Analyst says Latin America needs energy investments of $240 billion

Years of poor political and economic policies have left Latin American countries without sufficient capital to finance development of oil and gas resources to meet their growing needs, investment bankers said Thursday at the start of a 2-day Latin America energy conference in Houston.

Years of poor political and economic policies have left Latin American countries without sufficient capital to finance development of oil and gas resources to meet their growing needs, investment bankers said Thursday at the start of a 2-day Latin America energy conference in Houston sponsored by Center for Business Intelligence, Woburn, Mass.

Latin America will need $180-$240 billion to finance 3-4%/year growth in oil and gas production through 2010. But because low internal savings rates have limited local capital markets, most of that funding must come from direct foreign investments, said Alexandra S. Parker, vice-president and senior credit officer of Moody's Investor Service in Houston.

By comparison, worldwide exploration and production spending is expected to increase 15-20% next year to $110-$120 billion, she said.

Latin America has abundant oil and gas reserves�some 137 billion bbl of oil and condensates, and more than 280 tcf. But development of those reserves has been limited, and average annual production remains small, relative to the size of the resource base.

Policies of the Organization of Petroleum Exporting Countries will constrain oil production growth in Venezuela, a founding member; and, to a lesser extent, in Mexico, which has cooperated with the cartel in recent years, Parker said. But in the long run, competition for market shares will erode their compliance with OPEC, she said.

Gas accounts for less than 20% of Latin America's current production, with most of that associated gas. Yet regional gas markets are developing across international boundaries.

Latin America's population is growing twice as fast as that of North America in general, Parker said.

Latin America's growing demand for energy, primarily gas for power generation, is second only to that of Asia, said Alejandro Bertuol, director of Latin American corporate finance at Fitch IBCA, Duff & Phelps.

Mexico's energy demand is growing at an annual compound rate of 3%, compared to 1.5% for the rest of North American, said Bertuol. Energy demand in Central and South America is expected to escalate 4%/year through 2020, he said.

The 1980s generally represented a "lost decade" for Latin American countries�a period of state-controlled economic development, characterized by protected economies, debt crisis, hyperinflation, sizeable government deficits, weakened democratic institutions, and limited access to international capital markets, Bertuol said.

That was followed by an "era of reform" during the 1990s, with a subsequent shift toward market-based reforms, deregulation, privatization, trade integration, increased fiscal discipline, and greater political openness among Latin American countries. That, in turn, has generated significant access to international capital markets, said Bertuol.

However, Latin American countries are still plagued by low domestic savings, large public sector deficits, large external borrowing, and large development needs that adversely impact sovereign credit ratings. As a result, Latin America trails Asia as an attractive area for international investment, Bertuol said.

To compete for investment dollars, he said, Latin America must deepen its structural reforms, institutionalize democracy, curb corruption, and reduce its vulnerability to external shocks.

Although state-owned oil companies remain key players in many Latin American countries, the general move toward privatization is opening that area to international companies.

Mexico has not yet opened its upstream sector to private foreign investment, despite frequent speculation on the US side of the border that Mexican officials will "work around" that constitutional restriction somehow.

At the other extreme, Argentina has fully opened its upstream activity to outsiders and completely privatized its former national oil company.

However, a recent Moody's report said, "It is interesting to note that, while the liberalization trend got off to a strong start in the early 1990s, not much has changed over the past 3 years, with the exception of Brazil, which recently ended the monopoly of Petroleo Brasileiro over the E&P sector. In our view, the reluctance of certain countries to encourage direct foreign investment has contributed to the lack of growth in the region's proven oil and gas reserves."

Parker's outlook for foreign upstream investment in Latin American countries was:

� Brazil: Liberalization of that market will continue to attract foreign investment. But contract terms and the ability of private companies to obtain a level playing field will be key factors, said Parker.

� Venezuela: Investments in natural gas and liquefied natural gas projects will likely grow, with oil investments limited primarily to heavy crude projects. However, much depends on the stability of government policies and the ability of investors to obtain a fair return, she said.

� Colombia: Improvements of contract terms will increase foreign investment to some extent, but security issues remain a concern.

� Peru: Uncertainty in the wake of the recent political turnover could delay new foreign investment in oil projects. The domestic market for natural gas is limited.

� Ecuador: A new investment law has not yet been finalized. A proposed second pipeline for heavy crude is "starting to move ahead," and should eliminate capacity restraints. (OGJ, Oct. 9, 2000, p. 58. )

� Bolivia: Recent discoveries and opportunities to export natural gas to Brazil continue to attract investment.

� Argentina: Oil fields are mature, but investment in new natural gas fields will continue. Gas exports to Chile are on the rise, but competition with Bolivia will constrain gas exports to Brazil.

� Mexico: Upstream operations will not be opened to private and foreign participation in the foreseeable future.

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