LATIN AMERICAN PETROLEUM SECTOR AT CROSSROADS

Bob Williams
Associate Managing Editor-News

Latin America's petroleum industry stands at a precarious crossroads of change.

Fundamental changes of democratization, privatization, and economic reform that have marked South America's petroleum sectors since the late 1980s are seeping into other Latin American regions.

An unprecedented return of capital that had fled the region in the 1980s-Latin America's "lost decade"-is under way in full force. That demonstrates the improved credibility of the region's economic reform programs, reports the Inter-American Development Bank (IDB).

Even as those reform efforts marked progress in South America in 1991, however, that progress has been threatened in 1992 by political scandal, government crisis, and environmental controversy.

Just as the fitful transition to capitalism in the former U.S.S.R. has threatened to collapse the former Soviet republics into chaos because of its economic fallout, so has economic reform in such nations as Brazil, Peru, and Venezuela stumbled. On the other hand, privatization continues apace in Argentina and Mexico.

Those Latin American nations and others caught in the rising tide of privatization pulled by an increasingly market oriented global economy continue to avow their commitment to economic reform. But serious political missteps could undermine their efforts. One of the most worrisome pitfalls is the growing clamor over environmental degradation in the region and whether petroleum operations will be a seen as a culprit or a partner for environmental solutions.

SIGNS OF CHANGE

Signs of change are cropping up in two of the most unlikely arenas for possible private sector participation-even the more unlikely for being at opposite ends of the political and economic reform spectrums.

Mexico's oil and gas sector has eluded the free market reforms pushed by President Carlos Salinas de Gortari that have proven the envy of the world in a a dramatic economic turnaround (OGJ, Feb. 3, p. 16).

But even the stranglehold of Petroleos Mexicanos is showing signs of weakening. U.S. service and supply companies are winning contracts, and the government continues to grope for a way to provide foreign investment opportunities without fanning the flames of pro-monopoly nationalism as negotiations stall on the proposed North American free trade agreement.

In the Caribbean, even rigidly Communist Cuba is soliciting foreign joint ventures in petroleum exploration and development and refining in the wake of a cutoff of oil supplies and technology from the former Soviet Union. Whether a broader effort is forthcoming while Premier Fidel Castro persists in power remains to be seen.

Meantime, the momentum toward economic integration among Latin American nations continues, and growing energy interdependence is past the talking stage, with such projects as a gas pipeline from Bolivia to southern Brazil getting the green light (OGJ, May 11, p. 30).

PITFALLS AHEAD

As promising as the movement toward privatization and economic reform in Latin America's petroleum sector seemed in 1991, this year has shown that road to be a rocky one.

Political crises and scandals have rocked the administrations of key economic reform minded leaders throughout South America. In some instances those political problems have focused in part on economic dislocations stemming from the transition to a free market economy.

And environmental concerns, highlighted by the United Nations Conference on Environment and Development-the so-called Earth Summit-which was held in Rio de Janeiro last month, have jumped to the forefront of industry concerns in Latin America.

It's too soon to tell whether Earth Summit treaties will result in decreased access to oil and gas reserves or other more stringent environmental standards for petroleum companies working in Latin America. But it's certain to add pressure to governments and state and private companies to implement more environmental initiatives there.

Among recent developments:

Venezuela has slowed the momentum toward ending domestic subsidies of petroleum products. State oil company Petroleos de Venezuela SA insists reducing subsidies is critical if it is to be solvent enough to fund its ambitious 5 year, $48 billion capital spending program. Discontent over the economic effects of trimming those subsidies recently was cited as a factor in the aborted military coup aimed at President Carlos Andres Perez's government.
Land reform is at the heart of a dispute that may hinder development of Colombia's apparent new supergiant oil field, Cusiana, which Colombia's government has hailed as the biggest oil discovery in the Western Hemisphere since Prudhoe Bay.
Development of oil reserves in Ecuador's Oriente region has become the flashpoint for a political firefight between environmentalist organizations and native groups and government and industry.
Brazil's petroleum sector has been rocked by a series of political scandals that have embarrassed state oil company Petroleos Brasileiro SA and threatened to bring down the reformist government of President Fernando Collor de Mello.
A constitutional crisis and the threat of a civil war still pervades Peru, where President Alberto Fujimori suspended Congress in retaliation for what he called corruption and interference with his free market reforms.
Pemex, long the symbol of Mexico's national patrimony and an unassailable monopoly, reels from critics' allegations that the state oil company's negligence in environmental and safety issues has led to the widespread potential for calamities such as the Apr. 22 sewer explosion at Guadalajara (OGJ, May 4, Newsletter).

