take a close look, because it influences how much we will decide to invest in the future. But elections alone are not what will make things hang on either side.”

“Latin America has always had excellent prospecting and production opportunities, but it’s sometimes a question of knowing what’s prevailing: protectionism or market policies,” says Tim Samples, a professor at the University of Georgia who specializes in legislation for the sector.

Source: Dow Jones Newswires, Mexico City | Robbie Whelan, Paulo Trevisani and Bradley Olson

Leave a Reply