Three major Latin American oil-producing nations face different near-term policy prospects, ranging from reforms in Mexico to possible retreat in Brazil to near-total uncertainty in Venezuela, speakers said during a conference on Energy in the Americas.
"As we're looking ahead to what might happen in these countries, what we're really talking about is where they are headed politically," said Jeffrey Davidow, a former assistant US Secretary of State for Western Hemisphere Affairs who now is a senior counsel at The Cohen Group as he prepared to introduce speakers during DLA Piper LLC's 2013 Global Energy Summit on Oct. 22.
Mexico is poised to pass energy reform legislation by yearend, Brazil may be starting to retreat from changes begun when it partially privatized national oil company Petroleo Brasileiro SA (Petrobras), and the government of Venezuela "is counting its days" yet remains attractive to some foreign oil companies, Davidow said.
Changes proposed earlier this year by Mexico President Enrique Pena Nieto "take us back to conditions similar to what was in place immediately after nationalization in 1938," said Duncan Wood, director of the Mexico Institute at the Woodrow Wilson Center for Scholars. "This is a matter of both energy and financial security."
He said national oil company Petroleos Mexicanos (Pemex), which previous administrations made a cash cow to fund other programs from its oil revenue, would be allowed to keep more of its profits and enter into a competitive environment. Outside firms would be allowed to invest in exploration and production for the first time since 1960 with either production or profit-sharing agreements returning income to the central government instead of Pemex, Wood said.
Conducive to reform
"Earlier reform attempts failed in part because politicians responded to oil's deep connection to the national mentality," Wood explained. "It wasn't public opinion which held reform back, but elite opinions and interests. The political landscape we see now is highly conducive to oil reform, largely because changes are taking place across the economy."
Wood said he also expects Mexico's legislature to pass energy reforms before yearend and send them to the country's states for ratification early next year. The next step—development of production or profit-sharing agreements—will be harder and take more time, he predicted.
Private firms have said they await more details before considering any investments, and have asked questions about how big a share the country would receive, what roles regulators would play, how the new tax regime would be structured, and whether the deals would share productions or profits, Wood said. "The auction [on Oct. 21] on Brazil's presalt showed Mexicans what could happen in the process doesn't work," he added.
Brazil changed auction terms for offshore oil and gas resources because it expects the presalt structures in the offshore Santos basin to be unusually prolific, according to Bruno Chevalier, a managing director of independent power supplier Eneva.
The government tried to portray this first lease sale as a success, but received only a single bid from a consortium that included Petrobras, Royal Dutch Shell PLC, Total SA, China National Petroleum Corp., and China National Offshore Oil Corp. (OGJ Online, Oct. 21, 2013).
Backward step
Brazil's partial privatization of its national oil company was successful because it brought in outside investments to help it develop its prospects, Davidow said. "Several multinational companies stayed away from the subsalt auction because it looked like a step backward toward protectionism," he observed. "Brazil may be on the verge of making a mistake."
Chevalier said Eneva plans to use natural gas to generate power so the gas would not be stranded. "We are finding gas onshore, and shale gas also is a possibility," he said. "Next month, Brazil's oil and gas agency plans to hold its first dedicated auction for both in seven basins around the country."
Venezuela has grown increasingly unsettled following Nicolas Maduro's close election to succeed the late Hugo Chavez as president, said David Voght, managing director of consulting firm IPD Latin America. "The society is polarized, the electorate is divided, and Maduro must deal with heavy inflation, his legitimacy, a bad leadership team, growing criminal activity, and a divided military," he said.
Yet some multinational oil companies that left during Chavez's presidency are considering coming back because Venezuela's 297 billion bbl of crude, as measured by Ryder Scott Co. LP, makes its resources bigger than Saudi Arabia's, Voght continued. National oil company Petroleos de Venezuela SA's production is increasing, but only with foreign companies' help, he said.
"In the Orinoco belt, there are several large projects with outside companies," Voght said. "Yet PDVSA is having to import about 100,000 b/d of gasoline and other light products to dilute the heavy crude for export. It's still very subject to governmental whims. PDVSA probably won't achieve its goals because there aren't enough human resources in it. It is moving, however."