GAINS FROM ECONOMIC REFORM

The countries of Latin America and the Caribbean last year produced a series of solid economic achievements, IDB reports.

The region's overall gross domestic output increased by 2.7% in 1991, compared with a drop of 0.8% in 1990. The recovery could have been stronger were it not for an unfavorable economic climate, IDB said.

Especially noteworthy was the region's ability to attract foreign investment and regain access to international capital markets, IDB noted.

"Several countries-namely Argentina, Chile, Mexico, and Venezuela-have had notable success in attracting capital from abroad as a result of their efforts to stabilize their economies, liberalize trade, privatize public enterprises, and reform regulations on foreign investment," IDB said. "Much of this foreign investment has been in public enterprises that have been privatized."

In addition, some Latin American countries have made substantial progress in securing access to international capital markets they had been shut out of for much of the 1980s, the bank said.

"Significantly, a large portion of these offerings is believed to have been purchased by borrowing country nationals, representing a repatriation of flight capital.

"This repatriation is one of the strongest indicators of the increased credibility of these countries' economic programs and improved prospects for growth."

According to Organisation for Economic Cooperation and Development estimates, flow of private capital to Latin America and the Caribbean jumped to $24 billion from $11 billion during 1988-90.

LATIN AMERICA ENERGY OVERVIEW

Latin America will have to invest almost $320 billion in infrastructure and resource development to sustain energy self-sufficiency, according to a report by the Latin American Energy Organization (Olade).

The report identifies an ample resource base for self-sufficiency but notes the region needs financial and technological aid to bring those energy sources on line. It calls on governments to experiment with unsubsidized energy prices, spur foreign investment through tax incentives, and remove barriers to private capital.

East-West Center (EWC), Honolulu, contends that a conservative estimate of $45 billion in external capital is needed to expand Latin America's hydrocarbon sector in the 1990s.

Oil and petroleum products are expected to continue to dominate Latin America's energy mix in the years to come even as natural gas and coal are able to better compete.

EWC notes that the region encompassing Latin America and the Caribbean exported 36% of its primary energy and secondary products in 1990. Total energy production in 1990 was 4.723 billion bbl of oil equivalent (BOE), down from 4.81 billion BOE the prior year. The energy mix in 1990 broke out as oil 59%, natural gas 16%, biomass (including firewood and cane) 13%, coal 6%, hydro 6%, nuclear 0.2%, and geothermal 0.1%. About 93% of the region's primary energy exports of 1.26 billion BOE in 1990 was petroleum, with coal accounting for 6%. Although the natural gas share of regional exports was only 1.9% in 1990, EWC expects that share will rise as several countries in the region develop gas reserves for export.

Petroleum accounted for almost 53% of the total Latin America/Caribbean energy demand of 3.48 billion BOE in 1990, with other market shares held by gas 18%, biomass 17%, hydro 7%, and coal 4%. The role of biomass will decline as the region's economies develop and Brazil phases down its fuel alcohol program, EWC noted.

In 1990, the region exported 2.63 million b/d of crude and 1.13 million b/d of refined products. Of the latter, fuel oil accounted for 47% of the total, diesel 20%, and gasoline 18%. Fuel oil also is the main product import, followed by diesel, gasoline, and liquefied petroleum gas.

About 70% of Latin America's crude and product exports go to the U.S., accounting for about one third of the U.S. total.

Latin America, which accounts for 12% of the world's oil reserves and more than 11% of production, produced 6.9 million b/d in 1990, almost equal to that of the U.S. On the other hand, Latin American gas production totaled only a fifth of that of the U.S. in 1990, while its gas reserves outstrip those in the U.S. by 76 tcf.

Those resources are very unevenly distributed, EWC notes, with Mexico and Venezuela together accounting for more than 91% of the region's oil reserves and 67% of its crude production. The two also dominate gas reserves and production at a combined 73% and 60%, respectively.

The countries with the greatest restrictions on foreign participation-Mexico, Brazil, and Venezuela-are also the biggest petroleum producers.

But opportunities are opening up in hydrocarbon rich and poor countries alike in the region, marking a pivotal window of opportunity as Latin America's "perestroika" continues to expand.

As EWC put it, "The 1990s promises to be a decade of opportunity for Latin American and Caribbean nations. Investment prospects for private and foreign participation in the hydrocarbons sector are expanding; however, the interest of investors in such projects will be determined by a number of critical factors.

"Latin American and Caribbean nations will have to compete with other oil producing regions for capital funds and therefore need to be able to provide attractive and secure business climates. In addition, policies need to be developed to protect the environment, but these must be carefully coordinated with national economic development plans and energy security objectives."