North American firms compete for Latin America investments

John J. McKenna
Price Waterhouse LLP, World Energy Group
Houston

Without access to capital and the latest technologies, much of Latin America's wealth from its abundant energy resources will remain unrealized. So, to further develop their energy infrastructure, governments there are restructuring their energy sectors in an effort to attract private investment.

During the latest wave of investment throughout Latin America, no group has been more active than North American oil and gas companies. Many have bought stakes in Latin entities for rapid market penetration, while others have acquired substantial blocks of promising reserves or at least the rights to develop them.

In less liberalized regions, companies have established joint ventures to capitalize on opportunities. Partners have included national governments as well as local companies and individuals.

Mergers, acquisitions

Last year, numerous North American oil firms acquired stakes in energy entities and projects in Latin America.

Alberta-based NOVA Corp., which recently agreed to merge with TransCanada PipeLines Ltd., raised its indirect interest in Argentina's 4,500-km gas pipeline system, Transportadora de Gas del Norte, to 19.1% from 14.4% with an additional investment of $30 million.

In mid-1997, Pacific Enterprises International, whose principal subsidiary is the U.S.'s largest natural gas distribution utility, Southern California Gas Co., acquired for $48.5 million a 12.5% interest in two gas distribution companies that serve 1.1 million Argentines. And, in December 1997, Pioneer Natural Resources Co. paid $915 million to acquire Canada's Chauvco Resources Ltd., which has over 60% of its proven reserves in Argentina.

North American firms also have ensured continued merger and acquisition activity by acquiring Latin reserves from one another as they position themselves strategically.

In this year's first major deal, Union Texas Petroleum Holdings Inc. paid $294.5 million for Occidental Petroleum Corp.'s Cia. Occidental de Hidrocarburos Inc., sole operator of a block of Venezuelan reserves estimated to have 190 million bbl of oil. With this latest acquisition, Union Texas estimates that more than 25% of its worldwide reserve base will come from South America.

Last August, Santa Fe Energy Resources Inc. acquired for $34.4 million Anderson Exploration Ltd.'s interest and operatorship in a producing block in Argentina.

Other U.S. players active in the region include El Paso Energy and Enron Corp.

In a move to continue expanding its natural gas sales in South America, El Paso Energy raised its stake in Capsa, a privately held, integrated energy company in Argentina, to 45% from 33% with an additional investment of $65 million. Meanwhile, Enron, along with Gas Natural de España SA, acquired in July the first state gas companies sold in Brazil, Cia. Estadul SA and Riogas. The transaction was valued at $581.4 million and represented a 74% premium to the asking price for the two companies.

Governments in Latin America, including those in Colombia, Ecuador, and Venezuela, also have encouraged foreign investments by auctioning operating licenses to develop reserves. Venezuela has been the most successful to date.

In its high-profile auction held last June, the government raised $2.1 billion by successfully selling contracts to 17 of 20 mature oil fields. Among the winning bidders were several North American oil companies, including ARCO, Chevron Corp., Conoco Inc., PanCanadian Petroleum Ltd., Pennzoil Co., Phillips Petroleum Co., Royal Dutch/Shell, Texaco Inc., and Union Texas Petroleum.

Joint ventures, alliances

A high degree of restrictions on foreign ownership of energy entities in Latin America still exists. Therefore, consortia and joint ventures continue to be a common vehicle for foreign participation in the region.

Venezuela's latest round of auctions has spurred the creation of numerous alliances, including its six recently approved joint ventures with foreign firms to develop extra-heavy crude reserves in the Orinoco oil belt. These deals are worth a total of $17 billion.

Several of the ventures involve major North American companies. The largest, known as the Hamaca project, is worth $3.5 billion and involves Petroleos de Venezuela SA (Pdvsa), ARCO, Phillips, and Texaco.

Petrozuata, a joint venture of Pdvsa and Conoco, became the first Venezuelan joint venture to tap the international credit market by raising $1 billion last June with compliance advisory assistance from Price Waterhouse (see related story, p. 50). Ninety-five percent of the offering was raised in the U.S. through a 144A issue.

At the end of last year, several other joint ventures were established directly between North American firms and state oil companies.

Coastal entered into a memorandum of understanding with Pdvsa to jointly produce, refine, and market extra-heavy crude oil from the Zuata region of the Orinoco belt.

Exxon partnered with Pdvsa to develop extra-heavy oil resources in the Hamaca area of the Orinoco Belt in a project involving an initial capital investment of $800 million.

In other cases, North American firms have struck joint venture agreements with one another and with local companies.

Unocal agreed to explore jointly with Argentina's Yacimentos Petroliferos Fiscales SA (YPF) for oil in two large offshore areas in Argentina's oil-rich San Jorge basin.

Vancouver-based Westcoast Energy Inc. partnered in January with the Mexican company Constructoras ICA to jointly explore project opportunities in the Mexican natural gas sector. Amoco Corp. and Buenos Aires-based Bridas SA announced last September a strategic alliance called Pan America Energy that will target the Southern Cone region.

El Paso Energy, InterEnergy Corp., and Argentine power producer Capex (owned 55% by Capsa) formed a joint venture called Triunion Energy to seek out new Latin energy projects. And NOVA will head a group including El Paso, YPF, Chilean gas company C!a. de Consumidores de Gas, and Chilean state oil firm Empresa Nacional del Petroleo SA to build a $400 million gas pipeline between Argentina and Chile (OGJ, Feb. 9, 1998, p. 40).

In one of the more ambitious alliances to date, a diverse group of premier U.S. energy companies banded together to target Latin America. Pacific Enterprises, Dresser Industries Inc., Bechtel Enterprises, and Energy Asset Management in early 1997 announced plans to launch a $2 billion international energy infrastructure fund to acquire interests in electric, gas, petrochemical, and related infrastructure projects, primarily in Latin America (OGJ, May 12, 1997, Newsletter).

Further privatization

Over the next decade, Venezuela expects to attract more than $30 billion in private investment in its oil industry. Colombia, now the third largest oil producer in Latin America, has turned over most of the exploration of its reserves to the private sector. And Brazil, after decades of state monopoly, has begun to allow foreign participation in its energy sector.

North American companies are quickly positioning themselves to exploit the sweeping changes in Latin America's energy industry. The region's oil, natural gas, and electricity sectors hold enormous potential.

The current wave of mergers, acquisitions, and strategic alliances will assist Latin America in developing an infrastructure that can best tap this potential. Already, liberalization has led to a much faster development of the region's energy resources than would have otherwise occurred.

Outsiders who participate in this transformation stand to reap huge gains, and North Americans have shown that they are well aware of the opportunity and are making investments accordingly.

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