Even with Mexico’s presidential election completed on July 1, politics will remain the biggest variable in Latin America’s oil and gas outlook, two Washington-based authorities told OGJ in separate interviews on June 13. The single certainty is that the situation in Venezuela is growing worse, they added.
“Latin America has substantial reserves and major potential to increase oil production, but it also has major uncertainties. Brazil has moved forward, particularly in the presalt, and Mexico also is moving ahead in the Gulf of Mexico, where the potential is clearer,” said Lisa Viscidi, who directs the Inter-American Dialogue’s Energy, Climate Change, and Extractive Industries Program. “The investment climate depends on who’s in power. In Latin America, the country’s president has a lot of influence.”
Reforms are taking place because new administrations have come into office with economic and energy policy approaches oriented more toward the private sector and less toward nationalism, Viscidi said. State oil companies also are not as powerful because many of their profits and reserves are declining, and their financial situations are bleak, she said.
David L. Goldwyn, president of Goldwyn Global Strategies LLC and Energy Advisory Group chairman at the Atlantic Council, said, “Of all the regions in the world, despite its challenges, Latin America remains at the top of the oil and gas investment list. Even countries which are facing some internal challenges—like Brazil over corruption and Colombia over shale gas—are reliable investment destinations.”
He said, “In other countries, such as Argentina and Mexico, where the legal and fiscal regime’s future is uncertain, the size of the resource is so compelling that companies will be willing to explore, but probably will reserve a decision on whether to make large-scale commitments until the certainty becomes greater.
Both specialists said that Mexico’s next president—who, at the time of these interviews, would likely be frontrunner Andres Manuel Lopez Obrador, or AMLO—and his administration will determine whether the country’s substantial oil and gas reforms will continue. “The biggest question is whether they will go on at the pace they’ve been moving. Will there be more emphasis on strengthening [national oil company Petroleos Mexicanos]? Will fuel price liberalization continue, or will subsidies return?” Viscidi said.
Possible pause in reforms
Goldwyn noted that two of Mexico’s political parties—the PRI and PRN—want to continue reforms that have been enormously successful in attracting investment in the Mexican deepwater, shallow water, pipeline, and renewable energy sectors. “Lopez Obrador wants to take a pause in offering new acreage and wants to increase Mexican ownership of refineries and natural gas production. These initiatives would be expensive to pursue and may end up being studied before they are moved on with any serious intent,” he said.
A pause in offering new acreage would be very unfortunate for Mexico because international prices are finally at a level that could earn the country significant bonuses and assure a long-term stream of production, Goldwyn said.
“The key difference in an AMLO regime will be its treatment of Pemex, which still lacks the capital and technical expertise to pursue deepwater or unconventional development. If it is pushed into those areas, it will sacrifice both capital and production. My expectation is that there would be a year-long pause in new investment, but that practicality and market pressure may guide an AMLO administration into a pragmatic posture,” he told OGJ.
Goldwyn said Brazil probably will remain the No. 1 destination for international oil company investment in the region regardless of upcoming election results and challenges that the country faces. This is because its presalt resources are so huge and the opportunities for farmouts by national oil company Petroleos Brasilero SA (Petrobras) are so compelling, he said.
But Viscidi suggested that Brazil’s oil and gas situation looks less certain elsewhere. “We’ve seen from the truckers’ strike there that it’s hard to maintain realistic fuel prices when they start to go up. That’s important, because Petrobras is taking huge losses from subsidizing fuel prices. Also, even though it is not the default operator for leases, it still has the right of first refusal,” she told OGJ.
Argentina’s challenges
Argentina’s shale resource is immense and national oil company YPF is an enthusiastic partner, Goldwyn said. “The greatest logistical challenge is infrastructure to evacuate oil and gas once it’s produced. The big uncertainty is whether President Mauricio Macri’s reforms will survive Argentina’s politics and economics,” he said.
“Economically, the price supports for natural gas that have incentivized investment and Argentina’s debt obligations pose serious risks for the fiscal regime. I expect investment in Argentina’s upstream to plateau for a year or so until the future becomes clearer, Goldwyn said.
Viscidi agreed that Argentina has relatively fewer energy challenges than several of its neighbors but added, “There’s been a lot of pushback from electricity price reforms. That’s made things more difficult politically, and the government will be under pressure to change that, although the broad macroeconomic policies will remain stable under the Macri government.”
Goldwyn said, “Guyana is a huge bright spot. It has enormous deepwater potential and a government which is politically inclusive, committed to transparency, and capable of managing both cash flows and expectations that will come with its enormous oil development. ExxonMobil Corp., partnering with Hess Corp., has had two world-class exploration finds. When these come to fruition, Guyana could become the second or third-largest producer in the hemisphere.
“Colombia has always managed the creativity to punch above its weight by incentivizing investment despite modest resources,” Goldwyn noted. “Its production is declining, and the future of oil and gas lies in shale development in the Magdalena basin, where Colombian governments have tried to overcome environmental skepticism and opposition to shale development for the past 6 years. The national elections will determine how aggressively the next government produces shale, but they will require a creative fiscal regime that provides benefits if it is to succeed.”
Change unlikely in Venezuela
“I don’t expect any change in Venezuela. It’s still South America’s biggest producer, but production is continuing to decline under [President Nicolas] Maduro’s administration, and there’s no sign he’s going to be ousted,” said Viscidi. “But the government has many payments due this year, it can’t get any more credit, and creditors may try to seize its assets and are considering trying to seize shipments. Also, operations in the country—with workers going hungry, and no equipment being available—are going to make the situation worse.”
Goldwyn noted, “Venezuela is on what appears to be an irreversible decline. The fact that Citgo is beginning to source its feedstock from other countries is a sign that the end is near. The lack of materials, labor, and security will lead to a dramatic drop in Venezuelan production faster than international sanctions or any other external factor. There are a number of reasonable pathways back to productivity for Venezuela. All of them require the kind of change in regime that seems unlikely at this point.”
Asked whether attitudes held by the Trump administration toward the North American Free Trade Agreement might threaten US investments in Latin American nations’ oil and gas prospects, both observers said the impact would be heaviest in Mexico if the US decided to pull out of NAFTA.
“Right now, it looks like the three countries won’t make a deal and default to the old one instead, which is good for the energy sector,” Viscidi told OGJ. “I don’t think we can expect the Trump administration to protect the energy sector from impacts such as steel tariffs.”
Goldwyn said, “The Trump administration’s trade policies, especially its hostility to NAFTA and other free-trade agreements that now benefit LNG exporters, are all headwinds for US oil and gas producers. Mexico’s fear that the US will use gas or product exports as a weapon is both driving the desire for greater indigenous production and refining capacity. This is only bad news for the US oil patch.”
International oil companies will find ways to protect their investors, even if the US withdraws from NAFTA, Goldwyn predicted. “But the administration is seriously harming a brand which heretofore has been a hallmark of security and stability,” he warned.