Energy investors' confidence in Latin America on volatile ground

Nov. 21, 2002
Latin America's energy industry will require more than $225 billion in investments this next decade, but the region's political and economic environment suggests external financing will be difficult.

By Paula Dittrick
OGJ senior staff writer

HOUSTON, Nov. 21 -- Latin America's energy industry will require more than $225 billion in investments in the next decade, but the region's political and economic environment suggests that external financing will be difficult to find and expensive to obtain.

Concerns over sovereign-related issues could jeopardize the region's ability to raise the capital needed for all types of energy projects, Alejandro Bertuol, senior director of Fitch Ratings in New York, told analysts and reporters during a conference call earlier this month.

The $225 billion estimate includes upstream and downstream oil and natural gas projects, petrochemical projects, power projects, and associated infrastructure capital investments.

"Given the industry's close link with underlying sovereign risks, Latin America's energy sector is exposed to considerable volatility. This has increased funding costs, undermined investor confidence, and raised concerns regarding the achievement of long-term energy-related goals in the region," Bertuol said.

Acknowledging that some of the stress can be traced to spillover effects from Enron Corp.'s financial collapse, he said, "The region is most vulnerable to homegrown uncertainties."

Country credit ratings on the decline
Sovereign credit ratings have been deteriorating, he said. "With the exceptions of Chile and Mexico, Latin America's sovereign ratings are concentrated as speculative or non-investments grade category?. At present, 8 of the 12 sovereign ratings assigned by Fitch in Latin America have negative perspectives, including the key energy players of Venezuela, Brazil, Argentina, and Colombia."

Notwithstanding the sector's gradual opening to private participation over the past decade, the state remains a key player in Latin America's energy industry, he noted.

"This ownership structure tends to blur the line between corporate strategy and government policy objectives. This line is further clouded by financial considerations. In some instances, state-owned energy companies account for a significant portion of government revenues," he said.

Resources from these companies can be diverted to satisfy governmental or political needs, he said.

"Concerns about perpetual interference deepen as the underlying sovereign's credit profile deteriorates within a speculative rating spectrum, as has been the case with Venezuela," Bertuol said.

"Experience shows that in times of extreme stress, the sovereigns' ability to expropriate value from private companies is substantial. Argentina is an example where today many regulated energy companies are struggling to maintain their commercial viability," he added.

Strong regional energy fundamentals
But despite the widespread sovereigns' volatility, the region's energy fundamentals remain attractive. Latin America accounts for 12% of the world's proved oil reserves and 5% of its natural gas. The majority of these assets remain largely underdeveloped.

"More important, pent-up energy demand is significant. Over the next 20 years, Latin America's total energy consumption is expected to expand at a compounded annual growth rate of 5.7%—the highest in the world after developing Asia at 6.1%," Bertuol said.

Besides the significant domestic market potential, Latin America is an important exporter of crude oil and refined products because of its geographic proximity to the North American market. Yet, capital remains the key to tapping its significant potential.

"Potential investors require additional reassurances including stable, supported, and credible regulatory fiscal frameworks, real return-on-investment opportunities, and, in some instances, the flexibility to be the majority shareholder in a venture," Bertuol said.

"As Argentina is painfully learning today, once lost, investor confidence may take years to restore. The records show that energy investors and sponsors have a high tolerance for risk. The issue for Latin America today is one of credibility. Will regional governments take the necessary steps to make their volatile environments more attractive? If yes, the energy future is promising. If not, investments opportunities will exist, but efforts to secure the capital and sponsor participation will be difficult," he said.

Contact Paula Dittrick at [email protected]